CENVAT credit on fabrication steel was allowed for machinery use but denied for shed and civil construction use.

CENVAT credit was admissible on MS plates, angles, channels, beams, bars and similar items used for fabrication and erection of machinery, equipment and other production-related installations because such goods could qualify as components, spares or accessories of capital goods on a functional user test. Credit was not admissible where the same materials were used for sheds or other civil construction, as those uses did not satisfy the capital goods nexus. The disallowance was therefore set aside for machinery and equipment uses, the shed-related demand was sustained with interest, and penalties were deleted.

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Issues: Whether CENVAT credit was admissible on MS plates, angles, channels, beams, bars and similar items used for fabrication and erection of machinery and equipment, and whether credit was also admissible to the extent those items were used for sheds and other civil construction.

Analysis: The items were shown to have been used not only for plant sheds and storage sheds but also for machinery, equipment, handling systems, chimneys, tanks and other production-related installations. Applying the user test, goods used in the factory for erecting or fabricating machinery and equipment can qualify as components, spares or accessories of capital goods, even if they are not independently classifiable as capital goods. The reasoning was supported by the broad construction of capital goods under the erstwhile Rule 57Q and the settled principle that items essential for erection and effective use of machinery may attract credit. However, materials used for sheds and similar civil structures do not qualify for credit.

Conclusion: Credit on MS items used for machinery and equipment was admissible, while credit on MS items used for sheds was not admissible.

Final Conclusion: The disallowance was set aside to the extent it related to machinery and equipment, the shed-related credit demand was sustained with interest, and the penalties were deleted.

Ratio Decidendi: Materials used for erection or fabrication of machinery and equipment in the factory may qualify for credit as components, spares or accessories of capital goods on the basis of functional user, but materials used for sheds or civil construction do not.

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