2023 (6) TMI 554 - AT - Central Excise

Tribunal grants appeal on Cenvat Credit for common input services in Die Lube Unit. Discretionary distribution under Rule 7.

M/s. Morganite Crucible (India) Ltd. Versus Commissioner of Central Excise & Service Tax, Aurangabad

The Tribunal allowed the appeal challenging the Commissioner's Order regarding Cenvat Credit entitlement for common input services in the Die Lube Unit. ... CENVAT Credit - common input service utilized in its Die Lube Unit as per the provision of Rule 7 of Cenvat Credit Rules, 2004 - Suppression of facts or not - revenue neutrality - HELD THAT:- Similar issue came up for consideration before the Hon’ble High Court of Judicature at Bombay in the matter of THE COMMISSIONER, CENTRAL TAX, PUNE-I COMMISSIONERATE VERSUS M/S. OERLIKON BALZERS COATING INDIA P. LTD. [2018 (12) TMI 1300 - BOMBAY HIGH COURT] in an appeal filed by the department and in that matter the assessee having units at various places viz. Pune, Gurgaon, Chennai, Jamshedpur etc. took the Cenvat credit in its books during the period October, 2009 to March, 2014 at the Pune Unit only which was objected to by the department and it was the specific case of the department that the assessee should have distributed the tax credit to the various units situated across the country and should not have availed Cenvat Credit at Pune Unit only. In that decision the Hon’ble High Court after considering Rule 7 ibid as it was existing both pre and post amendment in 2012 held that the assessee was entitled to utilize the Cenvat credit at its one unit only i.e. Pune unit. The Hon’ble High Court also gone into the issue of revenue neutrality in that matter. The opening words of Rule 7 is ‘may distribute’ and therefore the assessee is not under any obligation to distribute. The word ‘shall’ which has been used later in the clauses/ subclauses to rule 7 will come into operation only if the assessee chooses to distribute among its units. Meaning thereby if the appellant chooses to distribute then only he has to follow all the conditions laid down in Rule 7 therein including clause (d) which mandates that such distribution be done on pro rate basis. During the period in issue the distribution was optional only was further strengthen from the fact that in the year 2016 Rule 7 was further amended and the word ‘may’ was substituted with the word ‘shall’ which makes it mandatory for the assessee to distribute the credits between the units - Otherwise also it is no doubt true that the entire excise would be revenue neutral as the utilization by any unit of the same entity would not make any loss to the exchequer as the credit disallowed from one unit in proportion to second unit will be eligible as credit to such other unit and the net credit availment and utilization form a company’s perspective will remain unchanged and also that the appellant is not going to gain anything extra to its entitlement. In such a scenario there is no question of any suppression on the part of the appellant and therefore extended period is also not invokable in the facts of the case and on this count also the demand fails. The impugned order is set aside and the appeal filed by the appellant is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessee having multiple units may avail and utilize Cenvat credit of input services at one unit without distributing the credit to other units under Rule 7 of the Cenvat Credit Rules, 2004 (Rule 7) for the period prior to the 2016 amendment. 2. Whether common input service credit availed and utilized at a separate unit with its own central excise registration can be disallowed on the ground that distribution should have been made pro rata under Rule 7(d) as it stood post-2012. 3. Whether invocation of the extended period of limitation is justified where the dispute concerns non-distribution of input service credit across units and where utilization across units would be revenue neutral. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Entitlement to avail/utilize input service credit at one unit (Rule 7 interpretation) Legal framework: Rule 7 (pre-2016 and post-2012 versions) governs the manner of distribution of Cenvat credit by an Input Service Distributor (ISD), using the expression 'may distribute the Cenvat credit' in its opening words; post-2012 it added subclauses including clause (c) (wholly used credit to be distributed to that unit) and clause (d) (pro rata distribution where service used in more than one unit based on turnover). Precedent Treatment: The Tribunal relied on a coordinate Bench decision and on a High Court decision that construed Rule 7 (pre-2016) as giving an option (may) to the assessee whether to distribute, and held that where the assessee chose not to distribute, it was entitled to utilize credit at one unit. Interpretation and reasoning: The Court emphasized the opening word 'may' in Rule 7 as