Litigation 'Embedded' to Credit on Angles, Channels- SC Resolves

LITIGATION ‘EMBEDDED’ TO CREDIT ON ANGLES, CHANNELS – SC RESOLVES

Prepared By:

CA. Pradeep Jain

CA. Preeti Parihar

Sukhvinder Kaur, LLB [FYIC]

Introduction: -

“Better late than never” – perhaps the assessees taking Cenvat Credit on Cement, angles, channels, CTD or TMT bar, etc. used for construction of shed, building or structure for support of capital goods will be agreeing squarely with it. Finally, hon’ble Supreme Court of India has given its verdict on the burning issue of availment of Cenvat Credit on these goods. Recently, it has been held by the Apex Court that credit on these items will be allowed as capital goods. Though the decision pertains to rule 59Q of the old Central Excise Rules, 1944; but since the relevant provision is also covered in new rule 2(a) of the Cenvat credit Rules, 2004; it has vital importance in this scenario of litigation. Perhaps the most awaited decision has been given by the hon’ble Supreme Court. It seems to give rest to the various issues pertaining to these goods. This article is about the litigation journey of allowability of Cenvat Credit on the impugned goods.

Background:-

To remove the cascading effect of payment of excise duty at every stage, the Government allowed taking of credit of inputs, capital goods as well as input services used in or in relation to manufacture of final products or for providing the output services. Cenvat Credit Rules, 2004 were framed for defining the inputs, capital goods and input services. The relevant definitions are given in rule 2 of these rules. As truly said, law is never perfect and there is always a chance of litigation. Following this, a battle was going on regarding the availability of cenvat 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. Assessees were taking credit on these items as capital goods contending that these are inputs used in the manufacture of capital goods while department was saying that these items are neither capital goods nor these are inputs. The matter was referred to the Larger bench of the Tribunal in the case of Vandana Global v/s CCE, Raipur.

Then in Budget 2009, the Government introduced an amendment by way of explanation in the definition of inputs as defined under Rule 2 (k) to provide that cement, angles, channels, CTD or TMT bar and other items used for construction of shed, building or structure for support of capital goods are not inputs.

Recently the Larger Bench gave its verdict and held that the said items were neither capital goods nor inputs used in the manufacture of capital goods which were further used in the manufacture of final products. We are discussing the same in this piece.

Definition of Capital Goods and Inputs: -

Before continuing further, the earlier definitions of capital goods and inputs prior to Budget 2009 should be considered. The “Capital Goods” has been defined under Rule 2(a) of the Cenvat Credit Rules, 2004. In this definition it is prescribed that the capital goods include the goods falling in chapter 82, 84, 85, 90, tariff heading 6805 & 6804 and pollution control equipments alongwith their components spares and accessories will be the capital goods if used in factory of manufacturer or for providing the output service.

Further, the definition of inputs is given under Rule 2 (k) of Cenvat Credit Rules, 2004 which is very wide and includes all the goods except light diesel oil, high speed diesel oil and motor spirit if used in or in relation to the manufacture of the final product – whether directly or indirectly, whether contained in the final product or not. It also includes the paints, packing material, fuels, steam, etc. and should be used within the factory. Inputs also include goods used in the manufacture of the capital goods which are further used in the factory of the manufacturer.

Issue involved: -

As per Explanation 2 to the definition of inputs, the inputs would include the goods used in the manufacture of capital goods which were further used in the factory of the manufacturer. This aspect of what will constitute inputs which were used for manufacturing capital goods needed interpretation and gave rise to point of litigation.

Whether the cement and steel items like angles channels, joists, TMT bars and CTD bars which were used in the manufacture of structure of foundation on which the capital goods/machinery will be mounted will fall under the purview of inputs as per Explanation 2 to Rule 2 (k) was the question involved in many cases.

Alternative issue raised simultaneously was whether these cement and steel items can be said to be capital goods as being classified as accessories to the capital goods.

