Input Service Distributor credit distribution upheld where Rule 7 conditions were met and Revenue took inconsistent stands.

A registered Input Service Distributor under the Cenvat Credit Rules, 2004 may validly distribute service tax credit to manufacturing units, provided the distribution stays within Rule 7 limits and is not made to a unit exclusively engaged in exempted goods or services. The Karnataka HC treated the tobacco division as part of the assessee rather than a separate legal entity, and held that the credit was lawfully availed. It also noted that the Revenue had accepted the same entitlement in later periods, so it could not take a contrary stand in this matter. The demand of Cenvat credit, interest and penalty was therefore unsustainable.

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Issues: Whether credit distributed by the Indian Leaf Tobacco Division, functioning as an Input Service Distributor, could be availed by the assessee, and whether the demand of Cenvat credit, interest and penalty was sustainable.

Analysis: The division was held to be an integral part of the assessee and not a separate legal entity. The registration as an Input Service Distributor under the Cenvat Credit Rules, 2004 enabled distribution of service tax paid input credit to the manufacturing units. The Court applied the settled position that, under Rule 7, the distribution of credit is constrained only by the amount of service tax paid and by the restriction against distribution to a unit exclusively engaged in exempted goods or exempted services. The Court also relied on the fact that the Revenue had accepted the assessee's entitlement for later assessment periods on the same issue, and therefore could not take a different stand in the present matter.

Conclusion: The credit distributed through the Input Service Distributor was validly availed by the assessee, and the demand raised by the Revenue was unsustainable.

Final Conclusion: The substantial questions of law were answered against the Revenue, and the appeal failed.

Ratio Decidendi: A registered Input Service Distributor may validly distribute credit in accordance with Rule 7 of the Cenvat Credit Rules, 2004, and the Revenue cannot arbitrarily depart from an accepted position on the same issue for subsequent periods.

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