indicative of discretionary power not an obligation to distribute. The subsequent use of 'shall' in later clauses was interpreted as operative only if the assessee elects to distribute. The Court noted that the plain reading shows the option to distribute was available during the period in question and that the mandatory substitution ('shall') occurred only with the 2016 amendment, which post-dates the period under dispute. Ratio vs. Obiter: Ratio - Rule 7 (as it stood during the relevant period) conferred discretion on the assessee to distribute input service credit; absence of ISD registration does not, by itself, negate the entitlement to avail credit at a unit where services were used and invoices were in the assessee's name. Conclusion: The assessee was entitled to avail and utilize Cenvat credit at its Die Lube unit without distributing the credit to other units under Rule 7 for the period before the 2016 amendment. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability of pro rata distribution (Rule 7(d)) and treatment of common input services Legal framework: Clause (d) of Rule 7 (post-2012) prescribes pro rata distribution where the input service is used in more than one unit, based on turnover during the relevant period. Precedent Treatment: The High Court decision considered by the Tribunal applied the same rule and observed that because Rule 7 began with 'may', distribution was optional in the period concerned; hence mandatory pro rata distribution under clause (d) applied only when the assessee chose to distribute. Interpretation and reasoning: The Tribunal observed that clause (d)'s pro rata mandate is conditional on the distribution being undertaken; the opening discretionary language permits the assessee to retain and utilize credit at a single unit where the service was used and invoices were in the assessee's name. The Tribunal further noted that the subject unit manufactured only excisable goods and not exempt goods, and the input service invoices were in the assessee's name, supporting entitlement to credit. Ratio vs. Obiter: Ratio - Clause (d) mandating pro rata distribution is triggered only when the assessee elects to distribute credits; it does not impose an independent obligation to distribute across units during the period in question. Conclusion: Pro rata distribution under Rule 7(d) is not automatically applicable; it becomes operative only if and when the assessee chooses to distribute input service credit among units. Therefore disallowance on the sole ground of non-distribution is not warranted for the period concerned. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Revenue neutrality and extended period of limitation Legal framework: Extended period of limitation for recovery is generally invoked where suppression, fraud or misstatement is found; lawfulness of invoking extended period depends on factual findings of concealment or tax loss. Precedent Treatment: The High Court (referred to by the Tribunal) held that where distribution/non-distribution of credit results in revenue neutrality (no net loss to exchequer), the question of law becomes academic and does not give rise to substantial question warranting intervention. Interpretation and reasoning: The Tribunal reasoned that utilization of credit by one unit of the same entity would not cause loss to the exchequer because any credit disallowed at one unit would be available to another unit; the overall credit position of the company remains unchanged. Given absence of suppression or intention to evade tax, there was no justification to invoke the extended period. The Tribunal also found no evidence that the appellant gained beyond its entitlement or concealed facts that would attract extended limitation. Ratio vs. Obiter: Ratio - Where the disputed practice (non-distribution and utilization of credit at a single unit) produces revenue neutrality and no suppression/intent to evade is shown, extended period of limitation is not invokable. Conclusion: Extended period of limitation cannot be invoked in the facts of this case because the arrangement was revenue neutral and there was no suppression or gain beyond entitlement; consequential demand based on extended period fails. OVERALL CONCLUSION AND ORDERING RATIONALE The Tribunal set aside the impugned adjudication and appellate orders disallowing Cenvat credit and demanding recovery, holding that: (i) Rule 7 during the relevant period conferred discretion ('may distribute') and did not mandate distribution absent an election to distribute; (ii) pro rata distribution under clause (d) is applicable only where distribution is undertaken; (iii) utilization of credit at a unit where services were used and invoices were in the assessee's name was permissible; and (iv) the exercise was revenue neutral and did not justify invocation of the extended period. The appeal was allowed with consequential reliefs in law.