Cenvat credit on steel used for fabrication of capital goods upheld; later Rule 2(k) exclusion held prospective only.

Steel items such as angles, channels, plates and rounds used within the factory for fabrication and installation of capital goods, accessories and closely connected support structures were treated as eligible for Cenvat credit because their direct use satisfied the user test. The later exclusion inserted in Rule 2(k) of the Cenvat Credit Rules with effect from 07.07.2009 was treated as prospective, so it could not be applied to deny credit for goods purchased and used before that amendment. The pre-amendment credit entitlement was therefore preserved.

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Issues: (i) Whether steel items such as angles, channels, plates, rounds and similar materials used in fabrication and installation of capital goods and their accessories within the factory were eligible for Cenvat credit. (ii) Whether the exclusion introduced in Rule 2(k) of the Cenvat Credit Rules, 2004 with effect from 07.07.2009 could be applied retrospectively to deny credit for the prior period.

Issue (i): Whether steel items such as angles, channels, plates, rounds and similar materials used in fabrication and installation of capital goods and their accessories within the factory were eligible for Cenvat credit.

Analysis: The materials were shown, through the Chartered Engineer certificate and supporting records, to have been used in fabrication of capital goods, accessories and plant-related equipment within the factory. The authority applied the established user test and treated such items as components, parts or accessories of capital goods when they were integrally used in the manufacturing setup. The reasoning also recognised that items used to create support structures for functioning machinery are not to be denied credit merely because they are fixed or embedded, if their use is directly connected with the operation of capital goods.

Conclusion: The steel items were eligible for Cenvat credit and the denial of credit was unsustainable.

Issue (ii): Whether the exclusion introduced in Rule 2(k) of the Cenvat Credit Rules, 2004 with effect from 07.07.2009 could be applied retrospectively to deny credit for the prior period.

Analysis: The relevant goods had been purchased and used before the amendment. The exclusion brought in by the 07.07.2009 amendment was treated as prospective, not clarificatory, and therefore could not govern periods prior to its commencement. The authority followed the view that the amendment could not be invoked to defeat credit already earned on the earlier factual matrix.

Conclusion: The 07.07.2009 exclusion could not be applied retrospectively against the assessee.

Final Conclusion: The denial of Cenvat credit was set aside and the appeal succeeded, as the disputed steel items were held to be credit-eligible for the pre-amendment period.

Ratio Decidendi: Steel items used in the factory for fabrication of capital goods, accessories and closely connected support structures satisfy the user test and qualify for credit, and a later exclusion in the credit rules operates prospectively unless expressly made retrospective.

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