Credit of Capital Goods not owned by manufacturer during receipt at factory

CA Manish Garg

CENVAT rules state that when the capitals goods are used by manufacturer, the taxes paid on the same are allowed as input credit and if the goods as final product are not chargeable to duty then credit is not allowed. Manufacturing industries are working to manufacture the product for the consumption of the consumer requires lot of machines and capital goods for the transportation as well as other purposes. This high amount of duty imposed upon them is allowed as credit to reduce the cascading effect of taxation.

Rule 3 of the CENVAT Credit states that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of duties , paid on any input or capital goods received in the factory of manufacture of final product. But the ownership of the goods matters; it does not mean that the manufacturer only safe keeping the capital goods on the behalf of other is eligible for the credit but if the goods belongs to manufacturer not owned by him at the time of receipt is still eligible for CENVAT Credit.

This above matter has also been argued at New Delhi CESTAT- in the case of M/s Indian Oil Corporation Ltd Vs CCE & ST, where stay has been given regarding pre-deposit of the Cenvat Credit demand, interest thereon and penalty thereon as there is no requirement that capital goods, at time of receipt, must be owned by manufacturer or that same would cease to be capital goods, if they are installed in factory and become fixed to earth; hence, credit cannot be denied on ground that they are not owned by assessee at time of receipt or after installation, they become fixed to earth.

Further if put some light on the definition of capital goods, pipes and tubes, pollution control equipment refractories, and storage tanks are required to be installed and after installation, the same put together constitute a manufacturing plant, which is a fixed to earth structure but still the CENVAT of pipes and tubes are allowed.

The words used in Rule 2(a) are “used in the factory of manufacturer of the final product” not “used in the manufacture of final product”. Therefore, once any item received in the factory as “capital goods” in terms of Rule 2(a) of the Cenvat Credit Rules, and is used in the factory, the manufacturer would be entitled to Cenvat Credit of excise duty paid in respect of the same.