whether the structural items could be treated as 'capital goods' under Rule 2(a) or as 'inputs under Rule 2(k) of the CENVAT Credit Rules, 2004?

PJ/Case Laws/2012-13/1233

Case: -COMMISSIONER OF CENTRAL EXCISE VISAKHAPATNAM-II COMMISSIONERATE V/S M/S SMILAX LABORATOREIS LTD

Citation: - 2012-TIOL-1224-CESTAT-BANG

Brief Facts: - The present appeal was filed by the department for stay of the impugned order passed by the Commissioner (Appeals). The respondent had availed CENVAT credit amount to Rs. 1389669/- on various structural items viz., MS angles, MS channels, plates, beams, etc. treated as 'capital goods' and claimed to have been used in the manufacture of various capital goods which were used in their factory for manufacture of excisable products during the material period. However, later on, they reversed the credit in the wake of audit objections in the month of July 2009. Subsequently, nevertheless, the respondent claimed refund of the amount. The department proposed to reject the refund claim by issuing a show-cause notice to the party, wherein it was alleged inter alia that the aforesaid structural items were not liable to be considered as 'Capital goods’ under Rule 2(a) of the CENVAT Credit Rules, 2004. The show-cause notice further ruled out the possibility of the said structurals being treated as 'inputs' as defined under Rule 2(k). The proposal in the show-cause notice was contested by the noticee. In adjudication of this dispute, the original authority rejected the refund claim on a few grounds, one of the grounds being that the party had not challenged their own self-assessment of the relevant monthly returns and consequently the claim for refund of the CENVAT credit utilized for payment of duty on final product was hit by the Hon'ble Supreme Court's decision in the case of M/s. Flock (India) Ltd. [2000 (120) E.L.T. 285 (S.C.)]=(2002-TIOL-208-SC-CX). Aggrieved, the party preferred an appeal to the Commissioner (Appeals). The learned Commissioner (Appeals) set aside the order-in-original and disposed of the assessee's appeal holding that "the claim of the appellants for credit into Credit Account is acceptable to the extent that the credit is available on the inputs used in the manufacture of capital goods subject to satisfaction of the jurisdictional Assistant Commissioner.

Appellant’s Contention: - The appellant contended that the appellant is not averse to grant of the benefit of CENVAT credit to the respondent either under Rule 2(a) or under Rule 2(k) of the CENVAT Credit Rules, 2004 subject to fulfillment of the requirements of usage of structural items in keeping with the provisions.

Respondent’s Contention: - The respondent argued that all the structural items were used in the manufacture of various capital goods such as storage tanks, reactors, etc. which were classifiable under chapter 84 of the Schedule to the Central Excise Tariff Act and therefore the structural items are liable to be treated as 'inputs' under Rule 2(k) and the 2nd explanation thereto. It is submitted that this claim was placed before the lower appellate authority but could not be placed before the original authority.

Reasoning of Judgment: - The CESTAT held that if the items can be shown to have been used in the manufacture of such structural items i.e., capital goods, they can be treated as 'inputs' as defined under Rule 2(k) in terms of the 2nd explanation thereto. If, on the other hand, the structural items are shown to have been used as components of capital goods classifiable under chapter 84 of the CETA Schedule, the structural items can be treated as 'capital goods' in terms of sub-clause (iii) of clause 'A' of Rule 2(a) of the CENVAT Credit Rules, 2004. Either way, it is up to the original authority to carefully examine the manner in which the structural items were used by the assessee.
Further the assessee could not place the necessary materials evidencing exact manner of use of the structural items, before the original authority. Apparently, they placed some of such materials before the appellate authority but that authority could not reach a conclusion on the manner of use of the various structural items. According to the appellate authority, the jurisdictional Assistant Commissioner had to examine the manner of use of all structural items by the assessee to his satisfaction. The original authority was unable to render useful findings for want of necessary materials which were not supplied by the party.

Decision: - Appeal allowed by way of remand.

Comment:-This is very interesting and important decision wherein the tribunal has held that if the goods are used in manufacture of capital goods then they will be allowed credit as inputs. But if the same are used as component of capital goods then they will be treated as capital goods. In both the cases, the credit will be allowed. The only difference is that 100% credit is allowed if these are treated as “inputs” but 50% credit in first year and remaining 50% in next financial year will be allowed if the credit is allowed as capital goods.

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PJ/Case Laws/2012-13/1233

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