2019 (4) TMI 430 - AT - Central Excise

CENVAT Credit - input service distribution - credit is sought to be denied on the ISD invoices on the ground that there is no nexus between the manufacture of final products and the services in question - Held that - The definition of input service for the purpose of manufacture is very wide. Obviously, several activities such as sales promotion, marketing, legal services, accounting etc., may not be handled in the factory but in the head office of the company. In such a case, the invoices will be received in the head office. Where the head office has more than one unit, provision has been made in Rule 7 of CCR, 2004 for the head office themselves to be registered as ISD and further distribute the credit to their manufacturing units. In case such service is attributable to only one unit, it has to be distributed to such unit only. Where such service can be attributable to more than one, it has to be distributed prorate to such units. Evidently, the scheme of CENVAT Credit Rules itself envisages the manufacturing unit in the field getting credit of services which are used in the head office, which will be indirectly relatable to the manufacture or which will not be directly relatable to the manufacture of final products in the field units. If the head office commits an error or plays mischief and wrongly distributes credit either by availing ineligible credit itself or by improperly distributing it can the recipient of the ISD invoices be able to correct the mistake? - Held that - In my considered view, they will not be able to do so. They will also not be able to explain why the credit was wrongly taken or distributed by their head office - Even if this argument is accepted, no malafide such as fraud, collusion, wilful misstatement or suppression of facts can be attributed to the field office. Once they have accepted the ISD invoices issued by their head office in good faith. Extended period of limitation cannot be invoked and the entire demand is time barred in this case. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Irregular availing of CENVAT Credit by the appellant.
2. Dispute regarding the admissibility of CENVAT credit on input services.
3. Legal position on recovery of CENVAT credit from Input Service Distributors (ISD).
4. Nexus between input services and manufacture of final products.
5. Applicability of Rule 14 of CENVAT Credit Rules, 2004 for recovery.

Issue 1: Irregular availing of CENVAT Credit
The appellant, a pharmaceutical manufacturer registered with the Central Excise department, was found to have irregularly availed CENVAT Credit. The appellant disputed the amount and did not reverse it, leading to a show cause notice seeking reversal under Rule 14 of CENVAT Credit Rules, 2004. The original authority confirmed the demand, imposed a penalty, and allowed a reduced penalty option. The first appellate authority reduced the penalty but upheld the order, resulting in the appellant appealing against the decision.

Issue 2: Dispute on CENVAT Credit Admissibility
The appellant argued that the credit in question was taken on ISD invoices issued by their Head office, and they were not the ones who directly took credit on the input services. They contended that the Head office should have been put to notice, not the recipient of the ISD invoices. The appellant highlighted legal precedents and the impugned order's content to support their claim that the services were integrally connected with the manufacture of goods, justifying the credit. They disputed the first appellate authority's claim of lack of documentary evidence submission.

Issue 3: Recovery of CENVAT Credit from ISD
The departmental representative reiterated that CENVAT credit can only be taken on eligible input services as per Rule 2(l) of CCR, 2004, emphasizing the need for a nexus with the manufacture of final products. They argued that recovery under Rule 14 can only be from a manufacturer or service provider, not from ISDs. Legal precedents were cited to support the position that ISDs cannot be put to notice for credit recovery, as they only pass on credit to field units.

Issue 4: Nexus Between Input Services and Manufacture
The judgment delved into the definition of 'manufacture' under the Central Excise Act, 1944, and the expansive scope of 'input service' under Rule 2(l) of CCR, 2004. It explained that various activities, even those not directly related to manufacturing, can be considered input services if they are in relation to manufacture. The judgment emphasized the wide definition of input services, including services used in modernization, renovation, and office-related activities.

Issue 5: Applicability of Rule 14 for Recovery
The judgment concluded that recovery under Rule 14 can only be made from the recipient of ISD invoices. It highlighted that if the head office wrongly distributes credit, the field office cannot correct the mistake. The judgment found the first appellate authority's denial of credit on the grounds of lack of documentary evidence erroneous, as the show cause notice was based on ISD invoices submitted by the appellant.

In conclusion, the judgment set aside the impugned order, allowing the appeal and emphasizing the need for a nexus between input services and the manufacture of final products. It clarified the recovery process under Rule 14 and the roles of ISDs and recipients of ISD invoices in CENVAT credit matters.