Cenvat credit on factory inputs and related services upheld where manufacture-linked use was shown and retrospective denial failed.

Cenvat credit on steel items used in the factory was remitted for fresh consideration because the denial had relied on a retrospective reading of the amended input definition that was later undermined, and the factual use of the goods required reconsideration. Credit on service tax paid for renting a godown outside the factory and for construction or repair of a warehouse shed was admissible because storage use outside the factory did not by itself defeat credit and the shed work was connected with manufacture. Demand on alleged illicit clearance of waste and scrap was unsustainable absent proof that credit had been taken on the underlying machinery. The personal penalty under Rule 26 was also set aside.

---

---

Issues: (i) whether Cenvat credit on steel items used in the factory was admissible and, if not, whether the denial based on the retrospective application of the amended input definition could stand; (ii) whether Cenvat credit on service tax paid for renting of a godown outside the factory premises and for construction or repair of a warehouse shed was admissible; (iii) whether demand relating to alleged illicit clearance of waste and scrap of plant and machinery was sustainable; and (iv) whether the personal penalty imposed under Rule 26 was justified.

Issue (i): whether Cenvat credit on steel items used in the factory was admissible and, if not, whether the denial based on the retrospective application of the amended input definition could stand.

Analysis: The denial of credit rested on the Larger Bench view that the amendment to the input definition had retrospective effect. That basis was no longer sound in view of the subsequent High Court ruling reversing that position. The record also contained a chartered engineer's certificate on the use of the goods, which required factual reconsideration.

Conclusion: The issue was remanded to the adjudicating authority for fresh consideration.

Issue (ii): whether Cenvat credit on service tax paid for renting of a godown outside the factory premises and for construction or repair of a warehouse shed was admissible.

Analysis: Credit could not be denied merely because the godown was situated outside the factory when it was used for storage of goods used in manufacture. The warehouse shed work was directly connected with manufacture and therefore qualified for credit.

Conclusion: The credit was held admissible.

Issue (iii): whether demand relating to alleged illicit clearance of waste and scrap of plant and machinery was sustainable.

Analysis: The department did not establish that credit had been taken on the machinery from which the scrap arose. In the absence of proof of availment of Cenvat credit on such machinery, no duty demand on the scrap could be sustained.

Conclusion: The demand on waste and scrap was set aside.

Issue (iv): whether the personal penalty imposed under Rule 26 was justified.

Analysis: The dispute turned on interpretation of the Cenvat credit regime, and the record did not justify a personal penalty in these circumstances.

Conclusion: The penalty was set aside.

Final Conclusion: The order resulted in partial relief to the assessee, with one credit issue remitted for reconsideration and the remaining contested issues decided in favour of the assessee.

Ratio Decidendi: Credit on goods or services used in or in relation to manufacture cannot be denied on an unsustainable retrospective interpretation or on a purely location-based objection, and a demand on scrap from machinery requires proof that credit had actually been availed on that machinery.

---