CESTAT Hyderabad Upholds CENVAT Credit on Factory Setup Services in Lupin Ltd. Case
Background and Context
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, delivered a significant ruling in the matter of Lupin Ltd. Vs Pr. Commissioner of Central Tax, partly allowing the appeal filed by Lupin Ltd. against an Order-in-Original dated 25.06.2020. The original order had confirmed multiple demands of Central Excise duty and CENVAT credit, along with interest and penalties, all stemming from a Show Cause Notice dated 06.03.2019.
The case arose because Lupin Ltd., a manufacturer of bulk drugs classified under Chapter 29 of the Central Excise Tariff Act, 1985, had been availing CENVAT credit on capital goods, inputs, and input services employed directly or indirectly in the manufacture of its final products. The Revenue raised objections across several distinct categories of credit claims, leading to the comprehensive adjudication by the Tribunal.
Key Disputes Before the Tribunal
The Tribunal addressed five separate issues raised under the Show Cause Notice:
- CENVAT credit of ₹2,34,58,942 on input services availed during the factory setup phase, prior to commencement of commercial production
- CENVAT credit of ₹8,40,735 on common infrastructure services including maintenance of roads, street lights, and drainage
- CENVAT credit of ₹14,55,256 on goods such as SS stools, SS buckets, SS containers, drum racks, HDGI cable tray ladders, fire extinguishers, glass fittings, and similar articles
- Differential duty of ₹2,66,731 on clearances to a related unit based on alleged non-adoption of 110% of CAS-4 value
- Recovery of ₹6,48,171 as the allegedly unappropriated portion of a total credit reversal of ₹15,01,222
Additionally, the assessee challenged the invocation of the extended period of limitation, the levy of interest, and the imposition of penalties.
Issue 1: CENVAT Credit on Pre-Production Factory Setup Services — ₹2,34,58,942
The Revenue's Position
The Commissioner had denied CENVAT credit on the ground that the services in question were received before commercial production commenced in August 2016, and that the expression "setting up" had been deleted from the inclusive portion of Rule 2(l) of the Cenvat Credit Rules, 2004 with effect from 01.04.2011. According to the Revenue, this deletion categorically excluded services connected with factory establishment.
The Tribunal's Reasoning
The Tribunal firmly rejected this line of reasoning. It held that deletion of the words "setting up" from the inclusive limb of the definition under Rule 2(l) does not, by itself, render inadmissible every service associated with the creation of a manufacturing facility. The substantive or "means" portion of Rule 2(l) remained intact and continued to cover services used by the manufacturer, directly or indirectly, in or in relation to the manufacture of final products.
The Tribunal articulated an important logical premise: a factory cannot manufacture its final products unless the manufacturing facility is first brought into existence and made functional. Consequently, where services bear a direct and demonstrable nexus with the creation or installation of the manufacturing facility, they satisfy the substantive definitional requirement under Rule 2(l), unless specifically covered by the exclusion clause.
Precedents Relied Upon
The Tribunal drew support from:
- Pepsico India Holdings Pvt Ltd., Vs Commissioner of Central Tax, GST-Commissionerate, Tirupati [2022 (56) GSTL 22 (Tri-Hyd)] — wherein it was held that services used for setting up a factory can qualify as input services even after 01.04.2011, if they fall within the main part of the definition under
Rule 2(l) - Mangalam Cement Ltd., Vs Commissioner of Central Goods, Excise and Service Tax, Udaipur [2024 (24) Centax 38 (Tri-Del)] — which adopted a similar view on the eligibility of services connected with setting up a manufacturing facility
Outcome
The demand of ₹2,34,58,942 under this head was set aside in its entirety.
Issue 2: Credit on Common Infrastructure Services — ₹8,40,735
The Revenue's Position
Credit was denied on services relating to maintenance of common roads, street lights, rainwater drainage, and allied infrastructure, primarily because these facilities were situated outside the registered factory premises. The Revenue took the position that physical location outside the factory boundary made such services ineligible.