2019 (4) TMI 475 - AT - Central Excise

Distribution of CENVAT Credit - whether the appellant a Public Sector Undertaking, has violated the provisions of Rule 7(d) of Cenvat Credit Rules, 2004 by distributing the cenvat credit of their Central Sales office an ISD and also by their Head Office at ISD, wherein 100% of the cenvat credit is transferred to the appellant unit located at Debari based zinc smelter? - revenue neutrality. Held that - The unit has not done any illegality in distributing more credit to a particular unit, as Rule 7 provides may which has been amended subsequently w.e.f. 1.4.2016 to the effect shall distribute - on the issue of Revenue neutrality also, the show cause notice is bad in law - appeal allowed - decided in favor of appellant.

Summary

Issues:
Violation of Rule 7(d) of Cenvat Credit Rules, 2004 by distributing cenvat credit, disallowance of excess credit, legality of distribution of credit, applicability of Rule 7(c), interpretation of Rule 7, revenue neutrality, entitlement to utilize CENVAT credit, appeal against show cause notice.

Violation of Rule 7(d) - Detailed Analysis:
The main issue in this case revolves around whether the appellant, a Public Sector Undertaking, violated Rule 7(d) of the Cenvat Credit Rules, 2004 by distributing cenvat credit. The Revenue contended that the appellant distributed excess credit, leading to a show cause notice proposing disallowance of the credit along with interest and penalties. The objection was based on the proportionate turnover of the appellant compared to other manufacturing units, which the Revenue argued was 48.58% for the relevant period. The appellant defended by stating that Rule 7(d) provides a suggested manner of distribution and that the credit was wholly attributable to services used in a specific unit, justifying the distribution.

Legality of Credit Distribution - Detailed Analysis:
The appellant further argued that the services of their Central Sales Office (CSA) at Debari/ISD were wholly received in the Debari unit, making the distribution legal. They contended that Rule 7(c) did not apply to the CSA Debari. Regarding the Head Office's distribution, the appellant highlighted that the word 'may' in the rule was suggestive, not mandatory, and that the distribution was in line with Rule 7. The appellant also referenced a decision by the Bombay High Court to support their position on the legality of the distribution.

Interpretation of Rule 7 - Detailed Analysis:
The Tribunal analyzed Rule 7 both pre and post-amendment and found that the option to distribute CENVAT credit was available to the assessee, as indicated by the use of the word 'may.' The Tribunal noted that the distribution would be revenue neutral, resulting in lesser service tax being paid by units utilizing the credit available for distribution. The Tribunal concluded that the question of law did not give rise to any substantial issue as the exercise was revenue neutral, making it academic and not entertained.

Revenue Neutrality and Entitlement to Credit - Detailed Analysis:
The Revenue argued that the units paying service tax through PLA were not entitled to take credit of the cenvat distribution. However, the Tribunal, considering the rival contentions and the decision by the Bombay High Court, held that the unit did not commit any illegality in distributing more credit to a specific unit. The Tribunal emphasized that Rule 7's use of 'may,' which was later amended to 'shall,' did not make the distribution illegal. Additionally, the Tribunal found the show cause notice to be legally flawed concerning revenue neutrality and set aside the impugned order, allowing the appeal with consequential benefits.

In conclusion, the judgment delves into the interpretation of Rule 7, the legality of credit distribution, and the concept of revenue neutrality, ultimately ruling in favor of the appellant based on the provisions of the Cenvat Credit Rules and relevant legal precedents.