The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that CENVAT credit cannot be denied merely because the words “setting up” were omitted from the inclusive portion of the definition of “input service” with effect from April 1, 2011.
The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) ruled that services used for establishing a manufacturing facility continue to qualify as input services under the main part of Rule 2(l) of the CENVAT Credit Rules, 2004, provided they are not specifically excluded. Consequently, it set aside a demand of ₹32.84 lakh, along with the equivalent penalty and interest, raised against Polychem Industries.
The appeal arose from an order of the Commissioner (Appeals), Vadodara, affirming the recovery of CENVAT credit amounting to ₹32,84,099 along with an equal penalty under the CENVAT Credit Rules, 2004 and the Central Excise Act, 1944. The dispute concerned service tax credit availed during January to June 2017 on services such as fabrication, erection of pipelines, welding, cutting, flange fixing and other activities undertaken for setting up the factory before the commencement of commercial production. The department alleged that these services had no nexus with manufacture and that the deletion of the expression “setting up” from the definition of input service after April 1, 2011 rendered the credit inadmissible.
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During the proceedings, Polychem Industries contended that although the phrase “setting up” was removed from the inclusive portion of Rule 2(l), the services remained covered by the principal part of the definition because they were used, directly or indirectly, in relation to the manufacture of final products. The appellant relied on several judicial precedents, including decisions of the Chhattisgarh High Court and various Benches of the Tribunal, which consistently recognized that services used for establishing manufacturing facilities remain eligible for credit unless specifically excluded.
The department argued that the legislative amendment made with effect from April 1, 2011 clearly reflected the Government’s intention to deny CENVAT credit on services used for setting up factories prior to commercial production. According to the department, since the expression “setting up” had been consciously removed from the inclusive definition of input service, the appellant could not continue to avail credit on such services.
After examining the statutory framework, the Tribunal observed that the amended definition of “input service” consists of three distinct parts—the main definition, the inclusive portion and the exclusion clause. It noted that while services used for setting up a factory were no longer expressly included in the inclusive part, they were also not specifically excluded under the exclusion clause. Therefore, the decisive question was whether such services fell within the broad language of the principal definition covering services used directly or indirectly in or in relation to manufacture.
Relying extensively on earlier judicial pronouncements, including Pepsico India Holdings Pvt. Ltd., Vimla Infrastructure Pvt. Ltd. and other Tribunal decisions, the Bench held that the process of setting up a factory is intrinsically connected with manufacturing activity. It observed that manufacture cannot commence unless the factory is first established and, therefore, services used for setting up the manufacturing unit have a direct nexus with manufacture. Since these services were not expressly excluded by the Rules, they qualified as eligible input services notwithstanding the omission of the words “setting up” from the inclusive portion of the definition.
The Tribunal also rejected the department’s invocation of the extended period of limitation. It held that under the statutory scheme prevailing during the relevant period, manufacturers were not required to disclose the nature of each individual service on which credit was availed in their monthly returns. As the credit was duly reflected in the returns and there was no statutory obligation to furnish further particulars, the appellant could not be accused of suppressing facts or making wilful misstatements with an intent to evade duty. Consequently, the extended limitation period and the penalty imposed under Rule 15(2) of the CENVAT Credit Rules were held to be unsustainable.
Allowing the appeal, the CESTAT set aside both the Order-in-Original and the appellate order. It held that the CENVAT credit of ₹32.84 lakh had been validly availed on services used for setting up the factory, quashed the demand, interest and penalty, and granted consequential relief to the appellant in accordance with law.
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