CENVAT Credit Allowed on Capital Goods Used in Works Contract Installation: CESTAT Kolkata Ruling Explained

Background and Context

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Larsen & Toubro Limited. Vs Commissioner of Central Excise (CESTAT Kolkata) dealt with an important dispute on eligibility of CENVAT credit on capital goods where:

  • The capital goods were purchased by a manufacturer under independent sale contracts;
  • These goods were later handed over to a works contractor for erection, installation and commissioning; and
  • The works contractor discharged service tax on a composition basis under “works contract service” without availing CENVAT credit on inputs.

The core controversy was whether the manufacturer (in this case, M/s. Tata Steel Limited) could legitimately claim CENVAT credit on such capital goods when the installation activity was performed by a service provider operating under the Composition Scheme.

This decision is important for assessees undertaking large infrastructure or plant expansion projects, where capital goods are frequently installed through turnkey or works contracts.

Key Facts of the Case

Business operations and project structure

  • M/s. Tata Steel Limited (“Tata”) is engaged in the manufacture of sized iron ore concentrate and iron ore fines.
  • To cater to enhanced iron ore requirements of its integrated steel plant at Jamshedpur, Tata implemented a new material handling system with wagon loading facilities at its Noamundi Iron Ore Mines.
  • The new system was intended to efficiently receive, handle and load iron ore on railway wagons at the siding for onward transport to the Jamshedpur plant.

To implement this large project, Tata entered into multiple contracts, which broadly covered:

  • Supply of indigenous designs and drawings for the material handling system;
  • Design, manufacture and supply of indigenous plant, machinery, equipment and auxiliaries;
  • Activities like receipt, unloading, storage and material handling at site;
  • Preservation, erection, testing and commissioning of the system; and
  • Civil and structural steel works related to the project.

Role of Larsen & Toubro and capital goods supply

Pursuant to these arrangements:

  • Tata issued purchase orders to M/s. Larsen & Toubro Limited (“L&T”) for supply of equipment, plant and machinery qualifying as “capital goods” for Tata.
  • These goods were:
    • Either manufactured by L&T and supplied directly to Tata; or
    • Procured by L&T from third-party manufacturers and dispatched directly to Tata’s premises.

Upon receipt:

  • Ownership of the capital goods passed to Tata at its warehouse or factory;
  • Tata recorded these goods as its capital assets; and
  • Tata availed CENVAT credit treating them as capital goods in its factory.

Handing over for installation and service tax payment

During the implementation phase:

  • Tata issued these capital goods to L&T on requisition for the limited purpose of erection, installation and commissioning in Tata’s premises;
  • L&T treated its activity as “works contract service” and opted for payment of service tax under the Composition Scheme, by consolidating the consideration under all linked contracts;
  • Critically, under the Composition Scheme:
    • L&T did not avail any CENVAT credit on inputs or goods supplied under the contracts;
  • On Tata’s side:
    • Tata took full CENVAT credit of the service tax charged by L&T on the works contract; and
    • Tata also took CENVAT credit on the capital goods received under the purchase (sale) contracts;
    • However, Tata did not take any CENVAT credit on goods that were directly used or consumed by L&T in executing the works contract (other than the capital goods already owned by Tata).

Thus, at no point did both parties avail credit on the same duty component, and the capital goods remained in Tata’s ownership throughout.

Departmental Action and Allegations

Investigation and Show Cause Notice

  • In October 2010, Revenue officers visited Tata’s premises, examined records, and recorded statements relating to the project and CENVAT credit availment.
  • After investigation, a Show Cause Notice (SCN) was issued proposing denial of CENVAT credit on the capital goods supplied by L&T under the purchase orders.

The Department’s core allegation was: