Prepared By: -
CA Pradeep Jain ,
Sukhvinder Kaur, LLB [FYIC]
CA Ridhi Anchalia
This is most interesting remark we got on our article "Amendment on Cenvat on building material: Far from solutions" after the pronouncement of Larger Bench decision in case of Vandana Global Limited [2010-TIOL-624-CESTAT-DEL-LB]. In the aforesaid piece prepared by me along with Sukhvinder Kaur and Neetu Sukhwani, we have opined that after the amendment in the definition of "inputs", the earlier cases will be decided in favour of manufacturers as the amendment is prospective and not retrospective. But our conclusion was wrong and Larger bench of Delhi Tribunal has given the decision in favour of Revenue. Then comes this interesting Comment. Comments from Readers of our website are always source of our inspiration. This remark has also prompted us to write this second piece on this subject in light of the latest larger bench decision.
Dispute involved: -
Always litigation arises when there are two ways of seeing the same thing. To this dispute also, the assessee and the revenue were walking on the two shores of the sea that never meet. To have a clear idea on the issue, we are discussing the issue in depth.
Before the recent amendment in Explanation 2 of the Rule 2 (k) the assessee was claiming credit on Cement and steel items as inputs used in the manufacture of capital goods. To this the argument by the assessee was that the said items were being used indirectly in relation to the manufacture of finished goods and whatever is used in the manufacture of final product will be available for Cenvat credit.
But the Revenue had its own contentions. According to them cement and steel are construction material and not inputs as they were not parts or components or accessories of capital goods.
So the revenue and the assessee both had their own contentions that is both were thinking of the cement and steel but an assessee will always look on that side of the coin that will allow him to avail Cenvat credit and according to the inbuilt nature of the department it will always see to that side of the coin disallowing the Cenvat credit to the assessee. The amendments in between always act as an antidote to the flames.
Legal Provisions: -
The Explanation 2 to Rule 2 (k) before the amendment read as under: -
Explanation 2 - Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;
Thus the word used in the definition was "goods" used in the manufacture of capital goods. The word GOODS in the definition made the definition inclusive that is the word GOODS had a wide connotation and could include anything including cement and steel items used for constructing the structure or for foundation on which capital goods would be affixed or mounted. This interpretation was given by assessee to take the advantage of the language used in the law. Accordingly, the assessee were claiming cenvat credit on the cement, steel sheets, angles, channels etc as they were used for making capital goods and were indirectly related to the manufacture of the final products. The revenue rejected to accept the inclusive nature of the definition and so it came up with show cause notices issued to the assessee denying the benefit of cenvat credit on the said goods.
There were number of judicial pronouncements on this issue. Some were in favour of manufacturers while others favoured the Revenue. We have already written on the same in earlier article and hence the matter was referred to larger bench.
Amendment in Explanation 2: -
While the matter was referred to larger bench, the department had a different prospect in mind. These decisions were acting as a sword on the intentions of the department. So the department came forward with a new amendment in the Explanation 2 of the Rule 2 (k) of the Cenvat Credit Rules, 2004 to specifically exclude cement, angles, channels, CTD bar 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. This was done by Budget 2009 introduced July 7, 2009. The said Explanation is reproduced hereunder for ready reference: -
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 othet items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods.;
So now what? A new amendment always opens the doors for a new dispute. Same happened with this amendment also. The department now forgot to explain whether the Explanation 2 would be applicable retrospectively or prospectively. So as always happens with the incompleteness in the formation of law a new issue for the applicability of the effect of amendment took birth. Every set of incompleteness in law will be judged by any person according to his benefits. Same happened here also the assessee was of the view that the amended Explanation 2 will have prospective effect and Revenue contended that the said Explanation 2 has made clear things which were already there. Therefore credit would not be admissible even before 2009.The assessee now contended that this amendment only proves that before this amendment credit was available on the angles, channels, joints, cement and steel sheets used the errection, construction or mounting of the capital goods. So a small mistake in the formation of the legal provision leads with a beneficial interpretation for the assessee. Even we were of the same opinion and wrote on the same lines in our aforesaid article. But the outcome of the verdict was known to anybody.
Latest Judgment of Larger Bench: -
The decision of the Larger Bench of the Tribunal in the case of Vandana Global Ltd & Ors v/s CCE, Raipur [2010-TIOL-624-CESTAT-DEL-LB] answered the referred question in favour of Revenue. The Larger Bench gave the findings that intention behind the amendment of Explanation 2 to Rule 2 (k) in 2009 was merely clarificatory in nature. It clarified as to what will be covered under the expression "input" used in the Cenvat Credit Rules, 2004. There was no scope that the said amendment was made to change the scope of the Rules or to introduce any new provision. Reliance was placed on the decision given in the case of J. K. Synthetics Ltd v/s CCE, Jaipur [1996 (88) ELT 785].
Further it was held that the clarificatory amendment made to Explanation2 to Rule 2 (k) in 2009 has retrospective application. It was held that the Explanation Memorandum to the Parliament alongwith the amending notification and the contemporaneous exposition of amendment given to the Department and public clearly showed that the said goods were never intended to be included by the rule making authority under the expression `input' eligible for cenvat credit.
The Larger Bench further held that the phrases `capital assets' and `capital goods' cannot be held to be synonymous. The phrase `capital assets' had wider meaning and would include capital goods and other assets such as immovable property in the form of building etc. Thus, the foundations and supporting structures embedded to earth may be categorized as capital assets but would not qualify to be capital goods in terms of the definition contained in the Cenvat Credit Rules. It was held that foundations and supporting structures were neither machinery items, nor components, spares nor accessories of machineries, nor have they been listed for special inclusion in the definition. They were held not to be part of accessory of the machinery. They were also held to not intermediate goods arising in the process of manufacture of final product.
So in the above decision it was held that cement and steel items could not be considered as inputs and therefore credit would not be available on the same.
Also, this decision made the Division Bench in the case of Bhushan Steel and Strips Ltd v/s Commissioner [2007-TIOL-2306-CESTAT-MUM] to be not correct view in law.
So the Larger Bench of the Tribunal has delivered the judgment on interpretation of the legal provisions. But now what about the assessee? The said judgment has shattered all the expectations of the assessee of availment of credit at least before the amendment in the definition. The above decision made it clear that it is the assessee who is at the disadvantageous place and has to bear the loss of sitting in this place.
But this controversy doesn't end here. There are Higher Forums wherein this judgment will be challenged and until the Apex Court gives any verdict in this regard, the issue is still in swing. The assessee should not loose hope because there are still miles to go before they sleep. So, let us wait for another round of litigation and matter will not end before Apex court. If the matter is settled by the Apex court in favour of manufacturers then we can see one retrospective amendment by Government. So, the future is uncertain for poor assessee.
But we once again should not form any opinion as our reader has clearly and truly said that we are tax experts and not Jyotishi. So, we should refrain from commenting on future course of action. But then what should we write? Only history and no comments. This is a vital question and we think only our readers can guide us in this regard.