CENVAT CREDIT ON INPUT – RECENT JUDICIAL DECISIONS

[Mr. M. GOVINDARAJAN]

Rule 2(k) of CENVAT Credit Rules, 2004 defines the term ‘input’ (as amended up to date) as–             

(i) all goods used in the factory by the manufacturer of the final product; or

(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or

(iii) all goods used for generation of electricity or steam for captive use; or

(iv) all goods used for providing any output service; but excludes-

(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;

(B) any goods used for -

(a) construction or execution of works contract of a building or a civil structure or a part thereof; or

(b)  laying of foundation or making of structures for support of capital goods, except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act;

(C) capital goods except when used as parts or components in the manufacture of a final product;

(D) motor vehicles;

(E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and

(F) any goods which have no relationship whatsoever with the manufacture of a final product.

 Explanation. – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;

There is many a litigation on interpretation of the provisions of this section in determining the eligibility of CENVAT credit on inputs. In this article some of the recently reported judicial decisions on this subject are discussed as below:

In ‘Bodal Chemicals Limited V. Commissioner of Central Excise, Ahmedabad’ – 2013 (7) TMI 4 - CESTAT AHMEDABAD it is undisputed that the appellant had availed the CENVAT credit of the items like solvents, master-coat, MS bar, angle, beam, HR coils etc.,   These goods were in the manufacture of vessels which were further utilized for the manufacturing of dye intermediaries. Such items were received by the appellants and consumed in the factory premises. Where the CERA auditors directed the assessee to reverse the amount of CENVAT credit, the appellants did so, but subsequently finding that these items on which credit was availed, can also be considered as input as they have used the said inputs on fabrication of machinery which is used in the manufacture of dye intermediaries, the appellants recredited the amount reversed. The Tribunal held that the appellants were entitled to credit of duty paid as per the provisions of Rule 2(k) of CENVAT Credit Rules, 2004.

In ‘Monarch catalyst Private Limited V. Commissioner of Central Excise, Thane- I’ – 2013 (7) TMI 5 - CESTAT MUMBAI the input credit has been denied on the premise that the appellant used furnace oil as fuel for manufacturing of dutiable goods as well as job work goods. The appellants are not maintaining separate accounts of the full consumed in the manufacture of dutiable goods and job work goods, therefore it was held by lower authorities that appellant is not entitled to input credit of furnace ore as they are not maintaining separate account of dutiable as well as exempted goods as per Rule 6(2) of CENVAT Credit Rules. The Tribunal held that the appellant was not manufacturing any exempted goods.   The findings of lower authorities are not sustainable and they have misrepresented the law.   The denial of credit on inputs is unsustainable.

In ‘Shree Rajasthan Syntex Limited V. Commissioner of Central Excise, Jaipur’ – 2011 (4) TMI 803 - CESTAT, NEW DELHI the Tribunal held that the show cause notice clearly refers to the use of cement and MS bars in the construction work of storage tanks.   However the use of the storage tank is humidification plant or otherwise is not relevant.   It is not disputed that the definition of ‘capital goods’ under CENVAT Credit Rules gives special treatment to storage tank and is included in the term ‘capital goods’ and the term ‘input’ also includes the goods used in the manufacture of capital goods which are further used in the factory of the manufacture.   It is not disputed that the appellants were using storage tanks in their factory in relation to manufacture of final products, namely, synthetic yarn.   Therefore as cement and MS bars are used in the manufacture of storage tank the appellants are eligible for CENVAT credit on these inputs.

In ‘Mesto minerals (I) Private Limited V. Commissioner of Central Excise, Ahamedabad’ – 2013 (7) TMI 3 - CESTAT AHMEDABAD the Tribunal found that there is no dispute that the wooden propellers are used by the appellant for making sand moulds from which he manufactures the casting propellers.   It is also undisputed that the excise duty has been paid on such wooden propellers by the manufacturers. The appellant has taken CENVAT credit of the duty paid under the capital goods.   The definition of the input in CENVAT Credit Rules, 2004 clearly indicates at explanation (ii) that ‘input’ includes the goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.   The Tribunal held that the item even if it is not the capital goods, it can be considered as an input as there is no dispute about the use in the factory premises of the appellant for manufacturing of propellers by casting.

