No ISD registration required for transfer of credit to different registered premises of a LTU.

Case:- 3M INDIA LIMITED, UB CITY, BANGALORE Vs THE COMMISSIONER OF CENTRAL EX. & S.T. LTU, BANGALORE

Citation :2013-TIOL-913-CESTAT-BANG

Brief facts:- The appellant filed stay application for waiver of pre-deposit and stay of recovery in respect of the adjudged dues. The department demand service tax and issue Show cause notice. The ground of show cause notice are as follows:-

(a) The appellant-company, having its corporate office at UB City, Bangalore has four manufacturing units - one unit at Electronic City, Bangalore, one at Ahmedabad and two units at Pune. All the manufacturing units have Central Excise registration with the department. The corporate office at UB City has registration with the department for providing taxable services such as management, maintenance or repair service, business auxiliary service, renting of immovable property service, etc. The Electronic City unit and one of the Pune units have similar registration with the department apart from their registration for manufacture of excisable goods.

(b) The corporate office at UB City and the unit at Electronic City paid service tax under 'reverse charge mechanism' under Section 66A of the Finance Act, 1994 in respect of management consultancy service received from their foreign parent company. Out of the said amount of service tax, the corporate office distributed to the manufacturing units at Bangalore (Electronic City), Pune (Ranjangaon Industrial Area) and Ahmedabad by raising challans but without obtaining registration as 'input service distributor' (ISD) defined under Rule 2(m) of the CENVAT Credit Rules, 2004.

(c) The amount of CENVAT credit so distributed to the Bangalore unit (Electronic City) was Rs.1 crore, credit of which was taken by the said unit in October 2010, though the payment of service tax under the reverse charge mechanism was made only in November 2010. The taking of credit of service tax before its payment was irregular.

(d) Though the distribution of CENVAT credit to the Bangalore, Ahmedabad and Pune units was claimed to be in the ratio of 60:25:15, no documentary evidence was produced to prove this claim.

(e) The corporate office at UB City contravened the provisions of Service Tax (Registration of Special Category of Persons) Rules, 2005 and Rule 4A(2) of the Service Tax Rules, 1994 by distributing CENVAT credit without obtaining registration as 'input service distributor', thereby attracting penalty under Section 77 of the Finance Act.

(f) The CENVAT credits so distributed by the corporate office and taken and utilized by the manufacturing units are liable to be recovered from the respective units with interest thereon inasmuch as the corporate office did not have ISD registration with the department and the challans issued by it without such registration are not valid documents for the purpose of availment of CENVAT credit.

(g) The corporate office and all the manufacturing units are liable to be penalized.

Thereafter, adjudicating authority passed order against appellant. Appellant filed an appeal before appellate authority and the learned Commissioner passed the impugned order-
(i) holding that the challans issued by the corporate office for transferring/distributing CENVAT credit to the manufacturing units at Bangalore (Electronic City), Ahmedabad and Pune in 2009-10 and 2010-11 without obtaining ISD registration were invalid for the purpose of availment of CENVAT credit;
(ii) denying the said credit to the said manufacturing units and ordering its recovery under Rule 14 of the CCR, 2004 read with Section 73 of the Finance Act;
(iii) demanding interest on the said amount of CENVAT credit under Rule 14 read with Section 75 of the Act;
(iv) imposing penalties of Rs.10,000/-, Rs. 1,63,77,285/-, Rs.36,03,763/- and Rs.24,89,525/- on the corporate office (UB City), the Bangalore unit (Electronic City), the Ahmedabad unit and the Pune Unit respectively under Rule 15 read with Rule 25 of the Central Excise Rules, 2002.

This decision of the learned Commissioner is presently under challenge.

Appellant’s Contention:-The appellant contested the above allegations in their reply to the show-cause notice. They contended that their corporate office was not distributing CENVAT credit but only transferring the credit of Rs.2,24,70,573/- to its own manufacturing units under Rule 12A(4) of the CENVAT Credit Rules, 2004. The corporate office and the manufacturing and service-providing units were, admittedly, part of a Large Taxpayer Unit. The payment of service tax by the corporate office and the Electronic City unit on management consultancy service imported from abroad was not in dispute. There was no allegation in the show-cause notice that the appellant contravened Rule 9(1) of the CCR, 2004 or that the challans issued by them were false or fictitious. Therefore the Commissioner's order treating the challans as invalid was bad in law. The corporate office and the manufacturing/service-providing units had the requisite registration with department for manufacturing excisable goods/providing taxable service. The show-cause notice did not allege that the 'management consultancy service' imported by the appellant was not an input service vis-à-vis their final products and output services. In such circumstances, the denial of CENVAT credit to the manufacturing units was not sustainable and no penalty was liable to be imposed on them or on their corporate office.

