Cenvat credit distribution by Input Service Distributor.

Case:-PRAJ INDUSTRIES LTD. VERSUSCOMMISSIONER OF C. EX., PUNE-III

Citation:-2014 (36) S.T.R. 1273 (Tri. - Mumbai)

Brief facts:-The appellant is in appeal against the impugned order wherein duty demand of ` 3,79,00,035/- has been confirmed against the appellant along with interest and equivalent amount of penalty under Section 11AC of the Central Excise Act has also been imposed.
The brief facts of the case are that the appellant is engaged in the manufacture of equipment, machinery, etc. required for distilleries, breweries, and ethanol projects at their manufacturing units situated at Khed and Sanaswadi. Khed unit is 100% EOU unit. Sanaswadi is a DTA unit. The Head office is situated at Pune and the same is registered with department as input service provider during the period June, 2006 to April, 2008. The appellant received the services of commission agent located overseas for procuring the orders for goods manufactured by the appellant for their EOU unit. Based on the procurement of the purchase orders, the appellant exports the final product manufactured by them. The appellant also received various other common input services used in or in relation to the manufacture of final dutiable goods. The payments of the input services were made by the appellant’s Head office. The appellants’ head office also paid the service tax on commission paid to overseas commission agent for procuring the purchase orders for export of goods under reverse charge mechanism. The head office distributed the service tax credit of 3, 79, 00, 035 /- to the appellant’s DTA unit. The appellant availed and utilised the aforesaid credit for payment of Central Excise duty on the final product manufactured and cleared by them. The EOU unit was also clearing final goods in DTA on payment of applicable excise duty. In these set of facts, the show cause notice was issued to the appellant (DTA unit) that the service tax credit distributed by the appellant’s Head office is not admissible as the service tax credit was availed in respect of input service received by the appellant EOU unit. Therefore, the credit is not admissible to the DTA unit.
To avoid litigation, the appellant reversed the entire amount of service tax credit along with interest from the DTA unit and availed the said credit for their EOU unit. Thereafter a show cause notice was issued on 8-4-2010 proposing to reverse the entire service tax credit transferred by the Head office to the appellant (DTA unit) during the period June, 2006 to April, 2008 along with interest and proposal to imposition of penalty was also made. The sole allegation in the show cause notice is that the input service were received by the EOU unit therefore, the same cannot be input service for DTA unit and credit of same is not admissible to DTA unit. The show cause notice was adjudicated and converted into an impugned order. Aggrieved from the said order, the appellant is before tribunal.

Appellant’s contention:- The ld. counsel for the appellant submits that the appellant is having two units one DTA and other EOU unit. The service tax has been paid at their head office located in Pune and registered as input service distributor. As the service tax of both the units have been paid by head office, therefore as per Rule 7 of the Cenvat Credit Rules, 2004, the Head office has correctly distributed the Cenvat credit to the appellant and therefore same is admissible as input service credit. To support this contention, he relied on the CBEC Circular No. 97/8/2007, dated 23-8-2007 and the decision of the Tribunal in ECOF Industries - 2010 (17)S.T.R.515 (T)which has been affirmed by the Hon’ble High Court of Karnataka in 2011 (271)E.L.T.58 = 2011 (23)S.T.R.337 (Kar.), 2012 (26)S.T.R.100, 2012 (277)E.L.T.317 (Kar.) = 2013 (29)S.T.R.107 (Kar.).
He further submits that the dispute is in nature revenue neutral as there is no loss to the revenue because the Cenvat credit was available to EOU unit and the said unit was converted into DTA unit and the credit was transferred to DTA unit as per Rule 10 of Cenvat Credit Rules, 2004. Therefore the situation is revenue neutral and in that situation, demand is not sustainable. To support this contention, he relied on Narayan Polyplast- 2005 (179)E.L.T.20 (S.C.), Narmada Chematur Pharmaceuticals - 2005 (179)E.L.T.276 (S.C.), Textile Corporation - 2008 (231)E.L.T.195 (S.C.), Jamshedpur Beverages - 2007 (214)E.L.T.321 (S.C.)and Coca Cola India P. Ltd. -2007 (213)E.L.T.490 (S.C.).
He further submits that the entire demand in the present case is barred by limitation as there is no evidence in the show cause notice or in the impugned order to prove that the appellant took the alleged inadmissible credit by way of suppression of facts or with intent to evade payment of duty. He submits that during the relevant time, the decision of ECOF Industries (supra) was available and as per the said decision, the appellant was entitled to take Cenvat credit. Further Rule 7 of the Cenvat Credit Rules, 2004 has been amended vide Notification 18/2012-C.E. (N.T.), dated 17-3-2012 and Notification 28/2012-C.E. (N.T.), dated 17-3-2012 which is evident that during the impugned period, the appellant has taken Cenvat credit correctly and there was no bar to avail Cenvat credit pertaining to EOU unit by the DTA unit. In these circumstances, it is prayed that the extended period of limitation is not invocable and in this case whole of the demand has been proposed to be confirmed by invoking the extended period of limitation. Therefore, the impugned order is required to be set aside.

Respondent’s contention:-The ld. AR drew their attention to the show cause notice and submits that the Cenvat credit is available on the input service and as per Rule 2(l) of Cenvat credit, the input service credit transferred to the appellant unit does not qualify as input service. Therefore, the appellant is not entitled to take the Cenvat credit of inadmissible input service. Therefore, the adjudicating authority has rightly confirmed the demand against the appellant.

