In a manufacturing process, there are a lot of raw materials used to make a final product. The excise duty paid on the said raw materials or inputs used in manufacturing of final products are eligible as Cenvat credit under the Cenvat credit scheme. However, all materials used in a manufacturing process are not inputs on which credit is available. The definition of input given in Rule 2 (k) of the Cenvat Credit Rules, 2004 prescribes what will constitute an “input” on which Cenvat credit is available to an assessee. Although most of the issues has been settled on this issue by judicial pronouncements but there are still some are pending. The credit of Cement, angles, channels CTD and TMT bars will be eligible for Cenvat credit is one of the issue in this direction. Although the amendment from this budget has tried to put an end to this controversy yet the old cases are pending. Hence, it is still important.
DEFINITION OF INPUT:- First of all, we have to see the definition of inputs given under Rule 2(k) of Cenvat Credit Rules, 2004. However, we are analyzing the definition existed before the amendment in this Budget. The definition of input (before amendment) is reproduced hereunder for ready reference:
(k) “input” means-
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
Explanation 1. - The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2. - Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;
Explanation 2 appended to the Rule 2 (k) provides that the goods used in the manufacture of capital goods which are further used in the factory of the manufacture will be “inputs” and therefore, credit is admissible on them. The goods used in manufacture of capital goods which are either immovable or embedded in the earth would cover a lot of goods. But would it also cover cement, angles, channels, CTD or TMT bars and other items used for construction? Or would these items be classified as “building material used for constructing plant & machinery”? As such the credit will not be allowed on the same or not. Whether the building material such as cement, angles, channels and the like used for the purposes of plant and machinery eligible for Cenvat credit is the question, the answer to which has been tried to seek in the following article resorting to the judgements given in various cases and interpretation of the language of the law. Further, there have been combined contentions of the assessee and the department which have resulted into the present ambiguous scenario in this matter. The following are the contentions of the assessee in respect of allowing credit on the materials used in the construction of plant and machinery. It has been seen that they have been allowed credit in respect of restricted materials and for the others the matter has been remanded to higher authorities. These are some of the cases that confirm the assesee’s viewpoint:
COMMISSIONER OF CENTRAL EXCISE, TIRUNELVELI vs INDIA CEMENTS LTD. [2005(188) E.L.T.304 (Tri.-Chennai): In this case, the credit was allowed on cement and 20mm rod material as capital goods but denied on Tooth point. The assessee relied on its own case having citation [2004 (175) E.L.T. 476 (Tri. – Chennai)] in which credit was allowed on Rebar coils, CTD Bars, TOR Steel, Joists and Cement as part of capital goods.
EAGLE FLASK INDUSTRIES LTD. vs COMMISSIONER OF CENTRAL EXCISE, PUNE-I [2004 (167) E.L.T. 116 (Tri. – Mumbai)]: It was held in this case that mortar and zimborne cement are used in the binding material in the consideration of the glass furnace and so clearly entitled to credit as inputs under Rule 57A since without their use, the furnace of which the glass process by the appellant may not be properly run. Hence, the Cenvat credit is allowed to the appellant.
LLOYDS STEEL INDUSTRIES LTD. vs COMMISSIONER OF C. EX., NAGPUR [2007 (211) E.L.T. 275 (Tri. – Mumbai)]: It has been held in this case that the Cement and steel, alongwith chemicals used for making foundations for installation of very heavy plant, machinery and equipment required to carry out manufacturing activity are eligible for capital goods credit.
BHUSHAN STEEL & STRIPS Ltd. v/s CCE, RAIGAD [2008 (223) ELT 517] in which the Tribunal has allowed input credit in respect of similar items used in the factory for construction work and fabrication of structures. It was also held therein that credit could not be denied on such materials on the ground that the materials have been used in immovable property/ civil construction. Although the credit was allowed as capital goods but it was contended that the credit can be allowed as input also.
These are some of the cases that were decided in favour of the department that the credit is not admissible on the materials used in the construction of plant and machinery:
COMMISSIONER OF CENTRAL EXCISE, INDORE vs L.G. HOTLINE CPT LTD.[ 2004 (176) E.L.T. 443 (Tri. – Del.)]: The assessee contended that cement, TOR steel have been used in the foundation of the machine and the equipment and the main plant; that it has been held by the Tribunal in the case of United Phosphorus Ltd. v. CC & CE, [2002 (150) E.L.T. 650 (Tri.)] that Rule 57Q does not provide that credit is not available, if the goods are used in the manufacture of goods which become immovable property; that therefore, the cement and TOR steel used in the foundation of machine and equipments are eligible capital goods. But the department’s contention that the definition of the capital goods as interpreted by the Hon’ble Supreme Court in the case of Jawahar Mills Ltd. makes it clear that these items which are used in the foundation of machines and equipments or for installation of conveyors are not capital goods as these are neither machine, machinery, etc. nor parts or components of the machine, machinery etc. The foundation work in which cement and TOR steel are used are nothing but civil construction on which capital goods purchased by them are being installed. As the civil construction does not become a part of the capital goods, cement and TOR steel, are not eligible for capital goods credit under Rule 57Q of the Central Excise Rules, 1944. Hence, the Cenvat credit is not admissible.
