By TIOL News Service

MUMBAI, JAN 19, 2018: BOTH, the assessee and the Revenue are in appeal against the order passed by the lower appellate authority.

The assessee has units situated at Thane, Maneck Nagar and Nasik. CENVATcredit of the following input services viz. legal, secretarial, information technology, human resources, corporate, finance, insurance etc. which were common to all units, was availed only at Thane unit.

Therefore, a SCN came to be issued alleging that the entire credit could not have been availed at one unit but should have been distributed amongst all the units.

For the period 1.7.2012 to 31.3.2013 ,demand was confirmed citing the amendment to Rule 7(d) of the CCR, 2004 read with Explanation 3 thereto.

The demand was upheld by the Commissioner (Appeals), however, he set aside the penalty.

And, therefore, appeals came to be filed by both sides.

The assessee submitted that the credit in respect of services that has been distributed was availed prior to 2012 and payments were also made prior to 2012 – invoices were produced in this regard. Inasmuch as since the credit accrued to them prior to the amendment to Rule 7 of the CCR, they could have distributed the credit as per the rule 7 as it existed prior to the said amendment. Moreover, it is a revenue neutral situation since by availing credit in only one unit the appellant could not have gained anything. Being a question of pure interpretation, the Commissioner(A) had rightly set aside the penalty and, therefore, there was no merit in the Revenue appeal. Reliance is placed on the apex court decision in Eicher Motors Ltd. - 2002-TIOL-149-SC-CX-LB to assert that the benefit available to them at the time of accrual of credit cannot be denied if the law is subsequently changed. Provisions of section 38A of the CEA, 1944 are also adverted to.

The AR supported the case of Revenue by submitting that once the credit was denied by the lower authorities by invoking section 11A(4) of the CEA, 1944, mandatory penalty u/s 11AC is imposable.

The Bench extracted sub-rule 7(d) of the CCR, 2004 and Explanation 3 thereto inserted in CCR on 1.4.2014 [amending notification 5/2014-CX(NT)] and which reads -

"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 on the input service to its manufacturing units or units providing output service, subject to the following conditions, namely:-

(a)

(b)

(c)

(d) credit of service tax attributable to service used by more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period.

Explanation 3: For the purposes of this rule, relevant period shall be,-

(a) If the assessee has turnover in the financial year preceding to the year during which credit is to be distributed for the month or quarter, as the case may be, the said financial year; or

(b) If the assessee does not have turnover for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed."

After considering the submissions, the Bench observed -

On Merits:

"6.1 It is seen that the said rule permits distribution of cenvat credit. Any duty paid by the assessee does not automatically become cenvat credit. Any duty paid by the assessee which qualifies the test of Rule 3 of the Cenvat Credit Rules, 2004 can become cenvat credit when the same is availed by the assessee as cenvat credit. The claim of UniDeritend Ltd. that as soon as they paid the duty, the same became credit in their account is misplaced. To convert any duty paid into cenvat credit, it has to be claimed in their account and returns as cenvat credit. In the instant case, while the invoices were raised prior to the amendment, there is no evidence if the payment was made prior to the amendment. Thus if the credit was available prior to the amendment is also a doubtful proposition. In any case UniDeritend Ltd. has availed the credit of duty paid by them after the amendment and thus the law as it existed at the time when they converted the duty paid by them into cenvat credit would be the law applicable to the said credit. Since at the time of availing cenvat credit, sub-rule (d) of Rule 7 and Explanation 3 of the said rule was in existence at the time of availing credit,UniDeritend Ltd. was required to follow the same and avail the credit only in terms of Rule 7(d) read with Explanation 3. In these circumstances, the demand of reversal of credit is upheld."

On Penalty:

"8. … Rule 7(d) has been incorporated in the Rules and it is unambiguous and clear. I find there is no merit in the argument of UniDeritend Ltd. Thus the issue was not a matter of interpretation. I find that the plain language of the Rule is very clear and leaves no scope for doubt. Under these circumstances, imposition of penalty is justifiable."

The appeal of the assessee was dismissed and that of Revenue was allowed.

In passing : The Rule 7 of CCR, 2004 over the years -

A. Rule 7 of CCR, 2004 prior to 01.04.2012 -

"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 use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed."

B. Rule 7 of CCR, 2004 w.e.f 01.04.2012 [upon substitution by 18/2012-CX(NT) dated 17.03.2012] -

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 conditions, namely: -

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

(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 only to that unit; and

(d) credit of service tax attributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.

Explanation 1 .- For the purposes of this rule, "unit" includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or otherwise.

Explanation 2.- For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5.

C. Rule 7 of CCR, 2004 as amended by notification 28/2012-CX(NT) dated 20.06.2012 (w.e.f 01.07.2012) –

(i) for clause (d), the following clause shall be substituted, namely:-

"(d) credit of service tax attributable to service used in more than one unit shall be distributed pro rata 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."

(ii) after Explanation 2, the following Explanation shall be inserted, namely:-

"Explanation 3. - (a) The relevant period shall be the month previous to the month during which the CENVAT credit is distributed.

(b) In case if any of its unit pays tax or duty on quarterly basis as provided in rule 6 of Service Tax Rules, 1994 orrule 8 of Central Excise Rules, 2002 then the relevant period shall be the quarter previous to the quarter during which the CENVAT credit is distributed.

(c) In case of an assessee who does not have any total turnover in the said period, the input service distributor shall distribute any credit only after the end of such relevant period wherein the total turnover of its units is available."

(See 2018-TIOL-266-CESTAT-MUM)