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PJ/CASE LAW/2015-16/2647

Whether capital goods are required to be installed in factory for taking credit?

Case:-COMMISSIONER OF C. EX. & S.T., DAMAN VERSUSAARTI INDUSTRIES LTD.
 
Citation:-2014 (307) E.L.T. 553 (Tri. - Ahmd.)
 
Brief facts:- Appeal No. E/186/2010-SM, filed by the Revenue, is directed against the Order-in-Appeal No. AKP/56-57/DIVN Vapi-I/DAMAN/2009-2010, dated 20-10-2009, passed by the Commissioner (Appeals), Central Excise, Customs and Service Tax, Daman.
Briefly stated facts of the case are that M/s. Aarti Industries Limited, the respondent, are engaged in the manufacture/processing of Organic and Inorganic Chemicals and availing Cenvat credit. The respondent purchased cylinders for storage of hydrogen gas for use in the process of manufacture of various chemicals in its factory. The hydrogen gas is procured from various suppliers, and in this process the empty Hydrogen Cylinders have to move out from the respondent’s factory frequently for refilling of hydrogen gas. After refilling, the Hydrogen Cylinders are received back in the respondent’s factory and put to use in the appellant’s factory for manufacture of final products. The Hydrogen Cylinders are installed on hired vehicles and interconnected to form ‘hydrogen cylinder bank’ for ease of their use, movement within appellant’s factory, and for transportation of empty ‘hydrogen cylinder bank’ from appellant’s factory to hydrogen gas supplier premises and back to respondent’s factory after refilling. The respondent took Cenvat credit of Rs. 35,37,783/- of excise duty paid on Hydrogen Cylinders under the category of ‘capital goods’ during the period from October, 2004 to May, 2007. Revenue objected to this Cenvat credit on the ground that the gas cylinders are not installed in the respondent’s factory. The original adjudicating authority disallowed the Cenvat credit to the respondent along with interest, imposed penalty of equivalent amount under Section 11AC on the respondent, and imposed penalty of one lakh rupees on Production Manager of the respondent. On appeal, the Commissioner (Appeals) allowed respondent’s appeal by setting aside the Order-in-Original of the adjudicating authority.
 
Appellant’s contention:-Shri G.P. Thomas, ld. AR for the appellant, reiterated the findings of the original adjudicating authority and argued that the impugned Order-in-Appeal is liable to be set aside.
 
Respondent’s contention:-Shri Mehul Jivani, learned advocate for the respondent argued during the course of hearing and written submissions filed on 2-5-2014 that Cenvat credit of duty paid on the capital goods - hydrogen gas cylinders - was correctly taken by the respondent as the same were being directly used by them in the manufacture of final products as required under Rule 2(a)(A) of the Cenvat Credit Rules, 2004. That there was no requirement under the said Rules that the capital goods must be installed in the factory for availing Cenvat credit. He cited the following case laws to show that condition of use of capital goods is satisfied even if the capital goods temporarily move out from the factory for repairs or for transportation of inputs/final products :
(i)        GNFC Limited. v.Commissioner of Central Excise, Vadodara [2012 (278)E.L.T.273 (Tri.-Ahmd.)]; and
(ii)       Diamond Cements v. Commissioner of Central Excise, Bhopal [2006 (205)E.L.T.868 (Tri.-Del.)].
It has been further argued by the respondent that Commissioner (Appeals) does not dispute the use of Hydrogen Cylinder bank in the factory for the manufacture of excisable goods and even show cause notice issued does not indicate the provisions of Rule 4(5)(a) and Rule 3(5) of the Cenvat Credit Rules, 2004 have not been followed. It was therefore, the case of the respondent that Revenue has gone beyond the scope of the show cause notice in filing the appeal. Learned advocate relied upon the following case laws :-
(a)       Bajaj Auto Limited [2003 (151)E.L.T.23 (Bom.)]
(b)       Amar Coach Builders [2005 (191)E.L.T.621 (Tri.-Del.)]
(c)       Nava Bharat Ferro Alloys Limited [2004 (166)E.L.T.72 (Tri.-Bang.)]
(d)       Swastik Coaters Pvt. Limited [1999 (107)E.L.T.533 (Tri.)]
(e)       HCL Infosystems Limited [2007 (216)E.L.T.728 (Tri.-Chennai)].
It was also the case of the learned advocate appearing on behalf of respondents that reversal of the credit at the time of removal of cylinders and again availing the Cenvat credit at the time of getting refilled cylinders, is Revenue neutral exercise and such a procedure will not help the Revenue in any way. Time-bar nature of the duty was also argued by the respondent on the ground that all the details regarding taking of Cenvat credit on cylinders as capital goods was shown in the periodical returns filed with the department.
 
