Input service distributor credit under Rule 6(5) protected, with duty quantification remanded and penalty unsustained.

Rule 6(5) of the Cenvat Credit Rules, 2004 was treated as applicable to an input service distributor, because the Rule's non-obstante protection for specified input services is not excluded by the distribution mechanism under Rule 7. On that basis, credit on covered services could not be denied merely because the assessee functioned as an input service distributor. However, the duty calculation on the available record was found inconsistent and required re-examination, so the quantification of liability was remanded. The penalty based on the disputed interpretation was not sustained in view of the uncertainty in the duty computation and the legal position on Rule 6(5).

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Issues: Whether Rule 6(5) of the Cenvat Credit Rules, 2004 applied to an input service distributor and whether the duty demand and penalty required fresh re-assessment.

Analysis: Rule 6 of the Cenvat Credit Rules, 2004 governs admissibility of Cenvat credit in relation to exempted goods or exempted services, and Rule 6(5) operates through a non-obstante clause protecting credit on specified input services unless such services are used exclusively for exempted goods or exempted services. The arrangement under Rule 7 for distribution of input service credit does not exclude an input service distributor from the scope of Rule 6(5). As the calculation sheets in the record were inconsistent, the duty liability required re-examination on available records. In view of the uncertainty in quantification and the legal position on Rule 6(5), the penalty based on the disputed interpretation could not be sustained.

Conclusion: Rule 6(5) was held applicable to the assessee as an input service distributor, but the matter was sent back for re-assessment of duty liability and the penalty did not survive.

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