The appellant also submit that it is not in dispute that the manufacturing units and the service providing units belonging to the appellant-company constitute a Large Taxpayer Unit (LTU) falling under the jurisdiction of the Bangalore LTU Commissionerate. These units (including the appellant's corporate office at UB City, Bangalore, which also provides taxable services) are duly registered with the department for the manufacture of excisable products or for providing taxable services or for both. It is also not in dispute that the corporate office at UB City Bangalore and the manufacturing unit at Electronic City, Bangalore received input service (management consultancy service) from abroad and paid duty thereon under 'reverse charge mechanism' in terms of Section 66A of the Finance Act, 1994. The service tax so paid from January 2010 to November 2010 is to the amount, out of which some were transferred as CENVAT credit to the manufacturing units at Bangalore, Ahmedabad and Pune respectively in the ratio based on these units' turnover of excisable products. This transfer of CENVAT credit was effected through issue of transfer challans containing the necessary particulars. The three manufacturing units took the respective credits on the strength of these challans. The entire exercise is in accordance with sub-rule (4) of Rule 12A of the CCR, 2004.

The appellant further submit that the company having been recognized as a LTU, the provisions of Rule 12A are squarely applicable to them and therefore the view taken to the contra by the adjudicating authority is unsustainable in law.

The appellant also pleaded that the adjudicating authority has held the transfer challans to be invalid on the ground that the appellant did not have ISD registration. It has done so, regardless of the fact that Rule 12A nowhere requires a LTU to obtain such registration for the purpose of issue of transfer challans or for transferring CENVAT credit from the account of one unit to the account of another unit. It is significant to note that the text of Rule 12A begins with a non obstante clause (notwithstanding anything contained in these rules).
The appellant also submit that the learned Commissioner failed to discern correctly the distinct features of 'transfer' of credit on the one hand and ‘distribution' of credit on the other. He failed to address the issue in proper perspective. He failed to appreciate that the purpose of requiring registration for an input service distributor was different from the purpose of making provision for transfer of credit between different manufacturing/service-providing units of a LTU.

The appellant further pleaded that it is also not the case of the Revenue that 'management consultancy service' imported by the appellant is not an 'input service' for their manufacturing/service- providing units. The fact that service tax was paid on the said service in terms of Section 66A of the Act is not in dispute. Again, the department has no case that the said service was not used by the three units (Bangalore, Pune and Ahmedabad) in, or in relation to, the manufacture of final products or rendering of output service. Again, there is no allegation that the particulars stated in the transfer challans issued by the corporate office to the three units were not correct. Nevertheless, the challans were rejected and the CENVAT credits were denied to the three units on the sole ground that the appellant had not obtained ISD registration. It was the bona fide belief of the appellant that, being a LTU, they were not liable to obtain ISD registration inasmuch as Rule 12A of the CCR, 2004 permitted them to issue transfer challans for transfer of CENVAT credit from one unit to another.

The appellant submit that the show-cause notice had not alleged that Rule 12A was not applicable to the LTU. It proceeded on the premise that ISD registration was required for transfer of CENVAT credit also. The conclusion arrived at by the learned Commissioner to the effect that Rule 12A was not applicable to the case is beyond the scope of the show-cause notice itself. At best, non-registration as ISD was only a procedural lapse which per se would not be a ground for denial of CENVAT credit to the appellant. As it is not the case of the Revenue that the appellant did something with intent to evade payment of duty or service tax or with intent to avail undue benefit, the penalties imposed on them are liable to be set aside.
The appellant also submit that In any case, the corporate office of the appellant obtained ISD registration in December 2010 and, therefore, for the ends of justice, the transfer challans issued by it and the CENVAT credits taken by the manufacturing units on the strength of such documents should be deemed to be valid. The taking of credit of service tax prior to its payment happened due to an inadvertent clerical mistake only and the same might not survive as a violation of law beyond the date of payment of the service tax.

