Whether ownership and movability of capital goods essential for claiming credit?

Case:-M/s INDIAN OIL CORPORATION LTD Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, ROHTAK

Citation:-2014-TIOL-579-CESTAT-DEL

Brief facts:-The appellant are a Public Sector Undertaking, engaged in the manufacture and marketing of petroleum products. The dispute in this case is in respect of their refinery at Panipat where they manufacture various petroleum products falling under Chapter 27 and also goods covered by Chapter 39 of Central Excise Tariff, Act 1985. During period from July'07 to March'12 the appellant had taken Cenvat Credit of Rs.3,67,72,79,616/- in respect of various items of capital goods received by them for erection, installation and commissioning of Nephtha Cracker Plant. A team of officers from the Jurisdictional Central Excise Commissionerate, Rohtak, visited the appellant's premises to ascertain the correctness of the Cenvat Credit taken. The Officers found that the appellant had entered into composite lump sum turnkey contracts for various EPCC (Engineering, Procurement, Construction and Commissioning Contracts) projects with different contractors such as M/s. Larsen & Toubro Ltd., M/s. Toyo Engineering Corporation,M/s. IOT Engineering Projects Ltd., M/s. TechnimontSPA, M/s. Paharpur Cooling Towers Ltd.,M/s. V.A. Tech Wabag Ltd., M/s. Nicco Corporation Ltd., M/s. Indian Oil Tanking Ltd., M/s.Samsung Engineering Co. Ltd., M/s. Engineers India Ltd. etc. Enquiry was conducted with various officers of the appellant company who were associated with setting up of Nephtha Cracker Plant. After scrutiny of the documents of contractors of the appellant for various contracts and enquiry with their officers, the investigating officers were of the view that the appellant are not eligible for capital goods Cenvat Credit in respect of various items of machinery, equipment and instruments falling under Chapter 84, 89 & 90 of the Tariff and other items mentioned in Rule 2(a) of the Cenvat Credit Rules, 2004, inasmuch as the contractors of the appellant had only installed the plant fixed to earth, which is non-excisable. Accordingly, a Show Cause Notice dt. 07.08.2012 was issued to the appellant for recovery of allegedly wrongly taken capital goods Cenvat Credit amounting to Rs. 367,72,79,616/- during the period from April'07 to March'12 along with interest thereon under section 11AB and also for imposition of penalty on them under Rule 15(2) of the Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944. This Show Cause Notice was issued by invoking the extendedperiod under proviso to Section 11AC of the Central Excise Act, 1944 by alleging that appellant company has committed fraud and deliberately suppressed the information from the Department with intent to evade the payment of duty by taking wrong Cenvat Credit. Since it had been found that the appellant during the period from Oct.'11 to March'12 had wrongly availed and utilized the Cenvat Credit of Rs.58,13,624/- in respect of Cenvat Capital Goods to which they were not eligible, another Show Cause Notice dt. 02.11.12 was issued to them for recovery of the above amount of Cenvat Credit along with interest thereon and also for imposition of penalty. Both the Show Cause Notices were adjudicated by the Commissioner, Central Excise, Rohtak vide order-in-original No.23-24/CE/Commr./DM/RTK/2012, dated 31.12.12 by Commissioner Central Excise, Rohtak by which he confirmed the Cenvat Credit demand of Rs.367,14,65,992/- and 58,13,624/- against the appellant along with interest thereon under section 11AB and besides this, imposed penalty of Rs. 367,72,79,616/- on the appellant company under Rule 15(2) of the Cenvat Credit Rules, 2002 read with Section 11AC of Central Excise Act., 1944. In this order the Commissioner has held that the capital goods in respect of which the Cenvat Credit, in question, has been taken by the appellant, had been brought by their contractors and used in execution the EPCC projects on turnkey basis which resulted in coming into existence of the plant, which was immovable in nature and could not be considered as excisable goods and hence the capital goods used for setting up of such plants would not be eligible for Cenvat Credit. Another ground for denial of Cenvat Credit is that the Appellant were not the owner of the goods at the time of their receipt and what they had received was aplant which is an immovable property. Against this order of the Commissioner this appeal hasbeen filed along with stay application.

