CESTAT grants ITC CENVAT credit on Air Separation Plant, quashes ₹1.89 crore demand, interest and penalty.

June 12, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has allowed ITC Ltd.’s appeal and set aside a demand of ₹1.89 crore along with interest and penalty that had been imposed over credit availed on machinery, equipment, and inputs used for establishing an Air Separation Plant at its paper manufacturing facility in Telangana. The Tribunal held that ownership of capital goods is not a prerequisite for claiming CENVAT credit and clarified that the immovable nature of an integrated industrial plant does not automatically disqualify credit on duty-paid machinery and components used in its installation.

The dispute arose from an Order-in-Original passed in March 2013 by the Commissioner of Customs, Central Excise and Service Tax, Hyderabad, which had disallowed CENVAT credit amounting to ₹1,89,28,243 claimed by ITC Ltd.’s Paperboards and Specialty Papers Division at Sarapaka. The department had also confirmed interest under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11AA of the Central Excise Act, 1944, and imposed an equivalent penalty under Rule 15 of the CENVAT Credit Rules read with Section 11AC of the Act.

According to the record, ITC manufactures paper and paperboards and requires oxygen and industrial gases for its production process. To meet this requirement, the company entered into an agreement with Inox Air Products Ltd. in September 2006. Under the arrangement, Inox supplied machinery, components, parts, and accessories under central excise invoices naming ITC as the consignee. These goods were received at ITC’s factory and were used for erecting and commissioning an Air Separation Plant within the factory premises. ITC availed CENVAT credit on the excise duty paid on those goods between October 2007 and April 2009.

The department later issued a show cause notice alleging that the components lost their independent identity after being incorporated into the Air Separation Plant, that the goods did not belong to ITC, and that the plant became immovable property after installation. It was also alleged that Inox had not discharged excise duty liability on the Air Separation Plant and therefore ITC was not entitled to credit.

Before the Tribunal, ITC argued that the machinery and components used for setting up the Air Separation Plant qualified as “capital goods” under Rule 2(a) of the CENVAT Credit Rules, 2004. The company contended that various items falling under Chapters 82, 84, 85 and 90 of the Central Excise Tariff Act were duty-paid capital goods, while other items constituted parts, components, and accessories of those capital goods. It further maintained that the Air Separation Plant was directly linked to the manufacture of paper products because it generated oxygen used in the production process.

ITC also emphasized that ownership was irrelevant for availing credit because the machinery had been received in its factory and used in manufacturing operations. The company relied on several judicial precedents, including decisions involving similar oxygen plant arrangements with Inox Air Products Ltd., where credit had been allowed despite the equipment being leased.

After examining the statutory framework and previous judicial decisions, the Tribunal agreed with ITC’s submissions. The bench comprising Judicial Member Angad Prasad and Technical Member A.K. Jyotishi noted that Rule 2(a) of the CENVAT Credit Rules specifically includes machinery, equipment, components, spares, and accessories falling under specified tariff chapters within the definition of capital goods. The Tribunal observed that there was no dispute regarding the duty-paid nature of the goods or their receipt within the factory premises.

Relying heavily on the earlier JSW Ispat Steel decision involving an oxygen plant installed by Inox Air Products Ltd., the Tribunal reiterated that “ownership of the machinery is not relevant” for determining eligibility to CENVAT credit. It further emphasized that industrial manufacturing plants are invariably created by assembling various machines and equipment, and denying credit merely because those machines ultimately form part of a larger integrated plant would defeat the objective of the CENVAT scheme.

In one of its key observations, the Tribunal stated that “so long as the individual machinery, equipment or appliance or parts and components thereof fall within the definition of capital goods under Rule 2(A) of the Cenvat Credit Rules, 2004 and so long as they are used within the factory of production for the manufacture of excisable goods which are chargeable to duty, the benefit of capital goods credit cannot be denied.”

The bench also rejected the department’s argument that the Air Separation Plant’s attachment to the earth rendered it ineligible for credit. It held that fastening machinery through nuts and bolts for operational stability and vibration-free functioning does not destroy the independent identity of the constituent machines. Consequently, the immovable character of the integrated plant had no bearing on the admissibility of credit on the underlying machinery and equipment.

Addressing Rule 4(3) of the CENVAT Credit Rules, the Tribunal clarified that the provision does not restrict credit only to cases where capital goods are leased from a financing company. According to the bench, the rule is enabling in nature and broadens eligibility rather than imposing limitations. Therefore, the fact that Inox Air Products Ltd. was not a financing company could not be used as a ground to deny credit.

The Tribunal further found that the adjudicating authority had travelled beyond the allegations contained in the show cause notice by relying substantially on ownership-related grounds that were not specifically pleaded in the notice. Such an approach, the bench held, violated principles of natural justice and rendered the order legally unsustainable.

Another important aspect of the ruling concerned the amendment made to Rule 2(k) of the CENVAT Credit Rules on July 7, 2009. The department had relied on the amended provision to deny credit. However, the Tribunal held that the disputed period, extending from October 2007 to April 2009, was entirely prior to the amendment. It therefore ruled that the amendment was prospective and could not be applied retrospectively to deny benefits that were otherwise available during the relevant period.

The bench also ruled in favour of ITC on the question of limitation. It noted that the company had availed credit through valid invoices and disclosed the same in statutory returns. Since all relevant facts were already within the knowledge of the department and the dispute involved interpretation of law, there was no suppression of facts, misstatement, or intent to evade duty. Consequently, invocation of the extended limitation period under the proviso to Section 11A(1) of the Central Excise Act was held to be impermissible.

Summarising its conclusions, the Tribunal held that the duty-paid goods used for setting up the Air Separation Plant were eligible for CENVAT credit as capital goods and inputs; ownership by Inox was irrelevant; Rule 4(3) did not restrict credit to leases from financing companies; operational immovability of the plant did not disentitle credit; the adjudication order had exceeded the scope of the show cause notice; the 2009 amendment to Rule 2(k) was prospective; and the entire demand was barred by limitation. On these findings, the Tribunal set aside the impugned order and allowed ITC’s appeal with consequential relief.

The ruling is expected to have wider implications for manufacturers operating leased industrial facilities and captive utility plants across India. It reinforces the principle that CENVAT credit eligibility depends primarily on the receipt and use of duty-paid goods in manufacturing activities rather than ownership structures or the eventual immovable nature of an integrated plant. The judgment also strengthens legal safeguards against retrospective application of restrictive amendments and against adjudication beyond the scope of a show cause notice, providing greater certainty to industry in indirect tax disputes.

Case Reference: M/s ITC Ltd. v. Principal Commissioner of Central Tax, Rangareddy-GST, Excise Appeal No. E/27150/2013, Final Order No. A/30321/2026