2025 (4) TMI 1097 - AT - Central Excise

Denial of Cenvat credit on capital goods purchased by the appellants - multiple contracts forming part of an Engineering Procurement and Construction (EPC) turnkey project - HELD THAT - The issue involved in the matter is squarely covered by the decision in the case of Larsen Toubro Limited 2024 (8) TMI 395 - CESTAT KOLKATA wherein it was held that appellant-Tata has correctly taken CENVAT Credit on the capital goods procured by them which have been ultimately used in the manufacture of final products. In these circumstances the denial of CENVAT Credit is not sustainable. The appellant has correctly taken the Cenvat credit on capital goods procured by them which were ultimately used in the manufacture of their final product therefore Cenvat credit cannot be denied to the appellant and the same is available to the appellant. Appeal allowed.

Summary

The core legal questions considered in the judgment are:

(a) Whether the appellant is entitled to avail Cenvat credit on capital goods procured from a contractor (L&T) under multiple contracts forming part of an Engineering, Procurement, and Construction (EPC) turnkey project;

(b) Whether the fact that the service provider (L&T) opted for the Composition Scheme under Works Contract Service, which restricts the availment of Cenvat credit on inputs used by the service provider, affects the appellant's right to claim Cenvat credit on the capital goods supplied;

(c) Whether the contracts entered into with L&T should be treated as separate sale and service contracts or as a single turnkey contract for the purpose of Cenvat credit;

(d) Whether penalty and interest imposed on the appellant and its officials for availing such credit are justified.

Issue-wise Detailed Analysis

1. Entitlement to Cenvat Credit on Capital Goods Procured under Multiple Contracts in an EPC Turnkey Project

The legal framework governing Cenvat credit is derived from the Central Excise law and Cenvat Credit Rules, which allow manufacturers to avail credit on inputs and capital goods used in manufacture of final products. The appellant, engaged in manufacturing sized iron ore concentrate fines, procured capital goods from L&T under four separate contracts for supply, erection, commissioning, and civil works for installation of a blast furnace and material handling system.

Precedents relied upon include the Tribunal's earlier decision in the identical case involving the appellant and L&T at Noamundi mines, where the Tribunal held that capital goods supplied under separate contracts, becoming the property of the appellant, qualify for Cenvat credit. The Tribunal also referred to the Hon'ble High Court of Himachal Pradesh decision in Commissioner of C.Ex. v. Gujarat Ambuja Cement Ltd., which recognized that capital goods forming part of the factory used in manufacture are eligible for credit. Further, decisions in Rajasthan Spinning & Weaving Mills Ltd. and International Tractor Ltd. were cited to emphasize that capital goods assembled through contractors and used in manufacturing final products entitle the manufacturer to credit.

The Court interpreted that the capital goods were procured under separate purchase orders, transferred to the appellant's warehouse, and remained the appellant's property during installation. The service provider (L&T) did not avail credit on inputs used in providing erection and commissioning services and paid service tax under the Composition Scheme, which disallows credit on inputs.

The key finding was that since the capital goods remained the property of the appellant and were used in manufacture, the appellant was entitled to avail Cenvat credit irrespective of L&T's credit restrictions under the Composition Scheme. The contracts were treated as separate transactions for supply and services, not as a single sale-service contract, thereby supporting credit claim.

Competing arguments from the Revenue contended that the contracts formed a single turnkey contract and that credit should be denied since L&T, as service provider, could not avail credit on inputs. The Court rejected this, holding that the appellant's right to credit is independent of L&T's credit eligibility.

Conclusion: The appellant is entitled to Cenvat credit on capital goods procured under the contracts, as these goods became the appellant's property and were used in manufacture of final products.

2. Effect of Service Provider's Composition Scheme on Appellant's Credit Eligibility

The Revenue argued that since L&T opted for the Composition Scheme under Works Contract Service, which restricts credit on inputs, the appellant could not avail credit on goods supplied by L&T that were subsequently used by L&T in providing services.

The Court examined the legal position that Cenvat credit is available to the manufacturer on capital goods used in manufacture, regardless of the service provider's credit status. The fact that L&T did not avail credit on inputs used in services and paid tax under Composition Scheme was held not to affect the appellant's entitlement to credit on capital goods purchased and owned by the appellant.

The Court distinguished the appellant's purchase of capital goods from L&T's provision of services, emphasizing that the appellant's credit claim was on goods purchased on sale basis, not on inputs used by L&T. The Tribunal's earlier decision in the identical case was relied upon to confirm this interpretation.

Conclusion: The service provider's choice of Composition Scheme and consequent credit restrictions do not preclude the appellant from availing Cenvat credit on capital goods purchased and owned by it.

3. Nature of Contracts - Separate Sale and Services or Single Turnkey Contract

The Revenue contended that the four contracts entered into with L&T were only for mutual convenience and formed a single EPC turnkey contract, implying that the supply of capital goods was incidental to the service contract and not a separate sale, thus disallowing credit.

The Court analyzed the terms and performance of the contracts and held that the contracts were independent and distinct, particularly Contract 2 which involved design, manufacture, and supply of indigenous plant, machinery, and equipment. The goods supplied under this contract qualified as capital goods, with property transferred to the appellant at its warehouse.

The Court referred to the principle that where goods are supplied under a separate contract and property passes to the purchaser, such supply qualifies as sale and credit on capital goods is admissible. The turnkey nature of the overall project does not negate the separate contracts and distinct transactions.

Conclusion: The contracts for supply of capital goods and services are separate and distinct, allowing the appellant to avail credit on capital goods supplied under the sale contracts.

4. Imposition of Penalty and Interest for Availing Cenvat Credit

The Revenue imposed interest and equal penalty on the appellant and personal penalties on responsible officials for wrongful availment of Cenvat credit. The appellant challenged the imposition on the ground that credit was lawfully availed.

The Court, relying on the Tribunal's earlier decision in the identical case, held that since the appellant was entitled to take credit on capital goods, the denial of credit was unsustainable. Consequently, penalty and interest imposed on the appellant and officials were not justified.

Conclusion: No penalty or interest is imposable on the appellant or its officials as the credit was correctly availed.

Significant Holdings

"The capital goods have been procured by the appellant/Tata under a separate contract, on payment, which has become the property of the appellant and the same has been handed over by Tata to L&T for installation and commissioning. L&T paid Service Tax on the said activity without taking CENVAT Credit on inputs used in providing the said service. In these circumstances, the goods remain the property of the appellant namely, Tata during the impugned period."

"Therefore, we hold that appellant-Tata has correctly taken CENVAT Credit on the capital goods procured by them which have been ultimately used in the manufacture of final products. In these circumstances, the denial of CENVAT Credit is not sustainable."

"As the appellant-Tata has taken CENVAT Credit correctly, we hold that no penalty is imposable on the appellants. Consequently, the penalties imposed on all the appellants is set aside."

Core principles established include:

- Cenvat credit on capital goods is admissible to the manufacturer if the goods are procured under separate contracts with transfer of property and are used in manufacture of final products, irrespective of the service provider's credit eligibility.

- The availment of Cenvat credit by the service provider under the Composition Scheme does not affect the manufacturer's right to credit on capital goods purchased.

- Separate contracts for supply and services within an EPC turnkey project must be examined on their terms; mere bundling under a turnkey project does not negate the separate nature of sale contracts.

- Penalties and interest cannot be imposed where credit is lawfully availed in accordance with law and precedents.

Final determinations:

The appellant's Cenvat credit on capital goods procured under the contracts is valid and cannot be denied. The imposition of demand, interest, and penalty is set aside. The appeal is allowed with consequential relief.