Distribution of cenvat credit taken in one unit to another unit of assessee

PJ/Case Laws/2011-12/1308

Case: CCE, Bangalore-I versus ECOF Industries Pvt. Ltd.

Citation: 2011 (23) S.T.R. 337 (Kar.)

Issue:- Whether service consumed in one unit and credit can be taken at other unit by distributing the same?

Brief Facts:- Respondent-assessee is a manufacturer of excisable goods falling under Chapter 34 of the Central Excise Tariff Act, 1985. They had availed service tax credit based on the invoice issued by the Chennai head office, which is registered as 'Input Service Distributor' and had paid service tax for services received by them from various service providers like insurance, telephones, security charges, travelling expenses, advertising, market research, courier, xerox maintenance, utility services, bank charges, AMC, professional charges, etc. The head office in turn distributed the service tax to the assessee. Assessee availed and utilized the said credit for payment of Central Excise Duty on their final products. The services in question were received by their head office at Chennai in respect of advertisement and other services, which are meant for the products manufactured by their units located at other places i.e. other than Malur Unit. The services like telephone, security charges, etc., are all received by them at Chennai and not related to Malur Unit.

On the ground that assessee had contravened the provisions of Rule 3 (1) of CCR, 2004 by irregular availment of service tax credit and a show cause notice was issued to them. It was alleged that said input services were not used in or in relation to the manufacture of finished goods or in relation to their manufacturing unit during December, 2006.

Assessee contended by referring to Rule 7 under which an input service distributor is allowed to distribute CENVAT credit in respect of service tax paid on input service to its manufacturing units or units providing output service. Therefore they sought for dropping of the proceedings. The Assessing Authority taking note of Rule 3(1) and Rule 7 and as well as the Board Circular, dropped the proceeding.

Aggrieved by the same, Revenue preferred an appeal before the Commissioner (Appeals). The Commissioner found that credit distributed was pertaining to advertisement of product which were manufactured at the respondent's other unit and not in their unit at Malur. The credit availed on other services viz., telephone, security services, insurance etc on which the service tax was paid at Chennai and that services provided were, not in the respondent's unit at Makin Therefore, it was held that assessee has not received input service and there is no discussion in the findings as to whether the credit has been utilized in relation to manufacture of goods in their Malur unit. The credit so availed pertains to advertisement and other services meant for the products manufactured by their units located at a place other than their Malur unit and the service tax availed on input service were not provided in the assessee's unit at Malur. The assessee has not used the input service in or in relation to the manufacture of the finished goods or in relation to their manufacturing unit. Therefore, the credit availed by the assessee was held to be not in accordance with the provisions of the Rule 3(1) of CENVAT Credit Rules, 2004. Accordingly, the appeal was allowed. Order-in-original passed by the Assistant Commissioner was set aside. The Commissioner (Appeal) confirmed the demand and interest and directed for payment of penalty of Rs. 1,00,000/- under Rule 15 of CENVAT Credit Rules, 2004.

Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal relying on Rule 7 as well as the master Circular issued by the Board held that the combined reading of 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 said two restrictions have no application to the facts of this case. The restrictions sought to be applied in this case in limiting the distribution of the service credit tax 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 and therefore the said restriction cannot be upheld. Accordingly, The Tribunal allowed the appeal, set aside the order of the appellate authority and restored the order-in-original. Aggrieved by the same, Revenue filed appeal before the High Court.

Appellant’s Contention:- Revenue contends that admittedly the service tax is paid in respect of the unit at Cuttack and it is sought to be availed by the unit at Malur. As the said tax has not been paid in connection with the input used in manufacture of products at Malur unit or in the advertisement or production at Malur Unit, the assessee is not entitled to the benefit of CENVAT credit under the rules. The lower Appellate Authority has rightly held so which order has been erroneously set-aside by the tribunal arid therefore he submits a case for interference is made out.

Respondent’s Contention:- Assessee submits that the definition of input service and input service provider read with Rule 3(1) and Rule 7(1) of the Rules makes it very clear that it is not the requirement of law, that the unit, which has paid the tax alone, is entitled to the benefit of the credit under the scheme. If a manufacturer has several units and has paid input tax, he is expected to register himself as an input service distributor, collect all these taxes paid and thereafter distribute the same to its various units except to two conditions which are mentioned in Rule 7.

Reasoning of the Judgment:- The High Court held that the definition of input service distributor makes it clear that a manufacturer or a producer of a final product or a provider of output service may have more than one unit and may be distributed in various parts of the country. It is in this background the definition of service distributor is defined as office of the manufacturer or producer of a final product or provider of output service which receives invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be. Therefore, the law mandates that the manufacturer who wants to avail the benefit of this service tax if he has more than one unit he should also get registered himself as a service provider and then, he would be able to collect all the input service tax paid in all its units and accumulate them at its head office and distribute the said credit to its various units.

Only two limitations are put for the distribution of credit by an input service distributor. Firstly, it cannot exceed the amount of service tax paid and secondly, the credit of service tax attributable to service used shall not be distributed in a unit exclusively engaged in the manufacture of exempted goods or providing of exempted services.

Therefore, these are the only two limitations, which are imposed in Rule 7 preventing the manufacturer from utilizing the CENVAT credit, otherwise, he is entitled to the said credit. Merely because the input service tax is paid at a particular unit and the benefit is sought to be availed at another unit, the same is not prohibited under law. It is in this context, the manufacturer is expected to register himself as a input service distributor and thereafter, he is entitled to distribution of credit of such input in the manner prescribed under law.

Decision:- Appeal dismissed.

Comment:- This is very important decision which says that under the concept of “service tax distributor”, it is not to be seen whether the service is consumed in one unit. Thus, if the payment is made from head office then it should be distributed amongst various units of a manufacturer. The department is raising reverse stands many times. We have seen that in one unit they have raised this point of consumption but in second case when we said we have consumed fully in this factory then they say that the invoice is in name of head office and it should be distributed. Hence, this decision has put an end to this type of arguments. Now, it is clear that when the invoice is in name of head office then it should be distributed.

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PJ/Case Laws/2011-12/1308

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