The appellant relied upon so many decisions of this Tribunal granting relief to manufacturers of final products to whom MODVAT/CENVAT credits were denied by the department on the ground that valid documents were not used for taking such credits vide Commissioner vs. Stelko Strips Ltd.: 2010 (255) E.L.T. 397 (P & H), and Sanghi Industries Ltd. vs. Commissioner: 2008 (230) E.L.T. 375 (Tri.-Bang.). There are also decisions where denial of MODVAT/CENVAT credit on the ground of non-registration with the department was set aside vide Commissioner vs. Myron Electricals Pvt. Ltd.: 2007 (207) E.L.T. 664 (P&H) = (2006-TIOL-439-HC-P&H-CX), Sutham Nylocots vs. Commissioner: 2005 (188) E.L.T. 26 (Tri.-Chennai) and mPORTAL India Wireless Pvt. Ltd. vs. Commissioner: 2012 (27) S. T.R. 134 (Kar.) = (2011-TIOL-928-HC-KAR-ST).

Respondent’s Contention:-The learned Additional Commissioner (AR) has reiterated the findings of the adjudicating authority.

Reasoning of Judgment:- The Tribunal heard both the party and considering the submissions & Pursuing the records, it is summarized that the learned Commissioner framed two issues as follows:
(i)            Whether the distribution, by the corporate office of the company, of credit of service tax (paid by the said corporate office and their manufacturing unit at Bangalore (Electronic City) on management consultancy service received from abroad, under the reverse charge mechanism in terms of Section 66A of the Finance Act, 1994) to the manufacturing units at Bangalore (Electronic City), Ahmedabad and Pune without taking ISD registration under the Service Tax (Registration of Special Category of Persons) Rules, 2005 was legally proper and regular and, if not, whether the challans issued by the corporate office for such distribution of CENVAT credit to the three manufacturing units in the year 2009- 2010 were valid documents for the purpose of availment of such credit by the three units.

(ii)           Whether the CENVAT credits so distributed to the three manufacturing units at Bangalore, Ahmedabad and Pune by the corporate office of the company under cover of transfer challans without ISD registration were admissible to the recipient units.

The Tribunal finds that in so framing the issues, the learned Commissioner was proceeding on the premise that the corporate office was distributing the credits to the three manufacturing units at Bangalore, Ahmedabad and Pune. Before the Commissioner, the case of the appellant was that their corporate office was transferring a part of the credit of service tax paid under reverse charge mechanism on ‘management consultancy service' received from abroad, to the three manufacturing units at Bangalore, Ahmedabad and Pune under sub-rule (4) of Rule 12A of the CCR, 2004 as applicable to a large taxpayer unit, which the appellant was. Therefore, the learned Commissioner ought to have, at the outset, determined whether the corporate office of the company was transferring the credit to the three manufacturing units or whether it was distributing the credit to them inasmuch as there is an intelligible difference between the two. An ISD - an office of the manufacturer of final products or provider of output service – receives invoices issued [under Rule 4A(1) of the Service Tax Rules, 1994] by input service providers, and issues invoices [under Rule 4A(2) of the Service Tax Rules, 1994] for the purpose of distributing the credit of service tax paid on the input services, to such manufacturer of final products or provider of output service. The ISD receives and distributes service tax credit. In the case of a LTU, any of its members viz. manufacturers of final products and/or providers of output services receives input services under cover of invoices issued by the providers of such input services and transfers CENVAT credit of the service tax paid on such input services, wholly or partly, to other members of the LTU, under cover of “transfer challans”. In the ISD regime, the manufacturer of final products or the provider of output services receives both input services and CENVAT credit of the service tax paid thereon. On the other hand, within a LTU, the transferee-member (premises) receives only CENVAT credit from the transferor- member (premises) under Rule 12A(4) of the CCR, 2004.

The Tribunal also finds that it should have been borne in mind by the learned Commissioner that ISD registration was required only where CENVAT credit was distributed. If CENVAT credit was only transferred from one manufacturing/service-providing unit of LTU to another manufacturing/service-providing unit of the LTU, the transactions were governed by the provisions of Rule 12A. Therefore, in order to ascertain the applicability of Rule 12A to the case on hand, it was imperative on the part of the adjudicating authority to determine whether the transactions under the challans issued by the corporate office to the three manufacturing units constituted 'transfer' of credit or `distribution' of credit. We find that the learned Commissioner chose to rule out the applicability of Rule 12A without even attempting a distinction between 'transfer' and 'distribution'. This is abundantly clear from the very first clause of para 21 of the impugned order, which reads thus: "I hold that the challans under which service tax credit   was transferred/ distributed by the corporate office to the manufacturing units at Bangalore (Electronic City), Ahmedabad and Pune during the years without obtaining registration as input service distributor are invalid, for the purpose of availing CENVAT credit".

