Cenvat credit on merged premises and project-import goods remains available, with only interim interest and no penalty basis.

Cenvat credit was discussed in two contexts: capital goods installed in an adjacent unit before merger, and goods imported under project imports. On the merger issue, credit under Rule 2(a) became available once the two premises formed a common entity, so earlier taking of credit did not defeat eligibility; the only consequence for the intervening period was interest. On project-import goods under CTH 98.01, the special explanation to Rule 3(1) permitted credit of additional customs duty regardless of the disputed CVD classification. As a result, the substantive credit claim was supported, and the associated penalty on the Managing Director lacked a basis.

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Issues: (i) Whether Cenvat credit on capital goods installed in an adjacent unit before the effective merger of the two entities was admissible and, if admissible, whether interest alone was payable for the intervening period; (ii) Whether Cenvat credit on goods imported under project imports was admissible notwithstanding the CVD classification adopted at import, and whether the penalty on the Managing Director could survive.

Issue (i): Whether Cenvat credit on capital goods installed in an adjacent unit before the effective merger of the two entities was admissible and, if admissible, whether interest alone was payable for the intervening period.

Analysis: The availability of credit under Rule 2(a) of the Cenvat Credit Rules, 2004 ordinarily requires use of the capital goods in the factory of manufacture. However, the two premises became a common entity upon merger with effect from 01.04.2009. The credit had been taken earlier, but the right to avail credit existed from the merger date, and the earlier taking of credit did not extinguish that eligibility. The only consequence for the intervening period was liability to interest.

Conclusion: The credit was admissible and the demand could not be sustained, though interest was payable for the intervening period.

Issue (ii): Whether Cenvat credit on goods imported under project imports was admissible notwithstanding the CVD classification adopted at import, and whether the penalty on the Managing Director could survive.

Analysis: For goods imported under CTH 98.01, the Explanation to Rule 3(1) of the Cenvat Credit Rules, 2004 specifically allows credit of the additional duty of customs. That special provision overrides the objection based on the CVD classification under Chapter 94. Since the import was under project imports, the goods were eligible for credit irrespective of the disputed CETH classification. Once the substantive credit was held admissible, the penalty foundation also disappeared.

Conclusion: The credit was admissible, and the penalty on the Managing Director could not survive.

Final Conclusion: The demand, interest-related consequence being limited to the intervening period on the first item, and the penalties were set aside, resulting in full relief to the appellants.

Ratio Decidendi: Where project-import goods fall under CTH 98.01, the specific explanation to the Cenvat credit rule governs entitlement to CVD credit irrespective of the disputed excise classification, and a merger creating a common entity cannot defeat substantive credit eligibility once the entities stand united.

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