Deemed Construction Service

‘Input’ for Cenvat as per definition existing upto 1-4-2011

1.1. Rule 2(k) of Cenvat Credit Rules, as existing upto 1-4-2011 was follows –

“Input” means –

(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly for indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;

(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.

Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.

Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods [The words in italics have been inserted w.e.f. 7-7-2009]

It can be seen that definition of ‘input’ is much broader than mere ‘raw material’. It covers not only raw materials but consumables, accessories, packing material and fuel (except LDO, petrol and HSD).

Cenvat provisions and valuation provisions are independent - CBE&C vide circular No. 137/3/2006-CX.4 dated 2-2-2006 has confirmed that availment of Cenvat credit and valuation for payment of duty are two independent issues.

1.1-1 Input for a manufacturer

Definition of ‘input’ as per rule 2(k) (as existing upto 1-4-2011), as far as manufacturer is concerned, is in two parts –

(a) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.

(b) ‘Input’ includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.

Normally, inclusive part expands the scope of any definition. Thus, for goods included in second i.e. inclusive part of definition, ‘use in relation to manufacture’ should not be required.

However, in Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193 = 22 STT 54 = 240 ELT 641 (SC), it has been held that Cenvat credit is not available in respect of fuel used for generation of electricity, which has been sold outside to sister units, vendors etc. It has been held that even in respect of second i.e. inclusive part of definition of ‘input’, relation with ‘manufacture’ is required – in appeal from Maruti Suzuki Ltd. v. CCE (2009) 238 ELT 180 (CESTAT). [This view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 29 STT 464 = 8 taxmann.com 122 = 260 ELT 321 (SC)]

In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense. Once a particular item is covered by the definition of ‘input’, one need not proceed further and examine the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final product [Now this decision stands overruled].

The word ‘includes’ is expansive, as is clear from the case law discussed below. However, as per clear decision of Supreme Court, even in respect of ‘inputs’ covered under inclusive part of definition, relation with manufacture will be required.

1.1-2 Meaning of ‘includes’

Definitions are ‘inclusive’ or ‘exhaustive’. If the definition uses the word “means” it means that it is restrictive and exhaustive. However, if the word “include/s “ is used it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = (1988) 2 SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787 = 80 Comp Cas 714 (SC) * Feroze N Dotivala v. P M Wadhwani 2002 AIR SCW 4904.

In Forest Range Officer v. P Mohammed Ali - AIR 1994 SC 120 = 1993 AIR SCW 3754 = 1993 (3) SCC (Supp) 627, it was observed : ‘Includes’ is used as extension. An interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause of inclusive definition is not meant to prevent the word receiving its ordinary, popular and natural sense wherever that would properly be applicable, but to enable the word as used in the Act to be applied to some things to which it would be normally not applicable’ - same view in Black Diamond Beverages v. CTO 1997 AIR SCW 3654 = (1997) 107 STC 219 (SC) = AIR 1997 SC 3550, where it was held that inclusive part of definition cannot prevent the main provision from receiving its natural meaning.

1.1-3 Inputs need not be utilised within the factory itself

The words ‘within the factory of production’ appear at the end of the definition. The question is whether those words apply only to second part of the definition or both parts of the definition, i.e. whether it is essential that inputs should be utilised in the factory itself or they can be utilised outside, so long as they are used in relation to manufacture. These words appear much after the words ‘and includes’ which separate first part from second part of definition. Moreover, these words are preceded by ‘,’ and not ‘;’. Thus, these words form part of only second part of the definition.

There were some contrary judgments. However, now, in Vikram Cement v. CCE 2006 (194) ELT 3 = 3 STT 230 (SC 3 member bench), it has been held that inputs need not be used within the factory. In this case, it was held that explosives used for blasting mines to produce limestone in manufacture of cement is eligible as ‘input’ even if mines are situated away from factory – followed in Rajshree Cement v. CCE (2008) 16 STT 399 (CESTAT).

In Vikram Cement v. CCE 2006(197) ELT 145 (SC), it has been held that Cenvat credit on capital goods is available only when mines are captive mines i.e. they constitute one integrated unit with main cement factory. Credit of duty on capital goods will not be available if the mine supplies to various cement factories of different assessees.

[Earlier, in CCE v. J K Udaipur Udyog Ltd. 171 ELT 289 = (2004) 7 SCC 344 = 2004 AIR SCW 4986, Supreme Court has held that Cenvat is available only if the inputs are used within the factory. Mine situated at a distance from factory cannot be considered as part of factory merely because it is connected with a ropeway, when no manufacturing process is carried on in the mine. Hence, explosives used in mine will not be eligible for Cenvat credit, even if limestone extracted from the mine is used for manufacture of cement in the factory. Now this judgment has been overruled]. [In Vikram Cement v. CCE (2005) 7 SCC 74 = 2 STT 185 = 187 ELT 145 (SC), it was observed that this decision needs reconsideration and matter was referred to large bench. Now, large bench has overruled decision in case of J K Udaipur Udyog Ltd. ]

Earlier, in Jaypee Rewa Cement v. CCE 46 RLT 491 = AIR 2001 SC 3935 = 2001 AIR SCW 3904 = 2001(8) SCC 586 = 133 ELT 3 (SC 3 member bench), it was held that explosives need not be used within the factory. Now, this decision has again become valid.

Department had expressed an opinion that in view of specific definition of ‘input’ in new Cenvat Credit Rules, Cenvat credit will be available only if inputs/capital goods are used within the factory. – CBE&C circular No. 637/28/2002-CX dated 8-5-2002. Now, this circular may have to be reviewed.

Factory has been defined in section 2(e) of CEA and it covers any premises, including precincts thereof, where manufacturing process is ordinarily carried out, and thus has wide meaning [see case law in earlier chapter in respect of ‘factory’].

Mere two separate registrations do not mean that these are separate ‘factories’ – In Diamond Cement v. CCE (2004) 169 ELT 34 (CESTAT), assessee had two units adjacent to each other. Separate registrations were obtained. DG set was installed in one unit while power was supplied to both the units. It was held that mere separate registrations do not mean that these are separate factories. Thus, fuel and lubricating oil used in DG set will be eligible for Cenvat even if power generated by DG set is used in both the units.

1.1-4 Capital goods must be used within the factory

Definition of 'capital goods' in Rule 2(a) of Cenvat Credit Rules specifies that the inputs/capital goods must be used within the factory of production. Even in that case, a view is possible that capital goods can be sent outside to job worker for any purpose. See discussions under ‘Capital Goods’.

Cenvat credit on electric cables used for feeder line from electricity sub-station to factory is not allowable as the assessee is not owner of land between the plant and electricity sub-station – National Organic Chemicals v. CCE (2004) 172 ELT 366 (CESTAT).

Capital goods extended from factory eligible – Capital goods outside factory but extended from factory are eligible for Cenvat (see case law under ‘Capital Goods’).

Partial use of Capital goods outside factory permitted - In CCE v. India Cements (2005) 1 STT 179 = 182 ELT 398 (CESTAT), it was held that Cenvat credit on capital goods is available when they are partly used in factory and partly outside the factory in mines.

1.1-5 Fuel used in the factory

Definition of ‘input’ covers fuel used in factory in or in relation to manufacture of final products or for any other purpose. However, the scope has been restricted through judicial interpretation.

In Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193 = 22 STT 54 = 240 ELT 641 (SC), it has been held that Cenvat credit is not available in respect of fuel used for generation of electricity, which has been sold outside to sister units, vendors etc. It has been held that even in respect of second i.e. inclusive part of definition of ‘input’, relation with ‘manufacture’ is required – in appeal from Maruti Suzuki Ltd. v. CCE (2009) 238 ELT 180 (CESTAT) [This view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 29 STT 464 = 8 taxmann.com 122 = 260 ELT 321 (SC)]

This was followed in CCE v. Gujarat Narmada Fertilisers Co. (2009) 9 SCC 101 = 22 STT 46 = 240 ELT 661 (SC), where it was held that fuel used in manufacture of exempted final products is not eligible as input for Cenvat credit – followed in CCE v. Rajasthan Textile Mills (2011) 268 ELT 524 (CESTAT).

In CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC), it was held that LSHS used for generation of electricity captively consumed for manufacture of final product is eligible as ‘input’ [In this case, it was held that Cenvat credit will not be available to the extent of electricity consumed in residential colony of workers. Really, the definition uses the words ‘for any other purpose’.].

In Vikram Cement v. CCE 2006 (194) ELT 3 = 3 STT 230 (SC 3 member bench), it was held that fuel can be used even outside the factory, provided electricity/steam generated is used within the factory. [Really, fuel can be used ‘for any other purpose’].

In Reliance Industries v. CCE (2008) 232 ELT 751 = 27 VST 13 (CESTAT), it has been clarified that fuel used for generation of electricity is eligible if electricity is used within factory for any purpose (even non-manufacturing activities) but not fuel used for electricity which leaves the factory - same view in CCE v. Reliance Industries (2008) 224 ELT 117 (CESTAT), based on decision of SC – followed in Ultra Tech Cement v. CCE (2008) 228 ELT 467 (CESTAT) – same view in Jawahar SSK Ltd. v. CCE (2010) 251 ELT 566 (CESTAT) * Tata Sponge Iron v. CCE (2010) 251 ELT 578 (CESTAT SMB).

Fuel used for generation of electricity is eligible if electricity is used in administrative office as well as in factory – CCE v. Solaris Chem Tech (2008) 225 ELT 443 (CESTAT SMB) – contrary view in CCE v. MCC PTA India (2010) 249 ELT 370 (CESTAT SMB), where it was held that fuel used should have relation with manufacture and hence fuel used for generation of electricity used in canteen and office is not eligible.

Fuel i.e. furnace oil used in process of manufacture of steel is ‘used’ in manufacture - Pratap Steel Rolling Mills v. State of Punjab (2007) 9 VST 629 (P&H HC DB).

Fuel used is eligible even if electricity or steam generated is used for any purpose – Shree Ambica Sugars v. CCE (2009) 233 ELT 116 (CESTAT SMB).

Fuel used partly in manufacture of excisable goods and partly non-dutiable or exempt goods is eligible for Cenvat credit – UOI v. Flex Chemicals (2007) 216 ELT 359 (MP HC DB).

Fuel (furnace oil) used partly in manufacture of excisable goods and partly non-dutiable or exempt goods is eligible for Cenvat credit. Reversal of proportionate credit is not required – CCE v. Super Auto (2008) 221 ELT 41 (P&H HC DB) [This decision cannot be quoted as authority since the rule 57CC (now rule 6(2)) has been amended w.e.f. 16-5-2005].

Fuel is raw material, processing material or consumable stores? – Fuel used to generate electricity for manufacture of end products is raw material, processing material or consumable stores? This would depend on the definition and hence matter was remanded to High Court to decide in State of Gujarat v. AMI Pigments (2009) 22 VST 615 (SC).

In remand, in AMI Pigments v. State of Gujarat (2010) 32 VST 97 (Guj HC DB), it has been held that fuel used to generate electricity used in manufacture of other goods is consumable store or processing material and is eligible for set off. However, fuel used for generation of electricity which is sold outside for a price is not eligible for set off.

Contrary views – There are some contrary decisions. Their validity is now doubtful.

Naptha used for generation of electricity is eligible even if part of electricity was transferred to sister unit as technological necessity. Proportionate reversal is not required – CCE v. Gujarat Alkali (2007) 218 ELT 506 (Guj HC DB) * Mangalam Cement v. CCE (2008) 225 ELT 354 (CESTAT).

In Hindalco Industries v. CCE 2006 (201) ELT 44 (CESTAT SMB), it was held that excess electricity generated can be sold outside and Cenvat is not required to be reversed. Phrase ‘for any other purpose’ is relevant – same view in Arvind Mills v. CCE (2007) 220 ELT 981 (CESTAT).

HSD, LDO, Petrol not eligible even if used as fuel - HSD, LDO and petrol have been specifically excluded from definition of ‘input’, even if used in or in relation to manufacture.

In Vam Organics v. State of UP (2003) 132 STC 8 (All HC DB), it has been held that diesel oil used in generating set is ‘used in manufacture’ followed in Goraya Straw Board v. State of UP (2005) 139 STC 156 (Uttaranchal HC DB). Thus, HSD, LDO and petrol is ‘used in relation to manufacture’, but Cenvat is not available in view of specific exclusion.

LDO and HSD and petrol is not eligible even if used as fuel – Imperial Granites v. CCE (2010) 256 ELT 610 (CESTAT SMB)

EOU can avail Cenvat credit of LDO? – In CCE v. Jagmini Micro Knit (2009) 238 ELT 327 (CESTAT SMB), it was held that as per EOU are eligible for Cenvat credit of duty paid on LDO in view of Notification No. 22/2003-CE dated 31-3-2003 and DGFT policy circular No. 37(RE-2005)/2004-2009 dated 5-12-2005.

Electricity cleared to Electricity Board and receiving again from Board – In Jindal Stainless v. CCE (2009) 239 ELT 49 (CESTAT), electricity captively generated was cleared to State Electricity board and simultaneously equal quantity was received from Board, as electricity generated in plant was fluctuating type. It was held Cenvat credit of furnace oil used for captive plant is available.

Furnace oil eligible - Furnace oil is consumable store. Input tax credit is available on furnace oil, unless it is mentioned in negative list – Consolidated Fibres Chemicals v. ACST (2008) 15 VST 222 (WBTT) * Reliance Industries Ltd. v. ACST (2008) 15 VST 228 (Ori HC DB).

Proportionate reversal of Cenvat not required - In CCE v. Sudarshan Spinning Mills 2004 (166) ELT 461 (CESTAT), it was held that since fuel is excluded under rule 6(2) of Cenvat Credit Rules, assessee is not liable to reverse Cenvat credit taken on fuel (furnace oil/LSHS in this case) used for generation of electricity used partly in manufacture of non-dutiable final goods. – same view in Gujarat Narmada Valley Fertilisers v. CCE 2007 (208) ELT 342 = 11 STR 431 (CESTAT 3 member bench) [This decision has been specifically overruled in CCE v. Gujarat Narmada Fertilisers Co. (2009) 9 SCC 101 = 22 STT 46 = 240 ELT 661 (SC)].

Fuel can be sent to job worker for generation and supply of electricity under Cenvat provisions - In Indorama Textiles Ltd. v. CCE (2007) 220 ELT 471 (CESTAT), furnace oil was sent by job worker to job worker for generation of electricity and supply to the assessee. Cenvat credit was taken by assessee of duty paid on furnace oil. It was held that this is permissible – view upheld in CCE v. Indorama Textiles (2010) 260 ELT 382 (Bom HC DB).

In Haldia Petrochemicals v. CCE (2005) 1 STT 261 (CESTAT), assessee was sending naptha to job worker for generation of electricity and steam. Electricity would be supplied by job worker to assessee. It was held that assessee will be eligible for Cenvat credit of Naptha even if identity of input is lost at the end of job worker.

Fuel used in power supplied to the manufacturer - In Gokak Mills Ltd. v. CCE (2007) 210 ELT 241 (CESTAT), one EOU unit supplied power to assessee. Assessee paid a amount to the EOU unit equal to on fuel and consumables used in such power generation. It was held that assessee can take Cenvat credit of this ‘amount equal to duty’.

Service tax on manpower supplied for operation of power plant - In Sanghi Industries v. CCE (2009) 19 STT 308 = 234 ELT 367 (CESTAT SMB), power plant was generating electricity which was supplied to residential colony, clinker unit, jetty and cement plant. [The Cenvat credit was denied by department on the ground that electricity is not excisable goods However, it was held that Cenvat credit of service tax paid on manpower supply service supplied to power plant and operation and maintenance of power plant is eligible.

Electricity is non-excisable goods – Electrical Energy is specified in tariff heading 2716 00 00. However, rate column is blank. In CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC), it was observed that electricity is not an excisable item. Hence, it can be argued that ‘amount’ is not payable on electricity supplied outside, as electricity is not ‘exempted goods’.

Inputs eligible for Cenvat under first part of definition

1.2 The definition of ‘input’ covers following -

· All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in relation to, the manufacture of the final products. The input may be used directly or indirectly in or in relation to manufacture of final product. The input need not be present in the final product (first part of the definition)

· Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for generation of electricity or steam used in or in relation to manufacture of final products or for any purpose. - - These can be used ‘for any purpose’. (second part of the definition)

· Input also includes goods used in manufacture of capital goods which are further used in the factory of manufacturer (Explanation 2 to the definition).

Inputs should be ‘used’ – mere intention to use is not sufficient – Rule 2(k)(i) which defines ‘inputs’ for manufacturer states that these should be ‘used in the factory’. Thus, mere intention to use is not sufficient to avail Cenvat credit.

Credit of stock of LDO on 28-2-2003 not to be reversed – LDO was eligible for Cenvat credit upto 28-2-2003 and became ineligible w.e.f. 1-3-2003. As per CBE&C circular No. 704/20/2003-CX dated 31-3-2003, if there was stock of LDO as on 28-2-2003, it would not be eligible and Cenvat credit on that stock should be reversed. This circular has been held as invalid in Grasim Industries v. CBE&C 2004 (163) ELT 10 (Kar HC) – Departmental SLP dismissed by SC on merit, relying on Samtel India v. CCE 2003 (155) ELT 14 (SC) – 170 ELT A306 – followed in Shree Rajashtan Texchem v. UOI 2005 (182) ELT 311 = 2 STT 175 (Raj HC DB) – Hence, the CBE&C circular has been withdrawn – CBE&C circular No. 812/9/2005-CX dated 22-3-2005 [There are many decisions of Supreme Court and Tribunal on this issue that vested right cannot be taken away. Good that at least finally, Board decided to withdraw its circular].

