CENVAT credit on goods used to build a kiln remained admissible before the restrictive amendment, despite composition-scheme tax payment.

CENVAT credit was treated as admissible on cement, MS angles, channels and similar goods used to construct and install a new kiln in the factory, because the kiln was machinery used in manufacture and, for the relevant period, Explanation (2) to the definition of inputs covered goods used in the manufacture of capital goods used in the factory. The later restriction introduced from 07.07.2009 was not applied retrospectively, and the contractor's payment of service tax under the composition scheme did not, by itself, bar the manufacturer's credit. The disallowance was therefore unsustainable and the demand was set aside.

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Issues: Whether CENVAT credit was admissible on cement, MS angles, channels and similar goods used for construction and installation of a new kiln in the factory, notwithstanding that the works contractor paid service tax under the composition scheme and that the kiln became an immovable property.

Analysis: The goods were used in relation to installation of a kiln, which is machinery employed in manufacture. During the relevant period, Explanation (2) to the definition of inputs covered goods used in the manufacture of capital goods used in the factory. The later amendment introduced a restriction only from 07.07.2009, which indicated that prior to that date such goods were not excluded. The Tribunal also noted that the Larger Bench view relied on by the department had been disapproved by subsequent High Court decisions, and that the contractor's choice to pay tax under the composition scheme did not by itself disable the manufacturer's credit where the goods were used in construction of the kiln.

Conclusion: CENVAT credit on the disputed goods was admissible and the disallowance was unsustainable.

Final Conclusion: The demand was set aside and the assessee's appeal succeeded with consequential relief.

Ratio Decidendi: For the period prior to the restrictive amendment, goods used in constructing or installing machinery or its supporting structures in the factory remained eligible for CENVAT credit, and the contractor's payment of service tax under a composition scheme did not, by itself, bar such credit to the manufacturer.

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