Contract manufacturing unit entitled to CENVAT credit on input services distributed by principal manufacturer pre-April 2016

The CESTAT NEW DELHI held that a contract manufacturing unit was entitled to CENVAT credit on input services distributed by the principal manufacturer even prior to April 1, 2016. The appellant operated under authorization from the principal manufacturer for contract manufacturing of biscuits under notification 36/2001-CE (NT). The tribunal applied the SC precedent in Dilip Kumar case regarding interpretation of tax exemption provisions, ruling that ambiguities should favor the assessee. The principal manufacturer was justified in distributing input service credits on pro-rata basis proportionate to turnover between its manufacturing plants and contract manufacturing units under CENVAT Rules. The appeal was remanded to Division Bench for final disposal.

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Issues Involved:
1. Legality of Input Service Distributors' (ISD) invoice issuance by Parle to its contract manufacturing unit under Notification No. 36/2001-CE (NT).
2. Entitlement of Krishna to CENVAT credit irrespective of the correctness of ISD invoice issuance by Parle.

Detailed Analysis:

Issue 1: Legality of ISD Invoice Issuance by Parle to its Contract Manufacturing Unit
The primary issue was whether the issuance of ISD invoices by Parle to its contract manufacturing unit, Krishna, was legal under Notification No. 36/2001-CE (NT). The Tribunal examined the provisions of Rule 2(m) and Rule 7 of the CENVAT Credit Rules, both before and after the amendment on 01.04.2016.

- Pre-01.04.2016 Provisions: Rule 2(m) defined an ISD as an office of the manufacturer or producer of final products. Rule 7 allowed the distribution of CENVAT credit to "its manufacturing units." The Tribunal noted that the term "its manufacturing units" should include contract manufacturers operating under the Registration Exemption Notification, which exempts the principal manufacturer from registration and procedural requirements, allowing the contract manufacturer to step into the shoes of the principal for compliance purposes.

- Post-01.04.2016 Provisions: The amendment explicitly included "outsourced manufacturing units" in the definition of ISD and allowed distribution of credit to such units. The Tribunal found that this amendment merely clarified the existing provisions and should be considered as having retrospective effect.

The Tribunal referred to the decisions in Tamil Trading Corporation and FDC Ltd., which supported the inclusion of contract manufacturers within the scope of "its manufacturing units." The Tribunal disagreed with the decision in Sunbell Alloys, which had relied on Panacea Biotec and excluded job-workers from the definition of manufacturing units of the principal.

The Tribunal concluded that Parle was justified in distributing credits on input services attributable to the final product on a pro-rata basis proportionate to the turnover of each unit, including its contract manufacturing units, under Rule 7(d) of the CENVAT Rules.

Issue 2: Entitlement of Krishna to CENVAT Credit
Given the favorable resolution of the first issue, the Tribunal found it unnecessary to address the second issue. However, the second issue was whether Krishna was entitled to avail CENVAT credit when the input service is attributed to goods on which excise duty is paid and includes the cost of services on which credit was taken. The Tribunal's resolution of the first issue implicitly affirmed Krishna's entitlement to CENVAT credit.

Conclusion:
The Tribunal held that Parle's issuance of ISD invoices to Krishna was legal under the pre-amendment CENVAT Rules, and the amendment effective from 01.04.2016 was clarificatory and had retrospective effect. Consequently, Krishna was entitled to avail CENVAT credit distributed by Parle. The matter was remitted to the Division Bench for disposal of the appeal.

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