2025 (7) TMI 410 - AT - Central Excise

Reversal of CENVAT Credit - capital goods and inputs transferred by the appellant to its Captive Power Plant the Captive Power Plant Unit located within the factory premises and created by the appellant as a separate Unit in the Books of Account for compliance of statutory requirements under Section 80IA of the Income Tax Act 1961 - removal of inputs/capital goods in terms of rule 3(4)/rule 3(5) of the Credit Rules - generation of electricity used in manufacture of excisable dutiable final goods during the period from November 2002 to July 2003 - duties paid on structures of Iron and Steel used in erection and installation of Chimney in the manufacture of dutiable final products would qualify as accessories eligible for credit as capital goods under rule 2(a)(A) of the Credit Rules during the period from April 2002 to April 2003. Whether the order directing for reversal of CENVAT credit availed by the appellant of duties paid on capital goods and inputs transferred by the appellant to its Captive Power Plant the Captive Power Plant Unit located within the factory premises and created by the appellant as a separate Unit in the Books of Account for compliance of statutory requirements under Section 80IA of the Income Tax Act 1961 for the reason that it would amount to removal of inputs/capital goods in terms of rule 3(4)/rule 3(5) of the Credit Rules is justified? - HELD THAT - The issue as to whether the appellant could avail credit of duties paid on parts components used in the Captive Power Plant has been settled in the own case of the appellant in Hindustan Zinc 2024 (2) TMI 1563 - CESTAT NEW DELHI where it was held that There is no dispute that machineries/components received at the factory of the appellant on which the credit has been availed are indeed capital goods in terms of Rule 2(a) of the CENVAT Credit Rules 2004 as is evident from the fact that the credit arrangement has been restricted in the impugned show cause notice to 50% in each year. We note that the Tribunal in several earlier decisions has held that the prerequisite for availment of CENVAT credit in respect of capital goods in the factory of manufacturer is its receipt in the factory and use in the manufacture of dutiable final product. The factual position that arose in Gujarat Ambuja Cements 2008 (10) TMI 363 - HIMACHAL PRADESH HIGH COURT is almost identical to the present case. The same Contractor had been engaged for setting up the D.G. Sets in question. It was held that the D.G. Sets which had been manufactured out of the parts components and accessories would be entitled to avail MODVAT credit of duty paid on such parts components and accessories. It was also found that the D.G. Sets were part and parcel of the factory and were capital goods. The decisions of the Tribunal in Gujarat Ambuja Cements and Aditya Cement 2008 (3) TMI 780 - RAJASTHAN HIGH COURT which decisions have attained finality would therefore be applicable to the facts of the present case. It therefore follows that the appellant was justified in availing credit of duties paid on parts components used in the Captive Power Plant installed by the Contractor - The ownership of goods is not relevant for deciding admissibility of CENVAT credit. The finding recorded by the Commissioner that at the time of receipt of capital goods in the factory for use in installation of the Captive Power Plant it is the Contractor who is the real manufacturer of the said plant and would eligible to take credit and not the appellant is therefore not correct. Whether CENVAT credit of duties paid on structures of Iron and Steel used in erection and installation of Chimney in the manufacture of dutiable final products would qualify as accessories eligible for credit as capital goods under rule 2(a)(A) of the Credit Rules during the period from April 2002 to April 2003? - HELD THAT - During the period from April 2002-April 2003 the appellant had availed CENVAT credit amounting to Rs. 11, 26, 005/- on duties paid on iron and steel items as capital goods for use as parts/components/accessories of Chimney specified capital goods falling under Chapters 82 84 and 85 of First Schedule to Tariff Act inasmuch as without the fabrication or providing the requisite supporting structure operation of the Chimney