CENVAT credit for plant erection upheld on capital goods, inputs, ownership, and retrospective amendment objections.

CENVAT credit was held admissible on duty-paid machinery, equipment, parts and accessories used to erect an air separation plant in the factory, both as capital goods under Rule 2(a) and alternatively as inputs under Rule 2(k). Credit was not denied merely because the plant was owned by the lessor, because the machinery was attached to earth for operational stability, or because the arrangement was not with a financing company. The adjudication also could not rely on a disqualification not alleged in the show cause notice, and the 07.07.2009 amendment to Rule 2(k) was treated as prospective only. The demand, interest and penalty were therefore unsustainable.

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Issues: (i) whether duty-paid goods received in the factory and used for erection of the Air Separation Plant qualified as capital goods under Rule 2(a) of the CENVAT Credit Rules, 2004; (ii) whether they alternatively qualified as inputs under Rule 2(k) of the CENVAT Credit Rules, 2004; (iii) whether ownership of the goods by Inox disentitled the appellant from availing credit; (iv) whether the attachment of the Air Separation Plant to earth affected admissibility of credit; (v) whether Rule 4(3) of the CENVAT Credit Rules, 2004 restricted credit only to goods leased from financing companies; (vi) whether the impugned order travelled beyond the allegations in the show cause notice; and (vii) whether the amendment to Rule 2(k) with effect from 07.07.2009 could be applied retrospectively.

Issue (i): whether duty-paid goods received in the factory and used for erection of the Air Separation Plant qualified as capital goods under Rule 2(a) of the CENVAT Credit Rules, 2004.

Analysis: The goods comprised machinery, equipment, parts and accessories falling under the relevant tariff chapters and were received under valid invoices in the factory. The integrated plant was assembled from individual duty-paid capital goods used in the manufacture of the final product. Credit on capital goods does not depend on the plant being separately excisable or on the machinery being used in isolation.

Conclusion: Yes. The goods were eligible for CENVAT credit as capital goods.

Issue (ii): whether they alternatively qualified as inputs under Rule 2(k) of the CENVAT Credit Rules, 2004.

Analysis: The plant and its components were used within the factory in the manufacturing process and formed part of the operational chain supporting manufacture of paper products. The wider definition of inputs covered goods used in the factory for manufacture of final products, and the nature of the items supported eligibility on this alternative basis as well.

Conclusion: Yes. The goods were also eligible as inputs.

Issue (iii): whether ownership of the goods by Inox disentitled the appellant from availing credit.

Analysis: The credit scheme turns on receipt and use of goods in the factory, not on title. The invoices named the appellant as consignee, the goods were received and used in its factory, and ownership remaining with the lessor was not a statutory disqualification.

Conclusion: No. Ownership by Inox did not disentitle the appellant from credit.

Issue (iv): whether the attachment of the Air Separation Plant to earth affected admissibility of credit.

Analysis: The fastening of machinery to the earth was for stability and functional operation. Such attachment did not destroy the identity of the constituent duty-paid machinery and components, and immovability of the integrated plant did not bar credit on the capital goods used to set it up.

Conclusion: No. Attachment to earth did not affect admissibility of credit.

Issue (v): whether Rule 4(3) of the CENVAT Credit Rules, 2004 restricted credit only to goods leased from financing companies.

Analysis: The provision is enabling and enlarging in nature. It does not limit credit to leases from financing companies; rather, it recognizes credit eligibility in leasing arrangements and does not impose the restrictive interpretation adopted in the impugned order.

Conclusion: No. Rule 4(3) did not impose such a restriction.

Issue (vi): whether the impugned order travelled beyond the allegations in the show cause notice.

Analysis: The show cause notice did not found the case on a disqualification based on ownership remaining with Inox, yet the demand was substantially confirmed on that basis. An adjudicating order cannot introduce a new ground beyond the notice, as that violates natural justice.

Conclusion: Yes. The impugned order travelled beyond the show cause notice.

Issue (vii): whether the amendment to Rule 2(k) with effect from 07.07.2009 could be applied retrospectively.

Analysis: The disputed period ended before 07.07.2009. The amendment was treated as prospective and could not be used to deny credit for a prior period.

Conclusion: No. The amendment could not be applied retrospectively.

Final Conclusion: The demand, interest and penalty were unsustainable both on merits and on limitation, and the assessee was entitled to the consequential relief granted.

Ratio Decidendi: CENVAT credit is admissible on duty-paid machinery, equipment, parts and components used in the factory even when assembled into an integrated plant attached to earth, and neither absence of ownership nor a leasing arrangement with a non-financing lessor defeats eligibility; an adjudication cannot also rest on a ground beyond the show cause notice, and a later restrictive amendment cannot be applied retrospectively.

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