2025 (9) TMI 618 - AT - Central Excise

Dunnage and pallets qualify as accessories/capital goods under Rule 2(a)(A) CENVAT Credit Rules, 2004; credit claim upheld

M/s. JSW Steel Ltd. Versus Commissioner of GST & Central Excise, Salem

CESTAT CHENNAI - AT allowed the appeal, holding that dunnage/pallets used to lift, transport and store steel billets and rounds qualify as ... Availment of CENVAT credit on the AS cast rounds/ billets falling under Chapter 7206 - capital goods or accessories of capital goods - Rule 2(a)(A) of the CENVAT Credit Rules, 2004 - interest and penalty - HELD THAT:- The dunnage or pallets enable heavy machinery and forklifts to easily lift and move steel billets, rounds, and similar materials within or out of the factory. These tools are essential for transporting semi-finished goods during manufacturing, as well as storing and shipping finished products, making them integral to the overall production and distribution process. They hence satisfy the criteria of accessory as discussed above. They are adjuncts or accompaniment to lifting machines/forklifts etc and add convenience or effectiveness to the said machines. They are thus devices that assist in operating machines. They are not necessarily confined to particular machines for which they may serve as aids and can be an accessory of more than one kind of machine. In Banco Products (India) Ltd. v. Commissioner of C. Ex., Vadodara – I [2009 (2) TMI 101 - CESTAT AHMEDABAD], a Larger Bench of this Tribunal examined the availment of CENVAT capital goods credit on plastic crates used in the manufacture of finished goods. In that case too it was found that the plastic crates do not fall under any of the specified headings for capital goods and the assessees’ claim for CENVAT credit was rejected. After an elaborate discussion the Tribunal held that as per the meaning and scope of the term “accessory”, as interpreted by Hon’ble Supreme Court in various decisions and by the Tribunal, plastic crates were eligible capital goods for the purposes of Modvat credit. The principle stated in the above judgment will also apply to this case. The dunnage or pallets which enable heavy machinery and forklifts to easily lift and move steel billets, rounds, and similar materials within or out of the factory are used for collecting, transporting and stacking material. They are necessary for undertaking production within the factory and are hence used “in relation to” the manufacture of the final product. Proper transportation and storage of inputs is essential for an efficient manufacturing process and its absence will affect the manufacturing process - Further the appellant first pays duty on the goods and then avails credit of the duty paid, in a revenue neutral situation. The departments allegation that this is being done to avail excess credit has not been substantiated with facts and figures and are hence mere allegations. Interest and penalty - HELD THAT:- Once the credit has been found eligible, the demand for duty and interest does not survive and the impugned order is liable to be set aside along with the penalty imposed. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether AS cast rounds/billets (Chapter 7206) used as dunnage/pallets within the factory qualify as 'capital goods' under Rule 2(a)(A) of the CENVAT Credit Rules, 2004 by virtue of being 'components, spares and accessories' of machinery (heavy lift machinery/forklifts) falling under Chapter 84. 2. Alternatively, whether such dunnage/pallets qualify as 'inputs' used 'in or in relation to the manufacture of final products' under Rule 2(g) of the CENVAT Credit Rules, 2004. 3. Whether demand, interest and penalty confirmed for alleged wrongful availment of CENVAT credit survive if the goods are held eligible for credit. ISSUE-WISE DETAILED ANALYSIS Issue 1: Eligibility as 'Capital Goods'-Accessories under Rule 2(a)(A) Legal framework: Definition of 'capital goods' in Rule 2(a)(A) includes specified tariff headings and 'Components, spares and accessories of the goods specified at (i) and (ii)'. The question is whether items not falling under specified headings can nonetheless be accessories of capital goods. Precedent Treatment: The Tribunal referred to judicial definitions of 'accessory' (Black's Law Dictionary; M/s. Annapurna Carbon Industries; Supreme Motors) and considered the Hon'ble Supreme Court's approach in Allied Air-Conditioning Corporation as relied upon by revenue but distinguished on facts. Interpretation and reasoning: The Tribunal adopts a functional and purposive test for 'accessory': an item that is adjunct, supplementary, or assists in operating or increasing the effectiveness/convenience of the primary machine. Dunnage/pallets are used to support, elevate and enable heavy lift machinery and forklifts to lift, move, stack and transport heavy billets/rounds during inter-division movements, storage and clearance operations. They are adjuncts that assist in the operation of handling machinery and are not confined to a single machine type. Ratio vs. Obiter: Ratio-an item which materially assists and is integrally connected to the operation of capital machinery may qualify as an 'accessory' under Rule 2(a)(A) even if it does not share the tariff heading of the machinery. Distinguishing point-mere non-attachment or different tariff classification does not ipso facto negate accessory status (distinguishing Allied Air-Conditioning on facts where items were neither joined nor functionally accessory as required). Conclusion: AS cast rounds/billets used as dunnage/pallets satisfy the legal meaning of 'accessory' to heavy lift machinery/forklifts and thus qualify as 'capital goods' under Rule 2(a)(A). Issue 2: Alternative classification as 'Input' under Rule 2(g) Legal framework: Rule 2(g) defines 'Input' as all goods used 'in or in relation to the manufacture of final products' whether directly or indirectly, with judicial authorities construing the phrase widely to include activities integrally connected to manufacture such as handling, storage and transportation of inputs and finished goods. Precedent Treatment: The Tribunal relied on Larger Bench and Supreme Court precedents (including Rajasthan State Chemical Works; Solaris Chemtech; Union Carbide LB decisions) and the Tribunal's own larger-bench decision in Banco Products accepting material-handling aids (plastic crates) as capital goods and/or inputs when integrally connected to manufacture. Interpretation and reasoning: Applying the wide interpretation, dunnage/pallets used for collection, transportation, stacking and storage are necessary for undertaking production and for enabling processes that are integrally connected with manufacture (movement of inputs to production platform, storage of finished goods, inter-division movements). Proper storage and material handling are essential to an efficient manufacturing process; absence would impede manufacture. Ratio vs. Obiter: Ratio-goods used for collecting, transporting or dispensing material that are necessary for undertaking production fall within 'in or in relation to manufacture' and qualify as inputs. The Banco Products reasoning is followed and applied. Conclusion: Even if not accepted as 'capital goods', the dunnage/pallets qualify alternatively as 'inputs' used in or in relation to manufacture and are eligible for CENVAT credit. Issue 3: Consequence for demand, interest and penalty Legal framework: If CENVAT credit is lawfully available, demands under Rule 14 (reversal) and consequential interest and penalties cannot subsist. Interpretation and reasoning: The Tribunal finds appellant paid duty and subsequently availed credit in a revenue-neutral manner; departmental allegations of excess credit were unsubstantiated. Once credit entitlement is established, the foundation for the demand and penalty collapses. Ratio vs. Obiter: Ratio-finding of entitlement to credit mandates setting aside of confirmed demand, interest and penalty arising from assertion of wrongful availment. Conclusion: The demand, interest and penalty confirmed by the lower authorities are set aside; the appellant is entitled to consequential relief as per law. Overall Conclusion The Court allows the appeal: AS cast rounds/billets used as dunnage/pallets are either accessories of capital goods under Rule 2(a)(A) or, alternatively, inputs under Rule 2(g), and accordingly CENVAT credit is admissible; consequent demand, interest and penalty are liable to be set aside.