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of <h1>Tribunal allows appeal for denied CENVAT Credit and penalties, deems manufacturing inputs eligible</h1> The Tribunal allowed the appeal by the Appellant, who was denied CENVAT Credit and faced penalty imposition for the period 2007-08 and 2008-09. The ... Recovery of CENVAT Credit - Inputs - cement - welding electrode - MS plate - MS angle - channel - penalty in terms of Rule 15(2) of CENVAT Credit Rules, 2004 read with Secion 11AC of the Central Excise Act, 1944 - HELD THAT:- The issue is no more res integra since the period of dispute is 2007-08 and 2008-09 and the amendment to the definition of ‘input’ was made on 07.07.2009 and which was made to be not retrospective. It is the case of the Appellant that the disputed items of iron and steel, cement, welding electrodes etc. were used in the factory in the manufacture of storage tank and also for pollution control system and thus are eligible as inputs and are squarely covered by the definition of ‘input’. Reliance has been made on the decision of the Tribunal in the case of M/S. SINGHAL ENTERPRISES PRIVATE LIMITED VERSUS THE COMMISSIONER CUSTOMS & CENTRAL EXCISE, RAIPUR [2016 (9) TMI 682 - CESTAT NEW DELHI] where it was held that applying the “User Test” to the facts in hand, we have no hesitation in holding that the structural items used in the fabrication of support structures would fall within the ambit of ‘Capital Goods’ as contemplated under Rule 2(a) of the Cenvat Credit Rules, hence will be entitled to the Cenvat credit. The impugned orders cannot be sustained and are therefore set aside - Appeal allowed - decided in favor of apellant. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit is admissible on welding electrodes and similar items used for repair, maintenance or fabrication in the factory, i.e., whether such goods qualify as 'input' under the CENVAT Credit Rules. 2. Whether CENVAT credit is admissible on structural iron & steel items (cement, MS plates, MS angles, channels, CTD/TMT bars, etc.) when used in the manufacture of capital goods (e.g., storage tanks, pollution control equipment) or in fabrication of support structures for capital goods-i.e., whether such goods fall within 'input' or 'capital goods' under Rule 2(a)/(k). 3. Whether the explanation/amendment to the definition of 'input' made w.e.f. 07.07.2009 operates retrospectively to deny credit for periods prior to amendment. 4. Whether the impugned disallowance and equal-amount penalty (under Rule 15(2) read with Section 11AC) could be sustained where CENVAT credit is found allowable on the facts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of CENVAT credit on welding electrodes and similar repair/maintenance items Legal framework: The definition of 'input' under the CENVAT Credit Rules (Rule 2(k)/(a) as applicable) and judicially developed tests for distinguishing 'input' from 'capital goods' or excluded items govern admissibility of credit on items used for repair/maintenance or fabrication. Precedent Treatment: Multiple Tribunal and High Court decisions have allowed credit on welding electrodes and similar items by treating them as 'inputs'; some contrary High Court decisions deny credit when items are characterized as capital goods. The Tribunal referred to consistent precedents that treat welding electrodes as allowable inputs. Interpretation and reasoning: The Court applied prior Tribunal and High Court authorities that accept welding electrodes as inputs when used in repair/maintenance or factory operations. The reasoning rests on the functional use of the goods in the manufacture or upkeep of factory machinery/equipment-i.e., they are consumed in the course of manufacturing operations and fall within the ordinary meaning of 'input'. Ratio vs. Obiter: Ratio - where welding electrodes are used in repair/maintenance or in fabrication integral to factory operations, they are 'inputs' eligible for CENVAT credit. Obiter - reference to contrary single High Court decisions without applying the user-test in identical factual matrices. Conclusion: CENVAT credit on welding electrodes is allowable for the disputed period under the applicable definition of 'input'. Issue 2 - Admissibility of CENVAT credit on structural iron/steel items used in manufacture of capital goods or fabrication of support structures Legal framework: Definitions of 'input' and 'capital goods' under the CENVAT Credit Rules; the 'user test' developed by higher courts (whether the goods, by user, are capital goods or inputs); Rule 2(a)/(k) and Explanation 2 (as amended w.e.f. 07.07.2009) are central. Precedent Treatment: The Larger Bench decision in Vandana Global Ltd. denied credit for certain