Revisiting CENVAT Credit on Inputs under Indian Indirect Tax Jurisprudence

Revisiting CENVAT Credit on Inputs under Indian Indirect Tax Jurisprudence

1. Introduction

The CENVAT credit mechanism, introduced to mitigate the cascading effect of indirect taxes, occupies a central position in India’s erstwhile central excise regime. While the advent of the Goods and Services Tax (GST) in 2017 has revamped indirect taxation, questions concerning the proper understanding of “inputs” under the CENVAT Credit Rules, 2004 (CCR 2004) continue to arise in pending litigation and transitional disputes. This article undertakes a doctrinal and jurisprudential analysis of CENVAT credit on inputs, synthesising key statutory provisions with leading judicial pronouncements such as Eicher Motors[4], Maruti Suzuki[5], Ultratech Cement[6] and subsequent appellate decisions, in order to delineate the contours of eligibility, restrictions and procedural compliance.

2. Legislative Framework

2.1 Statutory Basis

Section 37 of the Central Excise Act, 1944 empowers the Central Government to frame rules for carrying out the Act, pursuant to which the CENVAT Credit Rules were promulgated in 2002 and re-enacted in 2004[1]. Rule 3 of CCR 2004 constitutes the enabling provision, allowing a manufacturer or service provider to “take credit… of any duty of excise … paid on any input or capital goods received in the factory”[3].

2.2 Definition of “Input”

Rule 2(k) of CCR 2004 defines “input” in three limbs:

  • Specific limb: “all goods except light diesel oil, high speed diesel oil, motor spirit and motor vehicles, used in or in relation to manufacture…”
  • Inclusive limb: expressly includes goods used in the manufacture of capital goods, et cetera.
  • Place-of-use limb: contemplates usage “whether directly or indirectly” and “whether contained in the final product or not”.

The breadth of the provision reflects the legislative intent to facilitate seamless tax credit across the value chain, subject only to explicit exclusions (e.g., petroleum products) or later amendments (e.g., cement and steel used for civil structures, excluded w.e.f. 7-7-2009).

3. Doctrinal Underpinnings

3.1 Vested Rights and Certainty

In Eicher Motors Ltd. v. Union of India the Supreme Court held that MODVAT (now CENVAT) credit constitutes a vested right which cannot be divested absent clear statutory authority[4]. The ruling underscores the constitutional premium placed on certainty and non-retroactivity in fiscal legislation.

3.2 Functional Nexus Test

The Supreme Court in Maruti Suzuki Ltd. v. CCE crystallised the “functional nexus” doctrine, requiring that the input be used in or in relation to manufacture, directly or indirectly, within the factory[5]. The decision emphasised that the inclusive limb cannot be read disjunctively; the test of nexus remains paramount.

4. Judicial Construction of “Input” Eligibility

4.1 Goods Used Beyond the Factory Gate

The Tribunal in CCE, Nagpur v. Ultratech Cement Ltd. allowed credit on services utilised outside the factory, holding that denial solely on geographical location lacks statutory support[6]. Although the case concerned “input service”, its reasoning—eschewing a purely spatial test—has been invoked mutatis mutandis for inputs such as packing materials dispatched to depots (Stumpp Schuele & Somappa[11]).

4.2 Inputs Used Up to the Place of Removal

High Courts have differed on whether goods consumed after clearance but before export qualify for credit. While Sai Sahmita Storages accepted CHA and transportation services up to the port as eligible inputs/services for exporters[7], the Tribunal in Nitin Castings rejected credit on similar services, citing CBEC Circular 97/6/07-ST[15]. The divergence turns on the interpretation of “place of removal” in Section 4(3)(c) of the Excise Act.

4.3 Construction Materials: Cement and Steel

Prior to the 2009 amendment, cement and steel used in construction of jetties or plant buildings enjoyed a liberal credit regime. The CESTAT in Shreeji Shipping permitted credit on these items for port services on the ground that the exclusion inserted in 2009 “would apply only to manufacturers, not service providers”[8]. Conversely, post-2009 disputes often culminate in disallowance unless the assessee establishes utilisation as capital goods within the factory (e.g., Maan Steel & Power[24]).

