CENVAT Credit Cannot Be Denied On Works Contract Goods Outside Service Tax Levy: CESTAT Chennai

On 9 October, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Chennai, held that the Explanation to Rule 3 of the CENVAT Credit Rules, 2004, does not bar CENVAT credit on duty-paid capital goods transferred under a works contract, as the value of such goods falls outside the service tax levy.

A Bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed appeals filed by Toshiba JSW Power Systems Private Limited and set aside the denial of CENVAT credit, interest and penalties. It also held that the Department could not deny credit merely because the goods became part of an immovable plant. It observed:

“We hold, on the third issue, that the Explanation to Rule 3 does not bar the appellant's credit for either period. In a works contract the value of the goods transferred lies outside the levy of service tax, and no exemption in respect of it, whether claimed under Notification No.12/2003-ST or said to arise under Rule 2A, can attract the Explanation.”

Toshiba JSW, a manufacturer of turbines, generators, motors and rotary converters, engaged contractors to design, supply, install, test and commission systems for a new plant at its Manali factory. These included heating and ventilation equipment, transformers, electrical works, fire protection systems and industrial water systems.

The company issued letters of intent to the contractors and followed them with separate purchase orders for equipment supply and for installation, testing and commissioning. The contractors procured goods from manufacturers and dealers, whose excise duty-paying invoices named the contractors as buyers and Toshiba JSW as the consignee at its factory. The contractors separately charged service tax on erection and commissioning services.

Toshiba JSW claimed CENVAT credit on the excise duty paid on the goods as capital goods and on the service tax charged for erection services. The Department denied the credit, arguing that the contracts were composite engineering, procurement, construction and commissioning contracts. It contended that the contractors used the goods to create an immovable plant that was not excisable and that Rule 2A of the Service Tax (Determination of Value) Rules, 2006, read with the Explanation to Rule 3 of the CENVAT Credit Rules, barred the claim.

The adjudicating authority confirmed the demand, interest and penalty, and the Commissioner (Appeals) upheld the decision. The Commissioner reasoned that the contractors had procured and used the goods and that Toshiba JSW had not established a valid basis for issuing separate supply and erection orders.

Before the Tribunal, Toshiba JSW argued that the goods qualified as capital goods under Rule 2(a) of the CENVAT Credit Rules, had been received at its factory and were used to manufacture dutiable final products. It also submitted that the Board's clarification on the excisability of turnkey plants did not determine whether the company could claim credit on duty-paid components used in those plants.

The Revenue maintained that the contracts were composite works contracts and that the separate purchase orders facilitated the credit claim.

The Tribunal accepted that the contracts were, in substance, works contracts and that ownership of the goods passed to Toshiba JSW, at the latest, when the contractors incorporated them into the plant. However, it held that this did not defeat the company's entitlement to credit because the goods were covered by duty-paying invoices, received at its factory and used as components of its manufacturing plant.

It held that the provisions governing capital goods did not require the claimant to own the goods when it received them or to install them itself. It also rejected the argument that the plant's immovable nature automatically disqualified its duty-paid components from capital goods credit. It observed:

“If the immovability of an installed plant defeated credit on its components, capital goods credit would be unavailable for most of the goods for which the definition was framed. A construction which empties the definition of most of its content cannot possibly be the correct one.”

On Explanation to Rule 3, the Bench distinguished between goods whose value falls outside the service tax levy and goods exempted from an otherwise applicable levy. It held that the exclusion of the value of goods transferred under a works contract, whether under Notification No. 12/2003-ST or Rule 2A, did not constitute an exemption that could trigger the Explanation and bar credit.

It also held that the Department could not invoke the extended period of limitation because Toshiba JSW had claimed credit on duty-paying invoices, recorded it in its statutory records and disclosed it in its returns.

Accordingly, the CESTAT allowed both appeals, set aside the impugned order and granted consequential relief.

Counsel for the Appellant: Raghavan Ramabhadran, Advocate

Counsel for the Respondent: M. Selvakumar, Authorised Representative