2025 (10) TMI 177 - AT - Central Excise

Appellant allowed CENVAT credit on TMT bars, MS channels, beams, angles and round bars as eligible inputs

M/s Prakash Steelage Ltd. and Vipin Chaturvedi Versus CGST & Central Excise, Surat

CESTAT, Ahmedabad (AT) allowed the appellant's appeal and held that CENVAT credit on TMT bars, MS channels, beams, angles and round bars cannot be ... CENVAT credit of duty paid on TMT Bars, MS Channels, MS Beams, MS Angles, MS round Bars, etc. - Capital Goods or not - applicability of Rule 2A of Cenvat Credit Rules, 2004 - HELD THAT:- The department has disallowed capital based on the reasoning of the Larger Bench of Vandana Global Limited [2010 (4) TMI 133 - CESTAT, NEW DELHI (LB)] Tribunal Larger Bench which stand reversed in Vandana Global Limited vs Commissioner of Central Excise, Raipur [2018 (5) TMI 305 - CHHATTISGARH, HIGH COURT]. It was held in the above case that 'The jetty is constructed by the appellant by purchasing iron, cement, grid, etc., which are used in construction of jetty. The contractor has constructed jetty. There are two methods, one is that the appellant would have given entire contract to the contractor for making jetty by giving material on his end and then make the payment, the other method was that the appellant would have provided material to the contractor and labour contract would have been given. The appellant claims that he has provided cement, steel, etc., for which he was entitled for input credit and, therefore, in our opinion, the appellant was entitled for input credit and it cannot be treated that since construction of jetty was exempted, the appellant would not be entitled for input credit.' The stand of the department is no more res-Integra and the view taken by the Commissioner (Appeals) is not in consonance with the views of Hon’ble High Courts of Chattisgarh and Gujarat. Same is therefore rejected - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit of duty paid on TMT bars, MS channels, MS beams, MS angles, MS round bars, etc., used in fabrication/structural works qualifies as creditable 'inputs' under Rule 2(k) of the CENVAT Credit Rules, 2004 for the period April 2007-April 2009. 2. Whether such goods qualify as 'Capital Goods' within the meaning of Rule 2(a) for the same period. 3. Whether Explanation 2 to Rule 2(k) (as originally in force during the dispute period) excluded goods used in construction/supporting structures from being inputs, and whether the 07.07.2009 amendment (inserting an exclusion expressly listing cement, angles, channels, CTD/TMT bars etc.) is clarificatory and retrospective or prospective only. 4. Whether the Larger Bench decision holding that foundation/supporting-structure materials are not inputs (and treating the 2009 amendment as clarificatory and retrospective) remains binding in view of subsequent High Court decisions taking the opposite view. 5. Whether personal penalty imposed on an officer/director (vice-president) should be sustained where credit is found allowable for the period in dispute. ISSUE-WISE DETAILED ANALYSIS Issue 1 - CENVAT creditability of structural/steel items as 'inputs' (Rule 2(k)) Legal framework: Rule 2(k) defines 'input' to include 'all goods ... used in or in relation to the manufacture of final products' and, by Explanation 2 (as originally worded during the dispute period), expressly included 'goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.' The question is whether goods used in fabrication/embedded structures supporting plant/plant foundations qualify as inputs used in relation to manufacture of final products or as inputs for capital goods. Precedent treatment: A Tribunal Larger Bench had held that foundation/supporting-structure materials are neither inputs nor capital goods and treated the 2009 amendment as clarificatory (thus retrospective). Subsequent High Courts (notably Chhattisgarh and Gujarat) and several Tribunals have taken the opposite view, holding that steel/ cement used in fabrication of structures embedded to earth or supporting plant/jetty construction qualify as inputs (or as inputs for capital goods) pre-amendment. Interpretation and reasoning: The Court examined the text of Rule 2(k) and Explanation 2 as in force during April 2007-April 2009 and found that the inclusive language of 'all goods ... used in or in relation to the manufacture' and Explanation 2's inclusion of 'goods used in the manufacture of capital goods' supports treating items that go into fabricated structures used in production or service provision as inputs. The Court also considered functional realities (materials supplied for construction of jetty/factory/roads used in the provider's operations) and the manner of procurement/usage (supply of materials by appellant to contractor), concluding entitlement to credit where goods were provided/used by the taxable entity for its operational fixed structures. Ratio vs. Obiter: The ratio is that, for the period prior to 07.07.2009, goods like TMT bars and structural steel used in fabrication/embedded/supporting structures that are integrally used in the factory/for providing output service fall within the scope of 'inputs' under Rule 2(k) (including via Explanation 2). Observations on the method of construction (contractor vs. supplier-provided materials) and on exempted services vs. input credit are applied reasoning rather than mere obiter. Conclusion: CENVAT credit of the duty paid on the specified steel items is allowable for the period April 2007-April 2009 where such items were used to create structures/works integrally related to the factory or to provision of output services (e.g., jetty), subject to the factual finding that the goods were indeed supplied/used by the appellant for that purpose. Issue 2 - Whether such goods qualify as 'Capital Goods' (Rule 2(a)) Legal framework: Rule 2(a) enumerates classes of goods treated as 'Capital Goods' (chapters/heads, pollution control equipment, components/spares/accessories of specified goods, moulds/dies/jigs/fixtures, refractories, tubes/pipes, storage tanks, etc.) and excludes office equipment. The question is whether structural steel items fall within that enumerated definition. Precedent treatment: Departmental approach relied on the restricted, itemized definition to deny classification of structural steel as capital goods. Conversely, judicial authorities (High Courts/Tribunals cited by the appellant) have found that goods used