JANUARY 24, 2015

By C S Kalirajan D

ELIGIBILITY of CENVAT credit on capital goods is based on the nature of the goods manufactured by using such capital goods. Rule 6(4) of the CENVAT Credit Rules, 2004 disallows CENVATcredit on the capital goods which are exclusively used for manufacture of exempted goods or for providing exempted services. It is given to understand from the said rule that CENVATcredit on the capital goods which are used for manufacture of exempted as well as dutiable goods can be availed.

Now,in the mind of the assessee,the questions that may arise are -

++ Should capital goods be used simultaneously for manufacture of dutiable as well as exempted goods?

++ On receipt of capital goods, can the manufacturer use such capital goods for manufacture of dutiable goods and later use them for manufacture of exempted goods as well?

++ At time of receipt of capital goods, can a manufacturer use the capital goods for manufacture of exempted goods and later use it for manufacture of dutiable goods as well?

In terms of rule 4(2)(a) of the CCR, the manufacturer would become eligible to avail CENVAT credit immediately on receipt of Capital goods in the factory. However, rule 6(4) of the CCR, postulates a restriction on availment of CENVAT credit on capital goods which are used exclusively for the manufacture of exempted goods. Therefore, date for determination of eligibility of credit was seemingly ambiguous. The Larger Bench of Tribunal, Delhi in the case of Spenta International Ltd Vs CCE, Thane II - [2007-TIOL-1089-CESTAT-MUM-LB] has held that CENVAT Credit eligibility is to be determined with reference to the dutiability of the final product on the date of receipt of capital goods.In the light of the decision in the case of Spenta International ( supra ) most of us would have presumed that if on the date of receipt of capital goods the unit manufactures only exempted goods, the CENVAT credit is not eligible and accordingly may not be availed.

However in the case of Commissioner of Central Excise & Customs, Vadodara - II Vs Gujarat Propack [2008-TIOL-717-HC-AHM-CX] the Hon'ble High Court of Gujarat has held that CENVAT credit on capital goods is available even when such capital goods are initially used in manufacture of exempted goods at trial stage and subsequently used for manufacture of dutiable goods. Similarly in the case of Commissioner of Central Excise, Bangalore Vs Kailash Auto Builders Ltd. 2011-TIOL-974-HC-KAR-CX, the Hon'ble High Court of Karnataka has held that merely because goods were initially used in manufacture of exempted goods, credit of duty paid on capital goods could not be denied when assessee started to use them for manufacture of excisable goods.It was noted by the Lower Appellate forum in OIA that the manufacturer had made their intention clear to the department that they would be using the said capital goods in the manufacture of excisable final products once the factory starts working to its full capacity.

The Tribunal Mumbai has also taken a similar view in the case of Arvind Mills Ltd., Vs Commissioner of Central Excise, Ahmedabad - [2005-TIOL-1632-CESTAT-MUM] and in this case it was held that the capital goods in question were initially used in the manufacture of goods which were chargeable to ‘Nil' rate of duty and subsequently used to manufacture of goods chargeable to duty. Therefore, it cannot be said that the machines in question were used exclusively for the manufacture of products not chargeable to duty.

The Hon'ble High Court of Allahabad in the case of Brindavan Beverages Pvt Ltd Vs Commissioner of Central Excise, Meerut [2014-TIOL-542-HC-ALL-CX] has discussed the subject in detail. It was noted in this case that although the capital goods were initially used for manufacture of exempted goods, it was also capable of being utilized for manufacture of dutiable goods after making minor adjustments and software changes. However it is also observed that such minor change does not amount to modification of capital goods itself. Accordingly this case was remanded to Tribunal for fresh decision.On remand, the Tribunal, Delhi has noted that though the capital goods were used for manufacture of exempted goods on receipt of such capital goods, they also had an intention to utilize it for manufacture of dutiable goods. The Tribunal, Delhi [2014-TIOL-2136-CESTAT-DEL] has expressed a view that CENVAT credit would be admissible even if the capital goods are used for manufacture of dutiable goods and exempted goods at different points of time. However, if at the time of receipt of the capital goods, the manufacturer was using the capital goods only for manufacture of fully exempted final products and had no plan or intention to use them for dutiable final products and later on, either the final product becomes dutiable or he changes his plans and starts using the capital goods for manufacture of dutiable final products, the restriction provided under Rule 6(4) would be applicable.

Following aspects flow from perusal of legal provisions and decisions of various High Courts:

++ For availment of CENVAT credit on capital goods, it need not be used simultaneously for manufacture of dutiable as well as exempted goods.

++ CENVAT credit on capital goods is allowed even when such capital goods are initially used exclusively for manufacture of exempted goods provided the manufacturer could establish that they are having intention or plan to manufacture dutiable goods also at later point of time.

++ At the time of procurement of capital goods it should be capable of manufacture of dutiable goods as well.

++ Most importantly, there should not be a situation that the Capital goods are used for manufacture of dutiable goods just because of withdrawal of exemption to such goods manufactured or change of business plan which was not existing at time of procuring capital goods.

Number of cases taken up before the various judicial forums makes it clear that every manufacturer shall critically examine the CENVAT credit eligibility on the capital goods otherwise they may lose the eligible CENVAT credit. It may construed that on the date of receipt of capital goods having intention or planto manufacture dutiable goods in future would suffice although on the date of receipt of receipt of capital goods manufacturer manufactures only exempted goods.

Before parting: There may be a situation that the manufacturer may not have availed CENVAT credit on capital goods on the assumption arrived &based on misunderstanding of the decision in the case of Spenta International (supra) that CENVAT credit is not eligible on the capital goods which are initially used for manufacture of exempted goods though in future it would be used for manufacture of dutiable goods or on the date of receipt of capital goods manufacturer was engaged in manufacture of exempted goods. It is pertinent to note that since there is no six months period restriction available for availment of CENVAT Credit on capital goods unlike inputs and input services, the manufacturer could even now avail CENVAT credit on those capital goods on which no CENVAT credit was availed based on the wrong assumption.

(The views expressed in this article are strictly personal.)