Cenvat credit on windmill construction services was denied after the 2011 amendment, while penalty was set aside for want of suppression.

After the 1 April 2011 amendment to Rule 2(l) of the Cenvat Credit Rules, construction services used to set up a windmill away from the factory did not qualify as input services, so the Cenvat credit was inadmissible. Penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 15 of the Central Excise Rules, 2002 was not sustainable where the credit had been reversed with interest, the notice was within the normal limitation period, and no suppression or misdeclaration was shown. The demand was upheld and the penalty was deleted.

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Issues: (i) Whether Cenvat credit on construction services used for setting up a windmill away from the factory was admissible after 1 April 2011. (ii) Whether penalty was sustainable when the credit was reversed with interest and the notice was within the normal period of limitation.

Issue (i): Whether Cenvat credit on construction services used for setting up a windmill away from the factory was admissible after 1 April 2011.

Analysis: After 1 April 2011, the definition of input service under Rule 2(l) of the Cenvat Credit Rules excluded service portions in the execution of works contracts and construction services used for construction of a building or civil structure, or for laying foundation or making structures for support of capital goods. The omission of the expression relating to setting up also supported the view that such services were not intended to qualify as input services. The credit was therefore not available on services used for setting up the windmill.

Conclusion: The credit on construction services used for setting up the windmill was inadmissible.

Issue (ii): Whether penalty was sustainable when the credit was reversed with interest and the notice was within the normal period of limitation.

Analysis: The credit had been reversed with interest, and the notice was issued for the normal period of limitation. In the absence of suppression or misdeclaration, the conditions for imposing penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 15 of the Central Excise Rules, 2002 were not satisfied. The payment of the entire credit amount with interest also weighed against imposition of equivalent penalty.

Conclusion: The penalty was not sustainable and was set aside.

Final Conclusion: The demand on credit was upheld, but the penalty was deleted, resulting in a partial allowance of the appeal.

Ratio Decidendi: After the 1 April 2011 amendment, construction services used for setting up a new installation were excluded from input service coverage, and penalty under Section 11AC could not be sustained absent suppression or misdeclaration when the credit had been reversed with interest.

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