4.4 Common Inputs and Rule 6 Reversals

Where inputs are used for both dutiable and exempted outputs, Rule 6 mandates proportionate reversal or maintenance of separate accounts. In Thyssenkrupp Industries, the Tribunal confined the credit base to the actual common inputs of ₹2.07 crore, rejecting the Department’s inclusion of credits exclusively relatable to dutiable products[18]. The decision affirms a principle of proportionality and factual specificity.

4.5 Evidence and Documentation

Rule 9 of CCR 2004 requires proper invoices and duty-paying documents. Absence of a Chartered Engineer’s certificate led to denial of credit on welding electrodes and paints in Maan Steel; nevertheless, appellate fora have reversed such disallowance where judicial precedent recognises the items as inputs[24]. The tension illustrates the interplay between substantive eligibility and procedural compliance.

5. Interface with Input Service Jurisprudence

Although the present inquiry centres on “inputs”, modern factories seldom demarcate rigid boundaries between goods and services. Decisions such as Bharti Airtel[12] and ABB Ltd.[13] interpret Rule 3 to permit cross-utilisation of goods credit against service tax and vice versa, bolstering the seamless-credit objective. The jurisprudential trend is therefore integrative rather than siloed.

6. Continuing Relevance Post-GST

With the subsumption of central excise on most goods into GST, CENVAT survives for (i) tobacco and petroleum products, (ii) transitional credit, and (iii) legacy disputes. The principles distilled above retain salience in:

  • resolution of show-cause notices covering pre-2017 periods,
  • Section 140 GST Act transitional credit litigation, and
  • interpretation of analogous concepts (e.g., “input tax credit”) under GST.

7. Conclusion

The jurisprudence on CENVAT credit for inputs reveals a consistent endeavour by courts and tribunals to balance revenue considerations with the foundational VAT principle of tax neutrality. Key takeaways include:

  1. Credit is a vested right; legislative amendments alone can curtail it (Eicher Motors).
  2. The functional nexus test remains the touchstone of eligibility (Maruti Suzuki).
  3. Spatial or procedural objections cannot override substantive entitlement unless expressly provided (Ultratech Cement).
  4. Proportionality governs reversal under Rule 6; over-inclusive computation is impermissible (Thyssenkrupp).

As legacy disputes wend their way through appellate fora, practitioners must meticulously evaluate both the statutory text and the evolving case-law matrix to safeguard credit or defend revenue interests.

Footnotes

  1. Central Excise Act, 1944, s. 37.
  2. CENVAT Credit Rules, 2004, r. 2(k).
  3. CENVAT Credit Rules, 2004, r. 3.
  4. Eicher Motors Ltd. and Anr. v. Union of India, (1999) 2 SCC 361.
  5. Maruti Suzuki India Ltd. v. CCE, (2009) 9 SCC 193.
  6. CCE, Nagpur v. Ultratech Cement Ltd., 2010 SCC OnLine CESTAT 1550.
  7. CCE, Visakhapatnam-II v. Sai Sahmita Storages (P) Ltd., 2011 (270) ELT 33 (AP).
  8. Shreeji Shipping v. CCE, Rajkot, 2023 SCC OnLine CESTAT (Ahmedabad).
  9. CCE, Pune v. Dai Ichi Karkaria Ltd., CESTAT, 2008.
  10. CCE, Indore v. Grasim Industries Ltd., (2009) 14 SCC 596.
  11. CCE Bangalore-I v. Stumpp Schuele & Somappa Ltd., 2016 SCC OnLine CESTAT 4413.
  12. Bharti Airtel Ltd. v. CCE, Pune III, Supreme Court, 2024.
  13. Commissioner v. ABB Ltd., 2011 SCC OnLine Kar 1623.
  14. Unique Pharmaceuticals Laboratories v. CCE, 2018 SCC OnLine CESTAT 12814.
  15. Nitin Castings Ltd. v. CCE, Thane-I, 2023 SCC OnLine CESTAT.
  16. Maan Steel & Power Ltd. v. CCE, Bolpur, 2019 SCC OnLine CESTAT.
  17. Forbes Marshall Pvt. Ltd. v. CCE, 2012 ELT 285 (CESTAT-Mumbai).
  18. Thyssenkrupp Industries (I) Pvt. Ltd. v. CCE, Pune, 2014 ELT 310.