[The Start-Up Specialist] ANALYSIS OF RULE 2(a) OF CENVAT CREDIT RULES, 2004 ...
6 views
Skip to first unread message
Jha Saheb
Mar 30, 2011, 7:30:14 AM3/30/11
to mithil...@googlegroups.com
M. GOVINDARAJAN (CS)
CENVAT credit on the capital goods as defined under Rule 2(a) of CENVAT Credit Rules, 2004 used by the manufacturer of final goods and provider of output services used in the factory of the manufacturer of the final products or for providing output services may be taken and utilized. It is inevitable for the arising of litigation due to the interpretation of this definition. In this article Rule 2(a) which defines the term ‘capital goods’ is analyzed in detail.
Introduction
1. As all are aware CENVAT Credit Rules, 2004 (‘Rule’ for brevity) allow a manufacturer or producer of final products or a provider of taxable service to take credit of service tax, excise duty, education cess, higher education cess paid on such tax/duty etc., paid on any input or capital goods received in the factory of manufacture of final products or premises of the provider of output service and any input service received by the manufacturer of final products or by the provider of output services against the payment of central excise duty or service tax. Rule 2(a) defines the term ‘capital goods’; Rule 2(k) defines the term ‘input’ and Rule 2(l) defines the term ‘input service’. The assessees are facing so many show cause notices from the Department on taking as well as utilizing the CENVAT credit and also in interpretation of the definition. When comparing to the interpretation on ‘input’ and ‘input services’ litigation is less on interpretation of the definition of ‘capital goods’.
General Analysis
3. There is no clear definition for the term ‘capital goods’. The definition gives a list of goods which are ‘capital goods’. The definition is of two parts. One is 2 (a) (A) and the other is 2 (a) (B). Part A gives 7 types of goods applicable to both manufacturer of final products and provider of output service. Part B gives only one viz., motor vehicle which is applicable only to specified services.
Part A:
3.1 The list of goods provided in Rule 2(a) (A) are as follows:
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805,
grinding wheels and the like, and parts thereof falling under heading 6804 of the First
Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof; and
(vii) storage tank.
There is no much problem in interpretation of the terms mentioned in items (ii), (iv), (v), (vi) and (vii). Item No. 1 provides that goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6804 and 6805 of the First Schedule to the Excise Tariff Act. Disputes arised in classification of goods. Item No. 3 contains the components, spares and accessories of the goods specified in items (i) and (ii). If these capital goods are utilized in an office, then they will not be treated as capital goods since they are not involved in the manufacturing process.
Part B:
3.2 Part B provides that capital goods means motor vehicle registered in the name of provider of output services for providing taxable service as detailed below:
n Courier Agency – Sec. 65 (105) (f);
n Tour Operator – Sec. 65 (105) (n);
n Cargo Handling Services – Sec. 65 (105) (o);
n Goods Transport Agency – Sec. 65 (105) (zr);
n Outdoor caterer – Sec. 65 (105) (zzp);
n Pandal or Shamiana Service – Sec. 65 (105) (zzw).
In ‘Ganta Ramaniah Naidu V. Commissioner of Central Excise, Guntur’ – 2010 (18) STR 10 (Tri.Bang) the appellant is the service provider under the category of ‘site formation and clearance service’. He is engaged in providing the services of blast-hole drilling, blasting, excavation, loading, transport, spreading, dumping etc., of the over burden by using machines at open cast mines and also undertaking similar activities. The appellant availed CENVAT credit as capital goods. According to him trippers are used for transportation of the excavated iron ore material within the complex and CENVAT Credit Rules included certain capital items which are also covered motor vehicles provided that the vehicles are used for providing output service on which the appellant is discharging the service tax liability.
The Tribunal held that it can be noticed from the definition of ‘capital goods’ as to fall under the categories as indicated in Rule 2(a) (A) (i) i.e., under Chapter 82.4 or 90 with the exclusion it can be seen that Chapter 87 has been kept out of the purview of capital goods. Rule 2(a)(B) specifically allows credit of output services. In the absence of any other provisions, the Tribunal found that the credit availed by the appellant in this case is inadmissible as it is undisputed that the vehicles i.e., trippers are classified under Chapter 87 of the Tariff Act, 1985.
