Cenvat credit on power plant components used within the factory qualifies as capital goods despite no direct use in machinery.

Cenvat credit was admissible on Chapter 72 parts and components used within the factory for a power plant that supported manufacture of the final product. Rule 2(b) of the Cenvat Credit Rules, 2002 was applied to treat components, spares and accessories used in the factory as capital goods, and a restrictive requirement of direct use in the paper-making machinery was rejected. Credit was therefore allowed because the disputed items were used in a manufacturing-linked installation inside the factory, and the denial of credit, demand, interest and penalty did not survive.

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Issues: Whether Cenvat credit was admissible on parts and components falling under Chapter 72 that were used in a power plant installed within the factory and not directly in the paper-making machinery.

Analysis: Rule 2(b) of the Cenvat Credit Rules, 2002 treated as capital goods not only the specified chapters of goods, but also components, spares and accessories of such goods, when used in the factory of manufacture of the final products. The disputed items were used in the factory for setting up the power plant, and the power generated was used in manufacturing the final product. A restrictive reading requiring direct use in the paper-making machinery was rejected, as the statutory requirement was satisfied by use within the factory in a manufacturing-linked installation.

Conclusion: Cenvat credit on the disputed Chapter 72 items was admissible and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded, and the denial of credit, demand, interest, and penalty did not survive.

Ratio Decidendi: Components, spares and accessories used within the factory in a power plant connected with manufacture of the final product qualify for credit as capital goods, even if they do not directly form part of the final manufacturing machinery.

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