Assessee’s Stand: -

The assessee was contending that the cement and steel items were used to construct foundation or a structure on which the capital goods like cooling bed, tanks etc were mounted. Without such foundation or structure, the capital goods could not be installed and used in the manufacturing activity and therefore, the same were part of the capital goods. Thus, the cement and steel items used in the manufacture of such foundation and structure were inputs as per explanation (ii) to the Rule 2(k) of the Cenvat Credit Rules, 2004 and therefore, credit of duty paid on the same would be available.

Revenue’s Stand: -

The Revenue was alleging that since the said foundation or structures were embedded to the earth, these were immovable and as such, were not “goods” to fall under the definition of “Capital GOODS”. Further, it was contended that these structures could not be sold in the market. Therefore, credit was denied by raising the allegation that these do not satisfy the duo-test of ‘movability’ and ‘marketability’, due to which they cannot be said to be capital goods or inputs used in the manufacture of capital goods. Rather, these were civil structures on which credit cannot be allowed.

Judicial Verdicts: -

There are number of decisions in which the cement and steel items used for making foundation and civil structures was held to be inputs and cenvat credit was allowed on them.

In the case of Bhushan Steel & Strips Ltd. v/s Commissioner of C. Ex., Raigad [2008 (223) E.L.T. 517 (Tri. - Mumbai)] it was held that the credit will be allowed on cement and CTD bars used in manufacture of platform and merely because the platform is an immovable property is no ground for disallowing the credit. Similar decision has been given in the following cases:-

· Commissioner of Central Excise, Jalandhar v/s Pioneer Agro Extracts Ltd [2008 (087) RLT 0468 (P&H)]

· Bellary Steel & Alloys Ltd v/s Commissioner of C. Ex., Belguam [2005 (180) ELT 92 (Tri-Bang)]

· Ispat Industries Ltd. versus Commissioner of Central Excise, Mumbai [2006 (195) E.L.T. 164 (Tri. - Mumbai)]

· Divi’s Laboratories Ltd. vs Commissioner of Central Excise, Vishakhapatnam [2006 (196) ELT 0285 (Tri.-Bang.)]

· LLOYDS STEEL INDUSTRIES LTD. vs COMMISSIONER OF C. EX., NAGPUR [2007 (211) E.L.T. 275 (Tri.- Mumbai)]

In the above decisions, it was held that the cement, steel sheets, rods, etc. were used for laying the foundation of capital goods to be used in the factory of the manufacturer. Thus, the credit was allowed on them. On the other hand, there were also a number of decisions that held these items neither as capital goods nor as inputs. Some of these decisions are listed as follows:-

COMMISSIONER OF CENTRAL EXCISE, INDORE vs L.G. HOTLINE CPT LTD.[ 2004 (176) E.L.T. 443 (Tri. - Del.)]:

This case was decided by placing reliance on the decision of Hon’ble Supreme Court in the case of Jawahar Mills Ltd. wherein definition of capital goods was interpreted. In this case it was held that an immovable property cannot be termed as capital goods, by relying on this definition, it was held that 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.

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.

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 were lots of contradictory decisions on the issue, some favouring assessee, some favouring department. As such, there was an ambiguous situation till the matter was referred to larger bench.

Reference to Larger Bench:-

In the case of Vandana Global Ltd v/s Commissioner of Central Excise Raipur [2008 (230) ELT 0169 (Tri - Del.)] the issue was referred to the Larger Bench for consideration on the following issues: -

(a) Whether the term "capital goods" can include plant, structures embedded to earth?

(b) Whether the goods like angles, joists, beam, channels, bars, flats which go into fabrication of such structures can be treated as 'inputs' in relation to their final products as inputs for capital goods, or none of the above?

(c) Whether the credit can be allowed in respect of goods like angles, joists, beam, channels, bars, flats which go into fabrication of such structures and plant?

The matter was pending before the Larger Bench of the Tribunal, when the definition of input was amended by Budget 2009.

Budget Changes: -

The Explanation 2 to the definition of ‘input’ was amended to add the following words:

“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”.

