The Central Board of Excise and Customs (CBEC) has issued a useful circular regarding admissibility of Cenvat credit on structural components of boilers. The circular could have wider implications.
At present, the Cenvat Credit Rules, 2004, allow credit of duty paid on all goods used in a factory by the manufacturer of the final product but specifically exclude any for making of structures for support of capital goods (except for provision of specified services). The latest CBEC circular (no. 964/07/2012-CX, dated April 2) says those structural components to be used essentially as a part of a boiler system would be classifiable as parts only under Heading 8402 of the Tariff and since these structural components were nothing but parts and accessories of the Boiler, they would be covered by the definition of inputs under Rule 2(k)(iii) of the Cenvat Credit Rules, 2004 (i.e. all goods for generation of electricity & steam).
Further, these structural components shall not be hit by the exclusion clause to the said definition of inputs, as these are not used for laying of foundation or making of structures for support of capital goods, but are essentially parts of the said boilers, says the circular.
The CBEC says boilers are a combination of various systems such as coal handling, coal feeding, draft air, demineralisation, boiler feed water system, boiler tubes, boiler drums, super heat system, flue gases treatment, ash handling, etc. All these work in tandem to make a modern boiler. These systems comprise many parts, including structural components which are essentially boiler parts by way of technical specifications. Byr Section Note 4 to Section XVI of the first schedule to the Central Excise Tariff Act, 1985, where a machine (including a combination of machines) consists of individual components (whether separate or connected by piping, transmission devices, electric cables or other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole is to be classified in the heading appropriate to that function, says the CBEC.
The circular has wider implications because in the case of many other capital goods and systems, similar arguments can be advanced to claim Cenvat credit for duty paid on structures that support capital goods or systems. In fact, before the recent amendments to the Cenvat Credit Rules, 2004, there were many contradictory judgments on admissibility of Cenvat credit for not only supporting structures but even angles, channels, deform bars, etc.
The larger bench decision of the Customs, Excise and Service Tax Appellate Tribunal in the case of Vandana Global Ltd. [2010 (253) ELT 440 (Tri.-LB)] settled the issue that no credit would be available for such items but a challenge to that decision has been admitted in the Chattisgarh high court.
Last year, the government effectively shut the door to further disputes by amending the Cenvat Credit Rules, 2004, excluding goods for making such such supporting structures but the above circular now opens the door because the reasoning given for admissibility of boiler parts can very well apply to many other machines or systems.