Confusion regarding availment of credit on certain items as inputs or capital goods
A netizen sent us the following query regarding this confusion:
Input definition excludes
"(A) ...........................
(B) ...........................
(C) capital goods except when used as parts or components in the manufacture of final product ................"
It means parts or components used in the manufacture of final product are inputs.
What was the need for the inclusion of (C) in the exclusion?
Take the example of an electric motor; depending upon the usage it can be input or capital goods.
If the motor is used as a part or component in the manufacture of capital goods which are the final products of a manufacturing unit, electric motor is considered as input; if it is used in a factory as part of plant it is treated as capital goods.
The distinction we know. Hence even without (C) the purpose is served. Then what could be the purpose of inclusion of (C)?
Is it in lieu of explanation 2 in the definition of input up to the period 31.03.2011?
Kindly have your views in DDT.
In terms of exception clause (C) in the definition of inputs at Rule 2(k) of CENVAT Credit Rules, 2004 ('CCR, 2004'), "capital goods" are excluded from the definition of "inputs" except when used as parts or components in the manufacture of a final product. The illustration provided above i.e. receipt of 'electric motor' in the factory of manufacture aptly brings out the distinction of the item being used as an input or capital goods depending on its end use.
In this connection, it may be noted that in terms of Rule 4(2)(a) of CCR, 2004 only 50% of the duty paid on "capital goods" can be availed as CENVAT Credit in the year of its receipt and the balance 50% can be availed in the financial year subsequent to the year of receipt. There is no such restriction on availment of CENVAT Credit of duty paid on "inputs".
In view of the above restriction on availment of CENVAT Credit of duty paid on capital goods, an exception at clause (C) in Rule 2(k) becomes a necessity to bring out the distinction on certain items which are capable of being used as both "capital goods" and/or "inputs"/"raw materials" in the factory of manufacture, especially in the light of “broad-basing” the definition of input in this year's budget.
At this juncture it is pertinent to refer to latest Board's Instruction No. 267/11/2010-CX, dated 8-7-2010 on the subject which was issued in the backdrop of CESTAT Larger Bench Judgment in Vandana Global Ltd. vs. CCE, Raipur - 2010-TIOL-624-CESTAT-DEL-LB. In para 2 of this Instruction, Board also referred to the judgment of Tribunal in Vikram Cement vs. CCE, Indore - 2009-TIOL-1959-CESTAT-DEL and Vikram Cement vs. CCE, Indore - and clarified at para 3 of the instruction as follows:
It thus follows from the above judgments that credit on capital goods is available only on items, which are excisable goods covered under the definition of ‘capital goods' under CENVAT Credit Rules, 2004 and used in the factory of the manufacturer. As regards ‘inputs', they have to be covered under the definition of ‘input' under the CENVAT Credit Rules, 2004 and used in or integrally connected with the process of actual manufacture of the final product for admissibility of cenvat credit. The credit on inputs used in the manufacture of capital goods , which are further used in the factory of the manufacturer is also available, except for items like cement, angles, channels, CTD or TMT bars and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods. Further, credit shall also not be admissible on inputs used for repair and maintenance of capital goods .
Further in CCE vs. Gujarat Ambuja Cement Ltd - the High Court held that Plates/Rounds, TOR Steel, Channels, Angles, Sheets, Industrial Cables, Fuses, Plugs, Sockets, Electric Machinery used in Hydraulic system Motor Pumps/Electrical Motors by their use are to be covered in the definition of capital goods.
Since credit on certain items solely depends on the usage of those items in the factory of manufacture, Board may consider issuing a comprehensive clarification for the benefit of trade/industry and field formations.