2024 (10) TMI 6 - AT - Central Excise

Wrongful transfer of credit attributable to all units by ISD exclusively to the respondent - contravention of second proviso to Rule 3(4) of Cenvat Credit Rules - entitlement to take the credit of service tax paid on Clearing Forwarding Agents Services as it is a post manufacturing activity which is not used in or in relation to manufacturing of the goods - extended period of limitation - interest and penalty - HELD THAT - The perusal of the ingredients of input service shows that the law itself distinguishes between services included in means-clause which are used directly or indirectly, in or in relation to the manufacturing and other services covered under inclusive-clause. It shows that the concept of manufacturing cost and post manufacturing expenses like advertisement, market research etc are incurred in relation to sales of goods. The proviso to Rule 3(4) limiting such credit availment does not apply where the credit is availed based on the invoices issued by ISD. Further it is a settled issue that the department does not have jurisdiction to question the correctness of credit distributed by ISD from the recipient i.e. respondent which is merely availing the credit based on invoices issued ISD - reference made to the decision of the Tribunal in the case of Metro Shoes Pvt. Ltd. 2019 (9) TMI 1532 - CESTAT MUMBAI , wherein the Tribunal has observed ' The appellant-assessee is a recipient of credit that is assigned by the distributor who, undisputedly, has borne the incidence of tax on procured services. It is the distributor who can be charged with awareness of exempted output/output service. if any, and who is empowered by the statute to take the credit. And it is only such availment by the distributor that can be put to notice for ineligibility as espoused in the decisions that fulfill the criteria of precedent.' The credit of service tax used exclusively in units manufacturing exempted goods cannot be attributed to a specific unit. Services like advertisement, manpower recruitment, market research etc are used by all the units and therefore, no input service has been exclusively utilized in respondent s Guwahati units. Show cause notices also have not established that these input services were exclusively utilized in Guwahati units. In view of the above, Guwahati units are not exclusively engaged in manufacturing and clearing the exempted goods and therefore, ISD has not violated the conditions of Section 7(b) and instead correctly followed the same. Extended period of limitation - HELD THAT - The respondent and ISD have been regularly filing the returns wherein they have been showing the Cenvat Credit availed by them and the department has not brought anything on record to show that the respondent and ISD have concealed the material facts with intent to evade the payment of tax. Therefore, extended period of limitation cannot be invoked in the present case. Interest and penalty - HELD THAT - The question of interest and penalty does not arise because the demand of service tax itself is not sustainable. There are no infirmity in the impugned order passed by the learned Commissioner and the same is upheld - appeal of Revenue dismissed.

Issues Involved:
1. Wrongful transfer of Cenvat Credit by Input Service Distributor (ISD).
2. Eligibility to take credit of service tax paid on Clearing & Forwarding Agents Services.
3. Applicability of second proviso to Rule 3(4) of Cenvat Credit Rules.
4. Jurisdiction of the department to question the correctness of credit distributed by ISD.
5. Proportional distribution of credit as per Rule 7 of Cenvat Credit Rules.
6. Extended period of limitation for raising demand.
7. Imposition of interest and penalty.

Issue-wise Detailed Analysis:

1. Wrongful Transfer of Cenvat Credit by ISD:
The department contended that the ISD wrongly transferred credit attributable to all units exclusively to the respondent, violating the second proviso to Rule 3(4) of Cenvat Credit Rules. The respondent argued that Rule 4A(1) of Service Tax Rules, 1994, and Rule 9(1)(g) of Cenvat Credit Rules allow ISD to distribute credit via invoices, which the respondent availed correctly. The Tribunal found that the common input services received by ISD are not used directly in manufacturing but fall under the inclusive part of the definition of input service, thus the restriction in the second proviso to Rule 3(4) does not apply.

2. Eligibility to Take Credit of Service Tax Paid on Clearing & Forwarding Agents Services:
The show cause notices alleged that the respondent is not eligible to take credit of service tax paid on Clearing & Forwarding Agents Services as it is a post-manufacturing activity. The Adjudicating Authority held that these services are 'input services' and the respondent is entitled to take credit on these services. The Tribunal upheld this view, emphasizing that the law recognizes the difference between manufacturing costs and post-manufacturing expenses.

3. Applicability of Second Proviso to Rule 3(4) of Cenvat Credit Rules:
The Tribunal noted that the second proviso to Rule 3(4) limiting credit availment does not apply where credit is availed based on invoices issued by ISD. The common input services received by ISD are not used directly in manufacturing but are covered under the inclusive part of the definition of input service. The Tribunal referred to the decision in Godrej Consumer Products Ltd, which supported this interpretation.

4. Jurisdiction of the Department to Question the Correctness of Credit Distributed by ISD:
The respondent argued that the department does not have jurisdiction to question the correctness of credit distributed by ISD from the recipient. The Tribunal agreed, citing the decision in Metro Shoes Pvt Ltd, which held that the department cannot question the correctness of credit distributed by ISD from the recipient.

5. Proportional Distribution of Credit as per Rule 7 of Cenvat Credit Rules:
The appellant-Revenue contended that the credit should have been distributed proportionally. The Tribunal found that the show cause notices did not allege any violation of Rule 7, and during the relevant period, Rule 7 did not provide for proportional distribution. This condition was made effective only from 01.04.2012. The Tribunal cited various decisions supporting this view.

6. Extended Period of Limitation for Raising Demand:
The Tribunal found that the respondent and ISD were regularly filing returns, disclosing all required details. The department did not provide evidence of any concealment with intent to evade tax. Therefore, the extended period of limitation could not be invoked.

7. Imposition of Interest and Penalty:
Since the demand of service tax itself was not sustainable, the Tribunal held that the question of interest and penalty does not arise.

Conclusion:
The Tribunal found no infirmity in the impugned order passed by the Commissioner and upheld the same, dismissing the appeal of the Revenue. The order was pronounced in court on 27.09.2024.

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