The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a demand of ₹1.89 crore holding that CENVAT credit on duty-paid capital goods and inputs used for setting up an Air Separation Plant cannot be denied merely because the plant was leased from another company or became attached to the earth after installation.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that CENVAT credit is available on individual machinery, equipment, appliances, components and accessories that qualify as capital goods under the Rules. Merely because such equipment is assembled into a larger manufacturing plant does not extinguish the entitlement to credit.
The dispute arose from an Order-in-Original passed in March 2013 whereby the Department disallowed CENVAT credit amounting to ₹1,89,28,243 availed by assessee on capital goods and inputs used in establishing an Air Separation Plant within its paper manufacturing facility. Interest and an equivalent penalty were also imposed.
The appellant/assessee is engaged in the manufacture of paper and paperboards, required oxygen and other industrial gases for its manufacturing process. To meet this requirement, it entered into an agreement with Inox Air Products Ltd. for the installation of an Air Separation Plant within its factory premises at Sarapaka, Telangana. Various machinery, components, parts and accessories were supplied under excise invoices showing assessee as the consignee. The assessee availed CENVAT credit on the duty paid on these goods during the period October 2007 to April 2009.
The Department subsequently issued a show cause notice alleging that the components lost their identity once assembled into the Air Separation Plant, that the plant belonged to Inox rather than assessee, and that the plant became an immovable property upon installation. It was further alleged that since the integrated plant was not excisable goods, the credit was inadmissible.
The assessee contended that the machinery and equipment used for setting up the Air Separation Plant fell within the definition of “capital goods” under Rule 2(a) of the CENVAT Credit Rules, 2004. The company argued that duty-paid goods falling under Chapters 82, 84, 85 and 90 of the Central Excise Tariff qualified for credit irrespective of whether they ultimately formed part of a larger plant.
The company also submitted that ownership of the machinery was irrelevant because the goods were received in its factory, used in its manufacturing operations, and covered by valid duty-paid invoices. Further, the Air Separation Plant was used exclusively to generate oxygen and industrial gases required in the manufacture of paper products, establishing a direct nexus with the final products.
The Tribunal examined earlier decisions involving similar arrangements between manufacturers and Inox Air Products Ltd. It particularly relied on the decision in JSW Ispat Steel Ltd., where credit on machinery and equipment used for setting up an oxygen plant was held admissible even though the integrated plant became immovable after installation.
The issue before the Tribunal was whether the assessee could claim credit when ownership of the Air Separation Plant remained with Inox under a leasing arrangement.
Rejecting the Department’s stand, the Bench held that the CENVAT Credit Rules focus on receipt and use of goods in the factory rather than ownership. It noted that judicial precedents have consistently recognised that ownership is not a prerequisite for availing CENVAT credit on capital goods. Consequently, the fact that the machinery was leased by Inox could not be a valid ground for denying credit.
The Tribunal further held that fastening machinery to the earth by nuts and bolts for operational stability does not affect eligibility for CENVAT credit. It observed that individual machines retain their identity even after being integrated into a larger plant and that operational immovability of the final structure cannot extinguish credit on the constituent duty-paid capital goods.
The Bench found the Department’s reliance on the immovable nature of the Air Separation Plant to be legally misconceived.
Another factor that weighed with the Tribunal was that the adjudicating authority had substantially relied upon ownership-related objections that were not specifically raised in the show cause notice.
The Tribunal reiterated the settled principle that adjudication cannot travel beyond the allegations contained in the show cause notice. An order based on new grounds violates principles of natural justice and is liable to be set aside.
Apart from allowing the appeal on merits, the Tribunal also found the demand barred by limitation. It noted that assessee had availed credit on the basis of valid invoices, disclosed the same in statutory returns, and furnished relevant information to the Department. Since the dispute involved interpretation of law and there was no suppression or intent to evade duty, invocation of the extended limitation period was held unsustainable.
The Hyderabad CESTAT held that duty-paid goods used for setting up the Air Separation Plant were eligible for CENVAT credit as capital goods and/or inputs. Ownership of the machinery by Inox Air Products Ltd. was irrelevant for credit eligibility. Rule 4(3) of the CENVAT Credit Rules does not restrict credit only to assets leased from financing companies. The immovable nature of the integrated plant does not disentitle the manufacturer from claiming credit on the constituent capital goods. The adjudication order travelled beyond the allegations in the show cause notice. The 2009 amendment to Rule 2(k) could not be applied retrospectively. The entire demand was barred by limitation.
The Tribunal set aside the impugned order, including the demand of ₹1.89 crore, interest and penalty, and granted consequential relief to assessee Ltd. in accordance with law.
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