USHA ISPAT LTD. vs COMMISSIONER OF CENTRAL EXCISE, PUNE [2003 (156) E.L.T. 929 (Tri. – Mumbai)]: It has been decided in this case that Cement used in foundation of machinery in factory cannot be considered as component part of machine or equipment and hence denial of credit upheld. The contention of the department that it is difficult to consider cement as part of machinery or equipment as a component part is one without which the final machinery is not complete and into which the final machine can be resolved was confirmed.
HINDUSTAN ZINC LTD. versus DEPUTY COMMISSIONER [2009(236) E.L.T. 35(Raj.)] &[2008(225)ELT35]:- It has been that cement used as construction material not eligible as input in taking Cenvat credit under Rule 2(g) of Cenvat Credit Rules, 2002.
As such there are cases in this matter which are in favour and against the assessee and hence there remains ambiguity as to which viewpoint to be followed.
Reference to larger bench:-
One such case where this matter has been referred to larger bench was “Vandana Global Ltd. v/s Commissioner of Central Excise, Raipur” [2008 (230) ELT 0169 (Tri.-Del.)]. In this case, the assessee had used steel items like angles, joists, beams, channels, bars, flats etc. used in constructing structures which were permanently embedded to earth. These structures were related to power plants, sponge iron plants, ferro alloy plant steel division. The assessee availed credit of excise duty paid on such items by treating them as inputs and sometimes as capital goods.
The Revenue has opposed the contentions of the assessee by contending that the term capital goods cannot be given such a wide meaning and includes construction of plant; the credit on items like steel items and cement which go into manufacture of fabrication of immovable structure is not eligible.
The Tribunal referred the matter to the Larger Bench for resolving the issue.
This definition was amended recently by Budget Notification No. 16/2009-CE (NT) dated 07.07.09. Explanation 2 to Rule 2 (k) was amended in the following manner:-
Explanation 2. – Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods.
It is now provided that ‘Inputs’ which are eligible for availing Cenvat credit shall not include cement, angles, channels, CTD or TMT bar and other items used for construction of shed, building or structure for support of capital goods. Thus, this uncertainty has been removed to a large extent by this amendment of the recent budget but approach to be followed in the cases before such amendment is the major concern because the matter has been referred to the larger bench and the conclusion is awaited for the same
EFFECT OF THE AMENDED PROVISION:-
After perusing the Explanation 2 to Rule 2 (k) before and after amendment it becomes clear that by expressly excluding the said items from the definition now, it appears that the said items were included earlier. Therefore, credit on cement, angles, channels, CTD or TMT bar and other items used for construction of shed, building or structure for support of capital goods was admissible before the amendment. Therefore, an assessee will become eligible for Cenvat credit on these items if used by him before the amendment. This is also supported by the fact that the said amendment to Explanation 2 does not have retrospective effect.
Thus, if an assessee takes credit on the said items used in construction of structures for capital goods before 07.07.09 i.e. the date from which amendment to the definition is effective, the Department will not be able to contest the taking of Cenvat credit successfully.
Accordingly, the Department may lose in “Vandana Global Ltd. v/s Commissioner of Central Excise, Raipur” because of this interpretation of provisions. But we have to wait till the verdict comes. The department will contend that the impugned notification has made the things more clear which existed before such amendment.
Another question that still remains unanswered even after the amendment made is as to whether the credit would be deniable even if the said material being used in the construction or structure for support of capital goods is covered under the sub clause (iii) to the Rule 2 (a) defining the capital goods. This means that the goods used as spares, components, and accessories of the capital goods will still be eligible for Cenvat credit. This is due to the fact that the definition of inputs has been changed and there is no change in the definition of capital goods. Thus, there is still a hope for the assessee for taking the Cenvat credit on such items.
We have seen the judicial verdicts in favour and against the issue. The main pleading from the assessee side in most of the cases has been that the credit will be eligible as capital goods since these are used as spares, components and accessories of capital goods. It has been contended in few cases that it falls under the definition of inputs by virtue of Explanation 2 of definition of “Inputs” contained in Cenvat credit Rules. But the Board has amended the definition of inputs. Thus, still the controversy remains after this amendment. The assessee will be pleading that these are components, parts or accessories of Capital goods and as such he is eligible to take the credit on the same. But the department will plead that the same cannot be regarded as parts, components or accessories. Thus, it can be questioned whether it is an error on the part of Board? We should not always find fault with the Board. After all, it is famous maxim “Too err is human.”