Cenvat credit on erection and commissioning services remains admissible when the service completes a machine sold as a finished unit.

Erection and commissioning services used for machines sold as complete, erected and commissioned units were treated as input services under Rule 2(l) of the Cenvat Credit Rules, 2004 because the service charges formed part of the transaction value and the activity at the buyer's premises was incidental to and in continuation of manufacture. The rule was read as requiring use directly or indirectly in or in relation to manufacture, not confinement of the service to factory premises, so Cenvat credit was admissible. Once that substantive credit issue was accepted, the proposed enhancement of penalty under Section 11AC of the Central Excise Act, 1944 did not survive and was rejected.

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Issues: (i) Whether service tax paid on erection and commissioning services used for machines sold with erection and commissioning included in the contract value was eligible for Cenvat credit under Rule 2(l) of the Cenvat Credit Rules, 2004. (ii) Whether the revenue was entitled to enhancement of penalty under Section 11AC of the Central Excise Act, 1944.

Issue (i): Whether service tax paid on erection and commissioning services used for machines sold with erection and commissioning included in the contract value was eligible for Cenvat credit under Rule 2(l) of the Cenvat Credit Rules, 2004.

Analysis: The service charges formed part of the transaction value of the machines and the manufacturer had undertaken responsibility for erection and commissioning through the nominated agency. The activity at the buyer's premises was treated as incidental to the manufacture and as a continuation of the manufacturing process, because the machine was sold as a complete, erected and commissioned unit. Rule 2(l) did not require that the service be rendered only in the factory premises, and the relevant test was whether the service was used directly or indirectly in or in relation to manufacture.

Conclusion: The credit was admissible and the assessee succeeded on this issue.

Issue (ii): Whether the revenue was entitled to enhancement of penalty under Section 11AC of the Central Excise Act, 1944.

Analysis: The demand for penalty enhancement was contingent upon the denial of Cenvat credit. Once the assessee succeeded on the substantive credit issue, the basis for penalty enhancement did not survive.

Conclusion: The enhancement of penalty was not sustainable and the revenue failed on this issue.

Final Conclusion: The assessee was held entitled to Cenvat credit on erection and commissioning services, and the revenue's appeals, including the appeal for penalty enhancement, were rejected.

Ratio Decidendi: Where erection and commissioning charges are part of the sale transaction and the activity is incidental to completion of the manufactured product, the related service is an input service used in relation to manufacture and Cenvat credit cannot be denied merely because the service is rendered at the buyer's premises.

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