Pro rata input service credit distribution upheld for contract manufacturing units under the CENVAT Credit Rules.

Turnover-based pro rata distribution of input service credit by a principal manufacturer to its contract manufacturing units was treated as permissible under Rule 7(d) of the CENVAT Credit Rules, 2004. The Tribunal noted that the assessee manufactured biscuits exclusively for the principal manufacturer, inputs were routed through the principal, and the credit was linked to duty paid on the finished goods. It followed the settled Larger Bench view, finding no distinguishing facts to depart from that position. On that basis, the assessee was entitled to avail the CENVAT credit and the credit demand could not be sustained.

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Issues: Whether input service credit could be distributed by the principal manufacturer to its contract manufacturing units on a pro rata basis in proportion to turnover under Rule 7(d) of the CENVAT Credit Rules, 2004, and whether the assessee was entitled to avail such credit.

Analysis: The dispute turned on the treatment of the assessee as a contract manufacturing unit of the principal manufacturer and the distribution of credit by the principal as an input service distributor. The Tribunal noted that the assessee manufactured biscuits only for the principal manufacturer, that the inputs were supplied through the principal manufacturer, and that the credit was taken against duty paid on the finished goods. It further noted that the issue had already been decided by a Larger Bench and that the contrary authorities relied upon in the impugned order had been distinguished in that decision. In the absence of any distinguishing facts, the Tribunal followed the settled view that pro rata distribution of input service credit attributable to the final product was permissible.

Conclusion: The distribution of input service credit on a turnover-based pro rata basis was held to be valid, and the assessee was held entitled to avail the CENVAT credit.

Final Conclusion: The credit demand and the orders confirming it could not survive, and the appeal succeeded.

Ratio Decidendi: Where the principal manufacturer distributes input service credit attributable to the final product among its manufacturing units on a turnover-based pro rata basis, such distribution is permissible under Rule 7(d) of the CENVAT Credit Rules, 2004 if the units are part of the manufacturing arrangement and no distinguishing facts displace the settled Larger Bench view.

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