Appellant’s contentions:- Sh. B.L. Narsimhan, Advocate, the learned counsel for the appellant, pleaded that the capital goods Cenvat Credit, in question, has been taken by the appellant in respect of machinery, equipments, instruments etc. falling under Chapter 84, 85 & 90 of Tariff and other items which are covered by the definition capital goods, that no credit has been taken in respect of steel items, cement etc. used for supporting structures, of machinery, that for availment of capital goods Cenvat Credit, what is required is that the goods must be covered by the definition of capital goods as given in Rule 2(a) of Cenvat Credit Rules, 2004 i.e. goods fall in the Chapters mentioned in this Rule or are those goods which are mentioned in Rule 2(a) and that same are used in the factory, that how the goods covered by the definition of capital goods, as given in Rule 2(a), are used in the factory is not relevant, that whether the goods after being installed in the factory have become fixed to the earth is not relevant at all for capital goods Cenvat Credit, that ownership of the goods at the time of receipt is not relevant, as it is not disputed that the goods were used by the appellant company in their plant, that in this regard he relies upon the judgment of Hon'ble Punjab & Haryana High Court in the case of Commissioner of Central Excise, Ludhiana Vs. Pepsi Foods Ltd., reported in 2010 (254) ELT-284(P&H), that in any case, since the appellant company have paid to their contractors for the eligibility of the capital goods procured by them, the same belong to the appellant, that the issue as to whether the various items of capital goods after being installed in the refinery become fixed to earth plant which is not excisable, is not relevant at all for considering the capital goods for Cenvat Credit, that in this regard he relies upon the judgment of the Tribunal in the case of Omax Auto Ltd. (Final Order No.56592-56594/2013 dt. 15.05.2013) = 2013-TIOL-1276-CESTAT-DEL, that in terms of the EPCC contracts given to various contractors for various projects, the material received in the factory of the appellant are to be the property of the appellant and the contractor hold them in trust for the appellant company and in view of this, the finding of the Commissioner that at the time of receipt of goods in the factory, the same were property of the contractors is factually incorrect, that in any case the Cenvat Credit demand is time barred, as in the circumstances of the case and also in view of the fact that the appellant are Public Sector company run by the Govt. of India, it would be absurd to allege wilful suppression of the facts and fraud with intent to evade the payment of duty, that the impugned order is not sustainable at all, that the appellant company have strong prima facie case in their favour and hence the requirement of pre-deposit of Cenvat Credit demand, interest thereon and penalty may be waived for hearing of the appeal and the recovery thereof may be stayed till the disposal of the appeal.

Respondent’s contentions:-Sh. Amresh Jain, learned DR, vehemently opposing the stay application, pleaded that notwithstanding the fact that the goods procured by the appellant's vendors/contractors and brought into the refinery were machinery and equipment, the appellant would not be eligible for Cenvat Credit, as what the appellant had received in terms of their various EPCC contracts with their contractors were the plants, and the plants are fixed to earth and not excisable, that the appellant, therefore, would not be eligible for Cenvat Credit of the duty involved on various items of machinery which are installed and which together constitute a plant, that in support of his proposition that plant is non-excisable, he relies upon the judgment of the Hon'ble Supreme Court in the case of Quality Steel Tubes Pvt. Ltd. Vs. CCE, reported in 1995(75) ELT-17 (S.C.) = 2002-TIOL-25-SC-CXand also the Order No. 58/1/2002-CX dt. 15.02.2002 issued by the Board under section 37B of the Central Excise Act, that in any case, the appellant at the time of receipt of the goods in their factory, were not their owners and hence they were not liable for the Cenvat Credit and that the appellant, though a Public Sector Undertaking, have wilfully suppressed the relevant facts from the Department and hence longer limitation period under Proviso to Section 11A (c) has been correctly invoked and penalty on them under Rule 15(2) of Cenvat Credit Rules, 2004 read with Section 11AC has been correctly imposed. He, therefore, pleaded that the Commissioner's Order is absolutely correct and the respondent have been able to establish prima facie case in their favour and hence this is not the case for total waiver from the requirement of pre deposit.

