2018 (5) TMI 1511 - AT - Central Excise

Penalty - CENVAT credit - input service distribution - It was detected during the audit that the ISD i.e. Head Office of the assessee has distributed the input service credit wrongly between the units inasmuch as they should have distributed it proportionate to the turnover of different units but they transferred excess transfer on common services to the appellant based in Hyderabad - appellant reversed the credit alongwith applicable interest on being pointed out - Held that - It is beyond comprehension that the recipient of the invoice or even the departmental officers can be reasonably expected to know the turnover of different units and calculate the percentage of the credit to be distributed to them. This can only come up either through audit or investigation - The only person who should knowing this and distribute the credit appropriately is the ISD and they have violated the rules. As far as the appellant is concerned, he has taken credit on the basis of the invoice wrongly and when pointed out by the audit, reversed the credit and also paid interest thereon. The violation of Rule 7 (d) is on the part of ISD who is the registrant unit in Kolkata. Penalty - Held that - there is no evidence in the records of fraud, collusion, wilful misstatement or suppression of facts or contravention of any provisions of the Act or Rules with the intent to evade payment of duty on behalf of the appellant which would have rendered him to penalty under Rule 15 (2) read with Section 11 AC of Central Excise Act - penalty set aside. Appeal allowed in part.

Summary

Issues:
1. Incorrect distribution of CENVAT credit by Input Service Distributor (ISD).
2. Imposition of penalty under CENVAT Credit Rules, 2004.

Issue 1: Incorrect distribution of CENVAT credit by Input Service Distributor (ISD):
The case involved manufacturers of Alkyd Resins and other chemicals under chapter 32 and 39 of Central Excise Tariff Act. The appellants' Head Office in Kolkata acted as an Input Service Distributor (ISD) and distributed the credit of input services among three units. An audit revealed that the ISD had wrongly distributed credit between the units, resulting in an excess transfer of credit to one unit. Upon detection, the appellants reversed the credit along with interest. A show cause notice was issued seeking recovery of the excess credit, interest, and imposition of a penalty. The Dy. Commissioner confirmed the demand, interest, and imposed a penalty under CENVAT Credit Rules, 2004. The Commissioner (Appeals) upheld the order but reduced the penalty by 50% due to the reversal of the wrongly availed credit. The appellant contended that the ISD was responsible for appropriate credit distribution and that they rectified the error promptly upon audit detection. The appellant argued that there was no violation on their part as they relied on the ISD's invoice. The Department argued that the appellant should have known the turnover of each unit and taken credit proportionately. The ISD's violation led to the appellant's inadvertent error in availing excess credit.

Issue 2: Imposition of penalty under CENVAT Credit Rules, 2004:
The Department contended that the appellant violated Rule 7(d) of Central Excise Rule 2004 by failing to distribute credit pro rata based on turnover. The ISD's violation led to the appellant's contravention of Rule 15(2) of CENVAT Credit Rules 2004. The appellant argued that they rectified the error promptly upon audit detection and there was no evidence of fraudulent intent or evasion of duty. The Tribunal noted that the ISD was responsible for appropriate credit distribution, and the appellant, upon audit detection, rectified the error by reversing the credit and paying interest. The Tribunal found no evidence of fraud or intent to evade duty on the appellant's part. Consequently, the Tribunal allowed the appeal, confirming the recovery of credit and interest while setting aside the penalty imposed on the appellant.

In conclusion, the judgment highlighted the importance of accurate credit distribution by ISDs and the obligation of recipients to ensure compliance. The case emphasized the significance of prompt rectification of errors upon audit detection and the absence of fraudulent intent in determining penalty imposition under CENVAT Credit Rules, 2004.