2021 (7) TMI 457 - AT - Central Excise

CENVAT Credit - failure to distribute credit on certain common input services and transition to GST - violation of Rule 7 of CENVAT Credit Rules, 2004 - denial of substantive right on the ground of procedural irregularity - extended period of limitation - revenue neutrality - HELD THAT - In the present case, the learned Commissioner has confirmed the demand of CENVAT credit on the grounds that the appellant has failed to distribute the credit to its various units regarding common input service. The defence of the appellant that after the implementation of GST with effect from 01.07.2017, the appellants have taken single registration for all the 9 units working in the State of Karnataka in terms of Section 25 of the CGST Act, 2017. Further, it is found that the unutilized credit from ER-1 Returns and ST-3 Returns were transferred to Form GST TRAN-1 in terms of Section 140 of the CGST Act 2017 read with Rule 117 of CGST Rules 2017 and the same was further taken to Electronic Credit Ledger. Once the Department has not disputed the eligibility or entitlement of credit then the failure of the appellant to distribute the same and transition to GST after coming into force of GST is only a procedural lapse and it will not affect the substantive right of the appellant because the failure to comply with the provisions of ISD are at best may be termed as procedural irregularity and it has been consistently held by various Courts that substantive right cannot be denied merely on procedural irregularity. Extended period of limitation - revenue neutrality - HELD THAT - The extended period of limitation invoked by the Department is not sustainable in the present case because the appellant has not concealed any information from the Department and all the documents were provided by the appellant to the Audit Party and on the basis of Audit Report, the SCN was issued - Further the entire demand in the present case results into revenue neutral because even if the appellant had distributed the credit, it would have been available for utilization by appellant post GST regime in terms of Section 25 of the CGST Act, 2017. It is found that pre-requisite of revenue neutrality is that there is no extra benefit to the assessee and no loss is caused to the Revenue and these two pre-requisites are fulfilled in the present case because even if the disputed credit was distributed to the units at a pro-rata basis, net effect of such transaction would have been NIL and in the present case, the SCN was issued to the appellant after the introduction of GST that at which point the issue has become revenue neutral because the appellant has taken one registration. The entire situation is revenue neutral - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Irregular availing of CENVAT credit.
2. Revenue neutrality.
3. Distribution of CENVAT credit prior to and post 01.04.2016.
4. Procedural lapse and its impact on substantive rights.
5. Invocation of the extended period of limitation.

Issue-wise Detailed Analysis:

1. Irregular availing of CENVAT credit:
The appellant, engaged in manufacturing automobile parts and registered under the Finance Act, 1994, availed CENVAT credit on capital goods, inputs, and input services. During an audit, it was observed that the appellant, as an Input Service Distributor (ISD), failed to distribute credit on certain common input services, leading to the issuance of Audit Report No.1082/2017-18. The report demanded the reversal of ineligible CENVAT credit of ?16,40,610/- availed in violation of Rule 7 of the CENVAT Credit Rules, 2004.

2. Revenue neutrality:
The appellant argued that the entire exercise was revenue neutral. They contended that the unutilized credit was transferred to the GST regime's electronic credit ledger, and even if the credits were distributed to the respective units, it would have flowed back into the electronic credit ledger under GST. The Tribunal agreed, noting that the net effect of not distributing the credit and availing it by the ISD would be NIL after the GST implementation. Various court decisions supported this view, emphasizing that non-distribution of credit in a revenue-neutral situation is a condonable procedural lapse.

3. Distribution of CENVAT credit prior to and post 01.04.2016:
For the period prior to 01.04.2016, Rule 7 of the CENVAT Credit Rules, 2004, stated that the ISD "may distribute" the CENVAT credit. This was amended to "shall distribute" with effect from 01.04.2016. The appellant argued, and the Tribunal agreed, that the demand for the period from April 2014 to March 2016 was unsustainable as the distribution was not mandatory before the amendment. This was supported by decisions in cases like Commr. of C.T., Pune-I, Commissionerate v. Oerlikon Balzers Coating India P. Ltd., and Hindustan Zinc v. Commissioner of CGST.

4. Procedural lapse and its impact on substantive rights:
The appellant contended that the failure to distribute the credit was a procedural lapse that should not affect their substantive right to the credit. The Tribunal concurred, citing various court rulings that procedural irregularities should not deny substantial benefits. The eligibility or entitlement to the credit was not disputed by the Department, and the transition to GST was a procedural matter.

5. Invocation of the extended period of limitation:
The appellant argued against the invocation of the extended period of limitation, stating that they had not suppressed any facts with an intention to evade duty. All relevant documents were provided to the Audit Department. The Tribunal found the invocation of the extended period unsustainable, as the entire demand resulted in a revenue-neutral situation, and the appellant had not concealed information. The demand was based on the audit report, and the appellant's actions were transparent.

Conclusion:
The Tribunal set aside the impugned order, finding it unsustainable in law. The entire situation was revenue neutral, and the procedural lapse of not distributing the credit did not affect the substantive right of the appellant. The demand of ?16,40,610/- was annulled, and the appeal was allowed.