No time limit for utilisation of inputs - In Bharat Heavy Electricals v. CCE (2002) 50 RLT 208 (CEGAT), it was held that there is no time limit for consumption of inputs.

Penalty cannot be imposed only because inputs were not used for two years – CCE v. Ind-Swift Ltd. 2007 (208) ELT 212 (CESTAT SMB).

In Jindal Vijayanagar Steel Ltd. v. CCE 2006 (199) ELT 668 (CESTAT), it was held that even if inputs or capital goods are damaged, duty is not payable so long as these are lying in the factory, even if goods were insured.

Cenvat credit of capital goods used/manufactured in factory - Cenvat credit is available in respect of duty paid on 'capital goods' also. It may be noted that 'capital goods' can also be covered in definition of 'inputs' as these are obviously used 'in or in relation to manufacture'. Some provisions are common in respect of Cenvat on inputs and capital goods. However, there are some differences too. These are discussed later.

Capital goods manufactured within the factory - As per Explanation 2 to rule 2(k), ‘input’ includes goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’. [i.e. 100% Cenvat credit will be available in the same financial year].

Steel products used in manufacture of parts which are used in further capital goods are eligible – Steel Authority of India v. CCE (2008) 227 ELT 265 (CESTAT).

Steel plates and strips used in manufacture of capital goods are inputs. They are eligible – Hindalco Industries v. CCE (2008) 230 ELT 649 (CESTAT SMB) * Shree Cement v. CCE (2008) 227 ELT 249 (CESTAT SMB) * U G Sugar v. CCE (2008) 223 ELT 217 (CESTAT SMB) * KCP Ltd. v. CCE (2009) 237 ELT 500 (CESTAT).

Cement, TMT bar, steel tubes etc. used for construction of storage tanks and pipeline are eligible for Cenvat credit – Sai Samhita Storage v. CCE (2010) 28 STT 291 = 255 ELT 91 (CESTAT SMB).

In CCE v. Sai Sahmita Storages (2011) 270 ELT 33 (AP HC DB), it has been held that cement and TMT bar used for construction of warehouses (constructed to provide storage and warehousing service) is eligible for Cenvat credit as without these items, assessee could not provide storage and warehousing service.

Inputs used for manufacture of storage tank is eligible for Cenvat credit – Bannari Amman Sugars v. CCE (2010) 250 ELT 326 (Karn HC DB) [storage tank is covered within the definition of ‘capital goods’].

MS angles, channels, beams and welding electrodes used in manufacture of storage tanks used in factory are eligible for Cenvat credit – GMR Industries v. CCE (2009) 241 ELT 388 (CESTAT).

1.2-1 In or in relation to manufacture of final product

The inputs are eligible for Cenvat credit only if used in or in relation to the manufacture of final product, in respect of inputs which are not covered in second part of the definition of ‘inputs’. Thus, if an input is used ‘in the manufacture’ or ‘in relation to the manufacture’, it is eligible for claiming Cenvat credit.

‘In the manufacture’ means the input is actually used in the manufacture of finished product, either directly or indirectly. It may be present in the ‘final product’ in same or similar or identifiable form or it might have got converted during process and may not be seen or identified in the final product.

‘In relation to the manufacture’ means, the input has been used during a process while manufacturing the product like consumables, spare parts etc. The ‘input’ need not form part of final product. Thus, the term 'in relation to manufacture' is a very wide term and covers all inputs which have direct nexus with the manufacturing process. 'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much more wider than mere 'raw materials'.

The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI (2004) 5 SCC 632 = 167 ELT 3 = 4 STT 308 = 267 ITR 9 = 136 Taxman 596 = 135 STC 480 (SC) * CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).

'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79 * State of Karnataka v. Azad Coach Builders (2010) 9 SCC 524 = 7 taxmann.com 28 = 4 GST 72 = 36 VST 1 = 262 ELT 32 (SC 5 member bench).

The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.

‘In relation to’ has wide import but can have restricted meaning with reference to context – Though the phrase ‘in relation to’ has wide import, in the context of its use, it can be read as meaning a direct and proximate relation – Navin Chemicals v. CC (1993) 4 SCC 320 – quoted and applied in Indian National Shipowners Association v. UOI (2009) 19 STT 408 = 22 VST 293 (Bom HC DB).

‘In relation to’ though expansive, has to be read in context and cannot be given such a vast meaning so as to cover any activity howsoever remotely connected. The definition has to be interpreted in a sense appropriate to the phrase defined and the general purpose of enactment - Board of Control for Cricket in India (BCCI) v. CST (2007) 9 STT 399 = 7 STR 384 (CESTAT).

1.2-2 Input relating to integrally connected processes eligible

In J K Cotton Spinning and Weaving Mills v. STO, Kanpur 1965 (16) STC 563 = (1965) 1 SCR 900 = AIR 1965 SC 1310 = 91 ELT 34 (SC), Supreme Court has held that input need not be ingredients or commodities used in the processes, nor must they be directly and actually needed for ‘turning out or the creation of goods’. If the process is integrally connected with the ultimate production of goods and it would be commercially inexpedient to produce finished goods without such process, all inputs for such process will fall within the expression ‘in the manufacture of goods’. [In this case, it was held that 'designing' is a part of process of manufacture. However, building material cannot be said to be used 'in the manufacture of goods'] – followed in Hindustan Zinc Ltd. v. UOI (2008) 228 ELT 517 (Raj HC DB), where it was held that welding electrodes used for maintenance of capital goods are eligible as ‘inputs’ - also followed in CCE v. Gurukripa Resins (2011) 270 ELT 3 = 7 GST 93 = 12 taxmann.com 253.

In CCE v. Rajasthan State Chemical Works - 1991 (55) ELT 444 (SC) = AIR 1991 SC 2222 = 1991 AIR SCW 2548 = (1991) 4 SCC 473 = 36 ECR 465 (3 member bench), it was held as follows:

“Process in manufacture or in relation to manufacture implies not only production but the various processes through which the raw materials are subjected to change by various operations. Manufacture is the cumulative effect of various processes to which raw material is subjected. Therefore, each step towards such production would be a process in relation to manufacture. Where any process is so integrally connected with ultimate production of goods that but for the process, manufacture or processing of goods would be impossible or commercially inexpedient, the process is one in relation to the manufacture”.

In CCE v. Eastend Paper Industries AIR 1989 SC 488 = 43 ELT 201 = 77 STC 203 (SC) = 1989(4) SCC 244; it was held that anything required to make the goods marketable and all processes required for that are to be construed as ‘in the process of manufacture’ of final product. If any process is so connected with the ultimate production of goods, that, but for that process, manufacture or processing of goods would be commercially inexpedient, articles required in that process would fall within the expression ‘in the manufacture of goods’. In this case, it was held that use of wrapping paper is necessary to bring the goods into existence as these are known in the market. Hence, anything required to make the goods marketable must form part of the manufacture and any raw material or any materials used for the same would be component part of end product.

Similar views have been expressed by Apex Court in CCE v. Jay Engineering Works 1989 (39) ELT 169 (SC) = (1988) Supp. 3 SCR 998 = (1989) 75 STC 313 (SC) = AIR 1989 SC 488 * CCE v. Ballarpur Industries Ltd. - 43 ELT 804 (SC) = 1989 (1) SCR 323 = AIR 1990 SC 196 = 1989(4) SCC 566 = 77 STC 282 (SC) * CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).

In Indian Copper Corporation Ltd. v. CST, Bihar - AIR 1965 SC 891 = 1965 (16) STC 259 (SC), vehicles used for removing goods to the factory after mining were held to be ‘goods intended for use in the manufacture or processing of goods’ for such sale. This was so held as it was found that the dealer was engaged in both mining and manufacturing. The two processes were interdependent. It was impossible to exclude vehicles used for taking the goods (after mining) from mine to the factory. However, Supreme Court held that this benefit cannot be extended to hospital equipment, medical supplies and stationery as these are likely to facilitate conduct of business of manufacturing, processing or mining, but it cannot be said that they are ‘intended to be used’ in manufacturing, processing or mining. [Though this is a case under Central Sales Tax Act, the principle in this case is fully applicable to cases under Cenvat.]

In Shri Ramakrishna Steel Industries Ltd. v. CCE - (1996) 82 ELT 575 = 13 RLT 162 (CEGAT 3 member bench), it was observed that 'in relation to manufacture' is a broad term and covers inputs used indirectly. It even covers those inputs not used in mainstream of process but some other stream of manufacturing process, which is to be used for rendering final product marketable or used otherwise in assisting the process of manufacture. - similar views in Union Carbide of India v. CCE - 1996(86) ELT 613 = 1996(15) RLT 144 = 66 ECR 172 (CEGAT - 3 member bench 2 v 1 order), where it was observed that purpose of the word 'in relation to' is certainly to widen further the scope, ambit and content of 'inputs', so as to attract also goods which do not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of finished goods. The decision in Union Carbide has been approved in CCE v. Telco 1999(31) RLT 800 = 111 ELT 9 (Pat HC DB) * CCE v. Modi Rubber Ltd. 2000(119) ELT 197 = 38 RLT 718 (CEGAT 3 member bench) * Tamilnadu Petro-Products Ltd. v. CCE 2000(120) ELT 250 (CEGAT 3 member bench) * Rathi Udyog Ltd. v. CCE 2000(121) ELT 524 (CEGAT 5 member bench) * Arya Filaments v. CCE 2005 (180) ELT 140 (CESTAT).

Sodium Sulphate is essential for manufacture of paper and paper-boards and is eligible for Cenvat credit, even if it is burnt up during the process. The valid test is whether the input is essential or indispensable for the process - Ballarpur Industries Ltd. v. CCE - 43 ELT 804 = 1989 (1) SCR 323 = 1989(4) SCC 566 = AIR 1990 SC 196 = 77 STC 282.

In CTO v. Rajasthan Electricity Board (1997) 104 STC 89 (SC), it was held that motor vehicles, accessories, spare parts, soaps, tyres, tubes, raincoats and battery cells are ‘used in generation of electricity’ (and hence can be purchased against C form) [Decision under Sales Tax Law but principle applicable here also].

1.2-3 Inputs used indirectly or got consumed in process also eligible

In Eastern Electro Chemical Industries v. CCE 2005 (181) ELT 295 (SC 3 member bench), it was held that there were four kinds of inputs which could be said to be ingredients – (i) those which retain their dominant individual identity and character throughout the process and also in the end-product (ii) those which, as a result of interaction with other chemicals or ingredients, might themselves undergo chemical or qualitative changes and in such altered form find themselves in the end-product (iii) those which like catalytic agents, while influencing and accelerating the chemical reactions, themselves remain uninfluenced and unaltered and remain independent of and outside the end products and (iv) those which might be burnt up or consumed in the chemical reactions – relying on CCE v. Ballarpur Industries Ltd. 43 ELT 804 = 1989 (1) SCR 323 = AIR 1990 SC 196 = 1989(4) SCC 566 = 77 STC 282.

In CCE v. Hira Ferro Alloys 2000(118) ELT 94 (CEGAT 3 member bench), it was held that if lancing pipe gets consumed in the process, it is entitled to Cenvat – view approved in CCE v. Mukund Ltd. (2006) 4 STT 98 (Bom HC DB).

Inputs need not be found in full or in part in final product. Inputs getting used up after repeated use are eligible - CCE v. Decora Ceramics (2007) 10 STT 268 = 7 STR 124 = 215 ELT 353 (CESTAT).

1.2-4 One to one correlation not necessary in Cenvat

Rule 3(4)(a) of Cenvat Credit Rules states that Cenvat credit may be utilised for payment of any duty of excise on any final product. Thus, there is no requirement of establishing relation between inputs/input services and final product. For case law, see under Utilisation of Cenvat Credit in another chapter.

Credit on any input can be used for any dutiable final product - Credit of input can be used in any of the final product. An illustration will clarify. Assume that there are two inputs I-1 and I-2, used in two final products F-1 and F-2 respectively. Excise duty paid on inputs is Rs. 350 on I-1 and Rs. 150 on I-2. Manufacturer can avail credit of this duty paid. Duty payable on final product is Rs. 200 on F-1 and Rs. 400 on F-2. Thus, Cenvat credit on I-1 is Rs. 350 while duty payable on F-1 is only Rs. 200. Thus, even after utilising the full Cenvat credit, a balance of Rs. 150 is left to the credit of manufacturer. Normally, this credit would lapse as there is no provision in Cenvat to grant refund of such excess credit. However, Rule 3(3) of Cenvat Credit Rules provides that Cenvat credit can be utilised for payment of duty of excise on any final product manufactured by the manufacturer. Thus, the balance left on payment of duty on F-1 can be used while paying duty on F-2. On F-2, duty payable is Rs. 400, while credit available on I-2 is only Rs. 150. Thus, normally, the manufacturer will have to pay balance amount of Rs. 250 by cash (through PLA). However, since the manufacturer has credit balance of Rs. 150, he can utilise the same and pay only Rs. 100 by cash (i.e. through PLA). – confirmed in Mahindra & Mahindra v. CCE 2001(127) ELT 247 (CEGAT).

Of course, both F-1 and F-2 must be manufactured in the same factory. Further, this provision is not available if final product is exempt from duty i.e. cleared from factory without payment of duty.

In Pratap Steels Ltd. v. CCE 1997(95) ELT 584 (CEGAT), it was held that excess credit accumulated on account of duty on final product being less than duty on inputs utilised therefor, can be utilised for same final product manufactured out of non-duty paid inputs, as one to one correlation is not required under Cenvat.

Exception in case of goods in certain States – Goods manufactured in certain States are eligible for excise exemption. These States are – (a) North Eastern Region (b) Kutch district of Gujarat (c) State of Jammu and Kashmir (d) State of Sikkim. In case of goods manufactured in such States which are eligible for excise duty exemption, the credit of duty paid on inputs can be used only for payment of duty on final products cleared after availing exemption. [second proviso to rule 3(4) of Cenvat Credit Rules]. As per sections 150 to 152 of Finance Act, 2003, these provisions have been given retrospective effect right from 8th July, 1999, i.e. the date on which the exemption notifications were issued.

Inputs used in exempted final products not eligible - If a manufacturer manufactures more than one products, it may happen that some of the products are exempt from duty. In such cases, duty paid on inputs used for manufacture of exempted products cannot be used for payment of duty on other products which are not exempt from duty. – Rule 6(1) of Cenvat Credit Rules. Thus, this is an exception to above rule.

In CCE v. Modi Rubber 2001 AIR SCW 4363 (SC 3 member bench), it was held that no credit of duty paid on inputs is available if final product is exempt from duty. [Decision in respect of proforma credit, but principle applicable to Cenvat credit also].

As per Rule 6 of Cenvat Credit Rules, if the manufacturer is engaged in manufacture of both dutiable and exempt final products, he should maintain separate accounts of these inputs. However, if this is not possible, an 'amount' equal to specified % of 'price' of such exempted products' should be paid. [This aspect has been elaborated further in a later chapter].

Nexus between input and output necessary - In a case, Cenvat was availed on metal containers, but final products were actually packed in pouches. It was held that though one to one correlation is not required, nexus between input and final product has to be established - United Canning Co. v. CCE - 1994 (74) ELT 463 (CEGAT).

1.2-5 Storage of inputs outside the factory

Inputs should be stored within the factory. However, if manufacturer is unable to store the inputs inside the factory for want of space, hazardous nature of goods etc., he can store the inputs outside the premises. The storage point will be treated as extension of the factory. Permission from Assistant / Deputy Commissioner is necessary. [Rule 8 of Cenvat Credit Rules].

Supervision charges or MOT (Merchant Overtime Charges) are not required to be collected from assessee for storage of finished goods outside the factory. However, any other condition to safeguard revenue may be imposed by Jurisdictional Commissioner before granting permission for storage of non-duty paid goods. – CBE&C circular No. 709/25/2003-CX dated 23-4-2003. [Instructions in case of storage of finished goods, but principle will apply to storage of inputs outside the factory also].

As per Pune Commissionerate TN No 67/96 dated June 96, a register in prescribed form has to be maintained at the godown as well as factory. Inputs from outside godown should move under challan in prescribed form. As per Chandigarh-II Commissionerate TN 13/97-CE dated 17-11-1997, intimation in D-3 form is necessary within 24 hours of receipt of each consignment. Monthly stock statement should be submitted to Range Office. Cenvat credit can be taken only when entire inputs covered by an invoice are received in the factory – similar procedure in CCE, Ahmedabad II TN 93/2004 [179 ELT T15].

No assessee would like to tore goods outside factory except under compelling circumstances as storage outside is open to many vagaries of nature including theft, pilferage etc. Hence, shortage of space outside factory is an exceptional circumstance, and application for storage of goods outside factory should be considered, as per guidelines of CBE&C vide circular No. 206/40/96-CE dated 1-5-1996 – Anutone Accoustics v. CCE (2010) 250 ELT 590 (CESTAT).

Even if permission is not obtained, confiscation is not sustainable if there was no mala fide, but penalty for technical breach of law without intent to evade duty is sustainable – Sanchit Polymers v. CCE (2009) 241 ELT 240 (CESTAT SMB).

Cases in respect of eligibility of input for Cenvat

1.3 There is ample case law which clarifies inputs which are eligible for Cenvat credit.

Input used in by-product is also input used in main product - In Hindustan Copper Ltd. v. CCE 2006 (201) ELT 295 (CESTAT), it was held the by-product is not ‘final product’. It is not result of deliberate manufacture. It does not enter into equation between input and final product. In this case, it was held that reversal of Cenvat credit or payment of 10% ‘amount’ is not necessary if part of input goes into a by-product– relying on Swadeshi Polytex Ltd. v. CCE 1988(38) 794 (SC), where it was held that all inputs are used in manufacture of final product, even if part goes in by-product.

