Tribunal Upholds Disallowance of Cenvat Credit on Capital Goods for Non-Dutiable Product

The tribunal upheld the disallowance of cenvat credit on capital goods used for manufacturing a non-dutiable intermediate product, citing Rule 3 of Cenvat Credit Rules and the circular's applicability. The invocation of the extended limitation period was deemed unjustified, leading to a partial waiver of the demanded amount.

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Issues: (i) whether Cenvat credit on capital goods was admissible when the capital goods were used exclusively for manufacture of an intermediate product and not for the final dutiable product; (ii) whether the extended period of limitation could be invoked on the facts of the case.

Issue (i): whether Cenvat credit on capital goods was admissible when the capital goods were used exclusively for manufacture of an intermediate product and not for the final dutiable product.

Analysis: Rule 3 of the Cenvat Credit Rules, 2004 permits credit on capital goods received in the factory for use in the manufacture of the final product. The material on record showed that the machinery was used for manufacture of spirit, which was the intermediate product, and that denatured spirit was produced only after the spirit was stored and mixed with additives, without any separate machinery for that stage. In that setting, the use of the capital goods could not be treated as direct use in the manufacture of the final product. The circular relied upon by the appellant was read as supporting credit only where the manufacture of the intermediate exempt product formed part of a continuous manufacturing process leading to the dutiable final product. The earlier decision under the erstwhile Rule 57R(2) was held inapplicable because the Cenvat Credit Rules, 2004 contained no corresponding provision.

Conclusion: Cenvat credit was not prima facie shown to be admissible on the entire capital goods in the manner claimed by the appellant.

Issue (ii): whether the extended period of limitation could be invoked on the facts of the case.

Analysis: The order did not disclose satisfactory material showing that the department was unaware of the manufacturing process or that there had been non-filing of regular statutory records. The demand related to a long period, whereas the show cause notice was issued later, and the basis for alleging suppression rested mainly on the audit report without clear particulars as to when the relevant facts were first discovered. On that basis, the invocation of the extended period was found unsustainable for the earlier part of the demand.

Conclusion: The demand for the period prior to 17-2-2008 was held prima facie time barred.

Final Conclusion: Relief was granted only in part, with partial deposit ordered for the later period and waiver of the balance demand including penalty.

Ratio Decidendi: Cenvat credit on capital goods is not available where the goods are used exclusively for an exempt intermediate product and not in the manufacture of the final dutiable product, and extended limitation cannot be sustained without a clear showing of suppression or undisclosed facts.

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