Cenvat credit on fabrication materials and welding electrodes was upheld, while the restrictive amendment was held prospective.

Cenvat credit was treated as admissible for steel items used in fabrication of machinery and support structures, and for welding electrodes used for repair and maintenance of plant and machinery, because such use had a direct nexus with manufacture and fell within inputs used in or in relation to manufacture. Explanation 2 to Rule 2(k) of the Cenvat Credit Rules, 2004 was regarded as prospective only, so the restrictive exclusion could not apply to prior periods. The dispute was also described as interpretational, so extended limitation was unavailable and penalty could not be sustained.

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Issues: (i) Whether Cenvat credit was admissible on steel items used for fabrication of machinery and support structures, and on welding electrodes used in the factory; (ii) whether Explanation 2 to Rule 2(k) of the Cenvat Credit Rules, 2004 inserted on 07.07.2009 operated prospectively; (iii) whether the demand was barred by limitation and penalty and interest were sustainable.

Issue (i): Whether Cenvat credit was admissible on steel items used for fabrication of machinery and support structures, and on welding electrodes used in the factory.

Analysis: The relevant test was whether the goods had nexus with manufacture and whether their use was commercially necessary for carrying on manufacturing activity. The steel items were found to have been used in fabrication of machinery and its components, and welding electrodes were used for repair and maintenance of plant and machinery. Such use was treated as falling within the wider expression of input used in or in relation to manufacture, and therefore eligible for credit.

Conclusion: Cenvat credit was admissible on the steel items and welding electrodes, in favour of the assessee.

Issue (ii): Whether Explanation 2 to Rule 2(k) of the Cenvat Credit Rules, 2004 inserted on 07.07.2009 operated prospectively.

Analysis: The later judicial view relied on held that the amendment did not contain any indication that it was clarificatory and therefore could not be treated as retrospective. On that basis, the restrictive exclusion could not be applied to the period prior to its insertion.

Conclusion: The explanation had only prospective effect, in favour of the assessee.

Issue (iii): Whether the demand was barred by limitation and penalty and interest were sustainable.

Analysis: The dispute was held to be wholly interpretational, particularly in view of conflicting decisions on the subject. In such circumstances, extended limitation was not invocable and the penal consequence could not survive.

Conclusion: The demand was barred by limitation and penalty could not be sustained, in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded on merits as well as limitation, with consequential relief.

Ratio Decidendi: Goods used for repair and maintenance or for fabrication of machinery having a direct nexus with manufacture are eligible as inputs for Cenvat credit, and an amendment restricting such credit is prospective unless the statute clearly indicates retrospective operation; where the dispute is interpretational, extended limitation is not available.

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