iron/articles used as supporting structures; however, subsequent High Court and Supreme Court decisions (including a Supreme Court decision applying the 'user test' to steel plates and channels used in fabrication of chimneys/sets) have allowed credit where structural items are worked into or form part of capital goods. Tribunal and High Court authorities have followed the user-test approach to treat structurals as parts/components of capital goods when so used. Interpretation and reasoning: The Court applied the 'user test': examine the actual use to determine whether goods become part of capital goods (components/spares/accessories) or are used for construction of buildings/factory sheds/foundations (which exclusions target). Where structural items are worked upon and fabricated to form storage tanks, pollution control equipment, or fabricated support structures integral to operation of capital machinery (e.g., kilns, conveyors), they function as parts/components of capital goods. Such items thereby fall within the definition of 'capital goods' and, because Explanation 2 includes goods used in the manufacture of capital goods as 'inputs', the duty paid on them is eligible as CENVAT credit for periods prior to the non-retrospective amendment. Ratio vs. Obiter: Ratio - structural iron/steel items that are fabricated and used as integral parts/components or supports of capital goods satisfy the user test and qualify as capital goods (and therefore as 'inputs' under Explanation 2) for the pre-amendment period. Obiter - discussion of the Vandana Larger Bench as subject to later treatment and the treatment of certain contrary decisions as distinguishable on facts and temporal scope. Conclusion: For the disputed period (2007-08 and 2008-09), CENVAT credit is allowable on structural items when they were used in the manufacture of capital goods or fabricated into support structures for capital goods; such use brings them within the definition of 'capital goods' and hence within 'input' as applicable then. Issue 3 - Effect of the 07.07.2009 amendment to Explanation 2 (non-retrospectivity) Legal framework: Legislative amendment to Explanation 2 to Rule 2(a) excluding cement, angles, channels, CTD/TMT bars and other items used for construction of factory sheds, buildings, foundations or making of structures for support of capital goods; principles of retrospective vs prospective operation of statutory amendments. Precedent Treatment: Higher courts have held the 07.07.2009 amendment to be non-clarificatory and therefore prospective (not retrospective). Decisions allowing credit prior to the amendment have been upheld where the amendment could not be applied retrospectively. Interpretation and reasoning: The Court held that the amendment w.e.f. 07.07.2009 was not retrospective and, therefore, cannot be applied to deny credit for periods prior to that date. Reliance on authoritative rulings that the amendment is prospective and cannot negate rights accrued or controversies settled under the law as it stood for earlier periods. Ratio vs. Obiter: Ratio - the 07.07.2009 amendment is not retrospective and does not affect admissibility of credit for the pre-amendment period; therefore, exclusions introduced by the amendment cannot be invoked against claims relating to 2007-08 and 2008-09. Conclusion: The amendment of 07.07.2009 does not operate retrospectively and cannot be used to deny CENVAT credit for the disputed earlier period. Issue 4 - Sustainability of disallowance and penalty under Rule 15(2) read with Section 11AC when credit is found allowable Legal framework: Where CENVAT credit is held to be legitimately claimed under the law and established tests, consequential liability including penalty must be assessed in light of absence of culpable wrongdoing or misdeclaration. Precedent Treatment: Authorities have set aside penalties where the underlying credit claims were allowable or where the legal position was arguable/covered by precedent. Interpretation and reasoning: Because the Tribunal/High Court jurisprudence and the user-test support the allowability of the claimed credits for the relevant period, the disallowance is unsustainable. Imposition of penalty of an equal amount under Rule 15(2)/Section 11AC is not tenable when the credit claim is found legally allowable for the relevant period. Ratio vs. Obiter: Ratio - disallowance and concomitant equal-amount penalty cannot stand where CENVAT credit is correctly allowable on the facts and law applicable to the period in question. Conclusion: The impugned disallowance and equal-amount penalty are unsustainable and are set aside; consequential relief follows as per law.
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