2010 (4) TMI 133 - AT - Central Excise

2009 amendment not retrospective; CENVAT credit disallowed for cement and structural steel; Section 37(1) limits rule power

CESTAT held the 7.9.2009 amendment clarified the scope of 'input' and was not retrospective, so it cannot be read to permit CENVAT credit for periods ... Definition of capital goods under the CENVAT Credit Rules - inputs used in the manufacture of capital goods - integral connection / nexus test for eligible inputs - excisable goods requirement for CENVAT credit - clarificatory amendment and retrospective applicationDefinition of capital goods under the CENVAT Credit Rules - excisable goods requirement for CENVAT credit - whether plant or structures embedded to earth qualify as 'capital goods' under the CENVAT Credit Rules - HELD THAT: - The Court held that the expression 'capital goods' must be read in accordance with the specific definition contained in the CENVAT Credit Rules, which lists predominantly machinery items and certain specially included articles. Foundations and supporting structures embedded to earth are capital assets in a broader sense but do not fall within the enumerated concept of 'capital goods' under the Rules. The scheme treats capital goods as goods first; immovable structures embedded to earth are not goods in the requisite sense and therefore cannot be treated as capital goods for purposes of CENVAT. The separate statutory treatment of 'capital goods' and 'inputs' and the structure of the Rules demonstrate that foundations and supporting structures were not intended to be covered as capital goods. [Paras 41, 42, 43, 49]Foundations and supporting structures embedded to earth do not qualify as 'capital goods' under the CENVAT Credit Rules.Inputs used in the manufacture of capital goods - integral connection / nexus test for eligible inputs - whether goods like cement and steel structurals used for foundations or supporting structures can be treated as 'inputs' either for capital goods or in relation to the final products - HELD THAT: - Applying the integral connection/nexus test, the Tribunal held that such cement and steel items used to lay foundations or build supporting structures are neither inputs for capital goods nor inputs in relation to the final products. The definition of 'input' requires a proximate use 'in or in relation to the manufacture' of final products or in the manufacture of capital goods; items used only to provide immovable support or foundation are not integrally connected to the manufacturing process and do not participate in manufacture. The Rules separately regulate capital goods and inputs, and precedent and statutory scheme show that the impugned items cannot qualify as eligible inputs for CENVAT credit for the period in question. [Paras 44, 46, 47, 48, 49]Cement and steel items used for laying foundations or building supporting structures are not eligible as 'inputs' for capital goods nor as 'inputs' in relation to the final products; CENVAT credit cannot be allowed for the impugned period.Clarificatory amendment and retrospective application - whether the 7.7.2009 amendment to Explanation 2 was clarificatory and hence retrospective - HELD THAT: - The Court examined the legislative materials (Pink Book explanatory memorandum, Budget Bulletin, departmental communication) accompanying Notification No. 16/2009 and concluded that the amendment was intended as a clarification that 'inputs' do not include cement, angles, channels, CTD/TMT bars and similar items used for construction of sheds, buildings or structures for support of capital goods. Relying on precedent for application of clarificatory amendments, the Court found the amendment to be clarificatory in nature and retrospectively applicable, demonstrating that such items were never intended to be covered as inputs under the Rules. [Paras 32, 33, 34, 35, 36]The 7.7.2009 amendment is clarificatory and is to be applied retrospectively; it confirms that the impugned items were never intended to qualify as 'inputs'.Parts of machinery versus supporting structures - whether steel items in a particular appeal were used as fabricated parts of machinery (and thus may qualify) or merely for supporting structures - HELD THAT: - The Larger Bench did not decide factual allegations where steel items were contended to have been fabricated into parts of machinery rather than used as supporting/embedded structures. It directed that such factual determinations be examined afresh by the respective jurisdictional Benches in light of the individual case records and facts. [Paras 50]Matter remanded to the jurisdictional Benches for determination of whether the steel items in specific appeals were fabricated into machinery parts (potentially qualifying) or were used as supporting structures (not qualifying).Final Conclusion: The Larger Bench held that foundations and supporting structures embedded to earth are not 'capital goods' under the CENVAT Credit Rules, and cement and steel items used for such foundations or supports are not admissible as 'inputs' for capital goods or final products for the impugned period; the 7.7.2009 amendment was clarificatory and retrospective; factual claims that particular steel items were fabricated as machinery parts were remitted to jurisdictional Benches for decision. Issues Involved:1. Whether the term 'capital goods' can include plant, structures embedded to earthRs.2. Whether goods like angles, joists, beams, channels, bars, flats used in fabrication of such structures can be treated as 'inputs' in relation to their final products or as inputs for capital goodsRs.3. Whether credit can be allowed in respect of goods like angles, joists, beams, channels, bars, flats used in fabrication of such structures and plantRs.Detailed Analysis:Issue 1: Whether the term 'capital goods' can include plant, structures embedded to earthRs.The Tribunal examined whether structures embedded to earth can be considered 'capital goods.' The definition of 'capital goods' under the CENVAT Credit Rules includes machinery items, components, spares, accessories, and certain specifically listed items like pollution control equipment, moulds, dies, refractories, tubes, pipes, and storage tanks. The Tribunal concluded that foundations and supporting structures embedded to earth may be categorized as capital assets but do not qualify as 'capital goods' under the CENVAT Credit Rules. The Tribunal emphasized that the definition of 'capital goods' must be adhered to strictly and cannot be expanded to include structures embedded to earth.Issue 2: Whether goods like angles, joists, beams, channels, bars, flats used in fabrication of such structures can be treated as 'inputs' in relation to their final products or as inputs for capital goodsRs.The Tribunal considered whether steel items used for laying foundations and building supporting structures could be treated as inputs. The Tribunal concluded that these items cannot be treated as inputs for capital goods or final products. The main definition of 'input' under Rule 2(k) includes goods used in or in relation to the manufacture of final products, but the Tribunal clarified that this does not extend to goods used for laying foundations or building supporting structures. The Tribunal also rejected the argument that the value of these items contributes to the value of the final product, thereby entitling them to credit.Issue 3: Whether credit can be allowed in respect of goods like angles, joists, beams, channels, bars, flats used in fabrication of such structures and plantRs.The Tribunal examined whether credit could be allowed for steel items used in the fabrication of structures and plants embedded to earth. The Tribunal concluded that such structures and plants, being immovable property, are not 'goods' and therefore cannot be considered either as excisable goods or capital goods under the Central Excise Rules or the CENVAT Credit Rules. The Tribunal emphasized that the CENVAT scheme is designed to grant credit for excisable goods used in the manufacture of final products and not for immovable property.Conclusion:The Tribunal concluded that structures embedded to earth cannot be considered 'capital goods,' and goods like angles, joists, beams, channels, bars, flats used in the fabrication of such structures cannot be treated as inputs for capital goods or final products. Consequently, no credit of duty paid on these items can be allowed under the CENVAT Credit Rules for the impugned period. The Tribunal also held that the view taken by the Division Bench in the case of Bhushan Steel and Strips Ltd. was not correct in law. The individual appeals were directed to be returned to the jurisdictional Benches for final hearing and disposal.