Cenvat credit under works contract barred where contractor chose composition scheme and could not pass credit to recipient.

Cenvat credit was held unavailable on goods used in erection, commissioning and installation of a captive power plant under a works contract where the contractor had opted for the composition scheme. The decisive point was that the contractor, as the service provider executing the contract, was barred from availing credit on inputs used in that contract, and the recipient could not claim the same credit indirectly. The fact that the contract covered both inputs and capital goods, and that invoices named the recipient as consignee, did not change the position because all goods formed part of the same works contract. The demand and penalty were therefore sustained.

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Issues: Whether Cenvat credit on capital goods and inputs used in erection, commissioning and installation of a captive power plant under a works contract was available to the recipient when the contractor had opted for the composition scheme and was barred from taking such credit.

Analysis: The contract was for supply of materials, capital goods, parts and components as well as for erection, commissioning and installation of the boiler and power plant. The goods, whether manufactured by the contractor or procured and directly supplied to the appellant, were all used in execution of the works contract until the final plant came into existence and was handed over. The contractor had paid service tax on the gross value under the composition scheme under which the provider of taxable service is not entitled to take Cenvat credit on inputs used in the works contract. Since the contractor, as the person executing the final product under the works contract, was the person entitled or disentitled in respect of the credit chain, the appellant could not claim the same credit indirectly. The distinction between inputs and capital goods did not alter the position because both formed part of the same works contract and the invoice showing the appellant as consignee did not confer credit entitlement.

Conclusion: The appellant was not entitled to the Cenvat credit and the demand and penalty were sustainable.

Final Conclusion: The appeal failed because credit attributable to goods used in a works contract could not be passed on to the recipient where the contractor had already opted for the composition scheme and was barred from availing such credit.

Ratio Decidendi: Cenvat credit on goods forming part of a works contract cannot be claimed by the recipient when the contractor, being the service provider under the composition scheme, is statutorily barred from taking credit on the inputs used in that contract.

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