CENVAT credit on factory locomotives was upheld as admissible for internal material handling and related penalty fell away.

CENVAT credit was admissible on locomotives and locomotive parts used inside the factory to move raw materials and finished goods during manufacture. The locomotives were treated as industrial material-handling equipment functionally integrated with the manufacturing process, and earlier decisions were applied to hold that such use satisfies the user test for credit eligibility as accessories to capital goods. Once the credit was found admissible, the related demand, interest and penalty could not survive, and the denial of credit and penalty were set aside in favour of the assessee.

---

---

Issues: Whether CENVAT credit was admissible on locomotives and locomotive parts used within the factory for movement of raw materials and finished goods, and whether the related penalty could survive.

Analysis: The locomotives were used as industrial material-handling equipment inside the factory for shifting inputs and finished products in the course of manufacture. The issue was treated as covered by earlier decisions holding that such vehicles, when functionally integrated with the manufacturing process and used within factory premises, qualify as accessories to capital goods and satisfy the user test for credit eligibility. Once the credit on the locomotives and their parts was found admissible, the foundation for the demand, interest, and penalty ceased to survive.

Conclusion: CENVAT credit on the locomotives and their spare parts was held admissible, and the denial of credit and penalty were set aside in favour of the assessee.

---