Inputs received via job worker eligible – Sometimes, inputs purchased are directly sent to place of job worker and then brought to factory. In such case, Cenvat is eligible after inputs are received in the factory (see discussions in a later chapter).

Concept of Assessable Value not relevant - Eligibility of an input is decided on basis of provisions of Cenvat and considerations relevant for arriving at assessable value under section 4 may not be always relevant for arriving at the conclusion regarding eligibility to Cenvat credit - NGEF Ltd. v. CCE - 1995 (77) ELT 238 (CEGAT) [However, that concept may be kept in mind to have ‘Harmonious construction of Statute].

1.3-1 Process losses and handling loss are allowable

There will be some loss of inputs during manufacturing process. Cenvat is available on entire quantity of input even if part of input goes in process loss, since all inputs are ‘used’ in the manufacture of final product, even if it is not reflected in final product - Multimetals Ltd. v. ACCE 57 ELT 209 (SC) = 1992 (1) SCC 715 = AIR 1992 SC 1532 = 1992 AIR SCW 1644 - quoted with approval in UOI v. Indian Aluminium Co. Ltd. - 1995 (77) ELT 268 (SC - 3 member bench order), where it was held that exact mathematical equation between quantity of raw material purchased and the raw material found in finished product is not possible, and should not be looked for. [This judgment is in respect of Proforma Credit, but its ratio is fully applicable to Cenvat.]

In CCE v. IPF Vikram India 2002(150) ELT 175 (CEGAT), it was held that Cenvat on inputs which have gone in waste is not deniable – Departmental appeal dismissed by SC on merits – 2003(153) ELT A303.

Loss of input by evaporation during manufacturing processing is to be treated as ware or loss and Cenvat credit on such loss is not required to be reversed – CCE v. BOC (India) (2008) 223 ELT 33 (Guj HC DB).

Breakage of bottles not allowed? - In Bharat Coca-Cola Bottling NE P Ltd. v. CCE (2007) 216 ELT 548 (CESTAT), breakage of bottles in handling was less than 0.5%. As per Board circular No. ID/3/70-CX8 dated 26-4-2007, this was permissible. Hence, it was held that duty cannot be demanded on such bottles – same view in CCE v. Kandhari Beverages (2008) 224 ELT 265 (CESTAT SMB).

However, CBE&C is of the view that if glass bottles break, Cenvat credit should be reversed. In CBE&C circular No. 930/20/2010-CX dated 9-7-2010, it has been clarified that the earlier circular dated 26-4-2007 was not on Cenvat issue at all, As per Cenvat credit rules, if glass bottles break, Cenvat credit should be reversed. Hence, the earlier circular has been withdrawn (Glass is fragile and some breakage during processing is inevitable despite care. However, this universally known fact does not seem to be in knowledge of Board!).

Inputs getting used up or consumed eligible – In Eastern Electro Chemical Industries v. CCE 2005 (181) ELT 295 (SC 3 member bench), assessee was using MS casings in manufacture of Calcium Carbide. These got melted during process and got mixed up with other molten materials. It was held that it is ‘input’.

Loss of inputs during handling eligible - In or in relation to the manufacture covers the entire manufacturing process starting from initial stage of handling of inputs. Thus, if wastage of input at the initial handling from tank discharge due to various reasons like spillage, pipeline losses, handling losses etc., it is ‘in or in relation to manufacture’ and Cenvat cannot be denied. Hindustan Petroleum Corporation v. CCE (2001) 136 ELT 943 (CEGAT) – followed in CCE v. Hydrogas Plg (I) P Ltd. 2006 (196) ELT 167 (CESTAT) – same view in Zeneca ICI Agro Chemicals v. CCE (2009) 238 ELT 770 (CESTAT)..

In Hindustan Zinc v. CCE (2004) 172 ELT 244 = 63 RLT 400 (CESTAT), it was held that loss of inputs during handling and process of manufacture is allowable.

Excessive loss also permissible - Cenvat credit cannot be denied, even if excessive loss was due to negligent act of faulty mixing – CCE v. Pepsico India Holdings Ltd. 2004 (168) ELT 74 (CESTAT).

Even abnormal processing loss is eligible in absence of anything to show clandestine manufacture and removal of finished products – CCE v. Sree Nithyakalyani Textiles (2005) 183 ELT 365 (CESTAT SMB) * Sree Nithyakalyani Textiles v. CCE 2005 (184) ELT 398 (CESTAT) * Prism Pigments v. CCE (2007) 211 ELT 427 (CESTAT SMB).

When inputs should be treated as waste and scrap is the option of assessee. Presumption that 40% scrap is excessive and it should not exceed 10% is not correct – Sterlite Industries v. CCE 2006 (193) ELT 35 (CESTAT).

No demand can be raised for excess loss of inputs in absence of evidence of malpractice – CCE v. Sree Nithyakalyani Textiles Ltd. (2006) 3 STT 183 (CESTAT).

Process loss is allowable even if it is varying and higher in some months - BOC India v. CCE (2007) 213 ELT 448 (CESTAT).

In Eveready Industries India v. CCE 2005 (184) ELT 54 (CESTAT), it was held that Cenvat credit is available on basis of actual inputs used in manufacture and not on basis of ‘normative standards’ of consumption.

However, in R R International v. CCE 2005 (1) STT 214 (CESTAT), credit of inputs used in excess compared to ratio of previous period was disallowed when assessee could not establish that entire inputs were indeed used in manufacture of finished products.

Cenvat if Input becomes waste or scrap during manufacture - It is not essential that waste must arise from processing of inputs. It is also applicable in case of components which becomes defective because of use in conjunction with the final product. Cenvat credit will be admissible if the inputs becomes waste during manufacture of final product. However, if the input becomes scrap in store room itself, Cenvat credit will not be admissible. - CCE v. Ashok Leyland Ltd. - (1996) 83 ELT 364 (CEGAT).

Cenvat is eligible if defect in input was noticed during manufacture. This will be so even if supplier of input reimburses supplier for defects – Asahi India Safety Glass Ltd. v. UOI 2005 (180) ELT 5 (Del HC DB).

If input becomes defective or damaged during process even before put to use, Cenvat credit is not to be reversed even if assessee collected amount of loss from the job worker – Lakshmi Ring Travellers v. CCE (2010) 259 ELT 64 (CESTAT SMB).

Inputs issued from stores and rejected as line rejection at assembly stage are ‘inputs’ and reversal of credit is not required – CCE v. Kyungshin Industrial Motherson (2009) 239 ELT 121 (CESTAT SMB).

If input becomes waste during manufacture, Cenvat credit is not required to be reversed – Foil Pack India v. CCE (2007) 216 ELT 616 (CESTAT) * Monika Electronics v. CCE (2006) 204 ELT 468 (CESTAT SMB) * Titan Industries v. CCE (2009) 237 ELT 730 (CESTAT) * CCE v. BPL (2009) 237 ELT 344 (CESTAT SMB).

Excess use due to abnormal conditions eligible - Cenvat on inputs will be eligible even if there is excess use or loss due to abnormal operating conditions - ratio of Steel Authority of India Ltd. v. CCE 1996(88) ELT 314 (SC) = 1996 AIR SCW 3162 = AIR 1996 SC 2544 = (1996) 5 SCC 484.

Inputs used even in trial production eligible – Inputs used for trial production which turned into scrap are also used in or in relation to manufacture and are eligible. – Fertiliser Corporation of India v. CCE 1990(50) ELT 494 (CEGAT) – followed in CCE v. Duracell (2001) 137 ELT 882 (CEGAT SMB) * Tetra Pak India v. CCE (2010) 252 ELT 283 (CESTAT SMB) * Shree Rama Multitech v. CCE (2011) 266 ELT 81 (CESTAT) – exactly contrary view in Reliance Industries v. CCE 2004 (173) ELT 106 (CESTAT) * Warner Lambert India v. CCE 2004 (174) ELT 386 (CESTAT).

Excessive loss in initial stages of manufacturing is allowable. Cenvat credit cannot be denied, even if it may be negligent act of faulty mixing – CCE v. Pepsico India Holdings Ltd. 2004 (168) ELT 74 (CESTAT).

Process loss at place of job worker – Cenvat credit is eligible even if there is process loss at place of job worker – Tata Motors v. CCE (2011) 264 ELT 385 (CESTAT).

1.3-2 All inputs necessary to make the goods marketable are eligible

It is settled law that use of any material to render the goods marketable can be taken to be used in relation to manufacture of the final product - Monotype India Ltd. v. CCE - (1996) 83 ELT 594 (CEGAT) * Joy Foam Pvt. Ltd. v. CCE - (1996) 83 ELT 72 (CEGAT 3 member bench order).

Since ceiling fan cannot be marketed without regulator, it is an indispensable part of the fan, even if supplied separately, and eligible for Cenvat - Electroflame Ltd. v. CCE - (1996) 83 ELT 166 = (1996) 14 RLT 466 (CEGAT 3 member bench order) - followed in Himadri Electricals v. CCE 1999(108) ELT 532 (CEGAT).

In CCE v. Eastend Paper Industries AIR 1989 SC 488 = 43 ELT 201 = 77 STC 203 = 1989(4) SCC 244 it was held that anything required to make the goods marketable must form part of the manufacture and any raw material or any material used for the same would be component part for the end product.

In Bajaj Auto Ltd. v. CCE - 1996 (88) ELT 355 (CEGAT 3 member bench), it was held that tool kits and jack assemblies supplied along with motor vehicles, as necessitated by trade pattern, marketability test and statutory rules are 'inputs' eligible under rule 57A. - followed in CCE v. Mahindra Nissan Allwyn 1998(99) ELT 702 (CEGAT) – contrary view in CCE v. Bajaj Tempo Ltd. 2005 (1) STT 242 (CESTAT) * CCE v. Telco 2006 (196) ELT 308 (CESTAT) * Premier Automobiles v. CCE (2007) 209 ELT 439 (CESTAT SMB)

In Jagsonpal Pharmaceuticals v. CCE (2004) 170 ELT 142 (CESTAT 3 member bench), dealer was packing disposable syringes and needles along with injections in blister pack and selling them as unipack. It was held that Cenvat is available on disposable syringes and needles as it was ‘adoption of treatment to render the product marketable’. [This was in view of chapter note, but principle should apply in all cases].

Dry battery cell fitted to quartz clocks and time pieces are eligible as these are essential to make final product workable. Jayshree Industries - 1993 (63) ELT 492 (CEGAT ) = 1993 (45) ECR 185. Button cells used in electronic calculators eligible - CCE v. S.G. Electronics 1998(102) ELT 282 (CEGAT).

In some decisions under Notification 201/79 (proforma credit on TI 68 goods), it was held that all inputs which are necessary to make goods marketable would be eligible for proforma credit. Thus, in CCE v. Jay Engineering Works Ltd. - 1989 (39) ELT 169 (SC) = (1988) Supp. 3 SCR 998 = (1989) 75 STC 313 (SC) = AIR 1989 SC 488, it was held that ‘name plate’ is essential input for electrical fan as it could not be marketed without it, as per departmental instructions. In HMM Ltd. v. CCE - 1994 (74) ELT 19 (SC) = AIR 1995 SC 178, it was held that ‘horlicks’ cannot be marketed without putting into unit container as per tariff and hence ‘metal cap’ will be a ‘component part’ of goods and will be eligible for credit. Though these judgments are under proforma credit, the principle is fully applicable for Cenvat too.

In Bajaj Auto Ltd. v. CCE 2000(118) ELT 635 (CEGAT), it was held that if fitment of a part is mandatory as per rules (fitment of rear view mirror to scooter in this case), it is necessary to make the goods marketable and hence is an eligible input.

1.3-3 Cenvat credit available when one item in a combination package is bought out

In Lotte India v. CCE (2008) 224 ELT 102 (CESTAT SMB), assessee was selling combination pack of coffee bite and butter scotch. Coffee bite was manufactured while butter scotch was bought out. Product was sold under MRP provisions. It was held that combi-pack is a manufactured product and assessee is eligible for credit of duty paid on butter scotch purchases - relying on CCE v. Gupta Soaps (2007) 213 ELT 372 (CESTAT) – same view in CCE v. Sweet Confectionary (2009) 237 ELT 311 (CESTAT SMB).

In CCE v. Prime Health Care Products (2011) 272 ELT 54 (Guj HC DB), assessee was selling combo-pack of bought our tooth brush with tooth paste manufactured by assessee. It was held that this is ‘deemed manufacture’ and Cenvat credit is available of excise duty paid on tooth brush.

In CCE v. Gupta Soaps (2007) 213 ELT 372 (CESTAT SMB), assessee was supplying soap along with soap dish in one pack. Duty was paid on basis of MRP printed on the soap. It was held that assessee can take Cenvat credit of duty paid on the soap dish.

Contrary decisions - In G M Enterprises v. CCE (2005) 1 STT 162 (CESTAT) blades were supplied free along with razors in blister packing. It was held that free supply of blades had no concern with manufacture and assessment of manufactured item. Hence, assessee is not eligible for Cenvat credit of blades – relying on G S Enterprises v. CCE (2004) 144 ELT 387 (CESTAT).

In Shri Warana Sahakari Dudh Utpadak Prakriya Sangh v. CCE 2007 (209) ELT 196 (CESTAT SMB), 48 gm chocolate was supplied free along with 1 Kg Bournvita for some period as a promotional scheme. It was held that chocolate is not ‘input’ for Bournvita and hence not ‘input’.

In Goran Pharma v. CCE (2008) 231 ELT 645 (CESTAT SMB), assessee was purchasing toothbrush from market and selling it with toothpaste by packing them together. It was held that toothbrush is not input for toothpaste and not eligible for Cenvat credit.

In Perfetti Van Melle India v. CCE (2009) 235 ELT 850 (CESTAT), a tattoo was placed inside pack of chewing toffee as sales promotion scheme. It was held that this is not input as not used in manufacture of final product – confirmed in Perfetti Van Melle India v. UOI (2010) 254 ELT 620 (P&H HC DB) - same view in Wrigley India v. CCE (2010) 255 ELT 201 (P&H HC DB).

The decisions appear to be contrary to decisions cited above and probably need review.

1.3-4 Inputs required for quality control tests are eligible

If quality control tests are required for marketing the final products, they cannot be dismissed as not in relation to manufacture. The essential criterion to be applied is whether the test is necessary for marketing the product at the factory gate. If it is so, input used in such test is in relation to manufacture of final product. (i.e. they will be eligible as inputs) - Walchandnagar Industries Ltd. v. CCE - (1996) 83 ELT 117 (CEGAT) = (1996) 13 RLT 570 (CEGAT).

In Greaves Ltd. v. CCE 1999(113) ELT 270 (CEGAT), it was held that test pieces used to test the input are eligible [Even when the test pieces are scrapped after testing].

Goods used for testing of inputs is eligible, even if such testing is done in R&D wing – ITI Ltd. v. CCE 2005 (179) ELT 321 (CESTAT SMB).

In Prasad Films v. CCE 2001(130) ELT 491 (CEGAT), goods were brought into the factory after processing by job worker. These were tested randomly and labelling was done. It was held that quality control is an important facet of manufacturing activity where goods manufactured are of sensitive nature. ‘Labelling’ was found to be necessary to make the goods marketable. Hence, it was held that process is ‘manufacture’ and the inputs are eligible for Cenvat.

Inputs used for quality testing before actual manufacture – In Kirloskar Electric Co. Ltd. v. CCE (2006) 3 STT 240 (CESTAT) some inputs were used for quality testing during course of manufacture of final product. It was held that the Cenvat credit is allowable on such inputs as it is essential for process of manufacture – relying on Biddle Sawyer v. CCE (2004) 168 ELT 119 (CESTAT) and CCE v. Birla Tyres 2001 (138) ELT 168 (CEGAT) – same view in Tata Engineering v. CCE (2010) 256 ELT 56 (Bom HC DB)..

Inputs used in samples of final products kept for quality testing are eligible – In Nicholas Piramal v. CCE (2007) 218 ELT 439 (CESTAT), samples of final products were kept as per legal requirements. It was held that Cenvat credit of duty paid on inputs used in manufacture of final products, which are kept as samples as per rules, is allowable.

1.3-5 Repeated use is not a bar for availing Cenvat credit

Cenvat credit cannot be denied merely because an input is capable of repeated use. Just because it is capable of repeated use, the same cannot be taken to be falling in category of ‘appliances’ or ‘machinery’, which are excluded items for definition of inputs - CCE v. Halol Leather Cloth Mfg. Co. Ltd. - 1994 (74) ELT 322 (CEGAT) followed in CCE v. Indian Oxygen Ltd. - 1995 (78) ELT 270 (CEGAT). For example –

· BOPP film used as separating medium while putting sheets in press - CCE v. Weldekar Laminates (P.) Ltd. - 1990 (49) ELT 538 (CEGAT)

· Saggers and setters used in manufacture of tiles eligible even if they are thrown after certain repeated use – CCE v. Decora Ceramics (2007) 10 STT 268 = 7 STR 124 (CESTAT).