In ‘Fourrts (India) Laboratories Private Limited V. Commissioner of Central Excise, Chennai’ – 2013 (292) ELT 214 (Tri. Chennai) the Tribunal was of the view that the lower appellate authority is right in rejecting the claim of the appellant on the ground that the steel doors cannot be considered as an input for medicines when such doors are used in the store rooms where medicines are stored and have no role in the manufacturing process.

In ‘Kisan Sahkari Chini Mills Limited V. Commissioner of Central Excise, Lucknow’ – 2013 (7) TMI 2 - CESTAT NEW DELHI it was held that repair and maintenance of plant and machinery in an activity without which smooth manufacturing is not possible. Commercially, manufacturing activity is not possible with malfunctioning machines and leaking tanks, pipes and tubes.   Therefore the activity of repair and maintenance of plant and machinery is an activity which has direct nexus with manufacture of final products and the goods used in the activity would be eligible for CENVAT credit. For eligibility of an input for CENVAT credit what is relevant is whether the activity in which that input is used has nexus with the manufacture of final product and the nexus has to be determined on the basis of criteria as to whether that activity is commercially essential for manufacture of final products.

In ‘Dicitex Décor Private Limited V. Commissioner of Central Excise, Thane’ – 2012 (11) TMI 996 - CESTAT, MUMBAI the Tribunal held that the hangers are nothing but packing material in which the fabrics have been placed and therefore they are inputs as per Rule 2(k) of Cenvat Credit Rules, 2004 and rightly eligible for CENVAT credit.   As regards, book lets containing the designs, the same has been used in the manufacture of fabrics exported without the designs the fabrics could not have been manufactured.   Therefore drawings and designs are essentially inputs in or in relation to the manufacture of final products.   Therefore they qualify as inputs eligible for CENVAT credit under Rule 2(k) of CENVAT Credit Rules, 2004.

In ‘Hindustan Zinc Limited V. Commissioner of Central Excise, Jaipur-II’ – 2013 (3) TMI 427 - CESTAT NEW DELHI the Tribunal held the following inputs are eligible for CENVAT credit:

• The items used for repair and plant and machinery would be eligible for CENVAT credit;
• The asbestos jointing sheets are used for plugging the leakages in the pipes. It is to be treated as an item used for repair and maintenance and hence the same would be eligible for CENVAT credit;
• Rough castings, unmachined steel castings, HRCS castings etc., are used as a replacement for parts of the machinery and hence the same have to be treated as components and accessories of the cement, plants and machinery.   Therefore credit is eligible;
• Oxygen, nitrogen and welding electrodes used for repaid and maintenance of plant and machinery would be covered by the definition of ‘input’ as given in Rule 2(k) of CENVAT Credit Rules, 2004.

In ‘Commissioner of Central Excise, Bolpur V. Sova Ispat Alloys Limited’ – 2012 (9) TMI 603 - CESTAT, KOLKATA MS round is used to strike pointed furnace wall for making leakage point to bring hot liquid molten metals out of furnace and setting melted/consumed therein.   The Tribunal held that the use of MS round being essential as no manual operation was possible under high temperature.   In that view, use of MS round was part of manufacturing process and it was input for which credit could be taken.

In ‘Hindustan Zinc Limited V. Commissioner of Central Excise, Jaipur’ – 2013 (1) TMI 29 - CESTAT NEW DELHI the issue before the Tribunal is whether tyres which are used as part of LDPT can be considered as inputs. The Revenue argued that when LDPT cannot be considered as either capital goods or input then its parts also cannot be considered as either capital goods or input then its parts also cannot be considered as either capital goods or input and hence input credit should be denied.   The Tribunal held that nothing in the definition of ‘capital goods’ or ‘inputs’ provides for explicitly excluding tyres from either of the definitions.   However there can be hardly any doubt that tyres are not covered by the definition for ‘capital goods’.   However this is not a case with the definition of ‘inputs’.   If it is to be excluded it has to be only by implication.   Revenue has not advanced any argument that tyres are being accounted as capital assets and hence it cannot be considered as inputs.   Tyres get used in the process of handling raw materials which is an integral part of manufacturing process. CENVAT credit is allowed on goods which get consumed over a period of time.

The erstwhile definition for ‘input’ provides that all goods except light diesel oil and motor spirit commonly known as petroleum, used or in relation to the manufacture of final products whether directly or indirectly. The new definition excludes any goods which have no relationship with the manufacture of a final product (Rule 2(k)(F)).   It is, therefore, implied that whatever goods which have the nexus with the manufacturing activities either directly or indirectly will be eligible for inputs.