Immovability Of Plant Does Not Bar CENVAT Credit On Duty-Paid Machinery: CESTAT Hyderabad

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 12 June held that manufacturers can avail CENVAT credit on duty-paid machinery, components and equipment used to set up an integrated plant even if the completed plant becomes immovable property.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad allowed ITC Ltd.'s appeal, observing that ownership of the goods and their attachment to earth do not determine eligibility for credit and set aside a demand of Rs. 1.89 crore along with interest and penalty. The Bench held:

“The Law is well settled that even if individual machinery and components are assembled into a larger plant that becomes attached to earth, credit on the duty-paid capital goods remains admissible.”

The dispute arose after ITC entered into an arrangement with Inox Air Products Ltd. to install an Air Separation Plant within its Sarapaka factory for producing oxygen and other industrial gases used in manufacturing paper and paperboards. Inox supplied various machinery and components under excise invoices naming ITC as the consignee, and ITC availed CENVAT credit on the duty paid on those goods.

The Department denied the credit on the ground that the Air Separation Plant became immovable property upon installation, that Inox owned the machinery and that the plant itself did not constitute excisable goods.

Before the Tribunal, ITC argued that the machinery and equipment qualified as capital goods and inputs under the CENVAT Credit Rules and that ownership was irrelevant so long as it received and used the goods in its factory. It further contended that fastening the plant to the earth through nuts and bolts merely ensured operational stability and did not affect its entitlement to credit.

Relying on its earlier decision in JSW Ispat Steel Ltd., the Tribunal held that the CENVAT scheme seeks to prevent cascading of taxes and that machinery assembled into a larger manufacturing facility does not lose eligibility for credit merely because the resulting plant becomes immovable.

It further held that fastening machinery to the earth through nuts and bolts for stability and vibration-free operation did not destroy the identity of the constituent machines. Therefore, it rejected the Department's contention that the Air Separation Plant's immovability rendered the credit inadmissible.

The Bench also ruled that Inox's ownership of the machinery was immaterial. It noted that Rule 4(3) of the CENVAT Credit Rules enlarges the scope of eligibility and does not restrict credit to situations where the lessor is a financing company.

Moreover, it found that the adjudicating authority had travelled beyond the allegations in the show cause notice. It also held that the amendment to Rule 2(k), which came into effect on 7 July 2009, could not apply retrospectively to the disputed period.

It also held that limitation barred the entire demand because ITC availed the credit through valid invoices and duly reflected it in statutory returns and that the duty-paid goods used to set up the Air Separation Plant qualified as capital goods and inputs.

Accordingly, the CESTAT set aside the demand, interest and penalty and allowed the appeal with consequential relief.