By TIOL News Service

MUMBAI, JAN 08, 2014: DEMANDS of Rs.2,00,70,434/- & Rs.1,72,90,306/- have been confirmed against the two appellants with loads of penalties and interest on the ground that they availed CENVAT credit of service tax paid against invoices issued by M/s. Merck Specialties Ltd., as an ISD in contravention of Rules 2(m) and 7 of CCR, 2004.

It is alleged that M/s. Merck Specialties Limited who distributed the credit did not have any manufacturing unit of their own and the appellants are only job-workers who undertake repacking/re-labeling of goods imported/procured by M/s. Merck Specialties Ltd.

It is also alleged that the input service credit distributed by M/s. Merck Specialties Ltd. pertains to services such as car hire charges, outward transportation, clearing and forwarding charges, manpower recruitment agency services, maintenance and repair services and Custom house agent's services, event management services and since these input services were not used either directly or indirectly by the appellants in relation to the manufacture and clearance of the final products from the place of removal they are ineligible to avail the credit on the same.

Before the CESTAT, it is submitted that as per the agreement entered into by M/s Merck Specialties Ltd.with the appellants, they are manufacturing the goods on behalf of M/s. Merck and are also paying duty on the higher-price charged by M/s. Merck and M/s. Merck has authorized the appellants to pay duty on their behalf. In these circumstances, M/s Merck has paid service tax in respect of various taxable services which are in or in relation to the manufacture of goods and, therefore, being an input service distributor, the appellants are entitled to take credit in respect of the service tax paid by M/s Merck.

It is also submitted that the demand is hit by limitation as the credit taken was being reflected in the returns filed. The appellant also relied on the decisions in Tamil Trading Corporation vs. Commissioner of Central Excise, Tuticorin 2005-TIOL-1702-CESTAT-MAD, Colgate Palmolive (India) Ltd. vs Commissioner of Central Excise Mumbai 2011-TIOL-418-CESTAT-MUM, Tata Oil Mills Company Ltd. vs. Collector of Central Excise 2002-TIOL-255-SC-CX and the Finance Minister's Budget speech 2004-05 (para 146) to submit that the Government wanted to integrate service tax and excise duty by extending the credit of service tax across on goods and services and if service tax credit is denied on the services received by the principal manufacturer which has been distributed to the job-workers, the cascading effect of taxes would remain and, therefore, the purpose of the CENVAT credit scheme would get defeated.

The Revenue representative laid emphasis on rules 2(m) &7 of the CCR, 2004 and submitted that the appellants and the principal are independent entities; transactions between M/s. Merck and the appellants are on a principal-to-principal basis, and merely because the job-workers are paying excise duty on the value declared by M/s Merck Specialties Ltd. that by itself would not lead to the conclusion that the job-workers are not independent entities/manufacturers in their own right; it is a well settled position in law that job-workers are the manufacturers and not the suppliers of raw materials. Reliance is inter alia placed on the decision in Panacea Biotec Ltd. vs. Commissioner of Customs, New Delhi 2003-TIOL-328-CESTAT-DEL wherein it was held that the expression ‘factory' occurring in Rule 3 and 4 of the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 would not include factory of job-workers loaned to them on loan licence basis. Accordingly, it is prayed that the impugned demands are sustainable in law.

The Bench adverted to the provisions of rules 2 & 7 of CCR, 2004 and observed -

"5.3 Therefore, if anybody wants to avail input service credit, the above provisions of law has to be complied with. As per the definition of 'input service distributor' it has to be a service used by the manufacturer, whether directly or indirectly, in relation to the manufacture of final products and clearance of the final products up to the place or removal. In the present case, the manufacturer is the job-worker who has undertaken the processing of the goods supplied by M/s. Merck Specialties Ltd. and the services on which the credit is taken and distributed by M/s. Merck has nothing to do with the manufacturing operations undertaken by the appellants and, therefore, it is difficult to agree with the contention that the services received by M/s Merck is an input service relating to the manufacture of goods by the job-workers.

5.4 Secondly, 'input service distributor' means an office of the manufacturer or producer of final products. The office of M/s. Merck cannot be considered as an office of the job-worker and, therefore, the definition of ‘input service distributor' is not satisfied. Thirdly, Rule 7 deals with the manner of distribution, which specifically states that the input service distributor may distribute CENVAT Credit of the service tax paid on the input service to itsmanufacturing units.The job-workers' factory is not the manufacturing unit of M/s. Merck Specialties but they are independent legal entities by themselves and, therefore, the question of distribution of credit by M/s. Merck Specialties ltd. to the job-workers does not satisfy the condition that the credit is distributed to its manufacturing units. It is a settled position of law that job-workers who actually undertake the manufacturing process is the ‘manufacturer' of goods and not the supplier of raw materials."

