Our Article "Cenvat Credit on Channels and Angles"

[pradeep jain]

Dear Professionals,

The availability of cenvat credit on angles, channels etc. has long
been disputed and has been an issue of litigation before judiciary. In
this regard, we have prepared an article titled . It is
with great pleasure that we tell you that this article has been
published in Excise Law Times (ELT), which is a leading journal on
indirect taxation. This article can be viewed at our website in Event
Gallery.

We always look forward to your comments and views on the Articles
prepared by us, therefore, kindly give us your valuable comments and
further enrich our knowledge.

For the convenience of readers of this group, we are enclosing
hereunder our Article:

Article on Cenvat Credit on Angles & Channels

Prepared By:

CA. Pradeep Jain
CA. Preeti Parihar
Sukhvinder Kaur, LLB [FYIC]

Introduction: -

“Better late than never” – perhaps the assessees taking Cenvat Credit
on Cement, angles, channels, CTD or TMT bar, etc. used for
construction of shed, building or structure for support of capital
goods will be agreeing squarely with it. Finally, hon’ble Supreme
Court of India has given its verdict on the burning issue of availment
of Cenvat Credit on these goods. Recently, it has been held by the
Apex Court that credit on these items will be allowed as capital
goods. Though the decision pertains to rule 59Q of the old Central
Excise Rules, 1944; but since the relevant provision is also covered
in new rule 2(a) of the Cenvat credit Rules, 2004; it has vital
importance in this scenario of litigation. Perhaps the most awaited
decision has been given by the hon’ble Supreme Court. It seems to give
rest to the various issues pertaining to these goods. This article is
about the litigation journey of allowability of Cenvat Credit on the
impugned goods.

Background:-

To remove the cascading effect of payment of excise duty at every
stage, the Government allowed taking of credit of inputs, capital
goods as well as input services used in or in relation to manufacture
of final products or for providing the output services. Cenvat Credit
Rules, 2004 were framed for defining the inputs, capital goods and
input services. The relevant definitions are given in rule 2 of these
rules. As truly said, law is never perfect and there is always a
chance of litigation. Following this, a battle was going on regarding
the availability of cenvat credit on cement, angles, channels, CTD or
TMT bar and other items used for construction of shed, building or
structure for support of capital goods. Assessees were taking credit
on these items as capital goods contending that these are inputs used
in the manufacture of capital goods while department was saying that
these items are neither capital goods nor these are inputs. The matter
was referred to the Larger bench of the Tribunal in the case of
Vandana Global v/s CCE, Raipur.

Then in Budget 2009, the Government introduced an amendment by way of
explanation in the definition of inputs as defined under Rule 2 (k) to
provide that cement, angles, channels, CTD or TMT bar and other items
used for construction of shed, building or structure for support of
capital goods are not inputs.

Recently the Larger Bench gave its verdict and held that the said
items were neither capital goods nor inputs used in the manufacture of
capital goods which were further used in the manufacture of final
products. We are discussing the same in this piece.

Definition of Capital Goods and Inputs: -

Before continuing further, the earlier definitions of capital goods
and inputs prior to Budget 2009 should be considered. The “Capital
Goods” has been defined under Rule 2(a) of the Cenvat Credit Rules,
2004. In this definition it is prescribed that the capital goods
include the goods falling in chapter 82, 84, 85, 90, tariff heading
6805 & 6804 and pollution control equipments alongwith their
components spares and accessories will be the capital goods if used in
factory of manufacturer or for providing the output service.

Further, the definition of inputs is given under Rule 2 (k) of Cenvat
Credit Rules, 2004 which is very wide and includes all the goods
except light diesel oil, high speed diesel oil and motor spirit if
used in or in relation to the manufacture of the final product –
whether directly or indirectly, whether contained in the final product
or not. It also includes the paints, packing material, fuels, steam,
etc. and should be used within the factory. Inputs also include goods
used in the manufacture of the capital goods which are further used in
the factory of the manufacturer.

Issue involved: -

As per Explanation 2 to the definition of inputs, the inputs would
include the goods used in the manufacture of capital goods which were
further used in the factory of the manufacturer. This aspect of what
will constitute inputs which were used for manufacturing capital goods
needed interpretation and gave rise to point of litigation.

Whether the cement and steel items like angles channels, joists, TMT
bars and CTD bars which were used in the manufacture of structure of
foundation on which the capital goods/machinery will be mounted will
fall under the purview of inputs as per Explanation 2 to Rule 2 (k)
was the question involved in many cases.

