Credit distributed by HO without being registered as ISD is invalid.

Case:-NITCO LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, RAIGAD

Citation:-2014 (34) S.T.R. 835 (Tri.-Mumbai)

Brief facts:-The appeal and stay application are directed against the Order-in-Original Nos. 69-74/MAK(69- 71)/COMMR/RGD/12-13, dated 28-3-2013 passed by the Commissioner of Central Excise, Raigad.

The appellant is M/s. Nitco Ltd., Alibag. Acting on intelligence, the Central Excise Officers attached to the Preventive Section of the Raigad Central Excise Commissionerate initiated an inquiry against the appellant in respect of Cenvat credit availed by them during the period 2006-07 to 2010-11. The inquiry revealed that the appellant had availed Cenvat credit of Service Tax paid on services which were used for trading activity of imported goods and relating to their real estate business and the credit so taken was utilised towards discharge of excise duty on goods manufactured at their factory at Alibag. Theofficers of the appellant firm, in their statements recorded also admitted to taking Cenvat credit without proper supporting documents and on services which were exclusively for trading activity. The amount of credit so taken was quantified at Rs. 2,42,02,704/-. It was further observed that the Head Office of the appellant had distributed Cenvat credit of Service Tax paid on input services to the Alibag factory without getting themselves registered as an Input Service Distributor (ISD) and even though the services were availed by the factories at Alibag, Kanjur Marg and Silvasa, the entire credit was taken at the Alibag factory. The Cenvat credit so taken amounted to Rs. 2,92,78,755/, It was further noticed that the appellant had availed Cenvat credit without being in possession of proper documents as prescribed under Rule 9 of the Cenvat Credit Rules, 2004 and the credit taken without proper supporting documents amounted to Rs. 2,88,89,730/-. It was also noticed that the appellant had taken credit twice in respect of a sum of Rs. 8,19,902/- and therefore, the credit taken second time was liable to be recovered. It was also noticed that the appellant had taken excess credit amounting to Rs. 28,84,078/- than what has been shown in the input service invoices and hence the appellant was not eligible for the credit in excess of what is specified in the documents. Thus, during the period September, 2006 to September, 2010, the appellant has availed ineligible Cenvat credit amounting to Rs. 8,80,80,062/-. Similarly, for the subsequent period, the appellant had availed ineligible Cenvat credit amounting to Rs. 96,63,002/- during October, 2010 to December, 2011. On conclusion of the investigation, show cause notices were issued proposing to recover the above ineligible Cenvat credit taken by the appellant. The appellant contested the demands and submitted that ineligible credit taken by them would be only Rs. 3,23,60,407/- which they had reversed during the course of investigation. However, the adjudicating authority did not accept this plea and confirmed the Cenvat credit demands of Rs. 8,80,80,062/- and Rs. 96,63,002/- under the provisions of Rule 14 of the Cenvat Credit Rules read with Section 11A of the Central Excise Act along with interest thereon under Section 11AB. He also imposed a penalty of Rs. 8,80,80,062 /- on the appellant under the provisions of Section 11AC and a penalty of Rs. 19,62,600/- under Rule 15 of the Central Excise Rules, 2002. Aggrieved of the same, the appellant is before the Tribunal.

Appellant Contentions:-The learned Counsel for the appellant made the following submissions:-

As regards the denial of Cenvat credit amounting to Rs. 2,42,02,704/- specified in Annexure-A to the show cause notice, the said credit pertained to input services received from M/s. Union Constructions, M/s. Interarch Building Product Pvt. Ltd. and M/s Iffco Tokyo General Insurance and also the services received from M/s. TCI Supply Chain Solution. The services rendered by M/s Unico Construction pertained to civil construction of the vitrified tiles go-down constructed at the Alibags factory and the said go-down was used not only for storage of vitrified tiles imported or traded by them, but also for the storage of ceramic tiles manufactured by the appellant and stored in the said go-down and, therefore, it cannot be said that they had used the services exclusively for trading. Further, construction service is specified a Rule 6(5) of the Cenvat Credit Rules, 2004 and, therefore, when such service is used in the manufacture of both dutiable and exempted goods, the appellant is entitled to avail the entire Service Tax credit on such services.
As regards the services received from M/s. Interarch Building Product Pvt. Ltd., this service was also received in the construction of the proposed vitrified tiles go-down within the factory at Alibag. Since the service is notified under Rule 6(5) of Cenvat Credit Rules, 2004, the appellant is eligible to avail the entire Service Tax credit. Without prejudice to the above, it is submitted that if at all the credit of Service Tax paid on construction service, can be denied, it can be only to the extent attributable to the traded goods.