After adverting to the decisions in M.M. Khambhatwala 1996 (84) ELT 161 (SC), Ujagar Prints 2002-TIOL-02-SC-CX Commissioner of Central Excise & Customs, Aurangabad vs. Mahyco Seeds Ltd.2005(182) ELT 163 (Bom), & Bombay Tyre International 2002-TIOL-33-SC-CX the Bench observed -

"5.7 In the light of these evidences available on record, it is crystal clear that the appellants are manufacturers on their own right and there is no manufacturing of goods on account of M/s. Merck Specialties Pvt. Ltd. Once this position is clear, the rules relating to input service credit distribution becomes easy to interpret. As per Rule 2(m) of the CCR, 2004 ‘input service distributor' means an office of the manufacturer or producer of output service. In this case, the distributor is M/s. Merck Specialties ltd. whereas the manufacturers are the appellants. Since these are separate legal entities, office of M/s. Merck cannot be considered as an office of the manufacturer and hence Merck cannot be considered as an ‘input service distributor' as defined under Rule 2(m) of the CCR, 2004. Further, as per Rule 7, the input service distributor has to distribute the credit to ‘its manufacturing units'. The manufacturing units of the appellants are not that of M/s. Merck Specialties and these units belong to the appellants and therefore, M/s. Merck cannot distribute CENVAT credit to the appellants under Rule 7 of CCR, 2004 as aforesaid. The expression ‘its manufacturing unit' specified under Rule 7 has to be interpreted in terms of the ratio of the decision of the Tribunal in the case of Panasonic Biotec Ltd. (Cited supra). In that case, for availing the benefit of Notification 23/98- Cus., a condition was prescribed that the importer should utilize the imported bulk drugs in the manufacture of life saving drugs in his factory. A question arose whether ‘his factory' would include factory of job-worker and it was held that job-workers' factory will not come within the purview of ‘his factory' mentioned in the said notification. In the present case, the expression used is "its manufacturing unit”. The said expression would mean that the manufacturing unit of the input service distributor and not that of the job-worker' and, therefore, the contention of the appellants that they are eligible for the input service credit distributed by M/s. Merck Specialties Ltd. is not in accordance with the provisions of input service distribution scheme envisaged under CCR, 2004."

As regards the reference made to the Budget speech by the appellant, the Bench observed that it is a settled position of law that law has to be interpreted as it is expressly worded;the Finance Minister's speech and the intentions are not relevant for interpreting the law so long as the wording of the law are very clear.

The Bench further observed -

"…The scheme does not envisage distribution of credit to manufacturing units belonging to others. In the present case, we have already seen that the distribution has been done by M/s. Merck Specialties Ltd. who cannot be considered as input service distributor at all as the appellants are job-workers, and the appellant's manufacturing units do not belong to M/s. Merck Specialties Ltd. Further office of M/s. Merck Specialties cannot be considered as an office of the appellant. Therefore, the distribution of credit by M/s Merck Specialties ltd. to the appellants are contrary to the provisions of law and accordingly, they are eligible for the input service credit distributed by Merck Specialties Ltd. and we hold accordingly."

The plea of time bar was also dismissed by the Bench by noting the following -

"5.10 …Vide letter dated 07/08/2007 M/s. Merck Specialties Ltd. had intimated to the jurisdictional Dy. Commissioner of Service Tax that they will be distributing the CENVAT credit in respect of service tax paid on input services to their own manufacturing units in the jurisdiction of BelapurCommissionerate in respect of various services and they had given the appellants' address as the address of their manufacturing units. The fact that the appellants are independent job-workers and the transactions were on a principal-to-principal basis was not disclosed to the department. Thus, there is a deliberate mis-declaration on the part of M/s. Merck Specialties Ltd. in stating that the units to which they have distributed the credit are their own manufacturing units whereas the facts were otherwise. Similarly, in the declaration made to Dy. Commissioner, Belapur I Division, the appellants did not intimate that they were availing credit in terms of Rule 7 of CCR, 2004. In views of the deliberate mis-statement of facts on the part of the appellants, the invocation of extended period of time is clearly justified. Therefore, the demands are sustainable."

The imposition of mandatory penalty was also upheld.

In fine, the appeals were dismissed as being devoid of merits.

In passing : Also see H & R Johnson (India) Ltd. 2013-TIOL-1577-CESTAT-MUM.

(See 2014-TIOL-38-CESTAT-MUM)