in fabrication of structures that are integral to operations can be treated as inputs for capital goods or inputs under Explanation 2 pre-amendment. Interpretation and reasoning: The Court notes that the literal, headwise enumeration in Rule 2(a) does not expressly list structural steel items such as TMT bars and channels as 'capital goods' under clause (i). Therefore, treating such items as capital goods purely on the basis of that definition is not tenable. However, Explanation 2 to Rule 2(k) (pre-amendment) permitted inclusion of 'goods used in the manufacture of capital goods,' enabling credit where those goods serve to create or support capital goods or structured plant used in manufacture/service. Ratio vs. Obiter: The definitive legal ratio is that, under the pre-amendment legal scheme, such structural items are not necessarily 'capital goods' by the strict definition of Rule 2(a) but can qualify as 'inputs' by virtue of Explanation 2 to Rule 2(k) where they are used in manufacture of capital goods or structures integrally used in the factory/premises for provision of output service. Conclusion: Structural steel items do not automatically fall within the enumerated definition of 'capital goods' in Rule 2(a), but may be creditable as 'inputs' for capital goods under Explanation 2 as it stood during the disputed period. Issue 3 - Effect and character of the 07.07.2009 amendment to Explanation 2 (clarificatory/prospective) and retrospective application Legal framework: The 07.07.2009 notification amended Explanation 2 to expressly exclude cement, angles, channels, CTD/TMT bars and other items used for construction of factory shed, buildings, laying foundations or making structures for support of capital goods. Precedent treatment: The Larger Bench characterized the amendment as clarificatory and retrospective; High Courts disagreed, finding no legislative indicia of clarificatory intent and treating the amendment as substantive/prospective, thereby not impacting creditability for the pre-amendment period. Interpretation and reasoning: The Court reviewed the notification and legislative practice. It held that there is no express language in the amending notification indicating that the change was meant to clarify an existing legislative intent; rather, it introduced a new exclusion. Where the legislature intends retrospective clarification it normally indicates so. The Court found the Larger Bench's conclusion that the amendment was clarificatory rested on conjecture, lacking supporting material showing legislative intent to clarify. Consequently, the amendment cannot be applied retrospectively to disallow credits legitimately claimed under the law in force prior to the amendment. Ratio vs. Obiter: The ratio is that the 07.07.2009 amendment is not a clarificatory amendment with retrospective effect absent clear legislative intent; therefore, it cannot defeat claims validly made under the pre-amendment Explanation 2 for periods prior to the amendment. Conclusion: The 2009 amendment is not treatable as clarificatory and retrospective; it cannot be invoked to deny credit for the period April 2007-April 2009 where the earlier Explanation 2 permitted credit. Issue 4 - Binding effect of Larger Bench decision vis-à-vis subsequent High Court decisions Legal framework: Tribunal decisions and Larger Bench pronouncements carry persuasive/precedential weight; High Court decisions on the point are authoritative within their jurisdiction and may prompt re-evaluation of Tribunal conclusions. Precedent treatment: The Larger Bench took a restrictive view; later High Courts (Chhattisgarh, Gujarat) and other appellate bodies revisited and reversed that approach on legal and textual grounds, finding the restrictive reading unsustainable and the 2009 amendment non-clarificatory. Interpretation and reasoning: The Court weighed the Larger Bench's reasoning against the textual construction of Rule 2(k)/Explanation 2 and the legislative context of the 2009 amendment. Finding the Larger Bench's characterization of the amendment as clarificatory unsubstantiated, the Court followed the High Court decisions that interpreted the pre-amendment law to permit credit for structural items used integrally in operations. The Court rejected reliance on the Larger Bench where it conflicted with the persuasive high court jurisprudence and textual analysis. Ratio vs. Obiter: The operative ratio adopted is the High Court line of authority and textual interpretation favoring creditability for the pre-amendment period; the Larger Bench's contrary view is treated as distinguishable and not followed for the facts and period in dispute. Conclusion: The Court declined to follow the Larger Bench position to the extent it treated the amendment as clarificatory and retrospective; instead, it followed High Court authorities and allowed credit for the disputed pre-amendment period. Issue 5 - Personal penalty on officer/director where credit is allowable Legal framework: Penalty for wrongful availment of CENVAT credit is contingent on the correctness of the demand and the existence of culpability. Precedent treatment and interpretation: Where appellate scrutiny finds that the credit was allowable under the law as in force for the disputed period, sustaining a personal penalty is unsupportable. The Court applied the same legal analysis and holdings on creditability to the question of personal liability. Ratio vs. Obiter: The ratio is that personal penalty imposed on an officer/vice-president cannot be sustained where the underlying demand/denial of credit is set aside because the credit was lawfully available for the period in dispute. Conclusion: The personal penalty imposed on the officer/director is set aside as consequential relief because the CENVAT credit was held allowable for the disputed period. OVERALL CONCLUSION The Court allowed the appeals: holding that, for the period April 2007-April 2009, items such as TMT bars and structural steel used in fabrication/embedded/supporting structures that are integrally related to the factory or to provision of output services fall within the ambit of 'inputs' under Rule 2(k) (via Explanation 2 as then worded); that such items are not to be excluded by the 07.07.2009 amendment retrospectively; that the Larger Bench characterization of the amendment as clarificatory is not sustainable; and that consequent personal penalties must be set aside where credit is held allowable.