2017 (7) TMI 524 - HC - Central Excise

CENVAT credit - capital goods - componenets/spares/other accessories - scope of Rule 2(a)(A)(i) of the 2004 Rules - whether the structurals, cement, iron and steel, which are used in constructing foundations, would fall within the ambit and scope of Rule 2(a)(A)(iii), read with Rule 2(a)(A)(i) of the 2004 Rules? - N/N. 16/09. Held that - structurals, cement, as also, iron and steel, which are used to erect foundations, would come within the definition of input as they form part of the capital goods, which, in turn, are used in the manufacture of final product. The manner in which the Revenue seeks to read the provisions of Explanation 2 is flawed for the reason that the said Explanation cannot restrict the scope and ambit of the main provision, i.e., Rule 2k(i). Explanation 2 cannot be read in a manner that it constricts, the scope and ambit of the main provision, i.e., Rule 2k(i). The Court was, thus, clearly dealing with an exemption notification, and after applying a strict rule of construction, came to the conclusion that unless it is demonstrated that iron and steel structures, (which were claimed as component parts, within the meaning of sub-rule (5) of Rule 57Q), were essential in the manufacture of the sugar manufacturing unit or in the composition of the sugar manufacturing unit, they would not come within the ambit of the aforementioned exemption notification. MS structurals, which support the plant and machinery, which are, in turn, used in the manufacture of sugar and molasses are an integral part of such plant and machinery. The Assessee has clearly demonstrated that structurals as well as foundations, which are erected by using steel and cement are integral part of the capital goods (i.e., plant and machinery), as they hold in position the plant and machinery, which manufactures the final product. Therefore, in our opinion, whether the user test is applied, or the test that they are the integral part of the capital goods is applied, the Assessees, in these cases, should get the benefit of Cenvat Credit, as they fall within the scope and ambit of both Rule 2(a)(A) and 2k of the 2004 Rules. Appeal allowed - decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the Tribunal's reliance on Notification No. 16/09 prior to 07.07.2009.
2. Applicability of the Tribunal's reliance on Vandana Global Limited judgment.
3. Eligibility of M.S. Plates, M.S. Angles, and M.S. Joint as capital goods.
4. Qualification of M.S. Angles, M.S. Joint, and beams used for construction as capital goods.

Issue-Wise Detailed Analysis:

1. Validity of the Tribunal's reliance on Notification No. 16/09 prior to 07.07.2009:
The Court examined whether the Tribunal was correct in applying Notification No. 16/09 before its effective date of 07.07.2009. The Court found that the Notification was intended to operate prospectively, not retrospectively. The Notification explicitly stated its effective date, indicating that it was not meant to apply to periods before its issuance. Thus, the Tribunal's reliance on this Notification for periods prior to 07.07.2009 was incorrect.

2. Applicability of the Tribunal's reliance on Vandana Global Limited judgment:
The Tribunal had reversed the Commissioner (Appeals) order based on its own judgment in Vandana Global Limited, which was pending consideration before the Chhattisgarh High Court. The Court noted that the Vandana Global judgment could not be considered binding precedent, especially when contrary views had been expressed by the Supreme Court in other cases. Therefore, the Tribunal's reliance on Vandana Global Limited was not sustainable.

3. Eligibility of M.S. Plates, M.S. Angles, and M.S. Joint as capital goods:
The Court examined whether the structurals used to support plant and machinery could be treated as components, spares, and accessories of capital goods under Rule 2(a)(A)(iii) of the 2004 Rules. The Court referred to various judgments, including Rajasthan Spinning & Weaving Mills Ltd., which applied the "user test" to determine if items could be considered capital goods. The Court concluded that the structurals, even if falling under Chapter 72, could be treated as components and accessories of capital goods falling under Chapters 82, 84, 85, 90, and headings 68.05 and 68.04, thus eligible for Cenvat credit.

4. Qualification of M.S. Angles, M.S. Joint, and beams used for construction as capital goods:
The Court also considered whether items used in constructing foundations and supporting structures for plant and machinery could qualify as capital goods or inputs under Rule 2(k) of the 2004 Rules. The Court held that these items, used to erect foundations and support machinery, were integral to the capital goods and thus fell within the definition of "inputs" as they were used in the manufacture of final products within the factory. The Court emphasized that the 2009 Notification, which excluded these items from the definition of inputs, could only operate prospectively.

Conclusion:
The Court ruled in favor of the appellants, holding that the Tribunal's reliance on Notification No. 16/09 prior to its effective date and the Vandana Global Limited judgment was incorrect. The structurals, M.S. Plates, M.S. Angles, and M.S. Joint, used to support plant and machinery, qualified as capital goods and inputs, eligible for Cenvat credit. The appeals were allowed, and the Tribunal's judgments were set aside.