2025 (6) TMI 592 - AT - Central Excise

CENVAT credit on certain goods procured and used by the appellant in the setting up of a cement grinding plant - Inputs or not - HELD THAT - Attention was drawn to Explanation 2 appended to the definition of input to state that the Clinkerization Plant and Power Plant installed in the factory are to be considered as capital goods and since the disputed goods were used for installation of the said capital goods the benefit of input credit should be available. Reliance placed on the judgement of the jurisdictional Hon ble High Court in the case of Thiru Arooran Sugars Vs CCE 2017 (7) TMI 524 - MADRAS HIGH COURT where it was held that the structurals M.S. Plates M.S. Angles and M.S. Joint used to support plant and machinery qualified as capital goods and inputs eligible for Cenvat credit. The denial of cenvat credit benefit on the disputed goods cannot sustain for which reason the same is set aside. Appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the eligibility of cenvat credit on certain goods procured and used by the appellant in the setting up of a cement grinding plant. Specifically, the issues are:

1. Whether the goods such as cement, iron, steel, channels, angles, steel bars, plates, and other supporting structural items used in the construction of civil structures and foundations for the plant qualify as "inputs" under the Cenvat Credit Rules, 2004 (CCR 2004) for the purpose of availing cenvat credit.

2. Whether the fact that these goods, after installation, become part of immovable property embedded to the earth, excludes them from being considered excisable goods eligible for cenvat credit.

3. The interpretation and scope of the definition of "input" under Rule 2(k) of CCR 2004, including Explanation 2 appended thereto, especially in relation to goods used in the manufacture of capital goods.

4. The applicability of judicial precedents and the principles laid down by higher courts concerning the eligibility of cenvat credit on such goods.

Issue-wise Detailed Analysis

1. Eligibility of the disputed goods as "inputs" under CCR 2004

The relevant legal framework is Rule 2(k) of the Cenvat Credit Rules, 2004, which defines "input" as goods used in or in relation to the manufacture of the final products, whether directly or indirectly, contained or not contained in the final product, provided they are used within the factory of production. Explanation 2 to this Rule further clarifies that "input" includes goods used in the manufacture of capital goods which are further used in the factory.

The appellant contended that the disputed goods were procured and used for fabricating supporting structures and civil foundations necessary for erecting the cement grinding plant, which is a capital good. Therefore, these goods should be eligible for cenvat credit as "inputs" under the unamended definition of Rule 2(k).

The Court examined the appellant's submissions, including reliance on the jurisdictional High Court's decision in a similar matter, which held that the definition of "input" under Rule 2(k) is broad and includes goods used indirectly in the manufacture of the final product. The Court noted that the disputed goods were used within the factory premises and were integral to the manufacture of capital goods (the plant and machinery).

The Court referred to the High Court's reasoning that Explanation 2 does not restrict but rather expands the scope of "input" to include goods used in the manufacture of capital goods used in the factory. The Court emphasized that the inclusion or exclusion of goods from the final product is immaterial, so long as they are used in or in relation to the manufacture within the factory.

2. Impact of goods becoming immovable property on credit eligibility

The Revenue's main contention was that once the goods were assembled and installed, becoming embedded to the earth and thus immovable property, they ceased to be excisable goods and hence ineligible for cenvat credit.

The Court considered the Revenue's reliance on a Larger Bench decision which had held that machinery and components, once assembled and fixed to the earth, become immovable property and thus non-excisable. However, the Court noted that this view was overruled or qualified by subsequent decisions, including that of the Hon'ble High Court of Chhattisgarh and the Hon'ble Supreme Court.

The Court highlighted that the user test established by the Supreme Court in the case of Commissioner of Central Excise, Jaipur vs. Rajasthan Spinning & Weaving Mills Ltd. is the guiding principle. This test focuses on whether the goods are used in or in relation to manufacture, regardless of their physical nature post-installation.

Thus, the Court found the Revenue's argument flawed in treating the goods as ineligible solely because they became immovable property after installation. The Court held that the nature of the goods post-installation does not negate their eligibility for credit if they were used in the manufacture of capital goods within the factory.

3. Interpretation of Rule 2(k) and Explanation 2 of CCR 2004

The Court undertook a detailed textual and purposive interpretation of Rule 2(k) and Explanation 2. It underscored that the definition of "input" is inclusive and broad, covering goods used directly or indirectly in manufacture, including those used in capital goods manufacturing.

The Court rejected the Revenue's narrow reading that Explanation 2 restricts the scope of "input." Instead, it held that Explanation 2 clarifies and extends the ambit to include goods used in capital goods which are further used in the factory.

The Court also noted that the 2009 Notification, which clarified certain aspects of the credit rules, did not indicate any retrospective or declaratory effect that would affect the appellant's claim for the period 2006 to 2008.

4. Application of judicial precedents and principles

The Court relied heavily on the jurisdictional High Court's decision in the appellant's own case and other similar cases, which had consistently held that goods used in the manufacture of capital goods within the factory are eligible for cenvat credit as inputs.

The Court also referred to the principle laid down by the Supreme Court in the user test, which focuses on the use of goods in manufacture rather than their physical characteristics post-installation.

The Court distinguished the earlier Larger Bench decision relied upon by the Revenue, noting that subsequent authoritative rulings have clarified and evolved the law favoring credit eligibility in such circumstances.

The Court found that the appellant had produced sufficient evidence and statements to establish that the disputed goods were used within the factory premises for assembly and installation of capital goods integral to the manufacturing process.

Conclusions on Issues

The Court concluded that the denial of cenvat credit on the disputed goods was unjustified. The goods qualify as "inputs" under Rule 2(k) and Explanation 2 of CCR 2004, as they were used for the manufacture of capital goods within the factory. The fact that they became immovable property after installation does not disqualify them from credit eligibility.

The Court set aside the impugned order denying credit and allowed the appellant's appeal with consequential benefits.

Significant Holdings

"A close reading of the definition of 'input' in Rule 2k(i) would show that it includes all goods ... which are used in or 'in relation to manufacture of final products', (whether directly or indirectly, whether contained in the final product or not), albeit, within the factory of production. Explanation 2 only states that 'input' includes goods used in the manufacture of capital goods, which are further used in the factory of the manufacturer."

"The scope of the word 'input' has been further clarified in Explanation 2 to include goods, which are used in the manufacture of capital goods, which, in turn, are used in the factory of the manufacturer."

"Therefore, plant and machinery, which ... are capital goods ... would, in our view, take within its sway 'inputs', which come within the ambit and scope of Rule 2(k) read with Explanation 2; the only limiting condition being that these inputs should be used within the factory of the manufacturer."

"Structurals, cement, as also, iron and steel, which are used to erect foundations, would come within the definition of 'input' as they form part of the capital goods, which, in turn, are used in the manufacture of final product."

"The Department does not have a case that the items are not used as part of the cement plant. Instead, the Credit has been disallowed observing that these items take the nature of immovable property after being fixed to earth. ... This view was considered to be no longer good law ... The Hon'ble jurisdictional High Court ... has analysed the eligibility of Credit on the basis of user test laid down by the Hon'ble Supreme Court ... These cases assist the arguments of the appellant."

"Thus, following the decisions stated above as well as appreciating the facts presented by the records, we are of the considered opinion that the disallowance of Credit on the impugned items under the category of 'inputs' is unjustified and requires to be set aside, which we hereby do."