Purpose of Input Service tax distribution

PJ/Case Laws/2011-12/1502

Case: M/S MAHINDRA & MAHINDRA LTD v/s COMMISSONER OF CENTRAL EXCISE, PUNE-I

Citation: 2011-TIOL-1581-CESTAT-MUM

Issue:- Input service tax distribution – purpose behind it - in context of common services availed by various units of a single corporate entity - not mechanism for transfer of credit from one unit to another.

Brief Facts:- The appellant M/s Mahindra & Mahindra Ltd., Kanhe, Pune are manufacturer of Motor Vehicle Parts falling under Chapter 87 of the Central Excise Tariff Schedule. They have another manufacturing unit at Wagholi. Their Head Office is registered as an Input Service Distributor. It was noticed that Head Office had distributed input Service Tax amounting to Rs.1,21,497/- to the Kanhe unit in respect of services rendered to their another unit at Wagholi. Inasmuch as the services rendered were not availed by the Kanhe unit, a show-cause notice dated 1.10.2009 was issued to the appellant for recovery of the CENVAT Credit of Rs.1,21,497/- wrongly availed by them in terms of the provisions of Rule 14 of the Cenvat Credit Rules, 2004 and interest thereon was sought to be recovered under the said Rules. The notice also proposed to impose a penalty on the appellant under Rule 173Q read with Section 11AC of the Central Excise Act. The case was adjudicated by the jurisdictional Assistant Commissioner, who confirmed the demand of CENVAT Credit wrongly taken of Rs.1,21,497/- along with interest thereon under Rule 14 of the Cenvat Credit Rules, 2004. He also imposed an equivalent penalty of Rs.1,21,497/- on the appellant under Rule 15 of the said Rules read with Section 11AC of the Central Excise Act, 1944. The appellant preferred an appeal before the Commissioner (Appeals) who vide the impugned order upheld the order of the lower adjudicating authority and rejected the appeal.

Appellant’s Contention:- Appellant contended that there is no bar under Cenvat Credit Rules, 2004 for distribution of input service tax to a unit even though such input service might not have been availed by the said unit, so long as the input service tax is eligible to any unit of the appellant. He relied on the judgment of the Hon’ble High Court of Karnataka in the case of Commissioner of Central Excise, Bangalore-I Vs. ECOF Industries Pvt. Ltd. Reported in 2011 (271) ELT 58 (Kar)=(2011-TIOL-770-HC-Kar-ST), wherein the Hon’ble High Court held that 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. Once the manufacturer is registered as an input service distributor, he is entitled to distribute credit of such input in the manner prescribed under law.

Respondent’s Contention:- Revenue argued that in the instant case the input service tax paid for services availed at wagholi unit has been distributed to the kahne unit and these services pertain to warehousing service for the warehousing facility for wagholi unit, maintenance and repair service of the office equipment used in the wagholi unit and also for the vehicles used in the wagholi unit these services are no way connected with the manufacturing activity at the Kanhe unit and they have no nexus whatsoever with the activities at the Kanhe unit where the credit has been taken. They also relied on the Judgment of the Hon’ble High Court of the Gujarat in the case of Commissioner of Central Excise Vs. Gujarat Heavy Chemicals Ltd. reported in 2011(22) STR 610(Guj.)=(2011-TIOL-383-HC-AHM-SC), wherein it was held that to avail, input service tax credit there should be a connection between such services as having direct or indirect relation to manufacture as per the definition of input service under Rule 2(1) of the Cenvat credit Rules. They also relied on the judgment of the Apex court in the case of Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III reported in 2009(240) ELT 641 (SC)=(2009-TIOL-94-SC-CX).

Reasoning of Judgment:- The Tribunal noted that in the case of Maruti Suzuki Ltd., the Hon’ble Apex Court held that “unless and until the said input is used in or in relation to manufacture of final product within the factory of production, the said item would not become an eligible input. The said expressions 'used in or in relation to the manufacture' have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product.” Applying to the Apex Court's decision in the case of Maruti Suzuki (supra), it is seen that to qualify as an input service, such services should have been used whether directly or indirectly, in or in relation to the manufacture of final product or providing the taxable output services in the premises of manufacturer or where the provision of such services is taking place. In the instant case, there is no dispute about the fact that the services rendered at Wagholi unit were completely utilized there and they had no nexus or connection with the activities which were taking place at the Kanhe unit, where the credit has been availed. Therefore, such services cannot be treated as "input service" at the Kanhe unit for the purpose of availing credit. The input service distributor can distribute the Service Tax paid on input services amongst its various units only if such services are used among the units where the credit is taken. First of all the service has to qualify as an input service and thereafter, the tax can be distributed. The purpose of providing input service tax distribution is in the context of common services availed by various units of a single corporate entity. It is not mechanism for transfer of credit from one unit to another. If the appellant wanted such facility, then they should registered themselves as a Large Tax Payer unit and only when they register as a Large Tax Payer unit, they could transfer credit from one unit to another. The judgment in the case of Maruti Suzuki (supra) makes it also clear that unless and until the input service has nexus directly or indirectly, in or in relation to the manufacture of final products, the credit cannot be availed.

Decision:- Appeal disposed off.

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