· Lap films for manufacture of floppy diskettes - Allied Electronics and Magnetics Ltd. v. CCE - 1992 (62) ELT 629 = 1992 (20) ELR 185

· Release paper i.e. paper coated with silicon compound, used in manufacture of coated cotton fabrics participates in manufacturing process. It does not mean that it is a tool or appliance even if used 5 or 6 times and then discarded - Libra Plast Ltd. v. CCE - 1994 (72) ELT 860 (CEGAT - 3 member large bench order) * CCE v. Manish Vinyles - (1996) 87 ELT 556 (CEGAT)

· Grease proof paper used in relation to manufacture of polyurethane foam - even if used repeatedly till it is scrapped - Joy Foam P Ltd. v. CCE - (1996) 83 ELT 72 = (1996) 14 RLT 215 (CEGAT 3 member)

· Silver Halide film used repeatedly is permitted as it is a technical necessity in manufacture of final product - Indian Aluminium v. CCE 1999(113) ELT 263 (CEGAT).

Inputs used in manufacture of intermediate products are eligible, even in cases where the intermediate product is used more than once before getting used up, unless it is a tool or appliance - Gramophone Co. of India Ltd. v. CCE - 1994 (73) ELT 559 (CEGAT).

Plaster of Paris used in manufacture of 'plaster of Paris mould' which are captively consumed in the manufacture of sanitary-ware is eligible as Cenvat input - Raasi Ceramic Industries Ltd. v CCE 1997(95) ELT 401 (CEGAT).

1.3-6 Defective final product is ‘input’ for purpose of availing Cenvat credit

Often goods are despatched to customer by paying duty. The customer may reject the same if these are found defective. These are then returned to manufacturer. The manufacturer may like to rectify or recondition them. In such case, as per Rule 16 of Central Excise Rules, assessee can avail Cenvat credit of duty paid on such returned goods. While returning the goods after repairs / rectification / refining, if the process carried out was manufacture, duty will be payable at rate and value as on date of removal. If the process did not amount to manufacture, an ‘amount’ equal to Cenvat credit availed will be paid at the time of removal.

Duty on scrap generated during remaking at scrap value only – If scrap is generated during manufacture, duty is payable on scrap value – Sterlite Industries v. CCE 2006 (193) ELT 35 (CESTAT) [Here department was demanding duty on original value].

In Sundaram Industries Ltd. v. CCE 2006 (202) ELT 538 (CESTAT SMB), it was held that if the process of manufacture on defective/returned final products results in scrap, duty is payable only on scrap value.

1.3-7 Credit if goods lost / destroyed/damaged in process but no credit if inputs are lost or destroyed in store room or pilfered

Since credit on inputs is available only for inputs used in or in relation to manufacture of final products, if the inputs are lost or destroyed in the store room, credit of duty paid on such inputs will not be available, as it cannot be said that they are used ‘in or in relation to manufacture’.

In Timex Watches v. CCE 2002(141) ELT 152 (CEGAT), it was held that Cenvat credit is available if inputs are damaged during manufacture but is not admissible if inputs are destroyed prior to being used in manufacture. [i.e. before issuing inputs for production] – same view in Ashok Leyland v. CCE (2004) 169 ELT 131 (CESTAT SMB).

If inputs are damaged during manufacture, Cenvat credit is available – CCE v. Okaya Industries (2010) 250 ELT 404 (CESTAT).

If inputs are lost in stores, Cenvat is not available but interest is not payable - Sweet Industries v. CCE (2009) 238 ELT 522 (CESTAT SMB).

If inputs are lost due to heavy rains, Cenvat credit is reversible but interest is not payable and penalty cannot be imposed – Mayur Dye Chem International v. CCE (2009) 244 ELT 131 (CESTAT SMB) – same view in J K Cement Works v. CCE (2009) 236 ELT 362 (CESTAT SMB) where inputs were lost due to flood.

If waste is before actual manufacturing starts, such waste is not ‘during manufacture’ and in such case, Cenvat will have to be reversed. - Monica Electronics Ltd. v. CCE - 1995 (75) ELT 440 (CEGAT) (e.g. waste when inputs are in stores, or while issuing components to shop floor).

If packing material is damaged in process of packing, Cenvat is still eligible – CCE v. Dhariwal Industries (2007) 215 ELT 468 (CESTAT SMB)

If the input becomes scrap in store room itself, Cenvat credit will not be admissible - CCE v. Ashok Leyland Ltd. - (1996) 83 ELT 364 (CEGAT).

Loss due to leakage during process – Cenvat credit is available even if there is loss of input due to leakage in storage tank during process – Doaba Alco Chemicals v. CCE 2005 (179) ELT 434 (CESTAT SMB).

Fire during process - If the goods are damaged during production, Cenvat will be available. - - In Asmaco Plastic Industries v. CCE 1998(100) ELT 129 (CEGAT), it was held that Cenvat credit is eligible if inputs are destroyed by fire during the process. – same view in CCE v. HEG Ltd. 2001(127) ELT 121 (CEGAT SMB) * CCE v. Rajasthan Spg 2001(128) ELT 239 (CEGAT SMB) * Samtel Colour v. CCE (2004) 171 ELT 101 (CESTAT) * CCE v. Indchem Electronics 2003(151) ELT 393 (CEGAT) [Departmental appeal dismissed by SC – 2003 (157) ELT A206] * Supreme Industries Ltd. v. CCE (2006) 3 STT 274 (CESTAT) * Biopac India Corporation v. CCE (2008) 224 ELT 548 (CESTAT) * CCE v. Tulsyan NEC (2007) 207 ELT 209 (Karn HC DB) * CCE v. Arch Pharmalabs (2009) 239 ELT 381 (CESTAT) * Sweet Industries v. CCE (2009) 238 ELT 522 (CESTAT SMB).

If semi-finished goods are destroyed in fire, Cenvat credit is not required to be reversed. Issue of reversal applies only when final product is destroyed in fire – CCE v. Elam Pharma (2011) 264 ELT 567 (CESTAT SMB)

The view has been upheld in CCE v. Biopec India Corporation (2010) 258 ELT 56 (Guj HC DB).

In Asian Paints v. CCE 2004 (173) ELT 187 (CESTAT), it was held that if inputs are lost in fire in the work in process, Cenvat Credit is not required to be reversed. However, if inputs are lost in fire before issue to production, Cenvat credit should be reversed [However, it was also held that remission can be granted of duty on such inputs. Really, remission under rule 21 is only of ‘duty’. Here, no duty is payable. Only ineligible Cenvat credit has to be reversed].

If inputs are destroyed by fire before issued for processing, remission of duty paid on inputs is not available – CCE v. Paras Foam 2007 (209) ELT 241 (CESTAT SMB) – relying on Golden Polymex v. CCE 2003 (160) ELT 545 (CEGAT) - followed in Biopac India Corporation v. CCE (2008) 224 ELT 548 (CESTAT).

In Shreeram Capacitors v. CCE 2004 (166) ELT 262 (CESTAT), it was held that loss of inputs is admissible even if the fire takes place at the premises of job worker.

In a contrary view, in Tambraparani Coatings v. CCE 2006 (193) ELT 80 (CESTAT SMB), it was held that Cenvat credit is not available whether inputs are lost in fire even in cases where they were under processing.

Partially processed inputs damaged at place of job worker - In Sabero Organics v. CCE (2009) 236 ELT 281 (CESTAT), partially processed inputs were sent to job worker where they were lost during fire. It was held that remission application amounts for non-reversal of Cenvat credit on inputs. Credit is not required to be reversed as no reversal is required if Cenvatted inputs which are issued for manufacture are destroyed.

No Cenvat if Inputs stolen – In CCE v. Royal Containers 2006 (197) ELT 381 (CESTAT SMB), it was held that if inputs are stolen, Cenvat is required to be reversed. No remission can be granted as theft is not unavoidable accident.

Remission of duty on inputs lost in fire? – In Asian Paints v. CCE 2004 (173) ELT 187 (CESTAT), it was held that if inputs are lost in fire, remission of duty can be granted [Rule 21 uses the words goods unfit for consumption or for marketing. The words ‘finished goods’ are not used. Really, remission under rule 21 is only of ‘duty’. Here, no ‘duty’ is payable. Only ineligible Cenvat credit has to be reversed].

Damage by flood - In CCE v. Colour Chemicals Ltd. 1999(113) ELT 132 (CEGAT), it was held that Cenvat credit availed on inputs is eligible even if semi-finished goods and finished goods made out of inputs were washed away by flood water and lost – same view in CCE v. Beardsell Ltd. (2011) 270 ELT 693 (CESTAT).

Shortages in stock of inputs – If inputs are found short in stock taking, they are not used in or in relation to manufacture of finished goods. Hence, Cenvat credit is not admissible - K-Three Electronics Pvt. Ltd. v. CCE 2004 (173) ELT 432 (CESTAT) * CCE v. Kashyap Sweeteners 2006 (193) ELT 108 (CESTAT SMB) * Osil Steel Works v. CCE 2006 (193) ELT 196 (CESTAT) * Bharat Containers v. CCE 2006 (203) ELT 416 (CESTAT) * Rutvi Steel v. CCE (2009) 243 ELT 154 (CESTAT).

In Maruti Udyog Ltd. v. CCE 2000(115) ELT 433 (CEGAT), a demand of over Rupees 60 lakhs was confirmed when it was found that many inputs like tyres, stereos and air-conditioners were pilfered and actual cars produced were much less compared to the inputs received and issued to production.

However, in Maruti Udyog v. CCE 2004 (173) ELT 382 (CESTAT), it was held that minor variations in stock of inputs, which are within normal tolerance limit should be ignored, particularly when shortages are considered in the demand notice, while excess stock found is ignored [The shortages were about 0.24% of inputs received] – followed in Maruti Udyog Ltd. v. CCE 2007 (217) ELT 233 (CESTAT), where it was held that penalty and interest is not leviable in such cases – followed in Greaves Cotton v. CCE (2007) 208 ELT 393 (CESTAT) – same view in Denso Kirloskar Ind v. CCE (2006) 195 ELT 102 (CESTAT SMB), where it was held that when large number of inputs are handled, shortage of 0.6% is reasonable and duty cannot be demanded – followed in Balmer Lawrie v. CCE (2009) 239 ELT 314 (CESTAT SMB)..

In BHEL v. CCE (2008) 223 ELT 260 (CESTAT), there were minor shortages in stock of inputs. It was held that duty is not demandable on such shortages.

In Hindustan Zinc v. CCE (2004) 172 ELT 244 = 63 RLT 400 (CESTAT), it was held that loss of inputs during handling and process of manufacture is allowable. In this case, shortages were 1 to 1.5%.

In Hindalco Industries v. CCE (2009) 241 ELT 263 (CESTAT), it was held that meager differences in quantity due to difference is weighing scale, loss due to transit, evaporation etc. are to be ignored and reversal of Cenvat credit is not required – same view in Sayaji Sethness v. CCE (2009) 241 ELT 269 (CESTAT SMB) * CCE v. Ispat Industries (2011) 32 STT 148 (Mag) = 12 taxmann.com 24 (CESTAT).

In Techmseh Products v. CCE (2008) 221 ELT 129 (CESTAT), it was held that demanding duty on shortages found without considering excess stock found in some cases is not correct.

In Beck India Ltd. v. CCE 2004 (173) ELT 70 (CESTAT SMB), it was held that minor shortages due to evaporation losses are to be ignored and demand cannot be sustained.

In Indian Petrochemicals v. CCE 2005 (181) ELT 99 (CESTAT), minor shortages upto 0.17% fund by dip reading method were held as condonable and it was held that demand is not sustainable.

Loss due to natural evaporation in storage allowable – In CCE v. Associated Cement Companies Ltd. 2006 (197) ELT 215 (CESTAT 3 member bench), it was held that if there is loss due to evaporation of moisture during storage of goods (gypsum in this case) due to nature of the input, Cenvat credit is available on the entire quantity received. Credit is not to be varied on account of moisture loss – same view in CCE v. BOC India (2007) 213 ELT 647 (Del HC DB).

[Earlier, in Adhesives & Chemicals v. CCE 1999(113) ELT 609 (CEGAT), it was held that Cenvat credit is not available in respect of input lost due to evaporation in storage, as it is not used in or in relation to manufacture. - - This decision has now been reversed].

Evaporation of final product - Loss due to natural causes in inputs as well as final products is permissible. In such case, it is not necessary to reverse Cenvat credit on inputs used in final product which are lost due to natural causes – CCE v. Ajinkyatara SSK Ltd. (2007) 210 ELT 223 (CESTAT SMB) * CCE v. Shree Shiddheshwar SSK Ltd. (2007) 209 ELT 150 (CESTAT SMB).

In Baijapur Cooperative Sugar Factory Ltd. v. CCE (2008) 226 ELT 715 (CESTAT SMB), it was held that loss of rectified spirit upto 0.5% due to evaporation is permissible as Cenvat credit is not required to be reversed.

1.3-8 Reversal of Cenvat credit in respect of obsolete goods written off

As per rule 3(5B) of Cenvat Credit Rules (inserted w.e.f. 11-5-2007), if (i) inputs or (ii) capital goods before being put to use, are written of fully or provision is made in books of account to write off fully, the manufacturer or service provider is required to pay an ‘amount’ equal to Cenvat credit taken in respect of such inputs or capital goods. If these are subsequently used in manufacture of final products or provision of taxable service, manufacturer/service provider can take Cenvat credit of amount which was paid earlier.

It has been clarified that the reversal provision applies even in case of obsolete goods are contained in unfinished WIP (Work in Progress). If such obsolete goods are contained in finished product, then remission of duty is to be applied for under rule 21 where reversal of duty on inputs is required under rule 3(5C) of Cenvat Credit Rules. Hence, in such cases (i.e. obsolete inputs are contained in obsolete final product), rule 3(5B) will not apply – CBE&C circular No. 907/27/2009-CX dated 7-12-2009.

[Till 6-7-2009, rule 3(5B) stated that a ‘manufacturer’ is required to pay an amount equal to Cenvat credit taken if inputs or capital goods are written off in books of account. Rule 3(5B) has been amended w.e.f. 7-7-2009 to provide that rule 3(5B) shall apply to service provider also. This is really only a corrective amendment and not a substantial change].

Simple solution is not to write off fully, but write off net amount i.e. value of material less Cenvat availed, less one rupee (just to be on safe side).

Earlier, CBE&C in its circular No. 645/36/2002-CX dated 16-7-2002 had clarified that if unused inputs or unused capital goods are written off in the books of account, Cenvat credit should be reversed. However, if value of inputs is partially written off/reduced in accounts but the inputs are capable and available for use, there would be no question of payment of Cenvat credit availed (Now, even if these are available in factory, the credit will have to be reversed w.e.f. 11-5-2007)

In Bharat Heavy Electricals v. CCE (2002) 50 RLT 208 (CEGAT), it was held that when goods are lying in stock in factory premises, Cenvat credit is not to be reversed even though value has been written off in accounts, as there is no time limit for consumption of inputs – quoted and followed in CCE v. Kinetic Motors (2005) 183 ELT 300 (CESTAT) * Audco India v. CCE 2005 (184) ELT 77 (CESTAT) – same view in Asco (India) v. CCE (2007) 213 ELT 553 (CESTAT) * CCE v. Ingersoil Rand (2009) 235 ELT 142 (CESTAT) * CCE v. Fairfield Atlas (2008) 230 ELT 511 (CESTAT) * BHPV Ltd. v. CCE (2009) 240 ELT 49 (CESTAT).

(These decisions are not valid after 11-5-2007). However, these decisions are valid upto 1105-2007 - CCE v. Hindalco Industries (2011) 272 ELT 161 (Bom HC DB).

In RPG Cables v. CCE 2003 (157) ELT 273 (CEGAT), it was held that if obsolete stock of inputs is written off and is not physically available, Cenvat credit is required to be written off.

1.3-9 Loss/shortage in transit during receipt of inputs

There may be short receipt of goods. In such cases, no credit is available in case of shortages. However, if such shortage is due to natural causes, full Cenvat is available.

In CCE v. Bhuwalka Steel Industries (2010) 24 STT 436 = 249 ELT 218 (CESTAT 3 member bench), it has been held that tolerances in respect of hygroscopic, volatile and such other cargo has to be allowed as per industry norms, excluding, however, unreasonable and exorbitant claims. Similarly, minor variations due to weighment by different machines will also have to be ignored if such variations are within normal limits. Each case has to be decided according to merit and no hard and fast rule can be laid down with different kind of shortages, Various factors like (i) whether inputs were diverted en-route, (ii) whether goods are hygroscopic or are amenable to transit loss, (iii) whether the goods contain countable number of pieces and packages, (iv) whether difference in weighment is within tolerance limits with reference to Standards of Weights and Measures Act (v) whether recipient assessee has claimed compensation for shortages from supplier, transporter or insurer etc. have to be kept in view in deciding a case (Issue was referred to large bench).

No credit on short received inputs - If inputs are short received and there is loss during transit, the goods short received cannot be termed as 'used in or in relation to manufacture'. Hence, Cenvat credit on such short received inputs is not available - Asea Brown Boveri Ltd. v. CCE 1994(74) ELT 897 (CEGAT) - same view in Bombay Dyeing v. CCE 1999(113) ELT 331 (CEGAT) * Sterlite Industries v. CCE (2007) 212 ELT 193 (CESTAT) * Carborandum Universal v. CCE (2008) 227 ELT 535 (CESTAT SMB).

In Jaypee Laminations Ltd. v. CC 1999(105) ELT 210 (CEGAT), it was held that Cenvat credit is not available if inputs are damaged in transit and were found to be unfit for use in manufacture of final product.

In Unique Indus v. CCE (2004) 170 ELT 557 (CESTAT SMB), goods were short received. Assessee issued debit notes to supplier without proportionately reducing credit for inputs. It was held that he cannot take credit in respect of goods short received. Hence, demand of duty and penalty was confirmed.

In Surya Roshni Ltd. v. CCE 2005 (182) ELT 420 (CESTAT), raw material was glass. There were breakages of 4% in transport while receiving the goods. It was held that credit is not available, as these had not gone into manufacture of final products – same view in S N Brothers v. CCE (2009) 237 ELT 417 (CESTAT SMB).