Reasoning of judgement:- The provisions of Rule 2(a)(A) of the Cenvat Credit Rules, 2004 are reproduced below :
“Rule 2.Definitions. - In these rules, unless the context otherwise requires, -
(a)“capital goods” means :-
(A)       the following goods, namely :-
(i)        all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, [heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804] of the First Schedule to the Excise Tariff Act;
(ii)        pollution control equipment;
(iii)       components, spares and accessories of the goods specified at (i) and (ii);
(iv)       moulds and dies, jigs and fixtures;
(v)       refractories and refractory materials;
(vi)       tubes and pipes and fittings thereof; ***
(vii)      storage tank, and
(viii)     motor vehicles other than those falling under tariff Headings 8702, 8703, 8704, 8711 and their chassis (but including dumpers and tippers),
used -
(1)in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or
(1A)outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or
(2)for providing output service;”
A perusal of the above provisions reveal that the only condition for availing Cenvat credit on capital goods is their use within the factory of the manufacturer in the manufacture of final products. It is not disputed that the Hydrogen Cylinders are not capital goods. At present there is no requirement under the Cenvat Credit Rules that the capital goods must be installed in the factory of production. Evidently, hydrogen gas cylinders are used within the respondent’s factory for manufacture of final products, although the cylinders move out temporarily from the appellant’s factory for the purpose of refilling of hydrogen gas. Therefore, the requirement of use of capital goods within the appellant’s factory in terms of the said Rule 2(a)(A) is fulfilled. Further, Rule 4(5)(a) of the Cenvat Credit Rules, 2004 reads as under :
“(5)(a)The Cenvat credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning, or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the Cenvat credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the Cenvat credit attributable to the inputs or capital goods by debiting the Cenvat credit or otherwise, but the manufacturer or provider of output service can take the Cenvat credit again when the inputs or capital goods are received back in his factory or in the premises of the provider of output service.”
Therefore, the temporary to and fro movement of Hydrogen Gas Cylinders for the purpose of refilling of hydrogen gas is otherwise covered by the above provisions of the Cenvat Credit Rules, 2004.
It has been correctly argued by the respondent that the adjudication proceedings and the appeal proceedings cannot go beyond the scope of show cause notice. Further, reversal of credit at the time of removal of cylinders and taking of credit at the time of receipt of duly filled cylinders will not help Revenue in raising any additional Revenue as it is revenue neutral exercise.
In view of the above observations, appeal filed by the Revenue is rejected.
 
Decision:-Appeal rejected.
 
Comment:- The analogy of the case is that the fact of movement of the cylinders temporarily from the appellant’s factory for the purpose of refilling of gas cannot be the reason to deny cenvat credit of capital goods. There is no requirement under the Rule 2(a)(A) of the Cenvat Credit Rules, 2004 that the capital goods must be installed in the factory for availing Cenvat credit. Alternatively, even if the contention of reversing credit on removal of cylinders and taking credit on their receipt is observed, it will be revenue neutral exercise. Therefore, the cenvat credit on capital goods was allowed.
 
Prepared by :- Monika Tak

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