Alternative issue raised simultaneously was whether these cement and
steel items can be said to be capital goods as being classified as
accessories to the capital goods.

Assessee’s Stand: -

The assessee was contending that the cement and steel items were used
to construct foundation or a structure on which the capital goods like
cooling bed, tanks etc were mounted. Without such foundation or
structure, the capital goods could not be installed and used in the
manufacturing activity and therefore, the same were part of the
capital goods. Thus, the cement and steel items used in the
manufacture of such foundation and structure were inputs as per
explanation (ii) to the Rule 2(k) of the Cenvat Credit Rules, 2004 and
therefore, credit of duty paid on the same would be available.

Revenue’s Stand: -

The Revenue was alleging that since the said foundation or structures
were embedded to the earth, these were immovable and as such, were not
“goods” to fall under the definition of “Capital GOODS”. Further, it
was contended that these structures could not be sold in the market.
Therefore, credit was denied by raising the allegation that these do
not satisfy the duo-test of ‘movability’ and ‘marketability’, due to
which they cannot be said to be capital goods or inputs used in the
manufacture of capital goods. Rather, these were civil structures on
which credit cannot be allowed.

Judicial Verdicts: -

There are number of decisions in which the cement and steel items used
for making foundation and civil structures was held to be inputs and
cenvat credit was allowed on them.

In the case of Bhushan Steel & Strips Ltd. v/s Commissioner of C.
Ex., Raigad [2008 (223) E.L.T. 517 (Tri. - Mumbai)] it was held that
the credit will be allowed on cement and CTD bars used in manufacture
of platform and merely because the platform is an immovable property
is no ground for disallowing the credit. Similar decision has been
given in the following cases:-

• Commissioner of Central Excise, Jalandhar v/s Pioneer Agro Extracts
Ltd [2008 (087) RLT 0468 (P&H)]
• Bellary Steel & Alloys Ltd v/s Commissioner of C. Ex., Belguam [2005
(180) ELT 92 (Tri-Bang)]
• Ispat Industries Ltd. versus Commissioner of Central Excise, Mumbai
[2006 (195) E.L.T. 164 (Tri. - Mumbai)]
• Divi’s Laboratories Ltd. vs Commissioner of Central Excise,
Vishakhapatnam [2006 (196) ELT 0285 (Tri.-Bang.)]
• LLOYDS STEEL INDUSTRIES LTD. vs COMMISSIONER OF C. EX., NAGPUR [2007
(211) E.L.T. 275 (Tri.- Mumbai)]

In the above decisions, it was held that the cement, steel sheets,
rods, etc. were used for laying the foundation of capital goods to be
used in the factory of the manufacturer. Thus, the credit was allowed
on them. On the other hand, there were also a number of decisions
that held these items neither as capital goods nor as inputs. Some of
these decisions are listed as follows:-

COMMISSIONER OF CENTRAL EXCISE, INDORE vs L.G. HOTLINE CPT LTD.[ 2004
(176) E.L.T. 443 (Tri. - Del.)]:

This case was decided by placing reliance on the decision of Hon’ble
Supreme Court in the case of Jawahar Mills Ltd. wherein definition of
capital goods was interpreted. In this case it was held that an
immovable property cannot be termed as capital goods, by relying on
this definition, it was held that the foundation work in which cement
and TOR steel are used are nothing but civil construction on which
capital goods purchased by them are being installed. As the civil
construction does not become a part of the capital goods, cement and
TOR steel, are not eligible for capital goods credit under Rule 57Q of
the Central Excise Rules, 1944.

USHA ISPAT LTD. vs COMMISSIONER OF CENTRAL EXCISE, PUNE [2003 (156)
E.L.T. 929 (Tri. - Mumbai)]: It has been decided in this case that
Cement used in foundation of machinery in factory cannot be considered
as component part of machine or equipment and hence denial of credit
upheld.

HINDUSTAN ZINC LTD. versus DEPUTY COMMISSIONER [2009(236) E.L.T.
35(Raj.)] &[2008(225)ELT35]:- It has been that cement used as
construction material not eligible as input in taking Cenvat credit
under Rule 2(g) of Cenvat Credit Rules, 2002.

As such, there were lots of contradictory decisions on the issue, some
favouring assessee, some favouring department. As such, there was an
ambiguous situation till the matter was referred to larger bench.

