'Input' Not 'Capital Good' under Cenvat Rules: CESTAT Upholds CENVAT Credit on Dredger [Read Order]

The Hyderabad bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed an appeal, holding that a dredger used for providing taxable services is to be classified as an 'input' and not a 'capital good' under the Cenvat Credit Rules, 2004.

The asseessee, M/s Dredging Corporation of India, a Public Sector Undertaking, which had filed an appeal against the Order-in-Original dated 07.01.2016. The appeal challenged the disallowance of CENVAT credit amounting to over Rs. 33 crore paid on the import of a 'Self Propelled Trailer Suction Hopper Dredger'.

The core issue was the classification of the dredger for the purpose of availing credit. The department, upheld by the adjudicating authority, rejected the claim, arguing that the dredger was a capital asset and therefore did not fall within the definition of 'inputs' under Rule 2(k) of the Cenvat Credit Rules. They contended that even if not explicitly listed, it should be treated as a 'capital good' and thus excluded.

The appellant's counsel argued that the dredger was used directly in providing the output service of dredging, bringing it squarely within the definition of 'input' under Rule 2(k)(iv). They contended that the term 'capital goods' used in the exclusion clause of the same rule must be interpreted strictly and consistently with its specific definition under Rule 2(a) of the very same Cenvat Rules.

Since the dredger was not explicitly covered under the definition of 'capital goods' in Rule 2(a), it could not be treated as one for the purpose of exclusion. They relied on several Supreme Court decisions to argue that the definition from another statute, like the Income Tax Act, could not be applied mechanically.

The department's Authorized Representative maintained that since the dredger was treated as a capital asset for depreciation under the Income Tax Act, it should be considered a capital good for Cenvat purposes, irrespective of the specific wording of the rules.

The CESTAT bench, comprising Mr. A.K. Jyotishi (Technical Member) and Mr. Angad Prasad (Judicial Member), sided with the appellant. The tribunal agreed with the principle of strict interpretation of taxing statutes, emphasizing that the term 'capital goods' in Rule 2(k) must be understood in the context of the Cenvat Rules.

It held that it would be an absurdity to treat the dredger as not a capital good under Rule 2(a) but then treat it as one for the exclusion clause under Rule 2(k). The tribunal found that the appellant's treatment of the dredger for income tax purposes was immaterial to the Cenvat credit eligibility.

On the department's cross-appeal against the dropping of penalties, the tribunal dismissed it, noting that the credit was availed based on a misinterpretation of law, not any malafide intent or suppression of facts, especially considering the appellant is a PSU. Accordingly, the CESTAT allowed the Dredging Corporation's appeal, setting aside the order that disallowed the credit and dismissed the department's appeal on penalty.

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