ANALYSIS OF RULE 2(a) (A) (iii):
Definition of ‘Accessories & Components’
5. The Rules do not define the term ‘components or accessories’. In the absence of any definition of the said terms, it is permissible to refer to the dictionary meaning. The Webster Comprehensive Dictionary International Edition defines the term ‘components’ as a constituent part and as an adjective ‘serving or helping to constitute’. It is defined in Concise Oxford Dictionary Ninth Edition, as a noun as ‘a part of a larger whole’ and as an adjective as ‘being part of a larger whole’.
The term ‘accessory’ has been defined in Concise Oxford Dictionary, Ninth Edition, as a noun ‘an additional or extra thing, a small attachment or fitting, a small item of dress’, and as an adjective as ‘additional, contributing in a minor way, dispensable’. The same has been defined in Webster’s Dictionary as a noun as ‘a wing of secondary subordinate importance, an object or device not essential in itself but adding to the beauty, convenience or effectiveness of something else’ and an adjective it has been defined as ‘assisting as a subordinate, adding or contributing in consequential way, present in a minor amount and not essential as a constituent.
In ‘Commissioner of Central Excise, Delhi V. Insulation Electrical (P) Ltd.,’ – 2008 (224) ELT 512 (SC) it was held that ‘accessory’ is something supplementary or subordinate in nature and need not be essential for the actual functioning of the product.
It was held by Apex Court that ‘aiding or contributing in secondary way of assisting in or contributing as a subordinate is the essence on the basis of which it can be decided whether an article is an accessory or not.
Case laws
5.1 In ‘Madras Cements Limited V. Commissioner of Central Excise’ – 2010 (254) ELT 3 (SC) it was held that in order to avail CENVAT credit the assessee has to satisfy the Assessing Authority that the capital goods in the form of component, spares and accessories had been utilized during the process of manufacture of the finished product. In this case the appellant was not able to identify the machinery for which the goods in question has been used. In the absence of such identification, it was not possible for the Assessing Authority to come to a decision as to whether the credit would be given in respect of the goods in question.
In ‘Mehra Brothers V. Joint Commercial Officer’ – 1991 (51) ELT 173 (SC) it was held that ‘accessory’ means an object or device that is not essential in itself but that which adds to the beauty or convenience or something of greater or primary importance which assists in operating or controlling or may serve as aid to a accessory.
In ‘Commissioner of Central Excise, Raipur V. Jindal Steel & Towers Limited’ – 2011 (263) ELT 557 (Tri. Del) the respondent availed CENVAT credit on lattice steel structure, lattice type transmission tower, hot dip lattice tower, lattice type tower falling under Chapter sub Heading No. 7308.20 of the Schedule to the Central Excise Tariff under their capital goods credit account. A show cause notice was issued alleging that as sub rule 2(a) of CENVAT Credit Rules, 2004 these above items are not covered under capital goods. Hence the demand was confirmed by the adjudicating authority. On appeal CENVAT credit was allowed on the above said items holding that the same was used as accessories to the group of machines and machineries installed in the steel melting shop and no contrary evidence has been adduced by the revenue.
The Revenue filed appeal against the order of Commissioner (Appeals). The Tribunal held that whether these items are accessories or not it is to be examined by the user test that the impugned goods are used for transmission of electricity to a group of machines, such as the circuit breaker, disc insulator, lightning arrestor, current transformer, potential transformer, incoming/outgoing feeder control panel and relay bus, P.P. panel, transformer control panel and relay panel, multifunctional meter and bus ducts. The impugned goods are used for effective use of the electrical items which contribute not only to the process of stabilizing the electric power generated in the factory but also leads to manufacture of excisable iron and steel products. The Tribunal held that the impugned goods are nothing but accessories of electrical items. Thus they are qualified as accessories of capital goods and they are entitled for input credit.
In ‘Dharampur Sugar Mills Limited V. Commissioner of Central Excise, Meerut – II’ – 2010 (260) ELT 271 (Tri. Del) the appeal has been preferred by the appellant in view of the disallowance from February 2005 to September 2005, the appellant availed CENVAT credit on two goods. One was H.R. Coil Plate and Section/plate, angle – 7208.31/7209.11 and the other was graphite packing – 6805.90. The show cause notice no where stated as to how those two goods are not of the kind of capital goods. The conclusions in the show cause notice was that these two goods do not qualify to the definition of capital goods without any reason stated in show cause notice. But the appellant explained on each and every items of the Annexure to show cause notice submitting that when those goods are either components, spares or accessories supporting the capital goods of the class as defined by Rule 2(a)(A)(i) of CNEVAT Credit Rules, 2004, CENVAT credit is eligible.
In ‘Commissioner of Central Excise, Aurangabad V. Greaves Cotton Limited’ – 2010 (257) ELT 123 (Tri. Mum) the assessee has claimed the benefit of Rule 2(a) (A) (iii) of the CENVAT credit Rules. In other words, it is contended that the capital goods in question were components, spares and accessories of the goods specified in the preceding clauses of Rule 2. The assessee has not cared to specify the capital goods of which the goods in question were claimed to be components, spares or accessories. Thus the claim of the appellants under Rule 2(a) (A) (iii) of the CENVAT Credit Rules, 2004 stands unsubstantiated.
In ‘Oswal Overseas Limited V. Commissioner of Central Excise, Meerut – II’ – 2010 (254) ELT 338 (Tri. Del) it was held that the asbestos packing/compressed asbestos fibers used for packing leakage in pipes and are to be considered as the components or the integral parts of sugar machinery which falls under Chapter 84. Being so the authorities below clearly erred in disclosing the CENVAT credit availed by the appellant in relation to the asbestos joining sheets.
In ‘L.H. Sugar Factories Limited V. Commissioner of Central excise, Meerut’ – 2010 (251) ELT 135 (Tri. Del) the aluminium sheets used for replacing the old and worn out parts of boiler are spare parts of the boiler and hence covered by the definition of capital goods.
--
Posted By Jha Saheb to The Start-Up Specialist at 3/30/2011 05:00:00 PM
CENVAT credit on the capital goods as defined under Rule 2(a) of CENVAT Credit Rules, 2004 used by the manufacturer of final goods and provider of output services used in the factory of the manufacturer of the final products or for providing output services may be taken and utilized. It is inevitable for the arising of litigation due to the interpretation of this definition. In this article Rule 2(a) which defines the term ‘capital goods’ is analyzed in detail.
Introduction
1. As all are aware CENVAT Credit Rules, 2004 (‘Rule’ for brevity) allow a manufacturer or producer of final products or a provider of taxable service to take credit of service tax, excise duty, education cess, higher education cess paid on such tax/duty etc., paid on any input or capital goods received in the factory of manufacture of final products or premises of the provider of output service and any input service received by the manufacturer of final products or by the provider of output services against the payment of central excise duty or service tax. Rule 2(a) defines the term ‘capital goods’; Rule 2(k) defines the term ‘input’ and Rule 2(l) defines the term ‘input service’. The assessees are facing so many show cause notices from the Department on taking as well as utilizing the CENVAT credit and also in interpretation of the definition. When comparing to the interpretation on ‘input’ and ‘input services’ litigation is less on interpretation of the definition of ‘capital goods’.
General Analysis
3. There is no clear definition for the term ‘capital goods’. The definition gives a list of goods which are ‘capital goods’. The definition is of two parts. One is 2 (a) (A) and the other is 2 (a) (B). Part A gives 7 types of goods applicable to both manufacturer of final products and provider of output service. Part B gives only one viz., motor vehicle which is applicable only to specified services.
Part A:
3.1 The list of goods provided in Rule 2(a) (A) are as follows:
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805,
grinding wheels and the like, and parts thereof falling under heading 6804 of the First
Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof; and
(vii) storage tank.
