Cenvat credit – Of mindset and (juris)prudence
By Dr. G. Gokul Kishore
From excisability and manufacture to valuation, Union Excise Duties have witnessed pitched courtroom battles over the past few decades. Going by the judicial rulings in the past 2 decades, it appears Cenvat Credit can be crowned as ‘mother of all battles’. Rhetorical analogies apart, it is painful to note that the approach of the Department treating Cenvat credit as largesse to be bestowed upon assessees only if it wishes, points to the mind-set which is one of denial and riddled with suspicion. Unless the spirit of taxing value addition alone is imbibed and applied, both cost and woes of assessees, in the present regime and in the GST era, are bound to increase impacting competitiveness of the industry and consumers alike.
Let us take the issue of denial of Cenvat credit on goods used for laying of foundation or making of structures for support of capital goods. One of the relatively recent amendments to Cenvat Credit Rules, 2004 (CCR), definition of input hastens to exclude goods used to support machinery and other such capital goods. The very use of the term ‘capital goods’ indicates that goods which go into the making of support structures are, no doubt, used in relation to manufacture. The grand old user test of inputs i.e. ‘used in or in relation to manufacture’ has been sidelined deriving strength from CESTAT Larger Bench’s decision in Vandana Global [2010 (253) ELT 440 (Tri-LB)] holding credit as not admissible on such goods before and after amendment to the relevant rule on 7-7-2009. It will be appropriate to note that the statute even today acknowledges the above test when clause (F) of the definition of input under Rule 2(k) of CCR excludes goods having no relationship whatsoever with manufacture of a final product. That the goods which go into the making of the foundation for capital goods and which holds machinery to run without vibration and thus participating directly in production, are seen as not having any relationship with manufacture by way of express exclusion, vindicates the veracity of the statement made in the previous para – issue of credit is one of mind-set.
The second sacrosanct requirement for admissibility of credit has all along been ‘use in the factory’ which is fully satisfied in the case of goods used to lay foundation or to erect support structures for capital goods. Use in office was despised and credit was / is denied on such goods and assessees have to engage in long drawn litigation to avail credit when offices are integrally connected with plant. The subject goods are better placed vis-à-vis goods used in office of the manufacturer and yet, credit is barred. The rationale may be to plug revenue leakage as such goods may be diverted for purposes not related to manufacture. But, this is a verifiable fact and onus could have been fixed on the claimant, but outright restriction manifests systemic weakness to plug leakage.
Another incidental victim of the above amendment is the nexus theory built painstakingly over years of jurisprudence. Despite satisfying the nexus test, the above goods are treated unfairly and thus ostracised from the family of credit eligible inputs. It is an irony that on the one hand, credit is denied on such items thus pushing up the cost and on the other hand, stimulus to rev up the economy is rolled out by resorting to duty cuts occasionally.
Fortunately, a few tribunal decisions have come to the rescue of the assessees. Distinguishing the ratio of Vandana Global, the Chennai Bench of CESTAT in India Cement Ltd. v. Commissioner [2013-TIOL-1649 (Cestat-Mad.)] upheld credit admissibility on MS angles, MS beams, channels, etc., used for erecting various items of capital goods like electrostatic precipitator for raw mills and additional fly ash handing system. Cenvat credit on steel items used for fabrication of cooling bed for rolling mills, where cooling bed gets permanently attached to the earth, was held as permissible by the Delhi Bench of CESTAT in Jodhpur Alloys Pvt. Ltd. v. Commissioner [2012 (292) ELT 448 (Tri-Del.)]. It held that Cenvat credit would be admissible on steel items used for fabrication of cooling bed for rolling mills as such rolling mills qualify to be capital goods and the said steel items would be ‘inputs’ as they were necessary for manufacture of part of capital goods. In this case also Department placed reliance on Vandana Global but the same was not accepted.
While talking about capital goods, one item which cannot be missed is welding electrode which is used for repair and maintenance of plant and machinery. Even after a majority of High Courts holding credit as admissible on such electrodes [Hindustan Zinc - 2008 (228) E.L.T. 517 (Raj.) and Ambuja Cements 2010 (256) E.L.T. 690 (Chhattisgarh)] and even after more than 100 cases have been fought before Tribunal on this item, even today one finds this issue being agitated before the CESTAT. The honour of being the latest in this list is shared by the Tribunal order passed in Mangalam Cements Ltd. [CESTAT, Delhi, Final Order Nos. 50177-50179, dated 17-1-2014] wherein the Bench allowed credit considering the overwhelming affirmative view in respect of this item though there was a contra view of A.P. High Court.
As the Department watches all these litigations, a simple amendment to the CCR providing for express inclusion of items like welding electrodes, just as grinding wheels or storage tanks, would have helped the exchequer in channelizing its resources in more productive work. But one wonders whether such considerations do matter at all for the department when we go through orders like the one in Pepsico India Holding v. Commissioner [2012 (284) E.L.T. 514 (Tri. - Mumbai)] wherein the department went upto CESTAT with the hope of sustaining its stand on denial of credit on the ground that the invoices bore number which were hand-written or rubber-stamped and not printed.
[ The author is a Senior Manager, Knowledge Management & TCR, Lakshmikumaran & Sridharan, New Delhi ]