CENVAT credit on capital goods remained admissible despite contractor installation under a composition-based works contract regime.

CENVAT credit on capital goods separately procured by the manufacturer and later handed to a contractor only for erection and commissioning remained admissible because the goods became the assessee's property on receipt and were ultimately used in manufacture. The contractor's choice of the composition scheme under works contract service did not change the character of the goods in the assessee's hands or justify denial of credit. Once the credit was admissible, the related penalties on the assessee and co-appellant also could not survive, and both the denial and penalties were set aside.

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Issues: Whether CENVAT credit on capital goods procured under separate purchase orders and later handed over to the contractor for erection and commissioning could be denied on the ground that the contractor had opted for the composition scheme under works contract service, and whether the penalties imposed on the assessee and its co-appellant were sustainable.

Analysis: The credit dispute was held to be covered by the Tribunal's earlier decision on identical facts. The capital goods were acquired by the assessee on payment under separate contracts, became its property on receipt, and were later made available to the contractor only for installation and commissioning. The fact that the contractor discharged service tax under the composition scheme and did not take credit on the goods used by it did not alter the character of the goods as capital goods in the assessee's hands. Since the goods were ultimately used in the manufacture of the final product, the denial of credit was held to be unsustainable. Once the credit itself was admissible, the penalties based on the alleged wrongful availment could not survive.

Conclusion: CENVAT credit was held to be admissible to the assessee on the capital goods, and the denial of credit and the connected penalties were set aside.

Ratio Decidendi: Where capital goods are separately procured by the manufacturer, become its property, and are ultimately used in manufacture, credit cannot be denied merely because they are temporarily handed to a contractor for installation and the contractor is under a composition-based works contract regime.

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