2005 (11) TMI 398 - AT - Central Excise

Summary

Issues:
- Entitlement to Modvat credit on inputs used in the manufacture of capital goods
- Interpretation of Cenvat Credit Rules regarding credit in cases of inputs used in the manufacture of capital goods
- Revenue neutrality of the exercise

Entitlement to Modvat credit on inputs used in the manufacture of capital goods:
The case involved the appellants engaged in cement manufacturing who availed Cenvat credit of duty on inputs used in the manufacture of capital goods. The Revenue contended that since the capital goods were exempted due to their captive use, the appellants were not entitled to Modvat credit on the inputs used in manufacturing those capital goods. A show cause notice was issued proposing denial of Modvat credit and imposition of a penalty. The original adjudicating authority confirmed the duty demand and imposed a penalty, which was partially upheld by the Commissioner (Appeals). The appellants appealed against this order.

Interpretation of Cenvat Credit Rules regarding credit in cases of inputs used in the manufacture of capital goods:
The Tribunal analyzed the relevant rules and notifications in detail. Prior to the introduction of new Cenvat Rules, Rule 57D(2) allowed credit of duty on inputs used in the manufacture of capital goods even if those goods were not chargeable to excise duty. However, it was noted that no parallel provisions were made in the new Rules until the addition of Explanation 2 to Rule 2(f) of the Cenvat Credit Rules in 2003. Notifications were cited to support the inclusion of inputs used in the manufacture of capital goods for availing Modvat credit. The Tribunal referred to previous decisions where inputs used in the manufacture of capital goods were deemed eligible for Modvat credit, ultimately deciding in favor of the appellants.

Revenue neutrality of the exercise:
The Tribunal highlighted that the exercise of availing Modvat credit on inputs used in manufacturing capital goods was revenue neutral. The appellants had the option to pay duty on the capital goods and then avail Modvat credit on that duty for payment on the final product, making the process essentially paper-based and revenue-neutral. Considering these factors, the Tribunal set aside the impugned order and allowed the appeal, providing consequential relief to the appellants.