Loss in transit of inputs due to natural causes allowable – In CCE v. Bhuwalka Steel Industries (2010) 24 STT 436 = 249 ELT 218 (CESTAT 3 member bench), it has been held that tolerances in respect of hygroscopic, volatile and such other cargo has to be allowed as per industry norms, excluding, however, unreasonable and exorbitant claims.

It has been held that if the loss is due to dryage occurring in transit, i.e. moisture loss, full Cenvat credit is available, as full quantity is received in the factory and loss is only due to atmospheric changes - PKPN Spinning Mills v. CCE 1997(89) ELT 588 (CEGAT) * CCE v. Bombay Dyeing & Mfg Co. Ltd. 1998(97) ELT 101 (CEGAT) * Hindustan Lever v. CCE 2004 (166) ELT 273 (CESTAT) * Tata Motors v. CCE (2005) 1 STT 228 = (179) ELT 413 (CESTAT) * Ganges Valley Foods v. CCE (2007) 217 ELT 147 (CESTAT).

Loss in transit while receiving inputs, due to volatile nature of petroleum products is permissible. In such cases, there is no warrant for seeking reversal of credit of duty on inputs - CCE v. Reliance Industries Ltd. (2008) 224 ELT 260 (CESTAT SMB) * UOI v. Bhilwara Spinning (2008) 222 ELT 362 (Raj HC DB).

In SRF Ltd. v. CCE 2006 (196) ELT 293 (CESTAT), it was held that if furnace oil is received in sealed tankers from IOC (Indian Oil Corporation) and if there is variation in quantity received due to temperature change and change of specific gravity, Cenvat credit cannot be denied.

In Triveni Glass v. CCE (2008) 221 ELT 306 (CESTAT SMB), shortages less than 2% in furnace oil and fuel oil due to difference in measuring method (dip stick method at Indian Oil Corporation and weight method in factory of receipt) was held as condonable.

Minor shortages due to dryage and handling have to be ignored and credit of duty already paid (on such shortages) cannot be denied – Bhoruka Textiles v. CCE 2000 (116) ELT 583 (CEGAT SMB) – similar view in CCE v. Savita Chemicals (2007) 213 ELT 417 (CESTAT SMB) * Zeneca ICI Agro Chemicals v. CCE (2009) 238 ELT 770 (CESTAT).

Shortages of 1 to 2% due to weighbridge differences are permissible. Reversal of Cenvat credit is not required – Estee Auto Pressings v. CCE (2007) 209 ELT 211 (CESTAT SMB) – relying on Neera Industries v. CCE (1998) 104 ELT 382 (CEGAT) * Jalan Dyeing v. CCE (2011) 271 ELT 312 (CESTAT SMB).

Difference in weighment is ignorable if it is within limits and entire Cenvat credit is available - CCE v. Ispat Industries (2012) 275 ELT 235 (CESTAT) (Here difference was 0.02% to 0.04%).

In CCE v. Jaypee Rewa Cement 2005 (182) ELT 397 (CESTAT SMB), it was held that shortage of 0.12% on account of evaporation of LDO and furnace oil during transport upto factory by tankers is not significant. Hence, credit in respect of short quantity is not deniable.

In a contrary decision, in HEG Ltd. v. CCE 2001(127) ELT 235 (CEGAT), it was held that Cenvat credit in respect of furnace oil and LDO lost during transit (due to volatile nature of the product) is not permissible, as the volatile nature is already considered while assessing duty on those products under ASTM [This decision was considered in CCE v. Jaypee Rewa Cement 2005 (182) ELT 397 (CESTAT SMB), where it was held that this was due to different facts of the case].

1.3-10 Capital goods not defined as 'capital goods' will be eligible as 'inputs'

In CCE v. Tata Engineering & Locomotives Co. Ltd. 2003 (158) ELT 130 (SC), it has been held that fork lift trucks, lifting tackles, trolleys, conveyors and measuring instruments are ‘inputs’ used in or in relation to manufacture of final products. Thus, unless they are excluded by an exclusion clause, they will be eligible as ‘inputs’ [Decision under different notification, but principle is fully applicable here, as wording is similar].

If certain capital goods are not covered under definition of ‘capital goods’ as per rule 57AA(a) [Now rule 2(b) of Cenvat Credit Rules], these may be eligible as ‘input’ if used in or in relation to manufacture, as per ratio of decision of Union Carbide of India v. CCE - 1996(86) ELT 613 = 66 ECR 172 = 1996(15) RLT 144 (CEGAT - 3 member bench 2 v 1 order) - followed in CCE v. Durgapur Cement Works 1997(90) ELT 197 (CEGAT 3 member bench) * J K Synthetics v. CCE 1998(97) ELT 310 (CEGAT) * Modella Steel v. CCE 1999(108) ELT 463 (CEGAT) * CCE v. Madhya Bharat Papers Ltd. 1999(106) ELT 206 (CEGAT) - view finally confirmed in Pratap Rajasthan Spl Steel v. CCE 2000(118) ELT 246 (CEGAT 5 member bench) [Decisions in respect of earlier rules 57A and 57Q but should be applicable to new rules also]

In Godrej GE Appliances v. CCE 2000(124) ELT 538 (CEGAT), it was held that ‘fork lift truck’ used for movement of goods within the factory is ‘input’.

Storage system used for storing of raw materials is input and Cenvat credit is eligible – CCE v. Sonai Engineering (2010) 253 ELT 806 (CESTAT SMB). MS slotted racks used for storing raw material is eligible for Cenvat credit - Kosi Plast v. CCE (2011) 271 ELT 93 (CESTAT SMB).

Steel cabinets, steel tables, steel racks and tool holders manufactured in factory is shop floor equipment used in or in relation to manufacture – CCE v. Tata Motors (2010) 251 ELT 411 (CESTAT SMB).

Welding table which is used for welding is ‘input’ even if it does not fall within the definition of ‘capital goods’ – Switchgear Control Technics v. CCE (2009) 240 ELT 78 (CESTAT SMB).

Machinery is also used 'in relation to manufacture' and it is not considered as 'input' only because of exclusion clause. - Kinetic Honda v. CCE 2000(119) ELT 372 (CEGAT).

Cement, angles, bars and beams used for fabrication of structures or installation of machinery are neither inputs nor capital goods and are not eligible for Cenvat credit at least after 7-7-2009 - Explanation 2 to definition of ‘input’ reads as follows.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods [The words in italics have been inserted w.e.f. 7-7-2009].

In CCE v. Rajasthan Spinning & Weaving Mills (2010) 27 STT 451 = 255 ELT 481 (SC), it has been held that by applying ‘user test’, steel plates and MS channels used in fabrication of chimney for DG set is eligible as capital goods – followed in UOI v. Associated Cement Co. Ltd. (2011) 267 ELT 55 (Chhatisgarh HC DB).

However, in Vandana Global Ltd. v. CCE (2010) 26 STT 379 = 253 ELT 440 = 2010-TIOL-624-CESTAT (CESTAT 3 member bench), it has been held that cement, angles, bars and beams used for fabrication of structures or installation of machinery are neither inputs nor capital goods and are not eligible for Cenvat credit even prior to 7-7-2009.

This decision has been brought to notice of assesses and officers vide CBE&C circular No. 267/11/2010-CX.8 dated 8-7-2010 [The circular contains a statement ‘Credit shall not be admissible on inputs used for repairs and maintenance of capital goods’. This statement is likely to cause lot of headaches and harassment to manufacturers. Actually, spares and accessories are ‘capital goods’ as per definition. These are not ‘inputs’. Probably what CBE&C means is that ‘inputs’ like cement, angles, channels, CTD or TMT bars used for repairs and maintenance of capital goods are not eligible].

However, in view of decision of Supreme Court, validity of the Tribunal decision and CBE&C circular for the period prior to 7-7-2009 is doubtful. Hence, following decisions may be valid at least for the period prior to 7-7-2009.

In Bhushan Steel Strips v. CCE (2008) 223 ELT 517 (CESTAT), it was held that galvanized structure used as parts of transmission line which bring power to the factory from power plant is eligible for Cenvat credit – relying on Sanghvi Industries v. CCE (2006) 206 ELT 575 (CESTAT).

In Divi’s Laboratories Ltd. v. CCE 2006 (196) ELT 285 (CESTAT), structurals like angles, channels and pipes and tubes, HDPE pipes etc. (falling under chapters 72 and 73) were held as ‘capital goods’ since spares, components and accessories need not fall under chapter 82, 84, 85 or 90.

MS plates, angles, beams, joints etc. used for structural work to erect reactors, condenser, receive tank are eligible for Cenvat as capital goods – CCE v. Hyderabad Chemical Products (2009) 243 ELT 580 (CESTAT) * SLR Steels v. CCE (2010) 249 ELT 394 (CESTAT).

In CCE v. Madras Cement 2006 (203) ELT 605 (CESTAT), it was held that ducts and structurals of steel used in the plant and machinery are used for manufacture of capital goods and hence eligible for Cenvat credit.

1.3-11 Indirect use is permissible

Indirect use is also permissible. In Reliance Industries Ltd. v. CCE 1997(93) ELT 213 (CEGAT), it was held that furnace oil, light diesel oil and LSHS used as fuel in producing steam, which in turn is used in the main stream for manufacture of final products is eligible, even if steam is exempt from duty (but mentioned in rule 57A as eligible input). - same view in Western India Plywoods Ltd. v. CCE 1998(102) ELT 52 (CEGAT) * Oriental Carbon v. CCE 1998(102) ELT 321 (CEGAT) * Tata Chemicals v. CCE 1998(104) ELT 142 (CEGAT) * Raymond Ltd. v. CCE 2000(117) ELT 104 = 37 RLT 447 (CEGAT) * Indian Oil Corporation v. CCE (2006) 205 ELT 411 = 72 RLT 333 (CESTAT) [Note that these decisions are valid mainly on the point that indirect use is permissible. Otherwise, since LDO has been specifically excluded from definition of ‘input’, Cenvat on LDO is now not available]

In OCL India Ltd. v. CCE 1998(102) ELT 710 (CEGAT), it was held that light diesel oil (LDO) and low sulphur heavy stock (LSHS), used in generation of electricity, which in turn, is used in manufacture of final product is eligible. – confirmed in Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench) – followed in Chemicals & Plastics v. CCE 2001(131) ELT 133 (CEGAT) - similar views in Associated Cement Co. Ltd. v. CCE 1999(108) ELT 477 (CEGAT), in respect of Sulphuric Acid used for treatment of water used for generation of electricity, which was in turn used to manufacture cement. – similar view in respect of chemicals used for purification of water which was used for generation of steam and electricity. – SAIL v. CCE 2001(130) ELT 459 (CEGAT). [In this case, it was held that the input will not be eligible if steam or electricity is used in office premises or for township purposes. However, as per rule 2(g), goods used for manufacture of electricity or steam are eligible even if they are used for any other purpose]. [Note that these decisions are valid mainly on the point that indirect use is permissible. Otherwise, since LDO has been specifically excluded from definition of ‘input’, Cenvat on LDO is now not available].

Input eligible even if used in another stream of process, if it is to make product marketable or used for manufacture - Indirect use is also permissible. In Shri Ramakrishna Steel Industries Ltd. v. CCE - (1996) 82 ELT 575 = 13 RLT 162 (CEGAT 3 member bench), it was observed that 'in relation to manufacture' is a broad term and covers inputs used indirectly. It even covers those inputs not used in mainstream of process but some other stream of manufacturing process, which is to be used for rendering final product marketable or used otherwise in assisting the process of manufacture. - similar views in Union Carbide of India v. CCE - 1996(86) ELT 613 = 1996(15) RLT 144 = 66 ECR 172 (CEGAT - 3 member bench 2 v 1 order), where it was observed that purpose of the word 'in relation to' is certainly to widen further the scope, ambit and content of 'inputs', so as to attract also goods which do not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of finished goods – followed in Arya Filaments v. CCE 2005 (180) ELT 140 (CESTAT).

Inputs used in effluent treatment plant eligible - In Indian Farmers Fertilisers Coop Ltd. v. CCE - 86 ELT 177 (SC) = AIR 1996 SC 2542 = 1996(5) SCC 488 = 15 RLT 498, it has been held that treatment of effluents is an essential and integral part of the process of manufacture of plant. The apparatus used for such treatment of effluents in a plant manufacturing a particular end-product is part and parcel of the manufacturing process. Hence, inputs used in the effluent treatment plant will be treated as 'used in the manufacture'. It was also held that inputs used indirectly in the manufacture will also be 'in the manufacture'. It is not essential that to qualify itself as a raw material, it had necessarily and in all cases to go into and be found in the end-product.

Chemicals used in effluent treatment plant is ‘input’ for Cenvat credit - CCE v. Madras Aluminium (2008) 226 ELT 342 (Mad HC DB).

1.3-12 Inputs eligible for Cenvat credit even if intermediate product exempt

CBE&C had clarified vide para 5 of circular No. B4/7/2000-TRU dated 3-4-2000, that Cenvat credit should not be denied if the inputs are used in any intermediate of final product, even if such intermediate product is exempt from payment of duty. The idea is that Cenvat credit is available so long as the inputs are used in or in relation to manufacture of final product, and whether directly or indirectly – view reiterated in Chapter 5 Para 3.9 of CBE&C’s CE Manual, 2001. – same view in CCE v. Hindustan Sanitaryware 2002 AIR SCW 3652 = AIR 2002 SC 3162 = 145 ELT 3 (SC), in respect of earlier notification 217/86 – same view in Escorts Ltd. v. CCE (2004) 171 ELT 145 = 2004 AIR SCW 4826 (SC).

Cenvat credit is available on capital goods used in manufacture of exempt intermediate product, if final product is dutiable. – CBE&C circular No. 665/56/2002-CX dated 25-9-2002 – quoted and followed in Bharat Forge v. CCE 2004 (165) ELT 339 (CESTAT) – same view in SAIL v. CCE (2008) 222 ELT 233 (CESTAT).

In Sturdy Polymers v. CCE 2004 (164) ELT 442 (CESTAT), assessee was manufacturer of plastic pipes/tubes. During its manufacture, waste and scrap arose. This waste and scrap was converted into granules, which were used in manufacture of pipes/tubes. The pipes/tubes were cleared on payment of duty. The granules were exempt from duty and hence duty was demanded by department on waste and scrap, as it was used in manufacture of ‘exempted final product’. It was held that as long as intermediate product (granules in this case) is used for manufacture of dutiable final product, no duty is payable on inputs i.e. waste and scrap. Waste and scrap can be said to have been used indirectly in manufacture of final product and hence exemption under 67/95-CE will be available – relying on Supreme Industries v. CCE 2004 (148) ELT 484 (CEGAT) – affirmed by SC – 153 ELT A91.

1.3-13 Ownership or purchase of inputs is not essential

The requirement is that input should be used in or in relation to manufacture. The manufacturer need not be purchaser or owner of goods.

For example, a job worker is eligible to avail Cenvat credit of duty paid on inputs supplied by raw material supplier.

In CCE v. Bharat Electronic Stampings (2008) 224 ELT 121 (CESTAT), it has been held that Cenvat credit can be availed on dealer’s invoice even if there is no sale of goods. Similarly, Cenvat can be availed on the basis of stock transferred invoice even if there is no sale.

1.3-14 Inputs which only facilitate manufacture not eligible

Inputs which facilitate manufacture but are not integrally connected with manufacturing process are not eligible. Following examples will clarify :

Inputs used in R&D - CCE v. English Electric Company 1997(93) ELT 293 (CEGAT) - in this case, it was held that ammonia paper used for preparation of drawings is basically a R&D exercise and is not eligible as input as the process is not integrally connected with the manufacturing process.

Lighting in factory - Electric lamps used for lighting the manufacturing area are not eligible - Kanoria Sugar v. CCE 1996(87) ELT 522 (CEGAT).

SI Poles used in factory for filling electric bulbs, tube lights etc. are not eligible - Hindustan Zinc Ltd. v. UOI (2008) 224 ELT 604 (CESTAT SMB).

Building material, cement, steel - Building material used for factory building, office equipment such as fans, coolers etc. not eligible - J K Cotton Spinning and Weaving Mills v. STO, Kanpur, - 1965 (16) STC 563 = (1965) 1 SCR 900 = AIR 1965 SC 1310 = 91 ELT 34 (SC).

Cement used for construction/building material is not eligible input – Hindustan Zinc v. CCE (2009) 240 ELT 696 (CESTAT).

Steel used for construction of building, dispensary, generator shed is not eligible – Andhra Sugars v. CCE 2006 (196) ELT 78 (CESTAT) – same view in Sterlite Industries v. CCE 2006 (203) ELT 283 (where in fact, Advocate of assessee stated that they had not taken Cenvat credit on structurals used for construction purposes).

Items used for construction of steel structure of factory shed are not entitled to Cenvat credit - Vishwanath Sugars v. CCE (2009) 236 ELT 289 (CESTAT).

Structurals used within factory for construction not eligible as inputs – Sarita Steel v. CCE 2006 (203) ELT 274 (CESTAT).

GI sheets used in factory to protect the final product from dust is not used ‘in or in relation to manufacture of final product’ – CCE v. Polyplex Corpn (2004) 170 ELT 487 (CESTAT SMB).

Cement, steel, resin used in civil construction work is not eligible – CCE v. Rajaram & Brothers (2007) 217 ELT 284 (CESTAT SMB).

Cement used for construction purpose is not entitled to Cenvat credit – Chemplast Sanmar v. CCE (2007) 207 ELT 92 (CESTAT).

