"GST & Central Excise Appeals Rejected: Appellant's Right to Cenvat Credit for Common Input Service in Die Lube Unit Questioned".

The appellant contested an order rejecting their claim for Cenvat Credit for common input services used in their Die Lube Unit. The GST & Central Excise Commissioner argued that the appellant violated Rule 7 of the Cenvat Credit Rules, 2004, which mandates pro rata distribution of common input services based on turnover. The appellant's counsel argued that the credit cannot be denied even without an Input Service Distributor (ISD) registration and that the case is governed by revenue neutrality. A similar case was cited where the Bombay High Court ruled that the assessee was entitled to utilize the Cenvat credit at one unit only. The court concluded that the appellant was not obligated to distribute the credit among its units, and the entire exercise would be revenue neutral. Therefore, the impugned order was set aside, and the appeal was allowed with consequential relief, if any, in accordance with law.

This appeal has been filed from the impugned Order dated 31.12.2018 passed by the Commissioner of GST & Central Excise (Appeals), Nashik rejecting the appeal filed by the appellant.

2. The issue involved herein is whether the Appellant is entitled to the Cenvat Credit attributable to common input service utilized in its Die Lube Unit as per the provision of Rule 7 of Cenvat Credit Rules, 2004?

3. The appellant is engaged in manufacturing of excisable

goods viz. Silicon Carbide Crucibles, Clay Graphite Crucibles and

spout cement etc. at their factory at Plot No. B-11, MIDC,

Walgunj, Aurangabad. They started manufacturing a new

product Die Lube at their another unit at different premises with

separate Central Excise registration for this product and during

the period 2012-13 upto August, 2014 they had availed Cenvat

credit of common services such as Management, Software,

Accounting, Auditing, Banking, Trade mark, Security, SAP

software system used for manufacture and clearance of their

final product of Die Lube at that separate premises at Plot No. K-

256, MIDC, Walgunj, Aurangabad, which according to the

department the appellant has wrongly availed to the extent of

turnover of their Die Lube Unit in violation of Rule 7 ibid. As per

the department common input services shall be distributed to all

units pro rata on the basis of turnover of such units during the

relevant period as prescribed in Rule 7 ibid and accordingly after

invoking the extended period a demand cum show cause notice

dated 27.2.2017 was issued to the appellant, which culminated

into Adjudication order dated 14.12.2017 disallowing the credit

taken and recovery of the amount of Rs.3,46,039/- alongwith

interest and penalty. On Appeal preferred by the Appellant, the

31.12.2018 upheld the order of the lower authority and rejected

the appeal filed by the appellant.

4. According to learned counsel at their Die Lube unit only

excisable goods were manufactured and not exempted goods

and the invoices pertaining to the input service consumed in the

said unit were also in the name of the appellant and therefore

the availment of Cenvat credit on the said invoices cannot be

faulted. He also submits that the appellant is the head office of

the company, which is not an Input Service Distributor (ISD)

registrant and is availing and utilizing the Cenvat credit of

services availed at other units and not distributing the same.

According to learned counsel even if they did not have a

registration as an ISD, the availment of Cenvat credit cannot be

denied. As an alternative submission learned counsel submits

that the present case is governed by revenue neutrality

inasmuch the Die Lube unit would otherwise be eligible for the

credit that was availed by the appellant and therefore there was

no loss to the revenue. Per contra learned authorised

representative on behalf of revenue reiterated the findings

recorded in the impugned order and prayed for rejection of

appeal.

5. I have heard learned counsel for the appellant and learned

Authorised Representative for the revenue and perused the case

records including the synopsis/written submission and case laws

placed on record. Somewhat similar issue came up for

consideration before the Hon’ble High Court of Judicature at

Bombay in the matter of The Commr. Central Tax, Pune-I

Commissionerate vs. M/s. Oerlikon Balzers Coating India P. Ltd.;

2018(12)TMI 1300- Bombay High Court in an appeal filed by the

department and in that matter the assessee having units at

various places viz. Pune, Gurgaon, Chennai, Jamshedpur etc.

