CENVAT credit distribution to contract manufacturing units upheld under the pre-2016 Rule 7 framework.

An Input Service Distributor could distribute credit of input services to a contract manufacturing unit under Rule 7 of the CENVAT Credit Rules, 2004 for the period before 01.04.2016, where manufacture was carried on under Notification No. 36/2001-CE (NT). The Tribunal applied the Larger Bench view that the CENVAT scheme is meant to prevent cascading of taxes and duties, and that even under the unamended Rule 2(m) and Rule 7, service tax credit could be distributed by the principal manufacturer to its manufacturing units, including job workers and contract manufacturers. The later substitution of the rule was treated as clarificatory, and pro-rata distribution based on turnover was held permissible.

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Issues: Whether an Input Service Distributor could distribute credit of input services to a contract manufacturing unit under Rule 7 of the CENVAT Credit Rules, 2004 for the period prior to 01.04.2016 when manufacture was undertaken under Notification No. 36/2001-CE (NT).

Analysis: The Tribunal followed the Larger Bench ruling which held that the CENVAT scheme is intended to avoid cascading of taxes and duties. It accepted that, even under the unamended Rule 2(m) and Rule 7 of the CENVAT Credit Rules, 2004, credit of service tax paid on input services could be distributed by the principal manufacturer to its manufacturing units, including a job worker or contract manufacturing unit. The later substitution of the rule was treated as clarificatory and as curing the earlier lacuna. On that basis, distribution of credit on a pro-rata basis according to turnover among the principal manufacturer and the contract manufacturing units was held permissible.

Conclusion: The distribution of input service credit to the contract manufacturing units was held to be valid and the demand was not sustainable on merits.

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