By TIOL News Service

BANGALORE, JUNE 18, 2013: 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.

The corporate office at UB City and the unit at Electronic City paid service tax to the extent of Rs.5,62,86,663/- 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 a sum of Rs.2,24,70,573/- 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.

Commissioner passed the impugned order-

(i) holding that the challans issued by the corporate office for transferring/distributing CENVAT credit of Rs.2,24,70,573/- 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 under Rule 15 read with Rule 25 of the Central Excise Rules, 2002.

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 observed,

“Obviously, 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.

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. The learned Commissioner chose to rule out the applicability of Rule 12A without even attempting a distinction between 'transfer' and 'distribution'.”

The Tribunal analysed the provisions, particularly Rule 12A and observed,

“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 (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 (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 Tribunal remanded the matter to the Commissioner making it clear that he should proceed on the premise that Rule 12A of the CCR, 2004 is applicable to the appellant.

(See 2013-TIOL-913-CESTAT-BANG )