The phrase excluding “cement, angles, channels, CTD bars or TMT bars and other items used for making factory shed, building or laying foundation or making structures for support of capital goods” from the scope of definition of inputs was introduced vide Budget Notification No. 16/2009-CE(NT) dated 07.07.2009.

The effect of this amendment was that the impugned goods viz. cement, angles, channels, CTD/TMT bars, etc. were specifically excluded from the definition of “inputs’. As such, the assessee now could not take credit on these items as inputs when used for constructing foundations or supporting structures for capital goods.

Post Amendment issue: -

Although the Board had excluded the cement and steel items from the purview of the definition of “input”, but the issue then emerging was that the Explanation 2 to Rule 2 (k) only had prospective effect. Therefore, before the said amendment, the said steel items and cement were covered under the purview of input and the cenvat credit taken on the duty paid on them was available before July 7, 2009.

Accordingly, it was being understood that the cenvat credit could be taken on the said items which were used for making foundation or structure before the amendment in the definition of “input”.

Larger Bench judgment in Vandana Global Ltd: -

Recently, the Larger Bench of the Tribunal decided the issue in Vandana Global Ltd v/s CCE, Raipur [2010-TIOL-624-CESTAT-DEL-LB] which has poured water on all the aspirations of assessees. The Larger Bench has held as follows:-

Ø The Explanation 2 to Rule 2 (k) was merely clarificatory in nature, as such, the amendment made by Budget 2009 did not change the scope of the rules or introduced any new provision.

Ø The capital goods defined in the Rules enumerates number of goods specified therein. The cement, steel rods, CTD bars, etc. were neither listed for special inclusion in the definition, nor were components, spares and accessories of machineries.

Ø The cement and steel items could not be said to be used in the course of manufacture of the final product.

Thus, the larger bench decided that “Goods Like cement and steel items used for laying ‘foundation’ and for building ‘supporting structures’ can neither be treated as spares, accessories and components for capital goods nor as inputs in relation to the final product. It was also held that no credit of duty paid on the same can be allowed under the Cenvat Credit Rules for the period before Budget 2009. The reference was answered in favour of the Revenue and against the assessee.

Recent Board Circular:-

Referring the Larger bench decision in case of Vandana Global, Board has issued Circular No. 930/20/2010- CX ., Dated: July 9, 2010. In this circular, it is clarified as follows:-

Ø Credit on capital goods is available only if these specifically fall in the definition of capital goods as given under rule 2(a) of the Cenvat Credit Rules, 2004;

Ø As regards ‘inputs', they should be covered under the definition of ‘input' as given in rule 2(k) of the CENVAT Credit Rules, 2004 and they should be integrally used in the manufacture of the final product;

Ø No credit is allowed on the items like cement, angles, channels, CTD or TMT bars and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods.

Ø No credit is allowed on inputs used for repair and maintenance of capital goods.

Therefore, the board has simply reiterated the decision of larger bench, nothing has been added. In other words, clarification does not clarify anything new and the situation was the same before as it is after issuance of this Circular.

Starting of bad time for assessees:-

After the decision of larger bench, bad time had started for the assessees. Various tribunals have started deciding the cases against the assessees. In a recent decision, Delhi CESTAT has ordered for pre deposit in an identical case and have directed for analogous hearing of all similar cases. It has been done in the case of Spice Communication Vs CCE, Chandigarh [2010-TIOL-915-CESTAT-DEL] wherein credit is denied on the cement and steel items used for laying foundation and building supporting structure. The decision has been passed by relying on the decision of Vandana Global.

It was doubted that the decision of Vandana Global will encounter the large no. of assessees, but it seems that the hon’ble Supreme Court is merciful to the assessees. So, here comes the latest judgment of Apex Court favouring the assessees.