of the Captive Power Plant would not be possible. According to the appellant these technological structures qualify to be considered as parts/components/accessories of capital goods under rule 2(a)(A) of Credit Rules. The said technological structures of iron and steel such as columns plates platforms and angles provide necessary support to the chimney for its proper and smooth functioning which further facilitates manufacture of dutiable final goods. The said steel has to be considered as used in or in relation to manufacture of dutiable final products since without use of such steel capital goods could not have been manufactured/fabricated and without that the manufacturing activity could not have been undertaken. Thus the steel items form an integral part of the Chimney and would fall within the ambit of capital goods and eligible for credit. The maintenance of separate books of accounts for the Captive Power Plant located within the factory premises of the appellant to enable compliance of the statutory requirements of section 80IA of the Income Tax Act would not mean that there are two different business entities. According to the appellant they constitute one factory and the appellant would be entitled to avail credit of capital goods as well as inputs used in the Captive Power Plant for generation of electricity which is ultimately used by the appellant in the production of excisable final goods - The Commissioner has denied credit on inputs/fuels and capital goods on the ground that the appellant had claimed the benefit of section 80IA of the Income Tax Act by treating the captive power plant as a new industrial undertaking and therefore the same cannot be held to be a part of the factory of the appellant for the purpose of excise duty and CENVAT credit availed on inputs/capital goods which were transferred to Captive Power Plant would therefore have to be reversed in terms of rule 3(4) rule 3(5) of the Credit Rules. The provisions of rule 3(4)/rule 3(5) of the Credit Rules are not invokable as there is no actual or physical removal of goods from factory of the appellant to the Captive Power Plant located within the same premises. The power plant is a Captive Power Plant and part of the factory premises of the appellant. The entire power generated from Captive Power Plant is used in the factory for manufacture of the finished goods which are cleared on payment of excise duty. There is no physical removal of either the capital goods or inputs outside the factory premises of the appellant - the provisions of rule 3(4)/rule 3(5) of the Credit Rules are not applicable and denial of credit on this account is unsustainable. Extended period of limitation - HELD THAT - As the order cannot be sustained on merits it will not be necessary to examine the contention raised by learned counsel for the appellant that the extended period of limitation could not have been invoked in the facts and circumstances of the case. Imposition of penalty upon the appellant under section 11AC of the Excise Act - imposition of penalty equal to ten percent of the credit demand under rule 13 of the Credit Rules - HELD THAT - The imposition of penalty upon the appellant under section 11AC of the Excise Act and the imposition of penalty equal to ten percent of the credit demand under rule 13 of the Credit Rules cannot also be sustained. The demand relates to an interpretational issue and the issue has also been settled in favour of the appellant by the Tribunal in the matter of the appellant itself. Levy of interest - HELD THAT - Once the demand of CENVAT credit is not sustainable the recovery of interest does not arise. Conclusion - i) The appellant was justified in availing credit of duties paid on parts components used in the Captive Power Plant installed by the Contractor. ii) There is no physical removal of either the capital goods or inputs outside the factory premises of the appellant. The provisions of rule 3(4)/rule 3(5) of the Credit Rules are not applicable and denial of credit on this account is unsustainable. iii) The issue of extended period of limitation need not be considered. iv) Penalties and interest set aside. The impugned order passed by the Commissioner cannot be sustained and is set aside and all the thirteen appeals filed by the appellant are allowed.