Cement used in construction not eligible – CCE v. India Glycols (2008) 229 ELT 516 (Uttarakhand HC DB) * UOI v. Hindustan Zinc (2008) 225 ELT 183 (Raj HC DB).

In Hindustan Zinc v. DCCE (2008) 230 ELT 38 (Raj HC DB), it was held that even cement used for constructing foundation for erecting plant and machinery is not eligible – same view in Hindustan Zinc v. DCCE (2009) 236 ELT 35 (Raj HC DB).

Cement and steel for foundation of machinery eligible? - In Lloyds Steel Industries v. CCE (2007) 211 ELT 275 (CESTAT), it was held that Cenvat credit on cement and steel used for making foundations for installation of machinery, plant and equipment is eligible. However, in UOI v. Hindustan Zinc Ltd. (2007) 218 ELT 503 (Raj HC DB), it was held that even cement used foundation for machinery is not eligible – same view in Hindustan Zinc v. DCCE (2008) 230 ELT 38 (Raj HC DB).

In CCE v. Thirumalai Chemicals (2008) 227 ELT 592 (CESTAT), it was held that cement used for erecting plant, machinery is not eligible as input.

Luckily, in Lloyds Metals v. CCE (2008) 226 ELT 599 (CESTAT SMB), it was held that steel and cement used in foundation is eligible for Cenvat as capital goods cannot be used without structure (the aforesaid decision of Rajasthan HC was discussed but properly distinguished).

In CCE v. Andhra Sugars (2009) 243 ELT 592 (CESTAT SMB), the issue has been referred to large bench in view of contrary decisions.

Medical supplies and hospital equipment - Hospital equipment, medical supplies and stationery are likely to facilitate conduct of business of manufacturing, processing or mining, but it cannot be said that they are ‘intended to be used’ in manufacturing, processing or mining - Indian Copper Corporation Ltd. v. CST, Bihar - AIR 1965 SC 891 = 1965 (16) STC 259 (SC).

1.3-15 Tribunal decisions in respect of some inputs

Some decisions of Tribunal in respect of some specific eligible inputs will further clarify the legal position.

Those interested in case law relating to any particular input may send e-mail to me at dateyvs@yahoo.com.

Abrasives - Coated abrasives / paper board cannot be considered as appliance. It is eligible, as it is part of machine - Pratap Rajasthan Spl Steel v. CCE 2000(118) ELT 246 (CEGAT 5 member bench)

Acetylene and Oxygen gas - Oxygen and acetylene gas used for cutting to replace liners in cement mills after certain running hours are eligible, as they perform an important function 'in or in relation to manufacture' - Associated Cement Co Ltd. v. CCE 1999(108) ELT 477 (CEGAT).

Oxygen and acetylene gas used in manufacturing process for cutting (of runners & risers in castings) welding eligible. CCE v. Hindustan Development Corporation - 1990 (47) ELT 376 (CEGAT) noted with approval in Kesari Steels v. CCE - 1994 (74) ELT 123 (CEGAT). Same view in Larsen and Toubro Ltd. v. CCE - 1993 (63) ELT 126 (CEGAT). * Mukund Iron v. Collector - 1990 (45) ELT 84 (CEGAT) also see 1990 (48) ELT 552 (CEGAT) * General Industrial Society Ltd. v. CCE - 1992 (60) ELT 569 (CEGAT). * Jyoti Steel Industries v. CCE - 1991 (53) ELT 14 (CEGAT). * Shimoga Steels Ltd. v. CCE - 1993 (67) ELT 666 (CEGAT) * Panchmahal Steel Ltd. v CCE - (1996) 83 ELT 91 (CEGAT).

Oxygen/Acetylene gas used in cutting of scrap of iron and steel into smaller pieces to be fed into furnaces is eligible – CCE v. Vimal Alloys (2010) 26 STT 211 = 254 ELT 220 (P&H HC DB) – same view in CCE v. Nabha Steel (2010) 254 ELT 252 (P&H HC DB).

Oxygen and Acetylene gas used for repairs and maintenance of plant is eligible for Cenvat credit - Hindustan Zinc v. CCE (2011) 272 ELT 393 (CESTAT SMB).

Oxygen and Acetylene gases used for welding and cutting of metals eligible as these are consumable in process of manufacture - Transformers and Electricals Kerala Ltd. v. CCE - 1993 (65) ELT 298 (CEGAT) * SAIL v. CCE (2008) 222 ELT 233 (CESTAT).

Though they perform the function of cutting, they cannot be termed as ‘tools’. Hence, eligible for Cenvat - CCE v. Avery India Ltd. - 1991 (56) ELT 790 (CEGAT). - similar view in CCE v Shiv Industries 1997(93) ELT 174 (CEGAT) [Contrary judgment in Jaya Bharat Steel Co. v. CCE - 1990 (49) ELT 527 (CEGAT), where it was held that oxygen gas used for ship breaking will not be eligible, as ship breaking is only to obtain scrap, iron and steel items, and does not amount to a manufacturing process. - [With respect, it is difficult to understand rationale of this decision]

Gas and Welding electrodes, gas used for maintenance

In Jaypee Rewa Cement v. CCE 2003 (159) ELT 553 (CEGAT 3 member bench), it was held that welding rods and gases used for maintenance and repair of machinery is not eligible as not integrally connected with manufacture. However, decision in Jayee Rewa has been overruled in Hindustan Zinc Ltd. v. UOI (2008) 228 ELT 517 (Raj HC DB). In this case, it has been held that welding electrodes used for repairing/maintenance of capital goods are eligible as ‘inputs’. In this case, reliance was placed on J K Cotton Spinning and Weaving Mills v. STO, Kanpur, - 1965 (16) STC 563 = (1965) 1 SCR 900 = AIR 1965 SC 1310 = 91 ELT 34 (SC), where it was observed, “Input need not be ingredients or commodities used in the processes, nor must they be directly and actually needed for ‘turning out or the creation of goods’. If the process is integrally connected with the ultimate production of goods and it would be commercially inexpedient to produce finished goods without such process, all inputs for such process will fall within the expression ‘in the manufacture of goods”.

In Mangalore Refinery v. CCE (2008) 221 ELT 567 (CESTAT), it was observed that decision of large bench of Tribunal in Jaypee Rewa was sub silentio as it did not consider binding decision of Supreme Court. Hence, the decision is not valid. In this case, it was held that argon gas used for welding of inputs/raw material which are used as capital goods is eligible.

In CCE v. Vasavdatta Cement (2009) 19 STT 67 = 230 ELT 335 (CESTAT SMB), entire case law on this issue is discussed and it has been held that welding rods used for maintenance of plant and machineries are eligible as inputs – followed in Jindal Stainless Ltd. v. CCE (2008) 230 ELT 125 (CESTAT SMB) – same view in UP State Sugar Corporation v. CCE (2009) 241 ELT 558 (CESTAT SMB) * CCE v. Bharat Aluminium (2009) 240 ELT 231 (CESTAT SMB) * Oswal Overseas v. CCE (2009) 240 ELT 544 (CESTAT SMB) * ACC v. CCE (2009) 237 ELT 573 (CESTAT SMB) * J K Cement Works v. CCE (2010) 252 ELT 249 (CESTAT SMB) * CCE v. Ramgarh Chinni Mills (2010) 251 ELT 139 (CESTAT SMB) * UP State Sugar Corporation v. CCE (2010) 250 ELT 417 (CESTAT SMB). * L H Sugar Factory v. CCE (2011) 272 ELT 275 (CESTAT SMB).

Welding rods are used as part of welding machine and hence are eligible as capital goods – Hindustan Zinc v. CCE (2010) 251 ELT 468 (CESTAT SMB).

Thus, now law is settled that maintenance items, welding electrodes, argon gas for welding etc. are eligible for Cenvat credit.

Despite these decisions, in Vikram Cement v. CCE (2009) 242 ELT 545 (CESTAT), it has been held that welding rods used for maintenance is not eligible as input – same view in J K Cement Works v. CCE (2010) 252 ELT 249 (CESTAT SMB). [really, the issue should have been referred to large bench].

In Associated Cement Companies Ltd. v. CCE (2010) 256 ELT 567 (CESTAT), it was held that oxygen and acetylene gases used for cutting etc. of machinery are not ‘capital goods’ [The issue was of 1994-95. Alternate argument that these can be ‘inputs’ was neither made nor considered].

Aluminium sheets used in electrolysis process - Aluminium sheets used in electrolysis process in manufacture of Zinc eligible as they are not ‘equipment’ as such. These participate in manufacturing process, hence eligible for Cenvat - Cominco Binani Zinc Ltd. v. CCE - 1990 (48) ELT 283 (CEGAT).

Anti corrosion material - Anti corrosion material used for prevention of water circulation tubes and pipes used in production of sugar and molasses eligible - CCE v. Gangeshwar Ltd. 1998(99) ELT 551 (CEGAT). Anti corrosion chemical added in tower in the process of cooling of water eligible - Shree Synthetics Ltd. v. CCE 1998(100) ELT 351 (CEGAT). - - Anti-rust and anti-corrosion oil applied to goods in last stage of manufacture as preventive measure to prevent rusting is an input eligible for Cenvat - Addison Co. v. CCE - 1990 (48) ELT 281 (CEGAT) also in CCE v. Kinal Engineering Co. Ltd. - 1992 (62) ELT 560 (CEGAT). * CCE v. Bimetal Bearings Ltd. - 1991 (56) ELT 578 (CEGAT). Similarly, surface protection film used on high finished stainless steel sheets to render goods marketable are eligible as inputs - CCE v. Salem Steel Plant - 1992 (61) ELT 706 (CEGAT).

Argon gas - Argon gas necessary for welding operation in manufacture of final product (machinery in this case) is eligible - Alfa Laval (India) Ltd. v CCE - (1996) 83 ELT 668 (CEGAT) * Mangalore Refinery v. CCE (2008) 221 ELT 567 (CESTAT). Argon gas used in testing samples of in process material eligible - CCE v Tata Engg & Locomotive Co. Ltd. 1997(92) ELT 107 (CEGAT). - followed in Insilco Ltd. v. CCE 1997(96) ELT 663 (CEGAT), where liquid nitrogen used for testing and gradation of final product are held as eligible.

BOPP films - BOPP films used in manufacture of laminated sheets is entitled for Cenvat credit, even if the BOPP film does not form part of the final product. - Weldekor Laminates (P.) Ltd. - 1990 (49) ELT 538 (CEGAT) and La-bel Laminates- 1992 (56) ELT 757 (CEGAT) * CCE v Ram Decorative & Ind Laminates 1998(99) ELT 68 (CEGAT SMB). [Note : BOPP films act as separators while putting sheet in the press]

Catalyst - Catalysts are eligible – Sterlite Industries v. CESTAT (2009) 239 ELT 392 (Mad HC DB) * Wyeth Laboratories v. CCE 2000(120) ELT 218 (CEGAT 5 member bench - 2 members disagreed but on different issue). Catalyst eligible. – CCE v. Tungabhadra Sugar 2001(130) ELT 902 (CEGAT).

Nickel used as catalyst eligible - Oswal Agro Mills v CCE 1998(99) ELT 107 (CEGAT) * CCE v. Oswal Agro 2000(118) ELT 166 (CEGAT) * BHEL v. CCE 2001(138) ELT 1402 (CEGAT) – same is ratio of Eastern Electro Chemical Industries v. CCE 2005 (181) ELT 295 (SC 3 member bench).

Chemicals in steam generation - Chemicals used in steam generation and gas generation eligible - ratio of Indian Farmers Fertilisers Coop. Ltd. v CCE 86 ELT 177 = AIR 1996 SC 2542 = 15 RLT 498 = 1996(5) SCC 488.

Coolants - Coolant used in turning and grinding operation eligible. – CCE v. A K Automatics 2001(130) ELT 911 (CEGAT).

Effluent treatment inputs - Treatment of effluents from the plant is an essential and integral part of process of manufacture. Inputs used in effluent treatment plant are to be held to be used in the manufacture of final product - Indian Farmers Fertiliser Coop v CCCE - 1996(5) SCC 488 = 86 ELT 177 = AIR 1996 SC 2542 = 15 RLT 498.

Electrolysis consumables - Coated Titanium Metal Anodes (a consumable item) used in electrolysis process during manufacture of caustic soda lye is eligible as input, as anodes do not come under excluded category viz. machines, machinery, plants etc. - Gujarat Alkalies and Chemicals Ltd. v. CCE - 1989 (41) ELT 424 (CEGAT). Similar view in CCE v. Andhra Sugars Ltd. - 1990 (50) ELT 289 (CEGAT). Mercury used as cathode in electrolysis of brine for manufacture of caustic soda is eligible input - CCE v Atul Products Ltd. 1998(97) ELT 522 (CEGAT).

Electroplating process chemicals - Chemicals used in electroplating process getting consumed in the process and replenished periodically - Cenvat eligible - CCE v. Bimetal Bearings Ltd. - 1991 (56) ELT 578 (CEGAT). Similarly, Aluminium sheets used in electrolysis process are eligible - Cominco Binani Zinc Ltd. v. CCE - 1990 (48) ELT 283 and 1990 (50) ELT 248.

Explosives used in mines - In Vikram Cement v. CCE 2006 (194) ELT 3 = 3 STT 230 (SC 3 member bench), it has been held that explosives used for blasting mines to produce limestone in manufacture of cement is eligible as ‘input’ even if mines are situated away from factory – same view in Jaypee Rewa Cement v. CCE 46 RLT 491 = AIR 2001 SC 3935 = 2001 AIR SCW 3904 = 2001(8) SCC 586 = 133 ELT 3 (SC 3 member bench) * Madras Cements Ltd. v. CCE (2010) 28 STT 263 = 257 ELT 321 (SC).

Explosives used in quarrying (blasting) the mined products which are used in factory for manufacture of cement are eligible, if process of mining and manufacturing are integrated process in manufacture of cement. (ACC v. CCE - 1991 (55) ELT 415 (CEGAT) followed in Indian Rayon and Industries Ltd. v. CCE - 1995 (76) ELT 358 (CEGAT) * Century Cement v CCE 1997(95) ELT 69 (CEGAT) * CCE v New Vikram Cement 1997(95) ELT 98 (CEGAT) * Jaypee Rewa Cement v CCE 1997(95) ELT 429 (CEGAT) * Ambuja Cement Eastern v. CCE (2005) 1 STT 160 (CESTAT).

Fire Bricks – Fire bricks used in electric arc furnace are eligible – Oswal Steels v. CCE 2006 (193) ELT 403 (P&H HC DB).

Foundry sand mould - Inputs used in sand mould in foundry are eligible. In Hindustan Motors Ltd. v. CCE 1993 (63) ELT 723 (CEGAT), Tribunal has held that sand moulds are not ‘goods’ as they are unstable and not marketable. Hence, they cannot be termed as equipment or apparatus. Chemicals and resins used for making the sand mould will be eligible for Cenvat credit. Same view confirmed in Leader Engineering Works v. CCE - 1993 (63) ELT 687 (CEGAT) * CCE v. Bharat Heavy Electricals 2004 (167) ELT 265 (MP HC DB). This view has now been confirmed in Shri Ramakrishna Steel Industries Ltd. v. CCE - (1996) 82 ELT 575 = (1996) 13 RLT 162 = 1996(63) ECR 193 (CEGAT 3 member bench ) - [CBE&C has issued circular No 301/17/97-CX dated 10.3.1997, accepting this view. Hence, earlier circular of the Board is withdrawn and some earlier contrary CEGAT decisions also stand overruled in view of decision of 3 member bench].

Graphite crucible - Graphite crucible used as container to hold molten metal eligible - Goetze India Ltd. v CCE 1997(96) ELT 323 (CEGAT). Silicon Carbide crucible is eligible as input as it gets completely consumed and helps as oxidizing agent. – Bansal Metallic Oxides v. CCE 2001(129) ELT 135 (CEGAT).

Grinding wheel - Grinding wheel eligible as input - Rathi Udyog Ltd. v. CCE 2000(121) ELT 524 (CEGAT 5 member bench) * CCE v. Batliboi & Co. (2010) 257 ELT 191 (Guj HC DB). Grinding media used in steel ball mills in manufacture of cement is eligible. Birla Corporation v. CCE (2001) 135 ELT 175 (CEGAT). [CBE&C vide circular No. 920/10/2010-CX dated 1-4-2010 has clarified that grinding media is capital goods].

Hydraulic Oils - Hydraulic oil and lubricating oil essential to ensure working of machinery eligible - Sipta Coated Steel Ltd. v. CCE 1998(99) ELT 553 (CEGAT).

Labels - Labels affixed to goods are eligible. - Eicher Motors Ltd. v. CC 2000(118) ELT 731 (CEGAT).

Lubricating oil and grease - Lubricating oil and greases used for lubricating machinery are eligible. - CCE v. Modi Rubber Ltd. 2000(119) ELT 197 = 38 RLT 718 (CEGAT 3 member bench) * Telco v. CCE (2001) 136 ELT 305 (CEGAT) * Rathi Ispat v. CCE (2001) 136 ELT 1308 (CEGAT) * Sipta Coated Steel Ltd. v. CCE 1998(99) ELT 553 (CEGAT) * Asianol Lubricants v CCE (2007) 217 ELT 243 (CESTAT) * L&T Case Equipment v. CCE (2007) 208 ELT 218 (CESTAT SMB).

Lubricating oil used in process of manufacture falling continuously on the brass sheets being rolled is eligible as input - CCE v. Devidayal Aluminium Ind P Ltd. - 1998(102) ELT 119 (CEGAT) - similar views in Devidayal Aluminium v. CCE 1999(112) ELT 627 (CEGAT) * Hari Machines v. CCE (2007) 215 ELT 262 (CESTAT).