The Tribunal further finds that considering the nature of dispute involved in this case, we observe that the only substantive issue to be considered in this case is whether, on the facts of this case, the corporate office of the appellant-company was distributing service tax credit to their manufacturing units at Bangalore, Ahmedabad and Pune in contravention of the provisions of the Service Tax (Registration of Special Category of Persons) Rules, 2005 and Rule 4A of the Service Tax Rules, 1994 or whether, as a member of a LTU, it was just transferring service tax credit to other members of the same LTU under Rule 12A(4) of the CENVAT Credit Rules, 2004.

The Tribunal also finds that the corporate office of the company at UB City, Bangalore and its manufacturing/service- providing units situated at Bangalore (Electronic City), Ahmedabad and Pune are, admittedly, members of the same LTU. During the period of dispute, all members of the LTU were having the requisite registration with the department. The corporate office of the company had service tax registration for providing services such as management, maintenance or repair service, business auxiliary service, etc. All the manufacturing units had Central Excise registration. Of these units, the one at Bangalore (Electronic City) and the one at Pune (Ranjangaon Industrial Area) had Service Tax registration as well. Other undisputed or indisputable facts are that the corporate office at UB City, Bangalore and the manufacturing unit at Electronic City, Bangalore paid service tax under the reverse charge mechanism in terms of Section 66A of Finance Act, 1994 in respect of management consultancy service received from abroad, that about 60% of this amount was earmarked for use by a trading unit of the appellant, that the balance amount was transferred by the corporate office to the three manufacturing units at Bangalore (Electronic City), Pune (Ranjangaon Industrial Area) and Ahmedabad under cover of transfer challans, that the allocations to the units at Bangalore, Ahmedabad and Pune were made in the ratio 60:25:15 based on these units' turnover of excisable products and that these units took the respective credits on the strength of the said challans. The case of the appellant is that the entire exercise was in terms of sub-rule (4) of Rule 12A of the CCR, 2004 and that the provisions requiring ISD registration were not applicable to them. At this stage, it will be useful to refer to the provisions of Rule 12A ibid .

The Tribunal also finds that the text of Rule 12A opens with a non obstante clause reading "notwithstanding anything contained in these rules". The rule lays down a special procedure for large tax payers. Sub-rule (1) provides for removal, without payment of the amount specified under sub-rule (5) of Rule 3, of inputs (except a few specified items) or capital goods as such by a LTU, under cover of a transfer challan/invoice, from any of its registered premises to its other registered premises (other than premises of first or second stage dealer) for further use in the manufacture of final products in the recipient premises subject to certain conditions. The chief condition is that the final products should be cleared from the recipient premises on payment of appropriate duties of excise within six months from the date of receipt of the inputs in the said premises. Alternatively, the final products should be exported out of India under bond or letter of undertaking within six months from the date of receipt of the inputs in the recipient premises. Sub-rules (2) and (3) may not be relevant to the present context. Sub-rule (4), which is central to the present dispute, provides for transfer, by a LTU, of CENVAT credit from one of its registered manufacturing/service-providing units to its other registered manufacturing/service-providing units. It also lays down the manner of transfer of CENVAT credit. It further provides that the recipient units can take CENVAT credit on the basis of transfer challans and that the utilization of such credit shall be subject to the limitations prescribed under Rule 3(7)(b). Sub-rule (5) provides that a LTU shall submit a monthly return for each of its registered premises. Sub-rule (6) is irrelevant to the present context. Sub-rule (7) provides thus: "Provisions of these rules, insofar as they are not inconsistent with the provisions of this rule shall mutatis mutandis apply in case of a large tax payer". To our mind, the provisions governing ISDs are inconsistent with the provisions of Rule 12A and hence not applicable to LTUs. The non obstante clause of Rule 12A assumes significance in this context.