Summary

Three core legal issues were considered by the Tribunal in these appeals arising from the order dated 31.01.2022 passed by the Commissioner adjudicating thirteen show cause notices against the appellant. The issues are:

(i) Whether the direction for reversal of CENVAT credit availed by the appellant on duties paid on capital goods and inputs transferred to its Captive Power Plant (CPP), which is a separate unit in the books of account but located within factory premises, is justified on the ground that such transfer amounts to removal under rule 3(4)/3(5) of the CENVAT Credit Rules;

(ii) Whether denial of CENVAT credit on duties paid on components/parts of the CPP installed by a third-party contractor, Wartsila Finland Oy, within the factory premises for generation of electricity used in manufacture of excisable goods during November 2002 to July 2003 is justified;

(iii) Whether CENVAT credit on duties paid on 'structures of Iron and Steel' used in erection and installation of the chimney for manufacture of dutiable final products qualifies as 'accessories' eligible for credit as capital goods under rule 2(a)(A) of the Credit Rules during April 2002 to April 2003.

The first and third issues relate to the admissibility of credit on inputs and capital goods used in the CPP and supporting structures, while the second issue concerns credit on components of the CPP installed by the contractor.

Issue-wise Detailed Analysis:

Issue (i): Reversal of CENVAT Credit on Inputs/Capital Goods Transferred to Captive Power Plant (CPP) Unit

Legal Framework and Precedents: The CENVAT Credit Rules, 2002/2004 govern the availment and reversal of credit. Rule 3(4) and 3(5) provide that when inputs or capital goods are physically removed from the factory, the manufacturer must reverse the credit availed. Section 80IA of the Income Tax Act allows creation of separate units for tax exemption purposes, which may maintain separate books of accounts. The key question is whether the CPP, though maintained as a separate unit in books, is a separate factory or business entity for excise purposes.

Precedents relied upon by the appellant include decisions in Dhampur Sugar Mills Ltd., Century Denim, Reliance Industries Ltd., and Sangam Spinners, which held that a CPP located within factory premises and exclusively used for manufacture of excisable goods forms part of the factory and credit on inputs/capital goods used therein is admissible.

Court's Interpretation and Reasoning: The Tribunal noted that the CPP is within the factory premises, and all inputs and capital goods were received under duty-paid invoices in the appellant's name. The separate books of account for the CPP were maintained solely for compliance with section 80IA of the Income Tax Act and do not create a separate factory or business entity for excise purposes. There was no physical removal of inputs or capital goods from the factory premises. Hence, the provisions of rule 3(4)/3(5) requiring reversal of credit on removal do not apply.

The Tribunal relied on an order of the Assistant Commissioner dated 30.10.2023 dropping proceedings on a similar issue, which has attained finality. The Tribunal held that the notional accounting entries for the CPP cannot affect the eligibility to credit under excise law.

Key Evidence and Findings: The CPP was installed within the factory premises, inputs and capital goods were received in the factory under duty-paid invoices, and electricity generated was exclusively used in manufacture of excisable final products. Separate books of accounts were maintained only for income tax purposes.

Application of Law to Facts: Since no physical removal occurred, and the CPP is part of the factory for excise purposes, reversal of credit under rule 3(4)/3(5) is not justified.

Treatment of Competing Arguments: The department argued that separate books of accounts and separate unit status under income tax law meant separate factory status for excise, requiring reversal. The Tribunal rejected this, holding that statutory compliance under income tax law does not alter excise classification.

Conclusion: The appellant was entitled to retain CENVAT credit on inputs and capital goods used in the CPP; reversal was not justified.

Issue (ii): Denial of Credit on Components/Parts of CPP Installed by Contractor

Legal Framework and Precedents: Rule 3(1) of the CENVAT Credit Rules provides that the manufacturer of final goods is entitled to credit on inputs and capital goods used in manufacture. The department contended that since the contractor was the actual manufacturer of the CPP, only the contractor was entitled to credit, not the appellant. The appellant relied on precedents including Gujarat Ambuja Cements Ltd., Aditya Cement Ltd., and others, which held that a manufacturer who receives capital goods/components under duty-paid invoices and uses them in the factory for manufacture of excisable goods is entitled to credit, even if the goods were assembled or installed by a contractor.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant had purchased the complete CPP from the contractor, who procured components, manufactured, erected, and commissioned the plant on site. The components were received in the factory premises under duty-paid invoices in the appellant's name. The appellant was not the manufacturer of the CPP but the ultimate user of the capital goods in manufacture of excisable goods.