With regard to the service received from M/s. Iffco Tokyo General Insurance, it is contended that the insurance taken pertained to not only traded goods but also to goods manufactured and sold by the appellant and the appellant had taken credit only on pro-rata basis to the extent attributable to manufactured goods and the credit attributable to the traded goods amounts to only Rs. 7,37,036/-.

As regards the services received through TCI Supply Chain Solution, they admitted that the said service pertained only to traded goods and the appellant had reversed the entire Service Tax credit.

With regard to the denial of Cenvat credit amounting to Rs. 92,78,755/- specified in Annexure-B to the show cause notice, it is their contention that the service provider has raised invoices on the Head Office in respect of the Alibag factory. Thereafter the Head Office of the appellant issued inter office memorandum/letters to the Alibag factory along with copies of relevant original invoices and the Alibag factory of the appellant availed Cenvat credit on the basis of original invoices which were available to the department for verification. The department has sought to deny the credit on the ground that the Head Office was not registered as an Input Service Distributor and hence, the Alibag factory of the appellant could not have taken any credit. It is their contention that in a case where the Alibag factory wants to avail the credit, it can do so, on the basis of the invoices issued by the service provider and the credit cannot be denied on the ground that the invoices were issued in the name of the Head Office.

The learned Counsel placed reliance on the decision of the Tribunal in the case of SGS India Pvt. Ltd. v. CCE - 2011 (270) E.L.T. 115 = 2012 (26) S.T.R. 395, Eveready Industries India Ltd. - 2007 (219) E.L.T. 333 (T), Chemplast Sanmar Ltd. - 2011 (267) E.L.T. 392(T) and Marmagoa Steel Ltd. v. UOI - 2005 (192) E.L.T. 82 (Bom.) in support of the above contention.

It is also submitted that the non-registration of the Head Office as an ISD for distribution of credit is only a procedural lapse and, therefore, such defect being remediable in nature, the substantive benefit of Cenvat credit cannot be denied. It is further contended that the unit at Silvasa was set up in March, 2009 and started commercial production in April, 2010. The other unit at Thane where the appellant was manufacturing tiles and pavers blocks, the invoices for the input services were addressed to the factory's address and these factories were closed on or around August, 2008 and the Registration Certificate was surrendered. Therefore, during the period in dispute, there was only one manufacturing unit of the appellant at Alibag and, therefore, the entire credit taken was only in respect of the services received at the factory at Alibag and, therefore, they have taken Cenvat credit correctly in respect of such services.

With regard to denial of Cenvat credit amounting to Rs. 2,88,89,713/-, specified in Annexure C to the notice, this credit has been denied on the ground that the credit has been taken on the basis of improper documents. However, neither the notice nor the impugned order specify how the documents, on strength of which the credit was taken, were improper. They had made available all the original tax invoice of the service providers pertaining to the credit in dispute to the department and these documents amounted to 2512 documents However, in respect of 2203 documents involving the credit of Rs. 2,45,45,648/-, the only ground for denial of the credit is "no proper document" without pointing out the discrepancies in these documents.

With regard to the denial of credit of Service Tax paid amounting to Rs. 20,04,910/- specified in Annexure-D to show cause notice, it is submitted that for the purpose of stay the appellant is not pressing this issue.

As regards the demands raised in Annexure-E & F to the show cause notice, these stand already reversed and Is included in the amount of Rs. 3,23,60,407/- reversed by-them during the time of investigation.

The appellant had explained the details of the availment of credit Annexure-wise before the adjudicating authority. However, the adjudicating authority has not given any finding in respect of the contentions raised by the appellant. It is their contention that they have reversed Cenvat credit in excess and are eligible for refund of Rs. 12,21,51,180/-

In view of the above, the learned Counsel pleads for grant of stay.

Respondent Contentions:-The learned Commissioner (AR) appearing for the Revenue, on the other hand, strongly refutes the contentions raised by the appellant.
As regards the Cenvat credit taken on the Insurance Policy, he submits that Shri Newton Misquitta, Senior Manager (Accounts) had confirmed that the Insurance Policy taken pertained to insurance of empty containers in respect of imported vitrified tiles. Similarly, marine cargo policies pertained to mainly imports of vitrified tiles, which were traded by the appellant. Again some of the policies pertained to insurance of their showroom located all over India, which was used for sale of the imported goods as well as domestically manufactured goods. Thus, it is clear that the appellant took ineligible Cenvat credit on the insurance services received by them.

Similarly, in the case of Cenvat credit taken and the basis for the same, Shri Sandeep Patil, Officer (Excise and Despatch) had admitted that the credits were taken on the instructions of Shri Bhanuprakash Sharma, Manager (Excise) without receipt of any documents and after taking the credit, the same were sent to Head Office for internal audit. He also confirmed that the input services received were used at the depot for both dutiable manufactured goods as well as traded goods and the Head Office of the appellant firm was not registered as an Input Service Distributor and the credit was taken in full even though the services were used for both dutiable goods as well as traded goods. He further confirmed that till November, 2008, the imported vitrified tiles were stored in the factory along with manufactured items and in 2006-07 a separate go-down called 'Vitrified Go-down' was built and vitrified tiles were stored in the Vitrified tiles go-down and subsequently, the vitrified tiles were shifted to TCI go-down in Nov./Dec., 2008.

As regards the Service Tax credit taken on the invoices of M/s. Unico Construction and M/s. lnterarch Building Product Pvt. Ltd., the credits were taken as per the statements received from the Head Office without the invoices.

Similarly, Shri Subhash Pednekar, Senior Executive Accounts, whose statement was recorded under Section 14 of the Central Excise Act also confirmed that they used to prepare the monthly statement regarding payment of Service Tax which has to be availed as Cenvat credit and forwarded the same to the factory for availment of credit. The bills/invoices were subsequently forwarded to the Alibag factory and even though the services were availed in the depots, the Service Tax paid in such cases were forwarded to the Alibag factory for availment of credit. He also confirmed that although at the depots both imported vitrified tiles were traded along with the manufactured goods, the Service Tax paid on all the services used at the depot were included in the statements forwarded from the factory for availing of credit. It has been further admitted by him that Service Tax credit was taken at the factory without ensuring that the said services were input services used in or in relation to manufacture of excisable goods and common services used by the Head Office for both trading purposes and in relation to manufacture of excisable goods were sent to the factory for availment of credit. He further admitted that even though services were received and used in the Head Office, the bills were raised in the name of the Alibag factory and this was done to avail credit at the Alibag factory. The above position in relation to availment of ineligible credit has also been confirmed by Shri Newton Misquitta, Sr. Manager Accounts in his statement dated 17-8-2011.

As regards the availment of Cenvat credit on ineligible documents, the adjudicating authority has observed that the documents on the strength of which credit was taken are not proper documents and these facts were also admitted by the employees and, therefore, the credit taken on ineligible documents needs to be reversed.
He further submits that the appellant had taken Cenvat credit amounting to Rs. 20,04,910/- as specified a Annexure-D in respect of various services such as Club membership fees of Directors, Pest Control Services done at the residence of Directors, Annual Maintenance Contract of the equipments at the bungalows of Director, Printing of Invitations, Public relation services such as Hostess supply, Credit card services by the Directors, services relating to Tea parties and so on and these services had no nexus with the manufacturing activity undertaken by the appellant at their Alibag facoty.

The ld. AR submits that the appellate his committed a fraud on the exchequer by availing ineligible credit by resorting to mis-declaration and blatant violation of statutory procedures and therefore, imposition of mandatory penalty is justified and relies on the decision of the Apex Court in the case of Essar Oil Ltd. [2004 (172) E.L.T. 433 (S.C.)] in support of this contention.

In view of the above, he pleads that the impugned order needs to be sustained and the appellant should be put to terms.

Reasoning of Judgment:- The tribunal has carefully considered the submission made by both the sides.

As regards the Service Tax credit of Rs. 2,42,02,704/- availed by the appellant in respect of the construction services, the said construction was mainly used for storage of imported goods and was in respect of the trading activity. Prior to 2011, trading was not considered as service at all and, therefore, the appellant could not have taken credit pertaining to the trading activities ab iniito. Since Rule 6(3) talks of dutiable as well as exempted services, it cannot apply to a situation wherein credit taken pertains to a non-service activity. Similarly, in the case of Insurance services availed by the appellant, bulk of it pertains to traded goods and, therefore, the appellant could not have taken credit in respect of this service for the manufacturing activity undertaken at their Alibag factory.

With regard to demand of Rs. 2,92,78,755/-, this pertains to the credit distributed by the Head Officer of the appellant. During the material period, the Head Office was not registered as an Input Service Distributor and, therefore, the distribution of the credit by the Head Office without being registered as ISD is against the provisions of Cenvat Credit Rules. This Tribunal in the case of Mangalore Refinery & Petrochemicals v. CCE, Mangalore - 2013 (30) S.T.R. 475 (Tri.- Bang.), Hardik Founders & Engineers (P) Ltd. v. Commissioner of Central Excise, Pune-I - 2012 (26) S.T.R. 322 (Tri.-Mum.) and Khaitan Electricals Ltd. v. CCE. Kolkata-VI – 2011 (21) S.T.R. 184 (Tri.-Kol.) had consistently taken a view that the Service Tax credit can be distributed only if the services were received at the manufacturing premises and if it is received elsewhere, it is not permissible to avail of the Service Tax credit. Input Service Distribution scheme is a special scheme and if anyone wants to avail the benefit thereof, the terms and condition should be complied with completely. From the statements of the officials of the appellant firm, it clearly emerges that the credit was distributed by the Head Office without any registration and without ascertaining the receipt of the services at the Alibag factory. Services received at the depots were also distributed to the Alibag factory and also services received at the other factories of the appellant. Thus, as regards the denial of Cenvat credit of Rs. 2.92 crore the appellant is not prima facie eligible for the benefit of the same.

