Expansion Services Not Excluded from Credit: CESTAT Upholds ₹84 Lakh CENVAT Credit for Komatsu [Read Order]

In a recent ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that services used for expanding an existing manufacturing facility are not excluded from the definition of “input service” under the CENVAT Credit Rules, 2004, and allowed the company’s ₹84.08 lakh credit claim.

The appellant, Komatsu India, a manufacturer of dump trucks and hydraulic excavators, had expanded its factory operations between October 2014 and June 2015. During this period, it availed CENVAT credit on services like erection, commissioning, consulting engineering, and manpower supply, used to install machinery in the new wing of its plant.

So, the tax department issued a Show Cause Notice in November 2016, alleging that these services were used for “setting up” a factory, which was excluded from the definition of “input service” post-April 2011. The department demanded recovery of the credit, imposed a ₹5 lakh penalty, and initially sought interest as well.

The appellant argued that the services were directly linked to manufacturing hydraulic excavators and thus qualified as “input services.” also claimed that “expansion” of an existing factory is not the same as “setting up” a new one.

They also cited multiple tribunal decisions and Supreme Court rulings to support their interpretation and asserted that the Show Cause Notice was time-barred, as it was issued beyond the one-year limitation period applicable at the time.

On the other hand department maintained that the services were used before commercial production began and were part of setting up the new facility, and the disputed services were inseparable from civil construction and thus excluded. Also states that the notice was within time and justified under the law.

After hearing both sides te tribunal observed that expansion of an existing factory does not amount to “setting up” a new one. It stated that the main part of Rule 2(l) still covers services used in manufacturing, and the exclusion clause must be strictly interpreted. Since the services were used for installing machinery, not for civil construction, they remained eligible for credit.

The tribunal noted that the one-year limitation applied during the relevant period, and the department had not alleged fraud or suppression. Therefore, the demand was time-barred.

The bench, comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao, relied on precedent and observed that

“We observe that the dispute is purely interpretational relating to scope of Rule 2(l). The Hon’ble Supreme Court in Cosmic Dye Chemical v. CCE – 1995 (75) ELT 721 (SC) held that suppression must be wilful and with intent to evade duty. Similarly, in Padmini Products v. CCE – 1989 (43) ELT 195 (SC), it was held that mere wrong interpretation of law does not amount to suppression of facts and extended period cannot be invoked in cases involving bona fide interpretational disputes.”

Accordingly , the tribunal allowed Komatsu India’s appeal, set aside the impugned order, and restored the CENVAT credit of ₹84.08 lakh.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates