2018 (5) TMI 660 - AT - Central Excise

Tribunal rules in favor of appellant regarding credit distribution under CENVAT Credit Rules 2004

The Tribunal ruled in favor of the appellant in a case involving the distribution of credit between two manufacturing units for common services under the ... CENVAT credit - ISD - distribution of credit on pro-rata basis - Rule 7 (d) of the CCR 2004 - Extended period of limitation - suppression of facts - Held that: - Rule 7 states that the service distributor may distribute the CENVAT credit in respect of service tax paid on the input service to its manufacturing units subject to certain conditions. If he chooses to distribute: he will have to follow all the conditions laid down therein including clause (d) which mandates that such distribution be done on pro rata basis. The assessee has not violated the CENVAT Credit Rules as they existed during the period by not distributing the credit of service tax for common services between two Units - demand do not sustain - appeal allowed - decided in favor of appellant. Issues:1. Distribution of credit between two manufacturing units for common services under CENVAT Credit Rules 2004.2. Allegation of suppression of facts and invocation of extended period of demand.3. Imposition of penalty under Section 11AC read with Rule 15(2) of CENVAT Credit Rules 2004.Issue 1: Distribution of Credit Between Units for Common ServicesThe appellant, having two units, claimed CENVAT credit for common services in only one unit, not distributing it between both units as required by Rule 7(d) of the CENVAT Credit Rules 2004. The appellant argued that during the relevant period, distribution of credit by input service distributor was optional, and they had the choice not to distribute the credit. The appellant contended that since both units were under the same management and paying duty through CENVAT credit and PLA, the action was revenue-neutral. The appellant relied on the principle of revenue neutrality and a similar case to support their argument. However, the Department argued that Rule 7 always mandated pro-rata distribution of credit between units. The Department also highlighted the suppression of this fact by the appellant, invoking the extended period of demand and penalty. The Tribunal found that during the relevant period, the appellant had the discretion to distribute or not distribute the credit, and they had not violated the rules by choosing not to distribute it. Therefore, the demand and penalty were not sustainable, and the appeal was allowed.Issue 2: Allegation of Suppression of Facts and Extended Period of DemandThe Department alleged that the appellant suppressed the fact of not distributing credit between units, warranting the invocation of the extended period of demand. The Department argued that the appellant could not have taken credit only in one unit without distributing it as per Rule 7(d). The Department contended that suppression was evident as the issue came to light only through an audit. The Tribunal, however, noted that the appellant had not violated the rules during the relevant period by not distributing the credit, as it was optional at that time. Therefore, the Tribunal held that the extended period of demand could not be invoked based on suppression of facts, and the demand was not sustainable.Issue 3: Imposition of PenaltyThe Department proposed to impose a penalty under Section 11AC read with Rule 15(2) of CENVAT Credit Rules 2004. The Department argued that since the appellant had not distributed the credit between units, penalty imposition was justified. However, the Tribunal found that as the appellant had not contravened the rules during the relevant period by not distributing the credit, the penalty was not imposable. The Tribunal allowed the appeal, concluding that neither the demand nor the penalty could be sustained based on the facts and legal provisions presented.In conclusion, the Tribunal ruled in favor of the appellant, holding that the distribution of credit between units for common services was optional during the relevant period, and the appellant had not violated the rules by choosing not to distribute the credit. The Tribunal found that there was no suppression of facts warranting the invocation of the extended period of demand, and the penalty was not imposable as the appellant's actions were in compliance with the rules at that time.