Reasoning of judgement:- In this case, the contention of the ld. AR is that the Cenvat credit taken on the input service does not qualify as input service for the appellant being a manufacturer of excisable goods. Therefore, the appellant is not entitled to take input service credit. But in this case, the service tax has been paid by the Head office of the appellant unit being input service distributor and the input service distributor is required to pay service tax on all the services availed by the several units of the input service distributor. Therefore, in this case the question of examination is whether input service distributor was entitled to take Cenvat credit on these services or not. If the allegation of the ld. AR is admitted that it is not a input service in that case the service tax was not required to be paid by the head office particularly in this case, the service tax liability has been arising on the head office under reverse charge mechanism which has been paid by head office. In these set of facts, it cannot be said that it is not an input service for the head office. Therefore, now they have to see whether head office has correctly transferred the credit or not. To transfer the Cenvat credit by head office to various units has been provided through Rule 7 of Cenvat Credit Rules, 2004.
Therefore, they have to look into Rule 7 of Cenvat Credit Rules, 2004 for distribution of input service credit.
Rule 7 is reproduced as under :-
“Rule 7. Manner of distribution of credit by input service distributor. - The input service distributor may distribute the Cenvat credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely :-
(a)        The credit distributed against a document referred to in Rule 9 does not exceed the amount of service tax paid thereon; or
(b)        Credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.”
The said rule has been amended by Notification 18/2012-C.E., dated 17-3-2012 wherein clause (c) has been inserted which is as follows :-
“(c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit”
Prior to said clause inserted in 2012, there was no bar on input service distributor to distribute the credit which pertains to one unit to another unit.
The said issue came up before this Tribunal in Ecof Industries (supra) wherein it has been observed as under :-
“5. After hearing both sides, we find that the Rule 3 merely says that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of any input services received by the manufacturer of such final product or provider of output services. The availability of credit therefore is related to the manufacturer of goods or provider of output services as a whole and not restricted to any particular unit of the manufacturer/service provider.
6. The Rule 7 referred to by the ld. Advocate reads as follows :-
Rule 7. Manner of distribution of credit by input service distributor. -The input service distributor may distribute the Cenvat credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely :-
(a)        the credit distributed against a document referred to in Rule 9 does not exceed the amount of service tax paid thereon; or
(b)        credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.
7. Para 2.3 of the Master Circular referred to by the ld. Advocate reads as under :-
“2.3 An ‘input service distributor’ is an office or establishment of a manufacturer of excisable goods or provider of taxable service. It receives tax paid invoices/bills of input services procured (on which Cenvat credits can be taken) and distributes such credits to its units providing taxable services or manufacturing excisable goods. The distribution of credit is subject to the conditions that, - (a) the credit distributed against an eligible document shall not exceed the amount of service tax paid thereon, and (b) credit of service tax attributable to services used in a unit either exclusively manufacturing exempted goods or exclusively providing exempted services shall not be distributed. An input service distributor is required (under Section 69 of the Act, read with Notification No. 26/2005-S.T.) to take a separate registration.”
The combined reading of the Rule 7 and the clarificatory Circular dated 23-8-2007 clearly shows that there are only two restrictions regarding the distribution of the credit. The first restriction is that the credit should not exceed the amount of Service Tax paid. The second restriction is that the credit should not be attributable to services used in manufacture of exempted goods or providing of exempted services. There are no other restrictions under the rules. The restrictions sought to be applied by the Department in this case in limiting the distribution of the Service Tax credit made in respect of the Malur Unit on the ground that the services were used in respect of the Cuttack Unit finds no mention in the relevant rules. As such, restricting the distribution of Service Tax credit in a manner as has been done by the impugned order of the lower appellate authority (original authority had approved of such distribution) cannot be upheld. In case the Department wants to place such restriction as is sought to be placed in the case, the rule is required to be amended.”
The view of the Tribunal was been affirmed by the Hon’ble High Court of Karnataka (supra).
Therefore, they hold that the appellant is entitled to take Cenvat credit during the impugned period as distributed by their head office.
They further find force in the argument of the ld. counsel that the entire demand in the present case is barred by limitation. As during the course of audit, it was revealed that appellant has availed Cenvat credit as per Rule 7 of Cenvat Credit Rules, 2004 and this fact was known to the revenue in the course of audit itself. Thereafter, the show cause notice was issued to the appellant by invoking the extended period of limitation. In this case, the extended period of limitation is not invocable, as the decision of the ECOF Industries (supra) was in favour of the appellant and appellant had bona fide belief that they are entitled to take Cenvat credit as distributed by the head office. Therefore, the allegation of suppression, fraud, collusion, wilful misstatement or intent to evade payment of duty does not sustain. It is also supported by the Notification 18/2012-C.E., dated 17-3-2012 wherein the Rule has been amended in the light of the decision of ECOF Industries (supra).
In these circumstances, the appellant succeeds both on merits as well as on limitation. Accordingly, impugned order is set aside and appeal is allowed with consequential relief, if any.

Decision:-Appeal allowed.

Comment:- The crux of the case is that following the ratio laid down in the case of ECOF Industries, assessee is entitled to take Cenvat credit as distributed by the head office. In the given caseCredit availed on services of overseas commission agents were procured by 100% EOU and were transferred to DTA unit by Head office, registered as input service distributor. The appellant also received various other common input services used in or in relation to the manufacture of final dutiable goods. The payments of the input services were made by the appellant’s Head office. Head Office is registered as input service distributor, required to pay Service Tax on all services availed by its several units and entitled to avail Cenvat credit on these input services on discharge of Service Tax liability arising under reverse charge mechanism. As per the provisions of Rule 7, only two things are to be examined i.e., the credit distributed by the ISD should not exceed the service tax paid and the credit should not be availed for services used in provision of exempted service. As far as these two things are found to be correct and proper, there is no reason for denial of cenvat credit distributed by the ISD.

Prepared by:- Monika Tak

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