CENVAT CREDIT ON CAPITAL GOODS

[Dr. Sanjiv Agarwal]

Can Capital Goods be Considered as Inputs

The capital goods which are used by the manufacturer or the service provider and which do not fall within the ambit of definition of input in rule 2(k) are to be treated as inputs and are entitled for the Cenvat credit. The CBEC through its Letter dated 23-10-2008 vide F No. 137/120/2008 CX-IV has already clarified the position and it states that the capital goods are entitled for Cenvat credit if it is used in the process. The relevant portion of the letter issued by the Department is as follows:

"The matter has been examined. It is possible that some of such goods may either fall within the definition of 'capital goods' or may not be covered under the said definition. However, as these goods are primary requirements for providing the above mentioned 'output services' for such service providers, the goods including vehicles, aircrafts, vessels etc., are in the nature of 'inputs'. It is emphasized here that this clarification is valid only when the output service is in the nature of service defined under the provisions of Section 65(105)(zzzj) of the Finance Act, 1994 and the goods in question are the tangible goods supplied during the course of providing the taxable services."

In the case of CCE v. Tata Engineering and Locomotives [2003 (11) TMI 68 - SUPREME COURT OF INDIA], the Apex court has held that capital goods like lift, trucks, lifting tackles, trolleys etc. were inputs since they were used in or in relation too manufacture of final product. In plethora of judicial pronouncements is has been held that if certain capital goods are not covered under the definition of capital goods as per rules then too they may be eligible for inputs if used in or the purpose of taking cenvat credit. Some of these are as under –

(1)      Union Carbide of India v. CCE [1996 (6) TMI 308 - CEGAT, NEW DELHI]

(2)      CCE v. Madhya Bharat Papers Ltd. [1998 (7) TMI 251 - CEGAT, NEW DELHI ]

(3)      Pratap Rajasthan Special l Steel v. CCE [2000 (4) TMI 57 - CEGAT, NEW DELHI]

(4)      Switch Gear Control Technics v. CCE [2008 (9) TMI 809 - CESTAT, BANGALORE ]

The principles regarding capital goods which are used in the process of manufacturing or which are used by the service provider by and large may be treated as inputs if they do not fall in the definition of capital goods as per rules.

CENVAT Credit on Inputs Used in Manufacture or Repair of Capital Goods

Vide CBEC Instruction Letter No. F No. 267/11/2010-CX8 dated 8.7.2010, CBEC has clarified

that credit on inputs used in the manufacture of capital goods, which are further used in the factory of the manufacturer is available, except for items like cement, angles, channels, CTD or TMT bars and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods. This is clarified by CB.E. & C taking support from the case of Vandana Global [2010 (4) TMI 133 - CESTAT, NEW DELHI (LB)] wherein the CESTAT Larger Bench held that cement and steel items used for fabrication of structures/ installation of production machinery are not entitled to Cenvat credit. Being a ruling favourable to it, the Department has lost no time in asking field formations to take action to safeguard revenue in the light of this j ruling. This means credit should be denied and notices should be issued for recovery if such credit has been taken on these items. The Larger Bench decision holding amendment to relevant rule excluding such items from definition of inputs as retrospective in effect is also specifically highlighted by the Board.

Using the same Circular, the CB.E. & C also clarifies that for eligibility to credit as capital goods, it should be excisable goods covered under the definition: of 'capital goods' under Cenvat Credit Rules, 2004 and used in the factory of the manufacturer. For inputs the test is they should be covered under the definition of 'input' and they should be used in or integrally connected with the process of I actual manufacture of the final product. Words "integrally" and "actual" are not provided in rules but supplied by the Board. Inputs used for repair and maintenance of capital goods are also ineligible for Cenvat credit and this includes welding electrodes.