Reasoning of judgment:-We have considered the submissions from both the sides and perused the records. The Cenvat Credit, in question, has been taken in respect of various items of the machinery. It is not disputed that the goods in respect of which Cenvat Credit, in question, has been taken are covered by the Chapter 84, 85 & 90 of the Central Excise Tariff or are the item specifically mentioned in Rule 2(a) and accordingly are covered by the definition of the 'capital goods' as given in Rule 2(a) of Cenvat Credit Rules. The Department seeks to deny the Cenvat Credit on the two grounds, namely ;-
(a) at the time of receipt of capital goods in the refinery where the same had been installed for setting up Nephtha Cracker Plant, the appellant were not owner of thegoods, as the same had been brought by their contractor for setting up the plant;and

(b) the goods after being installed had become fixed to earth structure which is notexcisable and hence the Cenvat Credit of Central Excise duty involved these goodswould not be available to the appellant.

In term of the definition of 'capital goods' as given in Rule 2(a) of the Cenvat Credit Rules, 2004, the capital goods are those goods which are specified in this Rule and which (except for office equipment or appliance) are used in the factory of the manufacturer of the final products or for providing of output service. Thus any item which is covered by the list of the items mentioned in Rule 2(a) of the Cenvat Credit Rules, except for office equipment or office appliances, and is used in any manner in the factory of the manufacturer of the final products, would be covered by the definition of the capital goods and accordingly would be eligible for Cenvat Credit. There is absolutely no requirement that the capital goods at the time of receipt must be owned by manufacturer or that the same would cease to be capital goods, if they are installed in the factory and become fixed to earth. In fact, most of the capital goods the machinery, equipment or instruments covered by Chapter 84, 85 & 90, 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. Just because after being installed in the factory, the capital goods put together become a plant which is a fixed to earth structure, the Cenvat Credit cannot be denied on the basis that the plant which is fixed to earth structure, is not excisable. This preposition of the Department is, in fact absurd, as there is no such condition in Rule 2(a) for capital goods. For capital goods Cenvat Credit, the items must be among those mentioned in this Rule and should have been used in the factory of the manufacturer and how the items are not used relevant. 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 is "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. If the logic of the commissioner in the impugned order is accepted, no capital goods Cenvat Credit can be allowed in respect of any item of capital goods enumerated in Rule 2(a) of the Cenvat Credit Rules, as all the items - various items of machinery covered under Chapter 84, 85 & 90 of the Tariff, pipes & tubes, tanks, pollution control equipments, refractories etc. have to be installed in the factory before being put to use and after installation, the same would become fixed to earth plant. Reading the impugned order gives an impression that the same has been passed without any application of mind. We, therefore, are of prima facie view that impugned order is not sustainable and as such the appellant have strong prima facie case in their favour. The requirement of pre-deposit of the Cenvat Credit demand, interest thereon and penalty is, therefore, waived for hearing of the appeal and recovery thereof is stayed till the disposal of the appeal.

Decision:-The stay application is allowed.

Comment:- The analogy is the case is that the credit of capital goods is available as far as it is covered by the list of items mentioned in Rule 2 (a) of the Cenvat Credit Rules, 2004. There is absolutely no requirement that the capital goods at the time of receipt must be owned by manufacturer or that the same would cease to be capital goods, if they are installed in the factory and become fixed to earth. If the contention that the capital goods credit is not admissible as the same are permanently affixed to the Earth is accepted, capital goods credit would not be admissible for most of the items specified in the definition of capital goods. Accordingly, the stay application was allowed because the capital goods credit was denied on absurd and irrelevant grounds.

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PJ/Case Law/2014-15/2154

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