2025 (10) TMI 616 - AT - Service Tax

Imported dredger qualifies as input under Rule 2(k) aligned with Rule 2(a); CCR capital goods exclusion inapplicable

CESTAT (Hyderabad) allowed the appeal, setting aside the Commissioner's order that disallowed CENVAT credit on an imported dredger. The tribunal held that ... Disallowance of CENVAT credit on dredger imported by assessee - to be considered as ‘input’ for the purpose of providing output service or to be treated as capital good despite it’s not being explicitely covered within the definition of capital goods under Rule 2(a)? - HELD THAT:- It is an admitted position that a plain reading of definition of capital good in CCR would not cover dredger. However, the expression used for defining capital good in Rule 2(k)(C) has to be construed vis-a-vis the definition given under Rule 2(a) and it has to be understood in the context in which the said expressions have been used for considering any good either as input or capital goods under CCR. It is found that 2(k) defines input and covers all kind of goods in relation to certain activities or with reference to certain end use. However, it also excludes certain category of goods from the purview their being treated as input and one of the exclusions is “capital goods”, except for when used as parts or components in manufacture of final product. Therefore, the intension is apparent that all types of inputs are covered within 2(k), barring certain inputs which may or may not be capital goods, as per 2(k)(A) to (F). While, it is a fact that a plain reading of provision would not cover dredger in the category of capital goods, but the definition itself provides that certain definition could be interpreted in the manner other than what has been indicated in the rules, if the context otherwise requires. Therefore, the whole dispute is centering around the definition of capital good. If the dredger is treated as capital, in view of it’s being treated as one under the Income Tax Act, then it gets excluded from being treated as input. Further, if the expression capital good used in the exclusion clause under Rule 2(k) is to be construed in terms of the definition of capital goods under the CCR itself, then dredger would not be considered as capital goods and hence the exclusion clause would not be applicable to the assesse. The CCR defines both the capital goods and input in a very restrictive term with certain inclusion and exclusion and therefore, it is obvious that all possible capital goods and all possible inputs have not been considered for the limited purpose of their eligibility within the scheme of CCR. The exclusion clause at v(c) is essentially to exclude capital goods, per se, from being defined as input except for a situation where an item is being treated as capital goods, are used as parts or components in the manufacture of a final product. Various courts and judicial forums have examined the expression “unless the context otherwise requires” has been used in definitions used in a statute and generally have held that general rule on construction is not only to look at the word but to look at the context also. Therefore, while the expression used in the definition of capital good used the term “means”, which is essentially required to be given it’s ordinary or natural meaning, however, when the expression has been used “unless the context otherwise required” it essentially extends the meaning of the word - In the present appeals, it is found that a consistant view has to be taken and in terms of the same, the expression capital goods used in Rule 2(k) has to be understood in terms of definition of capital goods used under Rule 2(a) - there are no reason as to why the term capital goods used under Rule 2(k) has to be interpreted differently than the definition of capital goods given under Rule 2(a) for the purpose of eligibility or otherwise under CCR. There are no merit in the impugned order passed by the Commissioner and the same is liable to be set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an imported dredger used to provide taxable dredging services qualifies as an 'input' under Rule 2(k)(iv) of the Cenvat Credit Rules, 2004 or is excluded as a 'capital good' under Rule 2(k)(C) read with Rule 2(a). 2. Whether the expression 'capital goods' in the exclusion to Rule 2(k) must be interpreted strictly by reference to the definition of 'capital goods' in Rule 2(a) or may be expanded by reference to external statutes, accounting treatment or contextual considerations. 3. Whether interest under Rule 14 and recovery of the disputed Cenvat credit is justified if the dredger is not an eligible 'input'. 4. Whether penalties under Rule 15(1) and Rule 15A can be imposed where Cenvat credit is availed pursuant to an arguable interpretation of the Rules and in the absence of malafide or deliberate suppression. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility of imported dredger as 'input' under Rule 2(k)(iv) Legal framework: Rule 2(k)(iv) treats 'all goods used for providing any output service' as inputs but expressly excludes, inter alia, 'capital goods' (Rule 2(k)(C)). Rule 2(a) sets out a specific, limited definition of 'capital goods' by enumerated chapters/heads and categories. Precedent treatment: Tribunal and High Court decisions have both sides of interpretation-some earlier findings tended to treat items accounted as capital assets as not being inputs; other coordinate benches have applied strict/literal construction to treat goods falling within input definition as inputs where exclusions do not explicitly cover them. Higher court authorities emphasise strict interpretation of taxing statutes and that statutory definitions prevail over accounting or external statutory treatments. Interpretation and reasoning: The Court analysed the two definitional provisions together and emphasised the drafting phrase 'unless the context otherwise requires' in Rule 2. The Court found that Rule 2(a) deliberately confines 'capital