As regards the denial of Service Tax credit amounting to Rs. 2,88,89,713/-, the appellant's claim is that the department has not clearly shown how the documents on strength of which the credit was taken was improper and what particulars were missing in the documents, so as to deny benefit of the Cenvat credit. There is some merit in this contention but these needs to be verified with the actual documents which can be done only at the stage of final hearing.

As regards the demands of Rs. 20,04,910/- raised in Annexure-D to the show cause notice and the amounts of Rs. 8,19,902/- specified in Annexure-E towards availment of Cenvat credit twice and the amount of Rs. 28,84,078/- specified in Annexure-F towards excess availment of Cenvat credit, the appellant has not made out any case at all.

Thus, barring the demand of Service Tax raised in Annexure-C amounting to Rs. 2,88,89,713/- out of total demand of Rs. 9.7 crore, the appellant has not made out a prima facie case for grant of stay. The very fact that the appellant has made a payment of Rs. 3.23 crore after the commencement of investigation also is a clear pointer to the wrong availment of credit by the appellant. The confessional statements of the officials of the appellant firm also clearly show that the credit has been availed without following any procedures and credit has been distributed in gross violation of the procedures and norms for such distribution. Sri Newton Misquitta Senior Manager (Accounts) in his statement dated 17-8-2011 has clearly admitted that irrespective of the nature of goods insured including those pertaining to marble and mosaic division, they included all the insurance policies on which Service Tax was paid in the statement forwarded to the Alibag factory for taking credit. They never ensured that whether the said credit is in relation to the manufacturing activity. Further in respect of other input services, these included services received at the depots for which payments were made at the depots itself. However, no reconciliation was clone as to confirm whether the bills/documents with regard to the Service Tax paid pertained to the Alibag factory or not. Similarly, Sri Subash Pednekar, Senior Executive (Accounts) has also confirmed the above position in his statement dated 11-82011. He has also confirmed that at the depots both imported %untied tiles and manufactured tiles were traded and Service Tax paid on all services were included in the statement forwarded to the Alibag factory for Cenvat credit availment. Similarly in the case of common services used by the Head Office which were exclusively used for trading of imported vitrified tiles, Service Tax paid thereon was included in the statement forwarded to the Alibag factory. Sri Bhanu Prakash Sharma, Manager (Warehouse) has, in his statement before the investigating authorities, admitted that the appellant had availed Service Tax credit on common services such as advertising, security, accounting, courier, insurance, telephone, tours and travel, man-power supply, forklift charges, warehousing, annual maintenance contracts, etc. used for traded goods at their Alibag factory which was a mistake. Statements of Sid Sandeep Patil, Excise-in-charge also confirm and corroborate the above factual position. None of these statements has been retracted. In view of these clear admissions, the availment of Cenvat credit at least to the extent of about Rs. 7 crore by the appellant prima facie appears to be not in accordance with the provisions of Cenvat Credit Rules, 2004.

From the records of the case, it appears to be a case of "fraudulent availment" of ineligible Cenvat credit by resorting to manipulation of records/documents, deliberate mis-declaration and blatant violation of statutory procedures. It is a well-settled position in law that 'fraud' vitiates every solemn act and fraud and justice never dwell together.

The appellant has not pleaded any financial hardship. Therefore, as held by the Hon'ble High Court of Andhra Pradesh in the case of SQL Star International Ltd. v. Commissioner of Customs, Hyderabad - 2012 (25) S.T.R. 113 (A.P.) = 2012 (276) E.L.T. 465 (A.P.), the balance of convenience lies in favour of Revenue and the interests of revenue need to be protected and the appellant needs to be put to terms.

Accordingly, we direct the appellate to make a pre-deposit of another Rs. 3 crore (Rs. Three Crore only), in addition to the amount of Rs. 3.23 Crore already paid by them by reversal of credit, within a period of eight weeks and report compliance on 15-1-2014. On such compliance, pre-deposit of balance of dues adjudged against the appeal shall stand waived and recovery thereof stayed during pendency of the appeal.

Decision:- Stay partly allowed.

Comment:-The gist of the case is that credit cannot be distributed to other unit until and unless registration is taken as Input Service Distributor. Secondly, Cenvat Credit availed on both Insurance service and Construction service is not permissible as bulk of service pertains to traded goods.

Prepared by: Hushen Ganodwala

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PJ/CASE LAW/2014-15/2297

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