Lubricating oil used in factory – whether for manufacture of final product or in machinery - is eligible – Bajaj Auto v. CCE (2007) 209 ELT 457 (CESTAT).

Grease is ‘input’ – CCE. v. National Oxygen (2007) 207 ELT 516 (CESTAT).

Maintenance items eligible – Input used for maintenance of capital goods are not eligible for Cenvat credit – J K Cement Works v. CCE (2007) 6 STR 60 = 211 ELT 235 (CESTAT SMB) – relying on Jaypee Rewa Cement v. CCE 2003 (159) ELT 553 (CEGAT 3 member bench)

However, decision in Jayee Rewa has been overruled in Hindustan Zinc Ltd. v. UOI (2008) 228 ELT 517 (Raj HC DB). In this case, it has been held that welding electrodes used for repairing/maintenance of capital goods are eligible as ‘inputs’. In this case, reliance was placed on J K Cotton Spinning and Weaving Mills v. STO, Kanpur 1965 (16) STC 563 = (1965) 1 SCR 900 = AIR 1965 SC 1310 = 91 ELT 34 (SC), where it was observed, “Input need not be ingredients or commodities used in the processes, nor must they be directly and actually needed for ‘turning out or the creation of goods’. If the process is integrally connected with the ultimate production of goods and it would be commercially inexpedient to produce finished goods without such process, all inputs for such process will fall within the expression ‘in the manufacture of goods” – same view in Ambuja Cements v. CCE (2010) 256 ELT 690 (Chhatisgarh HC DB) * CCE v. Alfred Herbert (2010) 257 ELT 29 (Karn HC DB)..

MS/SS plates used in workshop for repair and maintenance of machinery are capital goods and eligible for Cenvat credit – UOI v. Hindustan Zinc Ltd. (2007) 214 ELT 510 (Raj HC DB) – upheld by SC – 214 ELT A115.

Asbestos packing used in maintenance is eligible – Dhampur Sugar Mills v. CCE (2008) 226 ELT 742 (CESTAT SMB).

Thus, law is now settled that maintenance items, welding electrodes, argon gas for welding etc. are eligible for Cenvat credit.

Despite these decisions, in Vikram Cement v. CCE (2009) 242 ELT 545 (CESTAT), it has been held that welding rods used for maintenance is not eligible as input – followed in Guljag Industries v. CCE (2010) 252 ELT 102 (CESTAT SMB). [really, the issue should have been referred to large bench]

Following case law is now not valid.

Maintenance items like Oxygen Gas used for repair work, cement used for maintenance of building, paints used for painting building structure, asbestos material used for general maintenance, steel/channels/pipes, electrodes etc. for structural maintenance, Copper wire cable for electricity supply, welding electrodes for repair work, machinery spare parts and bearings used for repairs are all held not eligible inputs - ACC v. CCE - 1991 (55) ELT 415 (CEGAT). Input used for maintenance of capital goods are not eligible for Cenvat credit – J K Cement Works v. CCE (2007) 6 STR 60 = 211 ELT 235 (CESTAT SMB) – relying on Jaypee Rewa Cement v. CCE 2003 (159) ELT 553 (CEGAT 3 member bench) – followed in Dewan Sugar Mills v. CCE (2008) 16 STT 369 (CESTAT) - followed in Stainless India Ltd. v. CCE 2005 (179) ELT 73 (CESTAT SMB), where it was held that steel sheets used for maintenance of platform (where raw material was fed into converter) are not eligible for Cenvat.

Mercury as cathode - Mercury used as cathode used in electrolytical process in manufacture of caustic soda is eligible - CCE v Mettur Chemical Ind 1991(56) ELT 465 = 34 ECR 330 (CEGAT).

Molybdenum wire - Molybdenum wire used in manufacture of bulb is not an appliance, though it gets consumed in the process. It is an eligible input. - ECE Industries Ltd. v CCE 1998(97) ELT 146 (CEGAT) * CCE v Kalpana Lamps 1997(91) ELT 162 (CEGAT) * ECE Industries Ltd. v CCE 1998(97) ELT 284 (CEGAT)

Nitrogen gas - Nitrogen gas used to create inert atmosphere in relation to manufacture of MMA Monomer (final product) is eligible for Cenvat credit - Gujarat State Fertilizer Co. Ltd. v. CC - 1994 (69) ELT 698 (CEGAT). Similarly, Argon gas used to provide inert atmosphere technically necessary is eligible for Cenvat - Widia (India) Ltd. v CCE - (1996) 83 ELT 373 (CEGAT)

Oxygen gas – It is eligible. See case under ‘Acetylene gas’.

Crates/racks used for storing/handling eligible - In CCE v. Black Diamond Beverages Ltd. 1997(91) ELT 422 = 14 RLT 855 (CEGAT), it was held that plastic crates used for storage and handling of final products are eligible – same view in CCE v. Ajanta Transistor Clock Mfg Co. (2009) 233 ELT 97 (CESTAT) – view confirmed in Banco Products v. CCE (2009) 235 ELT 636 (CESTAT 3 member bench), where it was held that plastic crates for material handling within the factory are eligible both as capital goods (as accessory of machinery) and also as inputs – followed in Miltech Industries v. CCE (2011) 263 ELT 635 (CESTAT SMB).

In GKN Sinter Metals v. CCE (2008) 224 ELT 560 (CESTAT SMB), it was held that plastic crates used for storing of raw materials are eligible – same view in Pallipalayam Spinners v. CCE (2008) 231 ELT 495 (CESTAT SMB) [It was held that the credit is eligible as capital goods. This does not seem to be correct].

The plastic crates used for storage and handling of final products are also eligible - followed in Delhi Bottling Co. v. CCE 1999(105) ELT 42 (CEGAT), where it was held that of packing material is eligible even when its cost is included in AV on installment basis – same view in CCE v. Dhillon Kool Drinks (2008) 229 ELT 193 (P&H HC DB) * Ace Glass Containers v. CCE (2010) 250 ELT 110 (CESTAT SMB).

Polyester bags used for dispensing materials used in batch-wise production is input for Cenvat purposes – CCE v. Anglo French Drugs (2008) 225 ELT 76 (CESTAT).

MS slotted racks used for storing raw material is eligible for Cenvat credit - Kosi Plast v. CCE (2011) 271 ELT 93 (CESTAT SMB)

However, in Banco Products v. CCE (2008) 226 ELT 436 (CESTAT SMB), some conflicting decisions were noted and hence issue has been referred to large bench.

Spares parts supplied with machinery is not ‘input’ - Spares parts supplied with machinery is not ‘input’ and is not eligible for Cenvat credit – JCB India v. CCE (2010) 251 ELT 433 (CESTAT).

Storage system is input - Storage system used for storing of raw materials is input and Cenvat credit is eligible – CCE v. Sonai Engineering (2010) 253 ELT 806 (CESTAT SMB). MS slotted racks used for storing raw material is eligible for Cenvat credit - Kosi Plast v. CCE (2011) 271 ELT 93 (CESTAT SMB)

Paper manufacture equipment - Industrial cloth, wire mesh and endless felt used in manufacture of paper and paper board is eligible. - confirmed in Ghataprabha Paper v. CCE 2000(117) ELT 552 (CEGAT 3 member bench) * CCE v. Rollatainers (2010) 26 STT 481 (P&H HC DB).

Phosphoric Acid - Phosphoric Acid added to cane juice for clarification. It cannot be identified as ‘apparatus’ for treatment of juice and eligible for Cenvat credit - Rahuri Sakhar Karkhana Ltd. v. CCE - 1993 (64) ELT (CEGAT).

Printing ink - Printing ink used to print product details on goods as required under Explosives Rules are eligible - Indian Explosives Ltd. v. CCE - 1990 (50) ELT 117 (CEGAT) printing ink used for printing brand name on package is eligible - Brooke Bond Lipton India Ltd. v. CCE - (1996) 84 ELT 293 (CEGAT).

Ramming mass - Ramming mass and fibre glass filter mesh eligible. * CCE v. Escorts Mahale Ltd. 2003 AIR SCW 2683 = 154 ELT 321 = (2003) 4 SCC 758 * Escorts Ltd. v. CCE 2000(120) ELT 75 (Kar HC DB) * CCE v. Steel Strips (2008) 232 ELT 598 and 232 ELT 395 (HP HC DB). Ramming mass is input. – Electro Steel Castings v. CCE (2001) 136 ELT 929 (CEGAT) * Rathi Ispat v. CCE (2001) 136 ELT 1308 (CEGAT) * CCE v. Steel Strip Alloys (2010) 254 ELT 410 (P&H HC DB)

Ramming farmers which are MS Steel put inside furnace for holding and ramming the lining of refractories in shape is eligible as input - Tata Motors v. CCE (2010) 252 ELT 265 (CESTAT).

Refrigerant gases - Refrigerant gases used for keeping the material at required level of temperature to produce proper chemical reaction is eligible as input even if it is circulated more than once. It still remains a consumable input - CCE v. Polyoleefins Industries Ltd. - 1995 (77) ELT 725 (CEGAT).

Safety appliances like hand gloves – Gloves used by workers of manufacturer of hot jobs and in handling corrosive material is ‘used in manufacture’ – Member, Board of Revenue v. Phelps & Co (1972) 4 SCC 121 = 29 STC 101 (SC) – quoted in Pratap Steel Rolling Mills v. State of Punjab (2007) 9 VST 629 (P&H HC DB) * Essel Mining and Industries v. CST (2011) 41 VST 154 (Ori HC DB).

In P Narendra Menon v. State of Kerala (2009) 23 VST 66 (Ker HC DB), it was held that safety gloves used for protection of workmen are ‘used in manufacture’ and are eligible for concessional rate of sales tax [decision under sales tax but principle fully applicable here].

Soda ash - Soda ash and caustic Soda used for cleaning of various machinery in sugar factory eligible - Triveni Engg v CCE 1999(105) ELT 427 (CEGAT). Soda ash used in softening water and cleaning bottles eligible - Residency Foods . CCE 1998(101) ELT 103 (CEGAT) * Residency Foods . CCE 1998(103) ELT 693 (CEGAT).

Steel balls - Steel balls for crushing cement, lubricating oil, ceramic balls, anti-seize agent applied to machinery - all eligible - Reliance Indus Ltd. v. CCE 2000(118) ELT 720 (CEGAT).

Steel scrap - Steel waste and scrap used by re-rolling in manufacture of final product eligible - CCE v. Inder Singh 1999(112) ELT 417 (CEGAT).

Thermocouple tips - Thermocouple tips used for measuring temperature and getting consumed during process of manufacture are eligible - Panchmahal Steel Ltd. v. CCE - 1996 (83) ELT 91 (CEGAT).

Washing bottles - Caustic Soda used for washing glass bottles for aerated waters are eligible, as washing of bottles is mandatory as per Prevention of Food Adulteration Act and is a process incidental or ancillary to completion of manufactured product in marketable form - Black Diamond Beverages Ltd. v. CCE - 1994 (69) ELT 572 (CEGAT) * Pure Drinks v. CCE 1997(92) ELT 52 (CEGAT).

Water purification chemicals - Chemicals used for purification of water for production of steam is eligible as steam is essential in manufacture of final product (explosives in this case) - Indian Explosives Ltd. v. CCE - 1990 (50) ELT 295 (CEGAT) * ICI Ltd. v. CCE 1995(78) ELT 695 (CEGAT). Similar view was taken in respect of chemicals used for treatment of water. This water was used in boilers to make steam for use in manufacture of cement. Boilers would have corroded with use of un-treated water, hence treatment of water is essential manufacturing process - ACC v. CCE - 1991 (55) ELT 415 (CEGAT). Chemicals are used in water treatment plant. The plant is used for manufacturing steam, which in turn is used to manufacture paper. Hence, the chemicals used in water treatment plant eligible - CCE v. Seshasayee Paper Boards Ltd. - 1992 (61) ELT 304 (CEGAT) * SAIL v. CCE 2001(130) ELT 459 (CEGAT) - similar views in Indian Farmers Fertilisers Coop Ltd. v. CCE - 86 ELT 177 = AIR 1996 SC 2542 = 15 RLT 498 = 1996(5) SCC 488.

Welding electrodes - (a) Welding electrodes used for filling up cavity in castings are consumable items and are eligible. Silicon carbide grains used for smoothing the surfaces is essential for manufacture of product, hence Cenvat eligible - Leader Engineering Works v CCE - (1996) 88 ELT 38 (CEGAT). (b) Welding electrodes used for spot welding in manufacture of final products eligible - Bajaj Auto Ltd. v CCE 1998(99) ELT 479 (CEGAT) * K L Steels v. CCE 1999(106) ELT 343 (CEGAT) * CCE v. Shree Cement 1999(114) ELT 940 (CEGAT) * Bombay Cranes v. CCE 200(122) ELT 217 (CEGAT) * CCE v. Maruti Udyog 2001(130) ELT 776 (CEGAT).

Welding electrodes used in factory are eligible – Ruchi Health Foods v. CCE (2007) 218 ELT 716 (CESTAT).

Welding rods used for manufacture of machinery, structure etc. are eligible Bhushan Steel Strips v. CCE (2008) 223 ELT 517 (CESTAT).

Welding electrodes used in maintenance work are eligible - In CCE v. Vasavdatta Cement (2009) 19 STT 67 = 230 ELT 335 (CESTAT SMB), entire case law on this issue is discussed and it has been held that welding rods used for maintenance of plant and machineries are eligible as inputs – followed in Jindal Stainless Ltd. v. CCE (2008) 230 ELT 125 (CESTAT SMB) – same view in Mansurpur Sugar Mills v. CCE (2009) 239 ELT 174 (CESTAT SMB) * ACC v. CCE (2009) 237 ELT 573 (CESTAT SMB) – same view in Ambuja Cements v. CCE (2010) 256 ELT 690 (Chhatisgarh HC DB) * Ace Glass Containers v. CCE (2010) 250 ELT 110 (CESTAT SMB) * CCE v. Monnet Sugar (2011) 265 ELT 233 (CESTAT SMB).

Earlier, in Jaypee Rewa Cement v. CCE 2003 (159) ELT 553 (CEGAT 3 member bench), it was held that welding rods and gases used for maintenance and repair of machinery is not eligible as not integrally connected with manufacture. However, decision in Jayee Rewa has been overruled in Hindustan Zinc Ltd. v. UOI (2008) 228 ELT 517 (Raj HC DB). In this case, it has been held that welding electrodes used for repairing/maintenance of capital goods are eligible as ‘inputs’. In this case, reliance was placed on J K Cotton Spinning and Weaving Mills v. STO 1965 (16) STC 563 = (1965) 1 SCR 900 = AIR 1965 SC 1310 = 91 ELT 34 (SC), where it was observed, “Input need not be ingredients or commodities used in the processes, nor must they be directly and actually needed for ‘turning out or the creation of goods’. If the process is integrally connected with the ultimate production of goods and it would be commercially inexpedient to produce finished goods without such process, all inputs for such process will fall within the expression ‘in the manufacture of goods”.

In Lloyds Metals v. CCE (2008) 225 ELT 222 (CESTAT) also, it has been held that welding electrodes used in factory for maintenance and repairs of plant and machinery are eligible for Cenvat credit.

Thus, maintenance items, welding electrodes, argon gas for welding etc. are eligible for Cenvat credit.

Despite these decisions, in Vikram Cement v. CCE (2009) 242 ELT 545 (CESTAT), it has been held that welding rods used for maintenance is not eligible as input [really, the issue should have been referred to large bench].

Following contrary decisions now stand overruled.

In Ramala Sahakari Chini Mills v. CCE (2007) 211 ELT 412 (CESTAT) it was held that welding electrodes used for repair and maintenance of plant and machinery are not eligible for Cenvat credit – same view in SAIL v. CCE (2008) 222 ELT 233 (CESTAT) – Civil Appeal dismissed by SC without giving reasons – 229 ELT A127 * CCE v. Sri Vishnu Cements Ltd. 2006 (201) ELT 607 (CESTAT) * UP State Sugar Corp v. CCE (2008) 221 ELT 149 (CESTAT SMB) – followed in Dewan Sugar Mills v. CCE (2008) 16 STT 369 (CESTAT) * Dhampur Sugar Mills v. CCE (2008) 228 ELT 590 (CESTAT SMB) * U G Sugar v. CCE (2008) 223 ELT 217 (CESTAT SMB) * SAIL v. CCE (2008) 222 ELT 233 (CESTAT) * UP State Sugar Corporation v. CCE (2009) 241 ELT 558 (CESTAT SMB).

Welding electrodes used in workshop for maintenance work is not eligible. – CCE v. Bellary Steels 2001(130) ELT 873 (CEGAT SMB) * Jubilant Organosys v. CCE (2007) 215 ELT 92 (CESTAT SMB) * Hindustan Zinc v. CCE (2008) 227 ELT 309 (CESTAT SMB) * Dhampur Sugar Mills v. CCE (2008) 225 ELT 219 (CESTAT SMB) * Lloyds Metals v. CCE (2009) 240 ELT 307 (CESTAT SMB)..

Now, these decisions are not valid and law is settled that maintenance items, welding electrodes, argon gas for welding etc. are eligible for Cenvat credit.

Wrapping paper - Wrapping paper used for wrapping finished paper reams has to be considered as raw material for paper reams, as paper reams are marketed in packed or wrapped condition - CCE v. Eastend Paper Industries Ltd. - 1989 (43) ELT 201 (SC) = (1990) 77 STC 203 = AIR 1990 SC 1893, quoted and followed in CCE v. Eastend Paper Industries Ltd. - 1993 (66) ELT 235 (CEGAT) - though the decision is in respect of proforma credit, the principle would apply in case of Cenvat too.

