Cenvat credit distribution rules changed by period, making post-2012 allocation limits and turnover-based verification decisive.
Cenvat credit distributed by an input service distributor for services used wholly in another unit was admissible up to 31.03.2012, because the then-applicable Rule 7 did not bar such distribution except in limited exempt-unit cases, so the demand for that period was unsustainable. From 01.04.2012 to 30.06.2012, amended Rule 7(c) required credit attributable to services used wholly in a unit to be distributed only to that unit, making distribution to another unit impermissible and the demand sustainable for that period. From 01.07.2012 onwards, Rule 7(d) required pro rata distribution based on turnover, so compliance had to be verified and re-quantified. The penalty was set aside.
Issues: Whether Cenvat credit distributed by the input service distributor in respect of services used wholly in another unit was admissible for the periods up to 31.03.2012, from 01.04.2012 to 30.06.2012, and from 01.07.2012 onwards under Rule 7 of the Cenvat Credit Rules, 2004, and whether the penalty could survive.
Analysis: For the period up to 31.03.2012, Rule 7 then in force permitted distribution of credit subject only to the limits that the credit could not exceed the service tax paid and that credit relatable to services used in a unit exclusively engaged in exempted goods or services could not be distributed. Credit attributable to services used wholly in the other unit was therefore not barred, and the demand for that period was unsustainable. From 01.04.2012, Rule 7(c) specifically required credit of service tax attributable to services used wholly in a unit to be distributed only to that unit, so distribution of such credit to the appellant's unit was impermissible for the period 01.04.2012 to 30.06.2012. From 01.07.2012, Rule 7(d) introduced pro rata distribution based on turnover, and the credit could be distributed subject to compliance with that formula and the related restrictions, requiring verification and re-quantification. In the circumstances, the penalty was not justified.
Conclusion: The demand was set aside for the period up to 31.03.2012, sustained for the period 01.04.2012 to 30.06.2012, and remanded for verification and re-quantification for the period from 01.07.2012 onwards; the penalty was also set aside.
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