The Tribunal relied on the Division Bench decision in Hindustan Zinc (08.02.2024) and the Tribunal's decision in Gujarat Ambuja Cements, upheld by the Himachal Pradesh High Court, which clarified that credit on components and accessories of capital goods is admissible to the manufacturer of final goods who uses such capital goods in its factory, even if the components are assembled by a contractor.

The Tribunal rejected the department's argument that the contractor alone was entitled to credit, noting that the contractor did not discharge excise duty on the assembled CPP and thus could not claim credit. The appellant had paid duty on components and had taken delivery in its factory, qualifying for credit.

Key Evidence and Findings: Agreements showed the contractor was responsible for procurement, manufacture, erection, and commissioning of the CPP. Components were received under duty-paid invoices in the appellant's name. The CPP was used exclusively in manufacture of excisable goods.

Application of Law to Facts: The appellant, as manufacturer of final goods and user of capital goods in the factory, was entitled to credit on components, regardless of the contractor's role.

Treatment of Competing Arguments: The department's reliance on the contractor's role as manufacturer was rejected. The Tribunal held ownership or manufacturer status of intermediate capital goods is irrelevant where credit is availed by the manufacturer of final goods who uses them in manufacture.

Conclusion: Denial of credit on components/parts of CPP installed by the contractor was unjustified; credit was rightly availed by the appellant.

Issue (iii): Eligibility of Credit on Iron and Steel Structures Used in Chimney Installation

Legal Framework and Precedents: Rule 2(a)(A) of the CENVAT Credit Rules defines capital goods to include parts, spares, and accessories of capital goods. The department challenged credit on steel items such as columns, platforms, angles, frames, and floor plates used as supporting structures for the chimney, contending these were civil structures not eligible for credit.

The appellant relied on Tribunal decisions including its own prior orders in Hindustan Zinc and other cases, which held that structural steel used in fabrication and support of capital goods qualifies as capital goods eligible for credit.

Court's Interpretation and Reasoning: The Tribunal held that the steel structures provided necessary support to the chimney, which is a capital good used in manufacture of excisable goods. Without such supporting structures, the chimney could not function properly. Therefore, these steel items formed an integral part of capital goods and were used in relation to manufacture of dutiable final products.

The Tribunal relied on its earlier decisions where similar steel structures were held to be capital goods eligible for credit.

Key Evidence and Findings: The appellant had availed credit on iron and steel items used in erection and installation of the chimney. These items were duty-paid and used within the factory premises.

Application of Law to Facts: The steel structures were accessories/parts of capital goods used in manufacture and thus eligible for credit under rule 2(a)(A).

Treatment of Competing Arguments: The department's contention that these were civil structures not used in manufacture was rejected as the Tribunal found them integral to the functioning of capital goods.

Conclusion: Credit on iron and steel structures used in chimney installation was admissible.

Additional Issues:

The Tribunal also considered the department's contention regarding extended period of limitation and imposition of penalties and interest. Since the demand was based on an interpretational issue now settled in appellant's favour, penalties and interest were not sustainable.

Significant Holdings:

"The appellant was justified in availing credit of duties paid on parts, components used in the Captive Power Plant installed by the Contractor."

"The ownership of goods is not relevant for deciding admissibility of CENVAT credit."

"The maintenance of separate books of accounts for the Captive Power Plant though located within the factory premises is for statutory compliance under Income Tax Act and cannot be treated as two different business entities."

"There is no physical removal of inputs/capital goods from the factory premises as the Captive Power Plant is located within the same premises. Therefore, provisions of rule 3(4)/3(5) of the Credit Rules are not applicable."

"The steel items used as supporting structures of the chimney form an integral part of capital goods and are eligible for credit."

"The Commissioner was not justified in denying credit or imposing penalties and interest, as the issue is one of interpretation settled in favour of the appellant by the Tribunal."

The Tribunal set aside the impugned order dated 31.01.2022 and allowed all thirteen appeals filed by the appellant.