2021 (5) TMI 906 - AT - Central Excise

CENVAT Credit - CENVAT Credit - Input service distribution (ISD) - input service is attributed to the goods on which excise duty is paid includes the cost of services on which credit was taken - Issuance of Input Service Distributors invoice by Parle to its contract manufacturing unit - contract manufacturing is carried out in terms of notification No. 36/2001-CE (NT) - HELD THAT - The appellant accepted the authorization and agreed to discharge all liabilities under the Excise Act and Rules made thereunder in respect of the goods manufactured from time to time by the appellant on behalf of Parle. The terms and conditions also stipulate that the appellant would work as a job worker for manufacture of Biscuits for Parle and that Parle would arrange to send the raw materials and packing materials to the appellant on payment of Central Excise duty and that the appellant would avail CENVAT credit of Excise duty paid on the raw and packing materials and capital goods. It also provides that the appellant would made excise invoice/stock, Transfer Notes to Depots or Wholesalers of Parle and would pay Excise duty on the assessable value as shown in the invoice of Parle - It is in terms of the CENVAT Rules, the Registration Exemption Notification and the aforesaid authorization that it has to be determined whether input service credit is available to the appellant even prior to 01.04.2016. The Constitution Bench of the Supreme Court in COMMISSIONER OF CUSTOMS (IMPORT) , MUMBAI VERSUS M/S. DILIP KUMAR AND COMPANY ORS. 2018 (7) TMI 1826 - SUPREME COURT was constituted to examine what would be the interpretative rule to be applied while interpreting a tax exemption provision/ notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied. The Supreme Court observed that the core issue to be examined in the event of any ambiguity in an exemption notification is whether the benefit of such an ambiguity should go to the assessee or should be considered in favour of the revenue by denying the benefit of the exemption to the assessee. CENVAT is a beneficial scheme with the stated purpose of allowing CENVAT credit of all taxes paid on inputs and services so as to avoid cascading effect of taxes and duties - even in terms of the provisions of rule 2(m) and rule 7 of the CENVAT Rules, as they stood prior to 01.04.2016, the appellant could distribute CENVAT credit in respect of the service tax paid on inputs services to its manufacturing units, including a job workers. Parle was justified in distributing credits on input services attributable to the final product on a pro-rata basis proportionate to the turnover of each unit between the manufacturing plants of Parle and its contract manufacturing units, including the appellant, under rule 7(d) of the CENVAT Rules. It would not be necessary to answer the issue that whether the appellant would, irrespective of the answer to the first issue, be entitled to avail CENVAT credit when input service is attributed to the goods on which excise duty is paid and includes the cost of services on which credit was taken. The matter may now be placed before the Division Bench for disposal of the appeal.

Summary

Issues Involved:
1. Legality of Input Service Distributors' (ISD) invoice issuance by Parle to its contract manufacturing unit under Notification No. 36/2001-CE (NT).
2. Entitlement of Krishna to CENVAT credit irrespective of the correctness of ISD invoice issuance by Parle.

Detailed Analysis:

Issue 1: Legality of ISD Invoice Issuance by Parle to its Contract Manufacturing Unit
The primary issue was whether the issuance of ISD invoices by Parle to its contract manufacturing unit, Krishna, was legal under Notification No. 36/2001-CE (NT). The Tribunal examined the provisions of Rule 2(m) and Rule 7 of the CENVAT Credit Rules, both before and after the amendment on 01.04.2016.

- Pre-01.04.2016 Provisions: Rule 2(m) defined an ISD as an office of the manufacturer or producer of final products. Rule 7 allowed the distribution of CENVAT credit to "its manufacturing units." The Tribunal noted that the term "its manufacturing units" should include contract manufacturers operating under the Registration Exemption Notification, which exempts the principal manufacturer from registration and procedural requirements, allowing the contract manufacturer to step into the shoes of the principal for compliance purposes.

- Post-01.04.2016 Provisions: The amendment explicitly included "outsourced manufacturing units" in the definition of ISD and allowed distribution of credit to such units. The Tribunal found that this amendment merely clarified the existing provisions and should be considered as having retrospective effect.

The Tribunal referred to the decisions in Tamil Trading Corporation and FDC Ltd., which supported the inclusion of contract manufacturers within the scope of "its manufacturing units." The Tribunal disagreed with the decision in Sunbell Alloys, which had relied on Panacea Biotec and excluded job-workers from the definition of manufacturing units of the principal.

The Tribunal concluded that Parle was justified in distributing credits on input services attributable to the final product on a pro-rata basis proportionate to the turnover of each unit, including its contract manufacturing units, under Rule 7(d) of the CENVAT Rules.

Issue 2: Entitlement of Krishna to CENVAT Credit
Given the favorable resolution of the first issue, the Tribunal found it unnecessary to address the second issue. However, the second issue was whether Krishna was entitled to avail CENVAT credit when the input service is attributed to goods on which excise duty is paid and includes the cost of services on which credit was taken. The Tribunal's resolution of the first issue implicitly affirmed Krishna's entitlement to CENVAT credit.

Conclusion:
The Tribunal held that Parle's issuance of ISD invoices to Krishna was legal under the pre-amendment CENVAT Rules, and the amendment effective from 01.04.2016 was clarificatory and had retrospective effect. Consequently, Krishna was entitled to avail CENVAT credit distributed by Parle. The matter was remitted to the Division Bench for disposal of the appeal.