Exemption on Capital Goods Doesn’t Block CENVAT Credit If Final Output Is Dutiable: Supreme Court

In this case, the assessee, engaged in manufacturing boilers and their components, availed Modvat credit on inputs used to produce capital goods within its factory premises. These capital goods were further utilized in the manufacture of excisable final products. The Department objected to the credit, arguing that since the capital goods themselves were exempt from duty, the inputs used to make them could not attract Modvat benefit. A show-cause notice was issued seeking recovery and penalty.

Both the adjudicating authority and the Commissioner (Appeals) confirmed the demand. Still, the CESTAT allowed Lipi Boilers’ appeal, holding that Modvat credit on inputs remains admissible when the resulting capital goods are used within the factory to manufacture dutiable goods.

Issue before SC: Whether Modvat credit under Rule 57Q and 57D of the Central Excise Rules, 1944, is allowable on inputs used in the manufacture of capital goods within the factory, when such capital goods are themselves exempt from excise duty.

SC Decided: When the Revenue filed an appeal to the Supreme Court, it upheld the Tribunal’s reasoning and thereby dismissing the appeal. It noticed that the core purpose of the Modvat scheme is to prevent cascading taxation by allowing credit on inputs used in further manufacturing, including when they go into capital goods used internally. The Court clarified that the exemption of capital goods from duty does not affect the admissibility of input credit, so long as the final output is dutiable.

Relying on Rule 57D(2) of the Central Excise Rules, 1944, the Court reaffirmed that credit cannot be denied merely because an intermediate product is exempt from duty. Thus, the assessee’s entitlement to Modvat credit was upheld, and the orders demanding reversal and penalty were set aside.

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