goods' to specific heads/items and that Rule 2(k) similarly defines inputs with explicit exclusions. The correct approach is to interpret 'capital goods' in the exclusion to Rule 2(k) by reference to the definition in Rule 2(a) within the CCR framework, not by importing definitions or accounting treatments from other statutes. Allowing the Department to treat an item as a capital good for exclusion purposes despite its exclusion from Rule 2(a) would produce an absurd and inconsistent result-i.e., an item not defined as capital good under Rule 2(a) being excluded as such under Rule 2(k). The Court held that definitions in the CCR must be read consistently; the context clause does not permit a departure that leads to inconsistency or absurdity. The admitted position that the dredger falls under Chapter 89 and is not within Rule 2(a)'s list was decisive. Ratio vs. Obiter: Ratio - The definition of 'capital goods' in Rule 2(a) must govern the meaning of 'capital goods' in the exclusion to Rule 2(k); an item not covered by Rule 2(a) cannot be excluded as a 'capital good' under Rule 2(k). Obiter - Observations regarding broader authorities on strict interpretation of taxing statutes and detailed discussion of comparative jurisprudence on literal versus contextual interpretation. Conclusion: The dredger, not being covered as a capital good under Rule 2(a), qualifies as an 'input' under Rule 2(k)(iv) and the Adjudicating Authority's disallowance of credit on the ground that the dredger is a capital good is unsustainable; the impugned order on this point is set aside. Issue 2 - Permissibility of referring to accounting treatment or other statutes in construing CCR definitions Legal framework: CCR contains specific definitions governing eligibility; the maxim in the Rules is that definitions in the same code control unless context requires otherwise. Precedent treatment: Higher court authority cited by the Court mandates that statutory definitions must generally be applied within the Act and that recourse to definitions in other statutes or to accounting practice is impermissible where the statute provides definitions. Case law also requires strict interpretation in fiscal statutes but allows contextual departure only to avoid absurdity. Interpretation and reasoning: The Court observed that capitalization in books of account or depreciation claimed under the Income Tax Act cannot alone convert an item into a 'capital good' for CCR purposes where CCR's definition does not include the item. The phrase 'unless the context otherwise requires' permits interpretive flexibility but does not authorize adopting definitions from other statutes or accounting practices in a manner that contradicts the CCR. The Court emphasised internal consistency: the same term used in related definitions within CCR must have the same meaning unless a context within the CCR itself compels otherwise. Ratio vs. Obiter: Ratio - External accounting treatment or definitions in other statutes cannot override the express definitions in CCR; the context must be sought within the CCR and parent Act, and definitions applied consistently. Obiter - Extended commentary on interpretive principles (literal, strict, purposive) and their application in taxation law. Conclusion: The Department's reliance on income tax treatment or accounting capitalization to classify the dredger as a capital good for exclusion under Rule 2(k) is impermissible; the CCR definitions govern eligibility. Issue 3 - Liability for interest on disputed credit under Rule 14/Section 75 Legal framework: Rule 14 provides for recovery of erroneously availed Cenvat credit and interest under the parent statute applies where credit is held inadmissible. Precedent treatment: Not specifically contested beyond statutory scheme that, if credit is disallowed, recovery with interest follows. Interpretation and reasoning: The Court's finding that the dredger qualifies as input means the assesse's claim of credit is legally sustainable. Consequently, there is no basis to sustain demand for recovery of the credited amount or interest predicated on disallowance. Ratio vs. Obiter: Ratio - Where a Cenvat credit is held to be legitimately availed under the CCR, corresponding demands for repayment and interest fall away. Obiter - None additional. Conclusion: No recovery of the disputed Cenvat credit or interest is warranted once the dredger is held to be an admissible input under Rule 2(k)(iv). Issue 4 - Imposition of penalties under Rule 15(1) and Rule 15A where credit availed pursuant to arguable interpretation and absence of malafide Legal framework: Rules 15(1) and 15A provide penalties for contraventions, including misstatement or suppression with intent to evade duty; mens rea or suppression is relevant for penalty imposition. Precedent treatment: Tribunal decisions cited support non-imposition of penalty where the assessee is a government undertaking, there is no evidence of suppression or malafide, and the credit was taken pursuant to a bona fide interpretation of the Rules. Interpretation and reasoning: The Court found no evidence of malafide, suppression, or deliberate evasion. The assesse took credit based on a reasonable interpretation of CCR; admitted accounting treatment did not equate to fraudulent intent. Public sector status and absence of mens rea strengthen the case against penalty. Given that the substantive disallowance itself was set aside, the Revenue's penalty appeal became moot/infructuous on merits. Ratio vs. Obiter: Ratio - Penalty cannot be imposed where credit was availed on an arguable construction of the rules without malafide or suppression; absence of intent to evade is a decisive factor against penalty. Obiter - Observations on precedents concerning penalties against government undertakings. Conclusion: The decision not to impose penalties under Rule 15(1) and Rule 15A is justified; Revenue's appeal against the dropping of penalty is disposed as infructuous in light of the substantive outcome.