2026 (3) TMI 406 - AT - Central Excise

Cenvat credit reversal: supplying inputs to contractors for use in the assessee's own manufacturing activity does not trigger reversal.

Whether Rule 3(5) of the Cenvat Credit Rules, 2004 required reversal of credit on explosives supplied to contractors for use in the appellant's own mines ... Denial of the CENVAT Credit availed - explosives removed by the appellant to the contractors as such without issuance of invoices - invoking Rule 3(5) of the Cenvat Credit Rules, 2004 - reversal of credit - extended period of limitation​​​​​​​ - Whether the appellant is required to reverse the CENVAT Credit availed on explosives, which have been used in the mines owned by the appellant, by contractors, for explosion / extraction of coal from the mines, or not. CENVAT credit on inputs supplied to contractors for use in assessee's own manufacturing - HELD THAT:- The explosives were deployed in the appellant's own mines for extraction of coal through contractors engaged under contract. Under these facts there was no removal of inputs 'as such' by the appellant; the explosives were consumed in the manufacture/extraction activity of the appellant. The Tribunal's earlier decision in M/s. Hindustan Zinc Ltd.[2024 (7) TMI 184 - CESTAT NEW DELHI] was applied to hold that supplying inputs and capital goods to contractors for use within the assessee's captive mines does not amount to removal attracting Rule 3(5) of the CENVAT Credit Rules. The court further noted that subsequent dismissal of departmental appeals by higher fora on the ground of low tax effect did not decide the merits, and therefore did not negate the Tribunal's binding effect in this context. Consequently, the appellant was correctly allowed to retain the CENVAT credit and the impugned demand, interest and penalty based on reversal under Rule 3(5) did not survive. [Paras 7, 8, 9] The appellant was not required to reverse the CENVAT credit availed on the explosives; Rule 3(5) is not attracted on these facts. Final Conclusion: The appeal is allowed; the impugned order demanding reversal of CENVAT credit on explosives is set aside and the appellant is entitled to consequential relief as per law. Issues: Whether the appellant was required to reverse CENVAT credit availed on explosives supplied to contractors and used for extraction of coal in the appellant's own mines, invoking Rule 3(5) of the Cenvat Credit Rules, 2004.Analysis: The explosives were supplied to contractors for use in the appellant's own mines under contract and were employed for extraction of coal that formed the appellant's final product. Under the statutory framework, recovery of credit is required where inputs are not used in or in relation to manufacture of final products or are removed as such. Where inputs are provided to service providers for use within the assessee's captive mines for mine development or extraction activities, such provision does not constitute removal of inputs as such. Prior tribunal decisions applying Rule 3(5) of the Cenvat Credit Rules, 2004 hold that supplying inputs and capital goods to contractors for use within the assessee's mines does not attract reversal of credit when those inputs are used for the assessee's manufacturing activity.Conclusion: The provisions of Rule 3(5) of the Cenvat Credit Rules, 2004 are not attracted and the appellant was not required to reverse the CENVAT credit availed on the explosives; the impugned order is set aside and the appeal is allowed.