There is no much problem in interpretation of the terms mentioned in items (ii), (iv), (v), (vi) and (vii). Item No. 1 provides that goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6804 and 6805 of the First Schedule to the Excise Tariff Act. Disputes arised in classification of goods. Item No. 3 contains the components, spares and accessories of the goods specified in items (i) and (ii). If these capital goods are utilized in an office, then they will not be treated as capital goods since they are not involved in the manufacturing process.
Part B:
3.2 Part B provides that capital goods means motor vehicle registered in the name of provider of output services for providing taxable service as detailed below:
n Courier Agency – Sec. 65 (105) (f);
n Tour Operator – Sec. 65 (105) (n);
n Cargo Handling Services – Sec. 65 (105) (o);
n Goods Transport Agency – Sec. 65 (105) (zr);
n Outdoor caterer – Sec. 65 (105) (zzp);
n Pandal or Shamiana Service – Sec. 65 (105) (zzw).
In ‘Ganta Ramaniah Naidu V. Commissioner of Central Excise, Guntur’ – 2010 (18) STR 10 (Tri.Bang) the appellant is the service provider under the category of ‘site formation and clearance service’. He is engaged in providing the services of blast-hole drilling, blasting, excavation, loading, transport, spreading, dumping etc., of the over burden by using machines at open cast mines and also undertaking similar activities. The appellant availed CENVAT credit as capital goods. According to him trippers are used for transportation of the excavated iron ore material within the complex and CENVAT Credit Rules included certain capital items which are also covered motor vehicles provided that the vehicles are used for providing output service on which the appellant is discharging the service tax liability.
The Tribunal held that it can be noticed from the definition of ‘capital goods’ as to fall under the categories as indicated in Rule 2(a) (A) (i) i.e., under Chapter 82.4 or 90 with the exclusion it can be seen that Chapter 87 has been kept out of the purview of capital goods. Rule 2(a)(B) specifically allows credit of output services. In the absence of any other provisions, the Tribunal found that the credit availed by the appellant in this case is inadmissible as it is undisputed that the vehicles i.e., trippers are classified under Chapter 87 of the Tariff Act, 1985.
ANALYSIS OF RULE 2(a) (A) (iii):
Definition of ‘Accessories & Components’
5. The Rules do not define the term ‘components or accessories’. In the absence of any definition of the said terms, it is permissible to refer to the dictionary meaning. The Webster Comprehensive Dictionary International Edition defines the term ‘components’ as a constituent part and as an adjective ‘serving or helping to constitute’. It is defined in Concise Oxford Dictionary Ninth Edition, as a noun as ‘a part of a larger whole’ and as an adjective as ‘being part of a larger whole’.
The term ‘accessory’ has been defined in Concise Oxford Dictionary, Ninth Edition, as a noun ‘an additional or extra thing, a small attachment or fitting, a small item of dress’, and as an adjective as ‘additional, contributing in a minor way, dispensable’. The same has been defined in Webster’s Dictionary as a noun as ‘a wing of secondary subordinate importance, an object or device not essential in itself but adding to the beauty, convenience or effectiveness of something else’ and an adjective it has been defined as ‘assisting as a subordinate, adding or contributing in consequential way, present in a minor amount and not essential as a constituent.
In ‘Commissioner of Central Excise, Delhi V. Insulation Electrical (P) Ltd.,’ – 2008 (224) ELT 512 (SC) it was held that ‘accessory’ is something supplementary or subordinate in nature and need not be essential for the actual functioning of the product.
It was held by Apex Court that ‘aiding or contributing in secondary way of assisting in or contributing as a subordinate is the essence on the basis of which it can be decided whether an article is an accessory or not.
Case laws
5.1 In ‘Madras Cements Limited V. Commissioner of Central Excise’ – 2010 (254) ELT 3 (SC) it was held that in order to avail CENVAT credit the assessee has to satisfy the Assessing Authority that the capital goods in the form of component, spares and accessories had been utilized during the process of manufacture of the finished product. In this case the appellant was not able to identify the machinery for which the goods in question has been used. In the absence of such identification, it was not possible for the Assessing Authority to come to a decision as to whether the credit would be given in respect of the goods in question.