Latest Supreme Court decision:-

Hon’ble Supreme Court has recently allowed credit of steel plates & M.S. Channels in the case of CCE, Jaipur Vs M/s Rajasthan Spinning & Weaving Mills Ltd [2010-TIOL-51-SC-CX]. The verdicts of Apex Court read as follows:-

“Central Excise - Modvat - assessee was entitled to avail of MODVAT credit in respect of steel plates and M.S. channels used in the fabrication of chimney for the diesel generating set, by treating these items as capital goods: steel plates and M.S. Channels, used in the fabrication of chimney would fall within the ambit of "capital goods" as contemplated in Rule 57Q. It is not the case of the Revenue that both these items are not required to be used in the fabrication of chimney, which is an integral part of the diesel generating set, particularly when the Pollution Control laws make it mandatory that all plants which emit effluents should be so equipped with apparatus which can reduce or get rid of the effluent gases. Therefore, any equipment used for the said purpose has to be treated as an accessory in terms of serial No.5 of the goods described in column (2) of the Table below Rule 57Q: SUPREME COURT”

In this case, steel plates & M.S. Channels were used for fabrication of chimney, which in turn became integral part of diesel generating set. The Apex Court favoured the contention of the assessee that the steel plates & M.S. Channels were components of chimney and chimney was held as accessory of DG set and as such credit of impugned goods was allowed as capital goods by hon’ble Supreme Court. This decision pertains to year 1999 when Central Excise Rules, 1944 were in force. Credit of capital goods was allowed under Rule 57Q of these rules. The capital goods were defined in explanation to this rule. The relevant part of this rule read as follows:-

“capital goods” means—

(a) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final products;

(b) components, spare parts and accessories of the aforesaid machines, machinery, plant, equipment, apparatus, tools or appliances used for aforesaid purpose; and

(c) moulds and dies, generating sets and weighbridges used in the factory of the manufacturer.”

As such, credit was allowed on the components, spare parts and accessories of machines, plant & equipments, etc. under this rule. If we recall the current definition of capital goods under rule 2(a), credit is allowed on components, spare parts and accessories of machines, equipments (falling under chapter heads specified therein) under clause (iii) of this rule.

If we compare this decision with new rules, the facts and circumstances are the same, the interpretation of relevant portion of both the rules, the old one and the new one, is the same. So, the ratio of this judgment may be made applicable to the current pending cases.

While parting: -

There has been a no. of ups and downs regarding availability of credit on items used in fabrication of plant & machinery. A number of issues were under litigation prior to budget, 2009. In some cases, credit of these goods was allowed as inputs & somewhere it was allowed as capital goods. The amendment by Budget 2009 denied the credit on these items as inputs. It was thought that the credit for prior period will be allowed as input. But this expectation was crushed by the decision of larger bench wherein it was held that the amendment is retrospective in nature. In this case, credit on impugned goods was also denied as capital goods. Further, the Board Circular dated July 9, 2010 has added the fuel to fire. Until this, the entire situation was in favour of department and poor assessees were empty handed. But every cloud has a silver lining…. It is proved by the recent Supreme Court decision allowing the credit on impugned goods as capital goods. Under Article 141 of the Constitution of India “the law declared by the Supreme Court shall be binding on all Courts within the territory of India”. So, now the ball is in hands of assessees… till when? God knows…

********

S.L.Bansal on 17 February, 2011 wrote:

After the decision of Supreme court in the case reported at CCE, Jaipur Vs M/s Rajasthan Spinning & Weaving Mills Ltd [2010-TIOL-51-SC-CX] the department is still isuing SCN on the basis of Vandna GloallCESTAT jyudgment and CBEC Circular. The matter should be referred to CBEC for amendement of CBEC Circluar after the decision of Supreme court as stated above. I do bot think that litigtion has ended. If you are havng any decision of Jaipur Commisionerate wherein above Supreme ourt judgment has been relied and demands raised on the basis of CBEC Circular and Vandna Global has been dropped. If so please send me copy of said judgment. S.L.Bansal

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Litigation 'Embedded' to Credit on Angles, Channels- SC Resolves

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