CENVAT Credit Not Denied Merely Because Expenses Booked At Head Office: CESTAT
Pranav B Prem
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, comprising S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member), has held that CENVAT credit distributed through an Input Service Distributor (ISD) cannot be denied to a manufacturing unit merely because the related expenses were booked in the books of the Head Office and not in the accounts of the factory receiving the credit. Allowing the appeals, the Tribunal set aside a demand of ₹3,07,83,328 along with interest and equal penalty, holding that such a condition is not prescribed under Rule 7 of the CENVAT Credit Rules, 2004 and cannot be read into the law.
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The appellant, Kansai Nerolac Paints Ltd., is engaged in the manufacture of paints, emulsions and varnishes. During an audit conducted by the Accountant General, it was observed that the appellant had availed CENVAT credit on advertisement agency services distributed by its Head Office acting as an ISD. The Department alleged that since the expenditure on advertisement services was booked in the books of the Head Office and not in the books of the manufacturing unit, the credit had been wrongly availed.
Based on this objection, multiple show cause notices covering periods from April 2006 to September 2013 were issued alleging violation of Rule 7 of the CENVAT Credit Rules and proposing recovery of ₹3,07,83,328. The demands were confirmed by the adjudicating authority, leading the appellant to approach the Tribunal.
Before the Tribunal, the appellant contended that there is no requirement under Rule 7 or any other provision mandating that expenses must be recorded in the books of the recipient manufacturing unit. It was argued that the ISD mechanism allows head offices to receive invoices for common input services and distribute the credit to manufacturing units. The appellant also relied on CBEC clarifications which recognized that services such as advertising, market research and consultancy are often procured centrally and their credit can be distributed through the ISD route.
The appellant further submitted that the eligibility of credit must be examined at the ISD level and not at the level of the recipient manufacturing unit. It was also contended that the show cause notices were based on audit objections and did not establish suppression, fraud or intent to evade duty.
After hearing both sides, the Tribunal observed that Rule 7, as applicable during the relevant period, imposed only two conditions for distribution of credit by an ISD: first, that the credit distributed should not exceed the amount of service tax paid, and second, that credit attributable to services used exclusively for exempted goods or services should not be distributed.
The Bench held that the rule does not require the expenses to be booked in the accounts of the manufacturing unit receiving the credit, and emphasized that no provision not expressly contained in the rules can be read into the statute. The Tribunal also noted the settled legal position that the Department cannot question the correctness of credit distributed by an ISD at the recipient unit’s end, as the recipient merely avails credit on the basis of invoices issued by the distributor.
In view of these findings, the Tribunal held that the show cause notices and the impugned order were unsustainable in law. Accordingly, the impugned order was set aside and all three appeals were allowed with consequential relief to the appellant.
Cause Title: Kansai Nerolac Paints Ltd Versus Commissioner of Central Excise, Goods & Service Tax, Faridabad
Case No.: Excise Appeal No. 55150 of 2014
Coram: S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member)
