2026 (3) TMI 1628 - AT - Central Excise

CENVAT credit on expansion-related services remained admissible, while the demand was time-barred and penalty could not survive.

CENVAT credit on erection, commissioning, installation and allied services used for expansion of an existing manufacturing facility remained admissible ... Input service - Expansion of existing manufacturing facility - Exclusion clause under CENVAT credit - Limitation for recovery of wrongly availed creditInput service - Expansion of existing manufacturing facility - Exclusion clause - CENVAT credit on erection, commissioning, installation, consulting engineering and manpower supply services used for expansion of an existing manufacturing facility remained admissible after deletion of the phrase 'setting up of a factory' from the inclusive part of Rule 2(l). - HELD THAT: - The Tribunal held that deletion of the expression relating to setting up of a factory from the inclusive portion of Rule 2(l) did not cut down the width of the main part of the definition, which continued to cover services used directly or indirectly in or in relation to manufacture of final products. It found that expansion of capacity in an already functioning factory could not be equated with setting up of a new factory. The disputed services were used for installation and operationalisation of plant and machinery in the expanded facility, and the show cause notice did not establish that they related to construction of a building or civil structure or laying of foundation for support of capital goods so as to fall within the specific exclusion. On that reasoning, denial of credit solely because the services were connected with expansion was held unsustainable. [Paras 12, 13, 14]The credit was held admissible on merits.Limitation - Relevant date for availment of credit - Extended period - The demand for recovery of the credit was barred by limitation. - HELD THAT: - The Tribunal held that for the relevant period the normal limitation under Section 11A(1) was one year, and the later amendment extending the period to two years was prospective and could not revive a demand already barred. It further held that, in cases of alleged wrongful availment of CENVAT credit, limitation had to be computed from the date of availment of credit and not from the due date for filing ST-3 returns, there being no statutory basis for adopting the return-filing date as the starting point. Since the notice did not invoke the extended period or allege suppression, fraud or wilful misstatement with intent to evade duty, and the dispute was interpretational, the demand issued beyond one year from availment was time-barred. [Paras 15, 16, 17, 18]The demand was held barred by limitation.Penalty - Consequential interest - Penalty and interest could not survive once the demand failed on merits and limitation. - HELD THAT: - The Tribunal held that, since the denial of credit failed both on merits and on limitation, the foundation for penalty under Rule 15(1) read with Section 11AC ceased to exist. On the same basis, the consequential demand of interest also could not be sustained. [Paras 19]Penalty and interest were held unsustainable.Final Conclusion: The Tribunal held that the disputed services used for expansion of the assessee's existing manufacturing facility qualified as input services and were not shown to fall within the exclusion clause. The recovery was also held time-barred, and consequently the interest and penalty were set aside and the appeal was allowed. Issues: (i) Whether CENVAT credit on erection, commissioning, installation and allied services used for expansion of an existing manufacturing facility is admissible post-01.04.2011 despite deletion of the phrase 'setting up of a factory' from Rule 2(l) of the CENVAT Credit Rules, 2004; (ii) whether the demand is barred by limitation; and (iii) whether penalty under Rule 15(1) is sustainable.Issue (i): Whether CENVAT credit on erection, commissioning, installation and allied services used for expansion of an existing manufacturing facility is admissible post-01.04.2011 despite deletion of the phrase 'setting up of a factory' from Rule 2(l) of the CENVAT Credit Rules, 2004?Analysis: The services were used for expansion of an already functioning factory and for installation and operationalisation of plant and machinery in the expanded facility. The main limb of the definition of input service retained wide amplitude and continued to cover services used directly or indirectly in or in relation to manufacture of final products. Deletion of the phrase 'setting up of a factory' from the inclusive portion did not curtail that substantive width. The services in dispute did not fall within the specific exclusions relating to construction of building or civil structure or laying of foundation for support of capital goods.Conclusion: Credit on the disputed services was admissible on merits and denial solely on the basis of deletion of the phrase 'setting up of a factory' was unsustainable, in favour of the assessee.Issue (ii): Whether the demand is barred by limitation?Analysis: The credit pertained to October 2014 to June 2015 and the notice was issued on 02.11.2016. The normal period then applicable was one year, and the notice did not invoke the extended period or allege suppression, fraud or wilful misstatement with intent to evade duty. The period for taking credit was to be reckoned from the date of availment of credit, and the later amendment extending limitation could not revive a time-barred demand. The dispute was interpretational and did not justify extended limitation.Conclusion: The demand was barred by limitation, in favour of the assessee.Issue (iii): Whether penalty under Rule 15(1) is sustainable?Analysis: Once the demand failed on merits and limitation, the foundation for penalty and the consequential interest demand did not survive. No independent basis remained for sustaining penalty.Conclusion: Penalty was unsustainable, in favour of the assessee.Final Conclusion: The credit was held admissible, the demand was held time-barred, and the penalty and interest did not survive, resulting in setting aside of the impugned order and allowance of the appeal with consequential relief.Ratio Decidendi: Services integrally connected with manufacture in an existing facility remain eligible as input services under the broad main limb of Rule 2(l), and exclusion clauses must be strictly construed; where no suppression or extended-period ground is established, limitation runs from the date of availment of credit and penalty cannot stand if the demand itself fails.