CENVAT Credit Allowed On Pollution-Control Infrastructure As Modernisation: CESTAT Ahmedabad

The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 4 May held that CENVAT Credit on civil construction and works contract services used for establishing effluent treatment infrastructure in an existing factory is admissible, since compliance with pollution-control norms is a statutory obligation and an integral part of the manufacturing process.

Judicial Member Dr. Ajaya Krishna Vishvesha held that settled law clearly recognises services availed for fulfilling statutory environmental obligations as admissible input services and allowed the appeal filed by Shree Sayan Vibhag Sahakari Khand Udyog Mandali Ltd. and set aside the demand of Rs. 16,67,562, along with interest and penalty. The Bench observed:

“...if the effluent generated in the manufacture is not treated, the appellant shall not be liable to run their factory. In this undisputed position, the effluent treatment activity is necessary to carry out the uninterrupted production of the final product in the appellant's factory therefore, it can be conveniently drawn the conclusion that the effluent treatment activity is a vital part of overall manufacturing of the final product.”

The cooperative sugar factory had availed CENVAT Credit on services used for constructing a Bio-Compost Yard, Compost Yard and Storage Lagoons forming part of its Effluent Treatment Plant. The infrastructure was mandatory under Pollution Control norms and Zero Liquid Discharge requirements, without compliance of which the factory could not legally operate.

The Department contended that after the amendment to Rule 2(l) of the Cenvat Credit Rules, 2004 with effect from 1 April 2011, construction and works contract services stood excluded from the definition of “input service”. According to the department, the exclusion applied even to civil construction undertaken for an effluent treatment plant.

Rejecting the contention, the Tribunal held that while the amended provision excluded construction services used for setting up a new factory or new civil structure, it continued to permit credit for services relating to modernisation, renovation or repair of an existing factory. Since the effluent treatment infrastructure had been installed within an operational manufacturing unit, the activity amounted to modernisation of the existing facility.

Relying on Cheminova India Ltd. v. CCE & ST, Surat and Adroit Pharmachem Private Limited v. Commissioner of Central Excise, the Tribunal noted that CESTAT Ahmedabad has consistently held that pollution-control infrastructure necessary for operating a factory forms part of the manufacturing process and that construction activity within a running factory qualifies as modernisation or renovation.

The Tribunal further held that the show cause notice had not alleged that the disputed services fell within the exclusion clause under Rule 2(l). It held that the adjudicating authority travelled beyond the scope of the notice by denying credit on a ground never proposed in the proceedings.

The Bench also restored Rs. 7,71,957 of CENVAT Credit reversed by the appellant on civil construction services, along with the interest paid on the amount, after noting that the credit had been reversed without utilisation.

Accordingly, the CESTAT set aside the impugned order and allowed the appeal with consequential benefits.