In ‘Mehra Brothers V. Joint Commercial Officer’ – 1991 (51) ELT 173 (SC) it was held that ‘accessory’ means an object or device that is not essential in itself but that which adds to the beauty or convenience or something of greater or primary importance which assists in operating or controlling or may serve as aid to a accessory.
In ‘Commissioner of Central Excise, Raipur V. Jindal Steel & Towers Limited’ – 2011 (263) ELT 557 (Tri. Del) the respondent availed CENVAT credit on lattice steel structure, lattice type transmission tower, hot dip lattice tower, lattice type tower falling under Chapter sub Heading No. 7308.20 of the Schedule to the Central Excise Tariff under their capital goods credit account. A show cause notice was issued alleging that as sub rule 2(a) of CENVAT Credit Rules, 2004 these above items are not covered under capital goods. Hence the demand was confirmed by the adjudicating authority. On appeal CENVAT credit was allowed on the above said items holding that the same was used as accessories to the group of machines and machineries installed in the steel melting shop and no contrary evidence has been adduced by the revenue.
The Revenue filed appeal against the order of Commissioner (Appeals). The Tribunal held that whether these items are accessories or not it is to be examined by the user test that the impugned goods are used for transmission of electricity to a group of machines, such as the circuit breaker, disc insulator, lightning arrestor, current transformer, potential transformer, incoming/outgoing feeder control panel and relay bus, P.P. panel, transformer control panel and relay panel, multifunctional meter and bus ducts. The impugned goods are used for effective use of the electrical items which contribute not only to the process of stabilizing the electric power generated in the factory but also leads to manufacture of excisable iron and steel products. The Tribunal held that the impugned goods are nothing but accessories of electrical items. Thus they are qualified as accessories of capital goods and they are entitled for input credit.
In ‘Dharampur Sugar Mills Limited V. Commissioner of Central Excise, Meerut – II’ – 2010 (260) ELT 271 (Tri. Del) the appeal has been preferred by the appellant in view of the disallowance from February 2005 to September 2005, the appellant availed CENVAT credit on two goods. One was H.R. Coil Plate and Section/plate, angle – 7208.31/7209.11 and the other was graphite packing – 6805.90. The show cause notice no where stated as to how those two goods are not of the kind of capital goods. The conclusions in the show cause notice was that these two goods do not qualify to the definition of capital goods without any reason stated in show cause notice. But the appellant explained on each and every items of the Annexure to show cause notice submitting that when those goods are either components, spares or accessories supporting the capital goods of the class as defined by Rule 2(a)(A)(i) of CNEVAT Credit Rules, 2004, CENVAT credit is eligible.
In ‘Commissioner of Central Excise, Aurangabad V. Greaves Cotton Limited’ – 2010 (257) ELT 123 (Tri. Mum) the assessee has claimed the benefit of Rule 2(a) (A) (iii) of the CENVAT credit Rules. In other words, it is contended that the capital goods in question were components, spares and accessories of the goods specified in the preceding clauses of Rule 2. The assessee has not cared to specify the capital goods of which the goods in question were claimed to be components, spares or accessories. Thus the claim of the appellants under Rule 2(a) (A) (iii) of the CENVAT Credit Rules, 2004 stands unsubstantiated.
In ‘Oswal Overseas Limited V. Commissioner of Central Excise, Meerut – II’ – 2010 (254) ELT 338 (Tri. Del) it was held that the asbestos packing/compressed asbestos fibers used for packing leakage in pipes and are to be considered as the components or the integral parts of sugar machinery which falls under Chapter 84. Being so the authorities below clearly erred in disclosing the CENVAT credit availed by the appellant in relation to the asbestos joining sheets.
In ‘L.H. Sugar Factories Limited V. Commissioner of Central excise, Meerut’ – 2010 (251) ELT 135 (Tri. Del) the aluminium sheets used for replacing the old and worn out parts of boiler are spare parts of the boiler and hence covered by the definition of capital goods.
--
Posted By Jha Saheb to The Start-Up Specialist at 3/30/2011 05:00:00 PM
Reply all
Reply to author
Forward
0 new messages