On 9 October, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Chennai set aside the denial of CENVAT credit, interest and penalties against Toshiba JSW Power Systems Private Limited. The bench held that duty-paid capital goods transferred under a works contract remain eligible for CENVAT credit and that the value of such goods falling outside the service tax levy does not attract the bar in the Explanation to Rule 3 of the CENVAT Credit Rules, 2004. It further held that the department could not deny credit merely because the goods became part of an immovable plant.

Toshiba JSW, a manufacturer of turbines, generators, motors and rotary converters, had engaged contractors to design, supply, install, test and commission systems for a new plant at its Manali factory. The work covered heating and ventilation equipment, transformers, electrical works, fire protection systems and industrial water systems. The company issued letters of intent and then separate purchase orders for equipment supply and for installation, testing and commissioning. Contractors procured the goods from manufacturers and dealers, with excise duty-paying invoices naming the contractors as buyers and Toshiba JSW as consignee at its factory. The contractors separately charged service tax for erection and commissioning services.

Relying on those invoices, Toshiba JSW claimed CENVAT credit on the goods as capital goods and on the service tax for erection services. The department denied the claim, treating the contracts as composite engineering, procurement, construction and commissioning contracts. It argued that the contractors had created an immovable, non-excisable plant and that Rule 2A of the Service Tax (Determination of Value) Rules, 2006, read with the Explanation to Rule 3, barred credit. The adjudicating authority confirmed the demand, interest and penalty, and the Commissioner (Appeals) upheld that order.

A credit that survived the works contract label

Before the Tribunal, Toshiba JSW argued that the goods satisfied the capital goods definition in Rule 2(a), had been received at its factory and were used to manufacture dutiable final products. It added that clarification on the excisability of turnkey plants did not decide whether credit could be claimed on duty-paid components used in those plants. The Revenue insisted that the contracts were composite and that separate purchase orders merely facilitated the credit claim.

The Tribunal accepted that the contracts were, in substance, works contracts and that ownership passed to Toshiba JSW, at the latest, when the contractors incorporated the goods into the plant. That did not defeat the credit claim. The goods were covered by duty-paying invoices, received at the factory and used as components of the manufacturing plant. The capital goods provisions, the Tribunal held, did not require the claimant to own the goods at receipt or to install them itself.

The bench also refused to infer a disqualification from the plant's immovable character. “If the immovability of an installed plant defeated credit on its components, capital goods credit would be unavailable for most of the goods for which the definition was framed,” it observed.

Exclusion from the levy is not an exemption

The central dispute turned on the Explanation to Rule 3, which bars credit when goods or services are exempted from service tax. The department said the exclusion of the value of goods in works contracts, reflected in Notification No.12/2003-ST and Rule 2A, operated as an exemption. The Tribunal disagreed. It drew a line between goods whose value lies outside the service tax levy and goods that are exempted from an otherwise applicable levy. The value of goods supplied in a works contract is not charged to service tax at all, making the exclusion a boundary of the levy rather than a concession within it.

The bench stated:

“We hold, on the third issue, that the Explanation to Rule 3 does not bar the appellant's credit for either period. In a works contract the value of the goods transferred lies outside the levy of service tax, and no exemption in respect of it, whether claimed under Notification No.12/2003-ST or said to arise under Rule 2A, can attract the Explanation.”

The distinction matters because the Explanation can strip credit even when the underlying transaction appears to be a service. By holding that a statutory exclusion from service tax is not an exemption, the Tribunal removed the revenue's main textual argument for denying credit on goods embedded in works contracts.

Disclosure defeated the extended limitation period

The Tribunal also rejected the department's use of the extended period of limitation. Toshiba JSW had claimed credit on duty-paying invoices, recorded it in its statutory records and disclosed it in its returns. There was no suppression or misdeclaration, and the extended period was therefore unavailable for reopening the claim.

The practical consequence is direct: manufacturers who receive capital goods through contractors and account for the credit transparently can protect themselves from time-barred demands, even if the revenue later disputes the legal basis of the credit.

The Tribunal allowed both appeals, set aside the impugned order and granted consequential relief. Toshiba JSW now stands absolved of the confirmed demand, interest and penalties, and the ruling confirms that credit eligibility for capital goods is determined by duty-paid receipt and use in manufacture rather than by the label given to the underlying contract.