Cenvat credit for plant, machinery and factory setup remains available where goods and services are used in fabrication and establishment.

Cenvat credit cannot be denied on iron and steel items used to fabricate plant, machinery and support structures merely on the theory that the structures became immovable property; the relevant test is actual use in fabrication within the factory, and a denial that departs from the show cause notice is impermissible. Credit on duty-paid capital goods received for setting up a plant is not dependent on commencement of production, and pre-production availment is not disallowed for that reason alone. Input service credit is also admissible where services are used for construction and setting up of the factory, since the relevant definition covered such services during the period in question.

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Issues: (i) Whether Cenvat credit on iron and steel items used for fabrication of plant and machinery and support structures was deniable on the ground that the impugned order travelled beyond the show cause notice and on merits under the credit rules; (ii) whether Cenvat credit on capital goods received for setting up the plant could be denied merely because production had not commenced; (iii) whether input service credit on services used for construction and setting up of the factory was inadmissible.

Issue (i): Whether Cenvat credit on iron and steel items used for fabrication of plant and machinery and support structures was deniable on the ground that the impugned order travelled beyond the show cause notice and on merits under the credit rules?

Analysis: The show cause notice proceeded on one basis, but the adjudication denied credit on a different ground. Such a departure from the notice was held impermissible. On merits, the denial based on the view that structurals and embedded plant became immovable property was not accepted. The applicable test was whether the goods were used in fabrication of capital goods or their supporting structures inside the factory, and the record did not contain a proper factual finding on actual use of the materials. Applying the user test and the settled line of authority, the credit could not be denied on the reasoning adopted in the order.

Conclusion: The denial of credit on iron and steel items used for fabrication of plant and machinery was unsustainable and was set aside.

Issue (ii): Whether Cenvat credit on capital goods received for setting up the plant could be denied merely because production had not commenced?

Analysis: The capital goods were admittedly received in the factory and were duty paid. The credit scheme under the Cenvat Credit Rules, 2004 does not make availment dependent on commencement of production, and mere accounting entry of eligible credit before production does not amount to unlawful utilization. The circular relied upon by the adjudicating authority related to a different regime and did not govern the dispute. The view that the goods became non-excisable immovable property after installation was not a valid basis to deny otherwise eligible credit.

Conclusion: Credit on capital goods could not be denied on the ground that production had not commenced, and the assessee's entitlement was upheld.

Issue (iii): Whether input service credit on services used for construction and setting up of the factory was inadmissible?

Analysis: The definition of input service during the relevant period was wide and expressly covered services used directly or indirectly in relation to manufacture, including services used for setting up, modernization, renovation, or repairs of a factory. The disputed services were used for establishing the production facility and therefore fell within the statutory definition. The circular relied upon by the adjudicating authority was not applicable to the facts, and the exclusionary approach taken in the order was inconsistent with the breadth of the credit provision.

Conclusion: Input service credit on services used for construction and setting up of the factory was admissible.

Final Conclusion: The impugned order was not sustainable in law, the credit disallowance and penalty could not survive, and the appeal succeeded.

Ratio Decidendi: Credit under the Cenvat scheme cannot be denied where the goods or services are used in the fabrication of capital goods or in setting up the factory, unless the revenue establishes a legally sustainable basis within the show cause notice and the applicable credit definition is not satisfied.

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