2023 (6) TMI 143 - HC - Central Excise

CENVAT Credit - capital goods or not - GP coils, GP sheets, aluminum sections used in making air ducts for humidification machinery - Rule 2 (a) of CCR, 2004 - HELD THAT - In the instant case, the GP sheets etc. are required for proper functioning of air humidifiers machine which ultimately supports the working of machinery and plant etc. of the appellant Company used in manufacture of cotton yarn and, therefore, they are integral part of the machinery as well as capital goods, as these ducts hold the air humidifier machine in position which ultimately helps in proper manufacturing of final product. It is not the case of the revenue that these items were not required to be used for making ducts. They might not be falling under Rule 2 (a) (A) (i) of the Rules, 2004 but they certainly fall under Rule 2 (a) (A) (iii) of the Rules, 2004 and can also be treated as spares and accessories of the capital goods i.e. humidifier machine. The GP sheets and GP coils etc. used as ducts for the humidifier machine also fall within the definition of inputs as given in Rule 2 (k) of the Rules, 2004 which says that input includes goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. Learned counsel for the revenue had vehemently argued that this explanation was no more available to the appellant in view of amendment dated 07.07.2009 in Explanation 2 of Rule 2 (k). As per this amendment, the inputs only include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but does 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. On applying the user test also, the case of the appellant can be stated to be squarely covered with the ratio of law as laid down in the above cited authorities. As such, there cannot be any hesitation to hold that the GP coils, GP sheets or aluminum sections which were used for preparing air ducts for the humidifier machine installed in the factory premises of the appellant were not only inputs but could also be treated as components or accessories of the humidifier machine and as falling within the definition of Rule 2 (a) (A) (iii) of the Rules, 2004 and were entitled to cenvat credit. The Tribunal was not justified in rejecting the claim of the appellant for availing cenvat credit in respect of aforementioned GP sheets and coils etc. by treating them as capital goods and as a consequence thereof, the revenue was also not entitled to claim any interest or impose any penalty on the amount of cenvat credit as taken on GP coils, GP sheets and aluminum sections etc. Appeal allowed - the issue answered in favour of the appellant assessee and against the revenue.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Eligibility of cenvat credit on GP coils, GP sheets, and aluminum sections used in manufacturing ducts for air humidification machinery.

Summary:

Condonation of Delay:
The application for condonation of delay of 4 days in filing the appeal was allowed for the reasons mentioned in the application.

Main Case:

Issue 1: Eligibility of Cenvat Credit on GP Coils, GP Sheets, and Aluminum Sections:
The appellant, engaged in manufacturing cotton yarn, availed cenvat credit on GP coils, GP sheets, and aluminum sections used in making ducts for air humidification machinery. The adjudicating authority confirmed a demand of Rs. 15,16,552/- and imposed an equivalent penalty. The First Appellate Authority partially allowed the appeal, disallowing Rs. 7,67,824/- but upholding the remaining demands. The Tribunal dismissed the appellant's appeal, holding that the GP sheets, GP coils, and aluminum sections did not qualify as "capital goods" under the Central Excise Tariff Act, 1985, and were not eligible for cenvat credit.

Issue 2: Definition and Interpretation of "Capital Goods" and "Inputs":
The appellant argued that these items should be considered as "capital goods" under Chapter 84 of the Tariff Act and as accessories under Rule 2 (a) (A) (iii) read with Rule 2 (a) (A) (i) of the Cenvat Credit Rules, 2004. The Tribunal had confused the terms "plant" and "machinery" and failed to apply the user test. The appellant also argued that these items should be considered as "inputs" under Rule 2 (k) of the Rules, 2004.

Tribunal's and Revenue's Stance:
The Tribunal and revenue argued that the GP sheets and aluminum sections fell under Chapters 72 and 76 of the Tariff Act, respectively, and were not covered under Rule 2 (a) (A) (i) of the Rules, 2004. They could not be treated as components, spares, or accessories of capital goods.

Court's Analysis and Judgment:
The court referred to the definitions of "capital goods" and "inputs" under the Rules, 2004, and previous judgments, including Rajasthan Spinning & Weaving Mills Ltd. and Thiru Arooran Sugars. The court applied the "user test" and held that the GP coils, GP sheets, and aluminum sections used for making ducts for the air humidifier machine were integral to the machinery and fell within the definition of "capital goods" and "inputs." The amendment to Explanation 2 of Rule 2 (k) dated 07.07.2009 was not retrospective and did not affect the appellant's case.

Conclusion:
The Tribunal was not justified in rejecting the appellant's claim for cenvat credit on GP sheets and coils. The appeal was allowed, and the Tribunal's order was set aside. The revenue was not entitled to claim interest or impose penalties on the cenvat credit amount. The question was answered in favor of the appellant, with no order as to costs. All miscellaneous applications were disposed of.