Reference to Larger Bench:-

In the case of Vandana Global Ltd v/s Commissioner of Central Excise
Raipur [2008 (230) ELT 0169 (Tri - Del.)] the issue was referred to
the Larger Bench for consideration on the following issues: -

(a) Whether the term "capital goods" can include plant, structures
embedded to earth?
(b) Whether the goods like angles, joists, beam, channels, bars, flats
which go into fabrication of such structures can be treated as
'inputs' in relation to their final products as inputs for capital
goods, or none of the above?
(c) Whether the credit can be allowed in respect of goods like angles,
joists, beam, channels, bars, flats which go into fabrication of such
structures and plant?

The matter was pending before the Larger Bench of the Tribunal, when
the definition of input was amended by Budget 2009.

Budget Changes: -

The Explanation 2 to the definition of ‘input’ was amended to add the
following words:

“but shall not include cement, angles, channels, Centrally Twisted
Deform bar(CTD) or Thermo Mechanically Treated bar(TMT) and other
items used for construction of factory shed, building or laying of
foundation or making of structures for support of capital goods”.

The phrase excluding “cement, angles, channels, CTD bars or TMT bars
and other items used for making factory shed, building or laying
foundation or making structures for support of capital goods” from the
scope of definition of inputs was introduced vide Budget Notification
No. 16/2009-CE(NT) dated 07.07.2009.

The effect of this amendment was that the impugned goods viz. cement,
angles, channels, CTD/TMT bars, etc. were specifically excluded from
the definition of “inputs’. As such, the assessee now could not take
credit on these items as inputs when used for constructing foundations
or supporting structures for capital goods.

Post Amendment issue: -

Although the Board had excluded the cement and steel items from the
purview of the definition of “input”, but the issue then emerging was
that the Explanation 2 to Rule 2 (k) only had prospective effect.
Therefore, before the said amendment, the said steel items and cement
were covered under the purview of input and the cenvat credit taken on
the duty paid on them was available before July 7, 2009.

Accordingly, it was being understood that the cenvat credit could be
taken on the said items which were used for making foundation or
structure before the amendment in the definition of “input”.

Larger Bench judgment in Vandana Global Ltd: -

Recently, the Larger Bench of the Tribunal decided the issue in
Vandana Global Ltd v/s CCE, Raipur [2010-TIOL-624-CESTAT-DEL-LB] which
has poured water on all the aspirations of assessees. The Larger Bench
has held as follows:-

 The Explanation 2 to Rule 2 (k) was merely clarificatory in nature,
as such, the amendment made by Budget 2009 did not change the scope of
the rules or introduced any new provision.
 The capital goods defined in the Rules enumerates number of goods
specified therein. The cement, steel rods, CTD bars, etc. were neither
listed for special inclusion in the definition, nor were components,
spares and accessories of machineries.
 The cement and steel items could not be said to be used in the
course of manufacture of the final product.

Thus, the larger bench decided that “Goods Like cement and steel items
used for laying ‘foundation’ and for building ‘supporting structures’
can neither be treated as spares, accessories and components for
capital goods nor as inputs in relation to the final product. It was
also held that no credit of duty paid on the same can be allowed under
the Cenvat Credit Rules for the period before Budget 2009. The
reference was answered in favour of the Revenue and against the
assessee.
Recent Board Circular:-
Referring the Larger bench decision in case of Vandana Global, Board
has issued Circular No. 930/20/2010- CX ., Dated: July 9, 2010. In
this circular, it is clarified as follows:-
 Credit on capital goods is available only if these specifically fall
in the definition of capital goods as given under rule 2(a) of the
Cenvat Credit Rules, 2004;
 As regards ‘inputs', they should be covered under the definition of
‘input' as given in rule 2(k) of the CENVAT Credit Rules, 2004 and
they should be integrally used in the manufacture of the final
product;
 No credit is allowed on the 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.
 No credit is allowed on inputs used for repair and maintenance of
capital goods.
Therefore, the board has simply reiterated the decision of larger
bench, nothing has been added. In other words, clarification does not
clarify anything new and the situation was the same before as it is
after issuance of this Circular.

Starting of bad time for assessees:-

After the decision of larger bench, bad time had started for the
assessees. Various tribunals have started deciding the cases against
the assessees. In a recent decision, Delhi CESTAT has ordered for pre
deposit in an identical case and have directed for analogous hearing
of all similar cases. It has been done in the case of Spice
Communication Vs CCE, Chandigarh [2010-TIOL-915-CESTAT-DEL] wherein
credit is denied on the cement and steel items used for laying
foundation and building supporting structure. The decision has been
passed by relying on the decision of Vandana Global.

