CENVAT credit on capital goods cannot be denied by recharacterising separate supply and service contracts beyond the show-cause notice.

CENVAT credit on capital goods used for setting up a thermal power plant is admissible where the goods were imported under a supply contract, duty was paid, and title passed on delivery, while separate service contracts for erection, commissioning, and civil work were independently taxed. Denial based on a combined reading of distinct contracts and an alleged contractor possession was unsustainable because that basis was not pleaded in the show cause notice. The operative principle is that a demand cannot be upheld on grounds beyond the notice, and separate supply and service arrangements cannot be recharacterised to deny credit when the contractual and factual record supports receipt of the goods by the assessee.

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Issues: Whether CENVAT credit on capital goods used for setting up the thermal power plant was admissible to the appellant, and whether denial of credit on grounds not alleged in the show cause notice could be sustained.

Analysis: The credit dispute was examined on the basis of the contracts for supply of machinery and for erection, commissioning and civil work. The capital goods were imported and received by the appellant under the supply contract, duty was paid, title passed on delivery subject to contractual conditions, and service tax had been discharged on the separate service contracts. The reasoning in the impugned order proceeded on a combined reading of distinct contracts and on an alleged possession of the goods by the contractor, although the show cause notice had not alleged the same basis for denial. The denial therefore rested on matters beyond the scope of the notice and ignored the relevant contractual and factual position.

Conclusion: The denial of CENVAT credit was unsustainable and the appellant was entitled to the credit.

Ratio Decidendi: A demand cannot be sustained on grounds not pleaded in the show cause notice, and CENVAT credit on capital goods cannot be denied by recharacterising separate supply and service contracts when the goods were duly imported, paid for, and received by the assessee.

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