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CX – ISD – Prior to 01.04.2012, no formula for distribution of credit was prescribed in rule 7 of CCR and, therefore, ISD was free to distribute credit as deemed fit: CESTAT

2019-TIOL-2525-CESTAT-MAD

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
REGIONAL BENCH, CHENNAI
COURT NO. III

Excise Appeal No. 40205 of 2013

Arising out of Order-in-Original No.36/2012, Dated: 26.10.2012
Passed by Commissioner of Central Excise, Chennai-III

Date of Hearing: 14.06.2019
Date of Decision: 14.06.2019

M/s TITAN INDUSTRIES LTD
(WATCH DIVISION) NO.3, SIPCOT INDUSTRIAL COMPLEX
HOSUR – 635126

Vs

COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX
CHENNAI-III COMMISSIONERATE 26/1, MAHATMA GANDHI ROAD
NUNGAMBAKKAM, CHENNAI – 600034

Appellant Rep by: Shri P R Renganath, Adv.
Respondent Rep by: Shri K. Veerabhadra Reddy, ADC (AR)

CORAM: Sulekha Beevi, C S , Member (J)
P Venkata Subba Rao, Member (T)

CX – The assessee is a manufacture of watches – During the period October 2006 to March 2012, they had availed cenvat credit on the basis of Inputs Service Distributor (ISD) invoices issued by their head office under Rule 7 of CCR, 2004 – A SCN was issued to assessee alleging that the input service distributor had wrongly allocated the excess cenvat credit by way of ISD invoices to the assessee by not apportioning the cenvat credit among different units in proportion to the sales turnover of different units – With effect from 1.4.2012, a specific formula was given in the rule regarding distribution of cenvat credit among various units by the ISD – Prior to this date, no such formula was indicated and therefore the ISD was free to distribute cenvat credit as deemed fit – The entire demand is not sustainable on the ground that Rule 7 of CCR, 2004 did not prescribe any formula for distribution of cenvat credit by ISD and therefore no liability can be fastened on them – No case has been made out by department for invoking extended period of limitation in as much as mere not indicating the formula adopted for distribution of cenvat credit does not amount to suppression of facts as there was no obligation upon the assessee to disclose the formula adopted by them – Therefore, even on limitation, Tribunal rule in favour of assessee – The impugned order is not sustainable: CESTAT

Appeal allowed

Case laws cited:

CCE Vs MDS Switchgear Ltd. – 2008-TIOL-245-SC-CX… Para 3

CCE Vs Dashion Ltd. – 2016-TIOL-111-HC-AHM-ST… Para 6

CCE Jaipur Vs National Engineering Industries Ltd – 2016-TIOL-922-HC-RAJ-CX … Para 6

FINAL ORDER NO. 40853/2019

Per: P Venkata Subba Rao:

This appeal is filed against Order-in-Original No.6/0212 dt. 26.10.2012 passed by Commissioner of Central Excise, Chennai-III.

2. The facts of the case, in brief, are that the appellant is a manufacture of watches and is registered with Central Excise Department for discharge of Excise Duty liability. They also avail the benefit of cenvat credit under Cenvat Credit Rules, 2004. During the period October 2006 to March 2012, they had availed cenvat credit on the basis of Inputs Service Distributor (ISD) invoices issued by their head office under Rule 7 of CCR 2004. The head office of the firm had distributed the credit among other different units in proportion to the overheads incurred by different units. A show cause notice was issued to the assessee who is a recipient of the ISD invoices alleging that the input service distributor had wrongly allocated the excess cenvat credit by way of ISD invoices to the assessee by not apportioning the cenvat credit among different units in proportion to the sales turnover of different units. By not following the formula they have distributed excess cenvat credit to the appellants which was sought to be recovered from the appellants under CCR 2004. After following due process, the demands were confirmed by the lower authorities and hence this appeal.