It was doubted that the decision of Vandana Global will encounter the
large no. of assessees, but it seems that the hon’ble Supreme Court is
merciful to the assessees. So, here comes the latest judgment of Apex
Court favouring the assessees.

Latest Supreme Court decision:-

Hon’ble Supreme Court has recently allowed credit of steel plates &
M.S. Channels in the case of CCE, Jaipur Vs M/s Rajasthan Spinning &
Weaving Mills Ltd [2010-TIOL-51-SC-CX]. The verdicts of Apex Court
read as follows:-

“Central Excise - Modvat - assessee was entitled to avail of MODVAT
credit in respect of steel plates and M.S. channels used in the
fabrication of chimney for the diesel generating set, by treating
these items as capital goods: steel plates and M.S. Channels, used in
the fabrication of chimney would fall within the ambit of "capital
goods" as contemplated in Rule 57Q. It is not the case of the Revenue
that both these items are not required to be used in the fabrication
of chimney, which is an integral part of the diesel generating set,
particularly when the Pollution Control laws make it mandatory that
all plants which emit effluents should be so equipped with apparatus
which can reduce or get rid of the effluent gases. Therefore, any
equipment used for the said purpose has to be treated as an accessory
in terms of serial No.5 of the goods described in column (2) of the
Table below Rule 57Q: SUPREME COURT”

In this case, steel plates & M.S. Channels were used for fabrication
of chimney, which in turn became integral part of diesel generating
set. The Apex Court favoured the contention of the assessee that the
steel plates & M.S. Channels were components of chimney and chimney
was held as accessory of DG set and as such credit of impugned goods
was allowed as capital goods by hon’ble Supreme Court. This decision
pertains to year 1999 when Central Excise Rules, 1944 were in force.
Credit of capital goods was allowed under Rule 57Q of these rules. The
capital goods were defined in explanation to this rule. The relevant
part of this rule read as follows:-

“capital goods” means—

(a) machines, machinery, plant, equipment, apparatus, tools or
appliances used for producing or processing of any goods or for
bringing about any change in any substance for the manufacture of
final products;

(b) components, spare parts and accessories of the aforesaid machines,
machinery, plant, equipment, apparatus, tools or appliances used for
aforesaid purpose; and

(c) moulds and dies, generating sets and weighbridges used in the
factory of the manufacturer.”

As such, credit was allowed on the components, spare parts and
accessories of machines, plant & equipments, etc. under this rule. If
we recall the current definition of capital goods under rule 2(a),
credit is allowed on components, spare parts and accessories of
machines, equipments (falling under chapter heads specified therein)
under clause (iii) of this rule.
If we compare this decision with new rules, the facts and
circumstances are the same, the interpretation of relevant portion of
both the rules, the old one and the new one, is the same. So, the
ratio of this judgment may be made applicable to the current pending
cases.

While parting: -

There has been a no. of ups and downs regarding availability of credit
on items used in fabrication of plant & machinery. A number of issues
were under litigation prior to budget, 2009. In some cases, credit of
these goods was allowed as inputs & somewhere it was allowed as
capital goods. The amendment by Budget 2009 denied the credit on these
items as inputs. It was thought that the credit for prior period will
be allowed as input. But this expectation was crushed by the decision
of larger bench wherein it was held that the amendment is
retrospective in nature. In this case, credit on impugned goods was
also denied as capital goods. Further, the Board Circular dated July
9, 2010 has added the fuel to fire. Until this, the entire situation
was in favour of department and poor assessees were empty handed. But
every cloud has a silver lining…. It is proved by the recent Supreme
Court decision allowing the credit on impugned goods as capital goods.
Under Article 141 of the Constitution of India “the law declared by
the Supreme Court shall be binding on all Courts within the territory
of India”. So, now the ball is in hands of assessees… till when? God
knows…

*******

Kind Regards,
CA PRADEEP JAIN, (B. Com Hons., F. C. A.)
Address:
"Sugyan"
H - 29, Shastri Nagar, Jodhpur (Raj.)
Mobile : +91-9928111481
Phone No. : 0291-2439496, 2611496, 3258496
Fax No. : 0291-2439496
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