2025 (2) TMI 949 - AT - Central Excise

Recovery of CENVAT credit under the CENVAT Credit Rules 2004 - appellant is a recipient of distributed credit from an Input Service Distributor (ISD) - rule 7 of CENVAT Credit Rules 2004 - HELD THAT - By a special provision viz. rule 7 of CENVAT Credit Rules 2004 distribution of credit of service tax paid on input services by input service distributor neither a manufacturer of excisable goods nor a provider of output service is permitted and therefore from not being in a position to utilize the credit so taken. From this it is apparent that the mechanism provided in rule 7 of CENVAT Credit Rules 2004 governing the distribution of such credit deems the credit so distributed to be eligible credit for the purpose of utilization. A harmonious reading of rule 3 and rule 4 of CENVAT Credit Rules 2004 and the conditions prescribed in rule 7 alone would determine the extent of validity of the credit so distributed within the scheme of CENVAT Credit Rules 2004. The whole of it operates on presumption that the objective of the scheme viz. restricting the tax liability at each stage in the chain only to the taxable event as set out in section 3 of Central Excise Act 1944 and section 66/66B of Finance Act 1994 will be adequately achieved by such distribution. The decision of the Tribunal in re Clariant Chemicals India Ltd 2015 (10) TMI 2754 - CESTAT MUMBAI was rendered on the limited issue of applicability of rule 6 in relation to exempted services and owing to which the Tribunal finding absence of mechanism for recovery fell back upon a singularity of the undertakings operated by that particular legal entity. The issue therein was not about the eligibility to take the credit under rule 3 of CENVAT Credit Rules 2004 but the propriety of retention of the credit in terms of rule 6 of CENVAT Credit Rules 2004. The impugned order has confirmed the recovery of credit taken and distributed under rule 7 of CNEVAT Credit Rules 2004 by the input service distributor (ISD) by subjecting it to scrutiny for eligibility thereof by reference to the activities undertaken by the appellant herein. The appellant herein has merely utilized the credit and to the extent that rule 3(4) of CENVAT Credit Rules 2004 has not been shown to have been breached is not concerned with the source of the credit. The obligation under rule 3(1) of CENVAT Credit Rules 2004 cannot be transferred to the recipient of credit under rule 7 of CENVAT Credit Rules 2004. Conclusion - i) The responsibility for verifying the eligibility of CENVAT credit lies with the ISD not the recipient of the distributed credit. ii) The recovery proceedings against the appellant were without legal authority. Appeal allowed.

Summary

The judgment of the Appellate Tribunal in the case of M/s Hindustan Coca-Cola Beverages Pvt Ltd revolves around the recovery of CENVAT credit under the CENVAT Credit Rules, 2004. The core issue is whether the appellant, as a recipient of distributed credit from an Input Service Distributor (ISD), can be held liable for the ineligibility of such credit.

Issues Presented and Considered:

The primary legal questions considered are:

• Whether the appellant, as a recipient of distributed credit, can be held liable for any ineligibility of the credit under Rule 14 of the CENVAT Credit Rules, 2004.
• Whether the obligation to ascertain the eligibility of credit lies with the ISD or the recipient of the credit.
• The legal framework and jurisdiction regarding the recovery of CENVAT credit distributed by an ISD.

Issue-wise Detailed Analysis:

1. Liability of the Recipient of Distributed Credit:

• Relevant Legal Framework and Precedents: The CENVAT Credit Rules, 2004, particularly Rule 3, Rule 4, and Rule 7, govern the availment and distribution of credit. The Tribunal referenced several cases, including Nalco Water India Ltd and Castrol India Ltd, which established that the inadmissibility of CENVAT credit can only be challenged at the ISD level.
• Court's Interpretation and Reasoning: The Tribunal emphasized that the appellant, as a recipient, merely utilized the credit distributed by the ISD and was not responsible for verifying the eligibility of such credit. The Tribunal highlighted that the ISD system is designed to facilitate credit distribution without imposing the burden of eligibility verification on the recipient.
• Key Evidence and Findings: The Tribunal found that the proceedings against the appellant were initiated based on the incorrect utilization of credit, but the responsibility for eligibility verification lay with the ISD.
• Application of Law to Facts: The Tribunal applied the legal framework to conclude that the appellant, as a recipient, is not liable for the eligibility of the distributed credit. The ISD is the entity responsible for ensuring compliance with the eligibility criteria.
• Treatment of Competing Arguments: The Tribunal considered the arguments from both sides but found that the appellant's position was consistent with the established legal framework and precedents.
• Conclusions: The Tribunal concluded that the appellant could not be held liable for the ineligibility of the credit, and the recovery proceedings against them were without legal authority.

2. Jurisdiction and Recovery Mechanism:

• Relevant Legal Framework and Precedents: The Tribunal referred to Rule 14 of the CENVAT Credit Rules, 2004, and previous decisions, including those in Clariant Chemicals and Kansai Nerolac Paints, to determine the jurisdiction and recovery mechanism.
• Court's Interpretation and Reasoning: The Tribunal reasoned that the jurisdiction to dispute the credit taken by the ISD does not lie with the authorities dealing with the recipient. The recovery mechanism should be directed at the ISD, which is responsible for the initial availment of credit.
• Key Evidence and Findings: The Tribunal found that the proceedings were incorrectly directed at the appellant, who was merely a recipient of distributed credit, rather than the ISD.
• Application of Law to Facts: The Tribunal applied the legal framework to determine that the recovery proceedings should have been initiated against the ISD, not the appellant.
• Treatment of Competing Arguments: The Tribunal considered the arguments regarding jurisdiction and found that the proceedings against the appellant were misplaced.
• Conclusions: The Tribunal concluded that the recovery proceedings were without legal authority, as they were directed at the wrong entity.

Significant Holdings:

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "The dispute is about the propriety of recovering credit from the person who, while, undoubtedly, entitled to utilize the distributed credit, was statutorily enabled to take the credit without having to ascertain the eligibility except in terms of validity of documentation which is legally silent on the provenance."
• Core Principles Established: The core principle established is that the responsibility for verifying the eligibility of CENVAT credit lies with the ISD, not the recipient of the distributed credit.
• Final Determinations on Each Issue: The Tribunal determined that the recovery proceedings against the appellant were without legal authority and set aside the impugned orders, allowing the appeals.

The Tribunal's decision underscores the importance of correctly identifying the entity responsible for verifying the eligibility of CENVAT credit and clarifies that the recipient of distributed credit cannot be held liable for its ineligibility. The judgment reinforces the legal framework governing the distribution and recovery of CENVAT credit, emphasizing the role of the ISD in ensuring compliance with eligibility criteria.