The text of sub-rule (4) of Rule 12A, eliminatingirrelevant portions, reads as follows:

(4) A large tax payer may transfer, CENVAT credit available with one of his registered manufacturing premises or premises providing taxable service to his other such registered premises by, -

(i)            making an entry for such transfer in the record maintained under rule 9;

(ii)           issuing a transfer challan containing registration number, name and address of the registered premises transferring the credit as well as receiving such credit, the amount of credit transferred and the particulars of such entry as mentioned in clause (i), and such recipient premises can take CENVAT credit on the basis of such transfer
challan as mentioned in clause (ii);

Provided that such transfer or utilization of CENVAT credit shall be subject to the limitation prescribed under clause (b) of sub-rule (7) of rule 3.

Provided further that nothing contained in this sub-rule be applicable if the registered manufacturing premises is availing following notifications of Government of India in the Ministry of Finance (Department of Revenue),-

(i) ………………..
(ii) ………………..
(iii) ……………….
(iv) ……………….
(v) ………………..
(vi) ……………….
(vii) ………………
(viii) ……………..

The Tribunal further concluded that CENVAT credit available with any one of the registered manufacturing/service-providing premises of a LTU can be transferred to other registered manufacturing/service-providing premises of the same LTU. For this purpose, appropriate entry has to be made in the record maintained under Rule 9 (See sub-rules (5) and (6) of this Rule). The transfer of credit has to be effected by issue of transfer Challan containing the registration number, name and address of the transferor-premises (sender- premises) as well as the registration number, name and address of the transferee-premises (recipient-premises), the amount of credit transferred and also the particulars of the entry made in the record maintained under Rule 9. The CENVAT credit on the basis of transfer challans can be taken at the transferee (recipient) premises. Nowhere in sub-rule (4) of Rule 12A is there any requirement of any ISD registration number to be mentioned in a transfer challan. What the sub-rule requires, inter alia , is the mention of "registration number" i.e. Central Excise registration number or Service Tax registration number. This being the legal position, the case of the Revenue that the challans issued by the corporate office without obtaining ISD registration are invalid for the purpose of availment of CENVAT credit and consequently the CENVAT credits received under cover of such challans by the three manufacturing units are not admissible to such units has no statutory backing. However, the admissibility of the credits to the three manufacturing units will be subject to the conditions and limitations prescribed under Rule 12A. The learned Commissioner had no occasion to examine whether such conditions were complied with by the appellant. This is because he ruled out the applicability of Rule 12A to the case on hand, outright.

The Tribunal also finds that Sub-rule (7) of Rule 12A must not be overlooked while dealing with the case of a LTU. As per this sub-rule, the provisions of CENVAT Credit Rules, 2004, insofar as they are not inconsistent with the provisions of Rule 12A, shall mutatis mutandis apply in the case of a LTU. Therefore, for the purpose of transfer of CENVAT credit under sub-rule (4) of Rule 12A, the transferor-unit should have initially taken the credit by making an entry in its CENVAT account maintained under Rule 9. In the same account, the transferor-unit should make another entry for transfer of the credit to its sister unit within the LTU. The latter unit (transferee/recipient unit) should also make corresponding entry in its CENVAT account maintained under Rule 9 upon receipt of the transfer challans issued by the other unit. The transfer challan should contain all the requisite particulars mentioned under clause (ii) of sub-rule (4) of Rule 12A. Whether the appellant, indeed, met these requirements is not clear from the records. This question was not examined by the learned Commissioner either. The claim of the appellant is that the transfer challans issued by the corporate office contained all the essential particulars for the purpose of availment of CENVAT credit by the recipient units. The learned counsel has referred to certain decisions while arguing that the CENVAT credits received by the three manufacturing units under cover of transfer challans cannot be denied to them on the ground of non-mention of any particulars in such challans. It is for the adjudicating authority to consider such claims. For all the reasons stated hereinbefore, we set aside the impugned order and allow this appeal by way of remand with a request to the Commissioner to undertake de novo adjudication of the dispute in accordance with law and the principles of natural justice. It is made clear that the adjudicating authority should proceed on the premise that Rule 12A of the CCR, 2004 is applicable to the appellant. The stay application also stands disposed of.

Decision:-Appeal allowed by way of remand

Comment:- The crux of this case is that there is difference between distribution of credit and transfer of credit and in case of a large tax payer unit, it is required to be examined the fact that whether there is distribution or transfer of credit as there are special provisions for transfer of credit under Rule 12A for a large tax payer unit and the same override the other provisions of the Central Excise Act. Accordingly, cenvat credit cannot be denied blindly on the allegation that input service distribution registration was not taken.

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PJ/Case Law/2013-14/1673

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