Inputs as per inclusive part of the definition

1.4 Definition of ‘input’ has ‘inclusive’ part by which the definition has been extended.

In Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193 = 22 STT 54 = 240 ELT 641 (SC), it has been held that even in respect of second i.e. inclusive part of definition of ‘input’, relation with ‘manufacture’ is required [This view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 29 STT 464 = 8 taxmann.com 122 = 260 ELT 321 (SC)].

Earlier, there were contrary views. In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench) and Arvind Mills v. CCE (2007) 220 ELT 981 (CESTAT), it was held that in case of items covered under the extended part, the requirement of ‘in or in relation to manufacture’ does not apply [Now these decisions are not valid].

Provisions in respect of ‘fuel’ are already discussed earlier. Other inputs covered under the extended definition are discussed here.

1.4-1 Accessories eligible for Cenvat

Accessories are eligible for Cenvat if these are cleared along with the final product - Rule 2(k)(i) of Cenvat Credit Rules.

Note that the rules do not require that value of accessories should be included in assessable value of final product.

Even prior to the specific definition, in CCE v. Lipi Data Systems - 1995 (80) ELT 542 (CEGAT - 5 member bench order), it was decided that items which are normally provided with the final product ready for delivery at the factory gate would qualify for Cenvat credit as if they are ‘used in or in relation to manufacture’. As per section 2(f) of CEA, any process incidental or ancillary to the completion of manufactured product is covered. Hence, in this case, it was decided that ribbon fitted in the printer manufactured and supplied by assessee will qualify as input for Cenvat purposes.

In Bajaj Auto Ltd. v. CCE - 1996(88) ELT 355 (CEGAT 3 member bench), it was held that jack assemblies and tool kits supplied along with motor vehicles are 'input' for purposes of Cenvat – contrary view in CCE v. Bajaj Tempo Ltd. 2005 (1) STT 242 (CESTAT) * CCE v. Telco 2006 (196) ELT 308 (CESTAT).

Canvas canopy fixed on chassis for protecting drivers is eligible as value included in assessable value - Tata Motors v. CCE (2010) 252 ELT 265 (CESTAT).

First Aid kit/box is essential accessory of motor vehicle and it is eligible for Cenvat credit, as value is included in price of motor vehicle – Bajaj Tempo v. CCE (2007) 207 ELT 600 (CESTAT SMB).

Spanner supplied with motor vehicle is ‘input’ - Bajaj Tempo v. CCE (2008) 230 ELT 506 (CESTAT SMB).

Tubes and flaps supplied with tyre are eligible when its price is included in assessable value, as tube and flap are accessories – Balakrishna Industries v. CCE (2007) 217 ELT 228 (CESTAT) [In this case, tube and flap was bought out. It was held that tube is part of tyre and flap is accessory].

In CC v. Maruti Udyog Ltd. 1999(107) ELT 118 (CEGAT), it was held that clock assembly, audio system and radio used in manufacture of deluxe model of motor car is eligible input under rule 57A.

Dropper supplied paediatric drops is an attachable component of the bottle. Its value is included in Maximum Retail price of the drug. Hence, Cenvat credit on duty paid on dropper is admissible - Heal Well Pharmaceuticals v. CCE 1994 (72) ELT 446 (CEGAT). This decision has been overruled by Bombay High Court on 10-6-2009 on basis of its own decision in case of Okasa. [251 ELT A89]

In Eveready Industries v. CCE 2005 (184) ELT 90 (CESTAT), it was held that if battery cells were cleared along with torches, Cenvat credit of duty paid on batteries is allowable as credit, if its value is includible in assessable value of final product (Actually, the rules do not say that its value should have been included in value of final products).

In Telco v. CCE 2001(131) ELT 420 (CEGAT), it was held that extra wheel, extra wheel rim and hydraulic jack supplied along with truck chassis are eligible for Cenvat credit.

Duty paid on first aid box compulsorily supplied with vehicle as per Motor Vehicles Rules and its value included is eligible for Cenvat credit – Bajaj Tempo v. CCE 2005 (186) ELT 447 (CESTAT) (prima facie view held and stay granted).

Floor mats specifically designed for use in particular type of motor vehicles and normally supplied with it are eligible for Cenvat credit - CCE v. Swaraj Mazda - 1993 (68) ELT 258 (CEGAT).

In R K Herbals v. CCE 2004 (167) ELT 448 (CESTAT), assessee was supplying bowl and spoon along with his herbal powder. These were necessary for effective use of the powder. It was held that Cenvat credit is allowable – relying on CCE v. Akhil Pharma 2001(127) ELT 755 (CEGAT), where it was held that if spoon is supplied with main item, Cenvat is allowable.

In Shriram Pistons v. CCE 2004 (164) ELT 289 (CESTAT), assessee was importing piston rings. These were tested to match size and other specifications of rings manufactured by assessee and were supplies as a set. It was held that this is ‘manufacture’ as new and different article emerges. Hence, assessee will be eligible to avail Cenvat of CVD paid on imported piston rings. Even if the process does not amount to manufacture, assessee will be entitled to Cenvat as accessory supplied with main product.

Items supplied along with main product eligible - Sometimes, two or more items are supplied together e.g. dropper is supplied along with the bottle of eye drop. In such case, Cenvat is available on all the items supplied together - Heal Well Pharmaceuticals v. CCE - 1994 (72) ELT 446 (CEGAT) - followed in CCE v. Rallis India Ltd. 1997(93) ELT 435 (CEGAT) * CCE v. Okasa 2001(132) ELT 379 (CEGAT) – confirmed in CCE v. Okasa Ltd. (2009) 241 ELT 359 (Bom HC DB).

In Syndet India v. CCE 2004 (166) ELT 349 (CESTAT), assessee bought unpacked bars and packed them after putting them inside packing of detergent powder manufactured by him. He took Cenvat credit of unpacked bar purchased by him and utilised it for payment of duty on packed bars. It was held that assessee is not required to reverse Cenvat credit, as payment of duty on final product has taken care of recovery.

Transformer oil - CBE&C has clarified, vide circular No 344/60/97-CX dated 22-10-1997, that transformer oil is vital for functioning of transformer. If cost of transformer oil is included in value of final products and is contained in the transformers at the time of clearance, Cenvat credit on transformer oil is eligible. - parallel TN 138/97 dated 17-11-1997 of Pune Commissionerate. In Crompton Greaves v. CCE 2004 (167) ELT 72 (CESTAT), it was held that Cenvat is allowable even if transformer oil is sent separately in drums, as long as it is used in transformer at site.

Cenvat credit on transformer oil is allowable as without power, manufacturing activity cannot be carried out – CCE v. Madras Aluminium (2008) 226 ELT 342 (Mad HC DB).

1.4-2 Cenvat on Paints

Paints used in factory are eligible.

Paints used to protect plant are eligible as input – Ruchi Health Foods v. CCE (2007) 218 ELT 716 (CESTAT).

Paint used for painting machinery and pipelines for their upkeep and maintenance is eligible input – CCE v. Nagarjuna Agrichem (2003) 160 ELT 572 (CEGAT) * U G Sugar v. CCE (2011) 272 ELT 383 (CESTAT SMB).

Paint used for production hall floor to ensure dust free floor for smooth movement of materials is ‘input’ and is eligible – Harsha Engineers v. CCE (2011) 30 STT 160 = 263 ELT 628 (CESTAT SMB)

However, in Associated Cement Co Ltd. v. CCE 1999(108) ELT 477 (CEGAT), it was held that paint used for protection of equipment or maintenance of equipment is not eligible [seems borderline case].

1.4-3 Cenvat available on packaging material

Cenvat is available on packing material as per definition of input contained in Rule 2(k)(i) of Cenvat Credit Rules.

Earlier rule 57B(1)(v) specified 'packing materials and materials from which such packing material are made, provided the cost of such packing materials is included in value of final products' as input. New rule 2(g) only specifies 'packing material'. However, it has been confirmed that raw material for packing material will also be eligible as input - Chapter 5 Para 3.3 of CBE&C’s CE Manual, 2001 - earlier MFDR circular No. 345/2/2000-TRU dated 29-8-2000.

All packing is eligible - In Hindustan Lever Ltd. v. CCE - 1994 (70) ELT 595 (CEGAT), cellophane tapes used for packing material has been held as eligible. In Pearl Soap v. CCE - 1996 (88) ELT 486 (CEGAT SMB), adhesive tape used for packing the product are held as eligible. In CCE v. Black Diamond Beverages Ltd. 1997(91) ELT 422 = 14 RLT 855 (CEGAT), it was held that 'packaging material' includes containers of all types - whether with lids or without lids. The plastic crates used for storage and handling of final products are also eligible - followed in Delhi Bottling Co. v. CCE 1999(105) ELT 42 (CEGAT), where it was held that of packing material is eligible even when its cost is included in AV on instalment basis.

In CCE v. Paras Pharmaceuticals P Ltd. 1999(108) ELT 580 (CEGAT), it was held that since rules do not define 'packaging material', any article used for packing will be eligible. In this case, suitcases used as secondary packing for packing goods was held as eligible.

Cenvat credit on secondary packing is available as it preserves quality of product - UOI v. Kwality Biscuits Ltd. (2011) 272 ELT 364 (Karn HC DB).

Cones and tubes for holding yarn is packing material – Cones and tubes used for holding yarn is ‘packing material’ – Udaipur Distillery v. Rajasthan Tax Tribunal (2003) 132 STC 489 (Raj HC) – quoted and followed in Hindustan Paper Products v. CTO (2004) 135 STC 373 (TNTST).

Cenvat on secondary packing available when valuation is on MRP basis even if packing cost charged separately - Packing cost is deemed to be included in MRP, as statutory definition of MRP includes such cost. Hence, charges for packing collected separately, but not in addition to retail price, are deemed to be included in MRP. Assessee can avail Cenvat credit on packing material used, whether primary or secondary. – Eveready Industries v. CCE 2002(142) ELT 432 (CEGAT) – followed in CCE v. Consupac (2009) 233 ELT 377 (CESTAT) [In this case, actually, packing cost was not charged separately].

Cenvat credit on packing material even if tariff value is fixed - Cenvat credit is available even when tariff value is fixed, since the value is to be taken as inclusive of all elements that go into making of finished goods – CCE v. Blue Blend 2007 (207) ELT 286 (CESTAT) * CCE v. Mahalaxmi Synthetics (2007) 215 ELT 412 (CESTAT SMB) * CCE v. Parasrampuria Inds Ltd. (2008) 232 ELT 340 (CESTAT) * CCE v. Valson Synthetics (2008) 229 ELT 155 (CESTAT SMB).

Packaging material as well as materials for such packaging material is eligible - Cenvat credit is available in case of packing material as well as materials from which such packing material is made e.g. - A manufacturer packs his products in plastic containers. If plastic granules are purchased and plastic containers are made out of the plastic granules, the manufacture will be eligible to avail Cenvat credit of duty paid on plastic granules, if the plastic containers are used in the manufacture of final product. The reason is (a) Use of inputs may be direct or indirect (b) Manufacture includes all processes incidental or ancillary. Thus, packing is a process incidental or ancillary to main manufacturing process (c) All inputs required to make the final product marketable are eligible for Cenvat credit.

In Parle Biscuits v. CCE 1994(74) ELT 603 (CEGAT), Rasoi Ltd. v. CCE 1990(49) ELT 522 (CEGAT), CCE v. Venlon Polyster Films 2000(117) ELT 748 (CEGAT) etc. it has been held that 'packing material' includes even material used to make such packages. In CCE v. Wipro Ltd. 2000(120) ELT 356 (CEGAT), it was held that tin plates used to make tin container which in turn used for packing final product are eligible for Cenvat credit.

Printing/marking of packing material - In CCE v. Sterlite Industries Ltd. - 1994 (74) ELT 712 (CEGAT), Tribunal allowed Cenvat credit on paints used in marking on drums of wires and cables as per customers request. In Multilayer Composites (P) Ltd. v. CCE - 1993 (65) ELT 565 = 46 ECR 436 (CEGAT), printing ink used on printed plastic film is eligible for Cenvat - followed in CCE v. Shree Nijrang 1999(113) ELT 520 (CEGAT), where printing ink used for printing name of buyer on bags was held as eligible input.

Cenvat on durable and returnable packing material - Cenvat credit is available on durable and returnable packing also, as definition of 'input' merely states that it includes packing material. In CCE v. Chennai Bottling 2001(133) ELT 657 (CEGAT), it was held that since proportionate cost of durable containers is included in assessable value of final products, they are eligible for Cenvat credit. [relying on earlier judgments in case of Black Diamond Beverages]. – similar view in CCE v. Kandhari Beverages (2002) 48 RLT 919 (CEGAT).

In Delhi Bottling Co. v. CCE 1999(105) ELT 42 (CEGAT), it was held that of packing material is eligible even when its cost is included in Assessable Value on installment basis – same view in CCE v. Dhillon Kool Drinks (2008) 229 ELT 193 (P&H HC DB).

In Indian Oil Corporation v. State of Punjab (2009) 24 VST 220 (P&H HC DB), it was held that gas cylinder is an input used for ‘processing goods for sale’ by oil companies. Oil companies are entitled to input tax credit [decision under Vat, but principle applies to excise also].

Container/bags used for transporting material - Container/bags used for transporting material is not eligible, as it is not actually used as packing material – Ponni Sugars v. CCE (2009) 18 STT 57 (CESTAT).

Cenvat credit of packing material used in depot – Since duty is payable on ex-depot price, Cenvat credit will be available for packing material used at depot – Hawkins Cooker v. CCE (2008) 225 ELT 305 (CESTAT SMB).

1.4-4 Lubricating oils, greases, cutting oils, coolants

Lubricating oils, greases, cutting oils, coolants are included in second part of the definition of ‘input’. Hence, they can be used for ‘any purpose’. In Sudarshan Spinning Mills v. CCE (2006) 195 ELT 290 (CESTAT SMB), it was held that credit of duty paid on lubricating oil in machinery is eligible even if the machinery is partly used for manufacture of exempted final products.

Input goods in respect of service providers

1.5 Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted way.

As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’.

Petrol, LDO, motor vehicles etc. not ‘input’- Motor vehicle is not input for service providers. However, it is eligible as capital goods in certain cases [see under ‘Capital Goods’]. Petrol, LDO and HSD is also not eligible as ‘input’.

Only goods directly used will be eligible in case of service providers – Definition of ‘input’ of goods in respect service provider is restrictive. In case of definition of ‘input’ in respect of manufacturer, the words used are ‘in or in relation to manufacture’, ‘whether directly or indirectly’, and ‘whether contained in the final product or not’. In case of ‘input service’ the words used are ‘in relation to providing an output service’. As we have seen, the words ‘in relation’ are broad and expansive and not restrictive. However, in case of input goods for service providers, the words used are ‘used for providing output service’. Thus, only those goods (except of course LDO, HSD and petrol) used directly for providing output service will be eligible for Cenvat credit.

In Mundra Port & SEZ Ltd. v. CCE (2009) 18 STT 314 = 33 VST 107 (CESTAT), it was held that cement and steel used for construction of jetty is not ‘input’ for providing taxable port service.

In HCL Technologies v. CCE (2010) 254 ELT 175 (CESTAT), a prima facie view was held that ‘input’ would cover only those goods which get consumed or transferred to service provider. It will not include ‘capital goods’ [Issue is arguable. The term used is ‘for providing any output service’. There seems no justification in restricting those words on basis of dictionary meaning of ‘input’].

Machinery, equipment etc. supplied during course of providing service of ‘supply of tangible goods for use’ is eligible as ‘input’ - Machinery, equipment, appliance, vehicles, aircrafts, vessels etc. supplied during course of providing taxable service of ‘supply of tangible goods for use’ is ‘input’ for providing the taxable service. Hence, excise duty/CVD paid on such machinery, equipment, appliance, vehicles, aircrafts, vessels etc. will be eligible for Cenvat credit. This clarification applies only in respect of service of ‘supply of tangible goods for use’ – CBE&C letter F No. 137/120/2008-CX.4 dated 23-10-2008 [20 STT 15 (ST)].

Assessable Value need not be inclusive of value of material - Note that it is not a requirement that value of material should have been included in ‘value’ on which service tax is paid/payable.

Receipt of input in premises of service provider not required – There is no requirement that inputs should be received in the premises of service provider.

Value of input need not have been included in taxable value – The rules do not provide that duty paid on input will be eligible only if its value is included in the value of service charged to customer. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service, whether or not its value is included in taxable service. However, these should be used ‘for providing output services.

As per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials sold by him while providing output services. That notification very clearly provides that if Cenvat on input is availed, the exemption under Notification No. 12/2003-ST shall not apply. Hence, if assessee has taken credit, he should reverse the same before sale of such goods to recipient of service, if he is paying service tax only on value of services and not on value of goods.

Steel structurals, pipes, plates - In some Tribunal decisions, steel structurals etc. were held as eligible for Cenvat credit. However Explanation 2 to definition of ‘input’ reads as follows .- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods [The words in italics have been inserted w.e.f. 7-7-2009].

* * * * *

Central Excise primer	Customs Law primer	Income Tax primer	Central Sales Tax primer
Labour Laws primer	Economic Laws primer	Corporate Laws primer	Service Tax primer
General Laws primer	Students Special	Some useful sites	Mr Datey's Books

Central Excise primer	Customs Law primer	Income Tax primer	Central Sales Tax primer
Labour Laws primer	Economic Laws primer	Corporate Laws primer	Service Tax primer
General Laws primer	Students Special	Some useful sites	Mr Datey's Books