3. Ld. counsel for the appellants contested the demands both on merit and limitation. On merit, it is the contention of the Ld. counsel that Rule 7 of CCR 2004 had sub-rule (a) and sub-rule (b) upto 1.4.2012 when sub-rule (c) and sub-rule (d) were also notified. By this amendment, a special formula for distribution of cenvat credit by ISD to various units has been incorporated in the rule itself. Prior to that date, there was no requirement of adopting any particular formula for distribution of cenvat credit among different units by the ISD. As the period in question was prior to 1.4.2012, no formula was required to be adopted as per the rule. The assessee was free to adopt any methodology and they have adopted a rational method by using the proportion of overheads as the basis for distribution of the cenvat credit. He would further argue that the distribution was not done by them but by the head office who are themselves registered as an ISD with the Central Excise department and if any mistake was committed by the ISD the SCN must be given to the ISD by the jurisdictional authorities and not to the recipient of the invoices by the Chennai Commissionerate. He would urge that it is well settled that the cenvat credit amount cannot be disturbed at the hands of the recipient [CCE Vs MDS Switchgear Ltd. – 2008 (229) ELT 485 (SC)] = 2008-TIOL-245-SC-CX. Therefore, Commissioner of Central Excise, Chennai-III having jurisdiction over the assessee had no locus standi to issue a show cause notice with respect to an act committed by their head office. Thus, not only has the SCN been issued to the wrong assessee but it has also been issued without any authority.

4. On limitation, it is his contention that the extended period of limitation was invoked in the SCN on the ground that the basis for distribution of credit was not disclosed. He would submit that there was no requirement under the law to disclose the basis for distribution of credit which, in any case, is not done by them but by the head office who are a separate registrant with the Service Tax department. It is well settled that suppression of facts would mean actual suppression of facts and when there is no liability to disclose any information the same need not be disclosed by them. In view of the above, the demand fails on the ground of limitation also.

5. Ld.D.R reiterates the findings of the lower authorities and asserts that the demands were correctly raised.

6. We have considered the arguments on both sides and perused the records. The main allegation in the SCN is that the ISD has wrongly distributed the service tax credit by not following the principle of proportionate to the turnover of sales. Rule 7 of CCR 2004 as applicable during the relevant period and upto 01.04.2012 read as follows :

“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.”

Subsequently, w.e.f. 1.4.2012, it has been revised as follows :

“Rule 7. Manner of distribution of credit by input services 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 servicetax 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 pro rata 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.”

As can be seen from the above, with effect from 1.4.2012, a specific formula was given in the rule regarding distribution of cenvat credit among various units by the ISD. Prior to this date, no such formula was indicated and therefore the ISD was free to distribute cenvat credit as deemed fit. This rule position has been made clear in the following judgments :

(i) CCE Vs Dashion Ltd. – 2014 (41) STR 884 (Guj.) = 2016-TIOL-111-HC-AHM-ST

(ii) CCE Jaipur Vs National Engineering Industries Ltd. 2016 (42) STR 945 (Raj.) = 2016-TIOL-922-HC-RAJ-CX

We, therefore, find in the present case the entire demand is not sustainable on the ground that Rule 7 of CCR 2004 during the relevant period did not prescribe any formula for distribution of cenvat credit by the ISD and therefore no liability can be fastened on them. We also find force in the argument of the appellant that no case has been made out by the department for invoking extended period of limitation in as much as mere not indicating the formula adopted for distribution of cenvat credit does not amount to suppression of facts as there was no obligation upon the assessee to disclose the formula adopted by them. Therefore, even on limitation we rule in favour of the assessee. We also find force in the argument of the assessee that the cenvat credit distributed by the ISD cannot be modified by a recipient of the ISD invoices namely appellant. The impugned order is not sustainable on all the three grounds.

7. In view of the above, we find that the impugned order is required to be set aside and we do so. Impugned order is set aside and the appeal is allowed with consequential benefits, if any.

(Operative part of the order pronounced in court)

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