Cenvat credit on steel used for capital goods fabrication remains available; later Rule 2(k) exclusion is prospective only.

Steel items used within a factory to fabricate capital goods, accessories and supporting structures integral to plant functioning were treated as eligible for Cenvat credit under the user test. The later exclusion inserted in Rule 2(k) of the Cenvat Credit Rules, 2004, effective from 7 July 2009, was stated to operate prospectively and not retrospectively, so it could not be used to deny credit for the prior period. The emphasis on immovable structures was not treated as decisive where the goods were used in the fabrication and support of manufacturing equipment. On that basis, credit was admissible and the related disallowance and penalty were unsustainable.

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Issues: Whether steel items used in fabrication and installation of capital goods and supporting structures inside the factory were eligible for Cenvat credit; and whether the amendment to Rule 2(k) of the Cenvat Credit Rules, 2004 with effect from 7 July 2009 could be applied retrospectively to deny credit for the period in dispute.

Analysis: The exclusion introduced in Rule 2(k) of the Cenvat Credit Rules, 2004 was held to be prospective and not retrospective. The steel items were found, on the basis of the Chartered Engineer's certificate and supporting material, to have been used in fabrication of machinery, accessories, and support structures integrally connected with the functioning of the cement plant. Applying the user test, such items were treated as relatable to capital goods and not merely as materials for civil construction or immovable structures. The emphasis on immovability was held not to be decisive where the goods were used to fabricate and support capital machinery within the manufacturing premises.

Conclusion: Cenvat credit on the steel items was admissible, and the disallowance based on retrospective application of the amendment and on the theory of immovable structures was rejected.

Final Conclusion: The denial of credit and the related penalty were unsustainable, and the appeal succeeded in full.

Ratio Decidendi: Steel items used within the factory in the fabrication of capital goods or their integral accessories are eligible for credit under the user test, and a later exclusion in the credit rules cannot be applied retrospectively to deny such credit for the prior period.

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