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2020 (12) TMI 911 - AT - Service TaxDistribution of CENVAT Credit - Cenvat Credit including Education Cess and SHE cess taken on the Research Development services received to their manufacturing units - Rule 7 of Cenvat Credit Rules, 2004 - HELD THAT - This Bench in its earlier judgement DR. REDDY S LABORATORIES LIMITED VERSUS COMMISSIONER OF CUSTOMS CENTRAL EXCISE SERVICE TAX, HYDERABAD 2020 (3) TMI 1276 - CESTAT HYDERABAD has held that the services used in the R D have a direct nexus with the manufacture of the final products. It is not necessary that the pharmaceutical industry has a complete R D facility in each of its manufacturing units. In order to economise and benefit from the economies of scale, R D units are set up as independent units for serving various manufacturing units of the manufacturer. In such a case, the services availed in the R D units have a direct nexus to the manufacture of the products in various units. If the assessee is registered as an input service distributor, the CENVAT Credit availed on the services used in the R D unit can be distributed to various manufacturing units. Appeal allowed - decided in favor of appellant.
Issues:
Whether the appellant is entitled to distribute the Cenvat Credit on Research & Development services to their manufacturing units in accordance with Rule 7 of Cenvat Credit Rules, 2004. Analysis: The main issue in this case revolves around the entitlement of the appellant to distribute the Cenvat Credit, including Education Cess and SHE cess, taken on the Research & Development services received to their manufacturing units in compliance with Rule 7 of Cenvat Credit Rules, 2004. The Tribunal considered the facts presented and the arguments from both sides. The Revenue issued a show cause notice, which was adjudicated by the Principal Commissioner through an impugned order, leading to the appeal before the Tribunal. The Tribunal noted that there was no dispute regarding the facts of the case. The appellant, a major manufacturer of pharmaceutical products, had an Integrated Product Development Organisation Unit (IPDO) undertaking research and development activities for various manufacturing units. The appellant contended that the services used in the IPDO were intrinsically linked to the manufacture of final products in their manufacturing units, justifying their entitlement to Cenvat Credit on such services. The Tribunal delved into the nature of the pharmaceutical industry, emphasizing its specialized characteristics and the importance of research and development in the manufacturing process. It highlighted that certifications, quality control, and regulatory clearances are essential for pharmaceutical products to be marketable. The Tribunal acknowledged that a significant portion of the cost of pharmaceutical products is attributed to research and development activities. It was observed that the services utilized in the R&D have a direct connection to the manufacturing of final products, even if a complete R&D facility is not present in each manufacturing unit. The Tribunal noted that R&D units are often established as independent entities to serve multiple manufacturing units, enabling the distribution of Cenvat Credit if the appellant is registered as an input service distributor. The Tribunal cited precedents from the Tribunal Allahabad and decisions from the Honorable Apex Court, as well as previous cases from CESTAT Hyderabad and Chennai, to support its view that the issue at hand had been settled in favor of the appellant. Consequently, the Tribunal found the impugned orders unsustainable and set them aside. The Tribunal concluded that the demand could not be sustained based on the established principles and case laws. Therefore, the appeal was allowed with consequential benefits, if any, as per the law, and the impugned order was set aside.
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