took the Cenvat credit in its books during the period October,

2009 to March, 2014 at the Pune Unit only which was objected

to by the department and it was the specific case of the

department that the assessee should have distributed the tax

credit to the various units situated across the country and should

not have availed Cenvat Credit at Pune Unit only. In that

decision the Hon’ble High Court after considering Rule 7 ibid as it

was existing both pre and post amendment in 2012 held that the

assessee was entitled to utilize the Cenvat credit at its one unit

only i.e. Pune unit. The Hon’ble High Court also gone into the

issue of revenue neutrality in that matter. The relevant

paragraphs of the said decision are extracted as under:-

8. It would be appropriate that we reproduce Rule 7 as

existing prior to 2012 and post 2012 which is as under:-

Rule 7 as Existing Prior to 2012 :-

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 used in a

unit exclusively engaged in manufacture of exempted

goods or providing of exempted services shall not be

distributed.

Rule 7 Post 2012 - amendment

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 used in a

unit exclusively engaged in manufacture of exempted

goods or providing of exempted services shall not be

distributed;

(c) credit of service tax attributable to service used

wholly in a unit shall be distributed to the unit; and

(d) credit of service tax attributable to service used in

more than one unit shall be distributed pro rate on the

basis of the turnover during the relevant period of the

concerned unit to the sum total of the turnover of all the

units to which the service relates during the same period.

9. From reading of the above Rules both pre and post

amendment, it would be noticed that both provisions give an

option to the assessee concerned whether to distribute input

services tax available to it amongst its other manufacturing

units which are providing output services. This is evident

from the use of word “may distribute the Cenvat credit” is

found in Rule 7 both prior and also post 2012. Thus, from the

reading of the Rules, the option was available to the

assessee whether to distribute the Cenvat credit or not. In

fact, our attention is invited to Rule 7 of the Cenvat Credit

Rules, 2004 as substituted w.e.f. 1-4-2016 which has made

it mandatory for distribution of input services to the various

units providing output services. This is evidence by the use

of words “shall distribute the Cenvat credit” in the

substituted Rule 7 as Cenvat Credit Rules 2004 w.e.f. 1-4-

2016. Therefore, on plain reading of Rule 7 as existing both

pre and post amendment 2012 covering period involved in

these proceedings, the respondent - assessee was entitled to

utilize the Cenvat credit available at its Pune unit.

10. In any event, the Tribunal, on facts found that the

entire exercise would be revenue neutral. This is so as the

distribution of Cenvat credit to the various units would result

lesser service tax being paid by cash on their activity of

coating as they would have utilized the Cenvat credit

available for distribution.

11. In this view of the matter, the question of law as

proposed does not give rise to any substantial question of

law as the entire exercise would be revenue neutral. Thus,

making the entire exercise academic. Therefore, the question

is not entertained.

12. Accordingly, the Appeal is dismissed.”

6. The opening words of Rule 7 is ‘may distribute’ and

therefore the assessee is not under any obligation to distribute.

The word ‘shall’ which has been used later in the clauses/ sub-

clauses to rule 7 will come into operation only if the assessee

chooses to distribute among its units. Meaning thereby if the

appellant chooses to distribute then only he has to follow all the

conditions laid down in Rule 7 therein including clause (d) which

mandates that such distribution be done on pro rate basis.

During the period in issue the distribution was optional only was

further strengthen from the fact that in the year 2016 Rule 7

was further amended and the word ‘may’ was substituted with

the word ‘shall’ which makes it mandatory for the assessee to

distribute the credits between the units. My aforesaid view finds

support from the decision of a co-ordinate Bench of the Tribunal

in the matter of Gloster Cables Ltd. Unit I vs. Commr. Central

Tax, Medchal Commissionarte; 2018 (5) TMI 660- CESTAT

Hyderabad. Otherwise also it is no doubt true that the entire

excise would be revenue neutral as the utilization by any unit of

the same entity would not make any loss to the exchequer as

the credit disallowed from one unit in proportion to second unit

will be eligible as credit to such other unit and the net credit

availment and utilization form a company’s perspective will

remain unchanged and also that the appellant is not going to

gain anything extra to its entitlement. In such a scenario there is

no question of any suppression on the part of the appellant and

therefore extended period is also not invokable in the facts of

the case and on this count also the demand fails.

7. In view of the discussions made hereinabove, the

impugned order is set aside and the appeal filed by the appellant

is allowed with consequential relief, if any, in accordance with

law.

(Pronounced in open Court on 13.06.2023)

(Ajay Sharma)

Member (Judicial)