2024 (7) TMI 1720 - AT - Service Tax

Appellant's captive mines and manufacturing unit treated as one entity; CENVAT credit distribution under Rule 7(b) upheld

CESTAT KOLKATA - AT allowed the appeal and set aside the impugned order, holding that the appellant's captive mines and the manufacturing unit form one ... CENVAT Credit - appellant can be considered as an Input Service Distribution in terms of Rule 2(m) of the CENVAT Credit Rules, 2004 or not - distribution of credit by an appellant - appellant is not a manufacturer, but engaged in the mining of Bauxite and registered as an office of Bauxite mines - HELD THAT:- The issue involved in the matter has been considered by this Tribunal in the case of Steel Authority of India Ltd.v. Commissioner of Central Excise and Service Tax, Bolpur [2024 (11) TMI 1174 - CESTAT KOLKATA] wherein it was held that 'The mines and the Appellant’s manufacturing unit belongs to one legal entity, which is engaged in manufacture of dutiable goods. Therefore, the observation given by the Ld. Commissioner that distribution of credit by the mines is in contravention of Rule 7(b) of the CENVAT Credit Rules is legally not tenable. Thus, the distribution of credit by captive mines as ISD is in accordance with the provisions of law.' Thus, the mines and the manufacturing unit belong to one legal entity, which is engaged in the manufacture of dutiable goods viz. Aluminium products. Therefore, the distribution of credit by the mines, being ISD, is in terms with the provisions of Rule 7(b) of the CENVAT Credit Rules, 2004. Accordingly, the distribution of credit by the appellant as an ISD is in accordance with the provisions of law and thus the CENVAT Credit has rightly been distributed by the appellant. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether credit of service tax/CENVAT paid on input services availed at captive mines can be treated as input service and distributed by the mines to manufacturing units through Input Service Distributor (ISD) invoices under Rule 7(b) of the CENVAT Credit Rules, 2004. 2. Whether captive mines and the downstream manufacturing units, being parts of the same legal entity, constitute an integrated unit for purposes of availment and distribution of CENVAT credit. 3. Whether distribution of CENVAT credit by mines that do not produce dutiable goods at the mine level (i.e., mines not subject to excise duty) contravenes Rule 7(b) or Rule 2(m) of the CENVAT Credit Rules, 2004. 4. Whether parallel or prior adverse proceedings against associated manufacturing units estop or preclude the mines from distributing CENVAT credit when identical issues have been decided in favour of the manufacturing units by the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility of input services received at captive mines for CENVAT credit distribution as ISD Legal framework: Rule 3 and Rule 7(b) of the CENVAT Credit Rules, 2004 define 'input services' and prescribe conditions for availment and distribution of credit; Rule 2(m) defines 'Input Service Distributor'. The scheme permits distribution of credit by an office of a manufacturer/service provider to other units of the same manufacturer. Precedent Treatment: The Tribunal has previously considered identical factual matrices and upheld entitlement to credit where services at captive mines bear a direct nexus to manufacture of final dutiable products at the manufacturing unit. Prior Tribunal rulings on captive mines and ISD distribution have been relied upon in the present decision. Interpretation and reasoning: The Tribunal reasoned that Rule 3 does not require that input services be received within the physical premises of the manufacturing plant; it suffices that services be used in or in relation to manufacture of the final product. Services like mining, security, cargo handling and transportation, though rendered at mines, have direct nexus with manufacture of the downstream dutiable products. Where the mines serve as intermediate stages or supply raw materials consumed in manufacture, the input services used in the mines fall within 'input services' eligible for credit. Ratio vs. Obiter: Ratio - input services availed at captive mines that directly relate to the manufacture of downstream dutiable products qualify as input services for CENVAT credit and may be distributed via ISD. Obiter - none identified beyond reliance on established nexus principles. Conclusions: Credit of service tax/CENVAT on input services availed at captive mines is eligible for distribution to manufacturing units through ISD invoices when those services bear a direct nexus to the manufacture of dutiable goods. Issue 2 - Whether captive mines and manufacturing units of the same legal entity form an integrated unit for CENVAT purposes Legal framework: The concept of an 'office of a manufacturer' and the ISD scheme contemplate distribution of credit among offices/units of the same legal entity engaged in manufacture; the test is functional and legal unity rather than mere physical location. Precedent Treatment: The Tribunal has repeatedly held that captive mines, established primarily to serve manufacturing units of the same legal entity, are integrally linked to the manufacturing process and, therefore, to be treated as part of the manufacturing entity for credit purposes. Interpretation and reasoning: The Tribunal examined the organizational and operational nexus: mines set up to supply raw material exclusively (or primarily) to manufacturing units; overall management and administrative control by the parent legal entity; consumption of entire extracted quantity by downstream units. These factors demonstrate that mines are not independent commercial units for the purpose of the ISD provisions but form part of an integrated manufacturing set-up. Administrative arrangements (e.g., placement under a Raw Material Division) do not negate legal unity. Ratio vs. Obiter: Ratio - where mines and manufacturing units belong to a single legal entity and the mines function as captive suppliers of raw material, they constitute an integrated unit for CENVAT/ISD purposes. Obiter - comments on administrative convenience and internal divisions being irrelevant to legal unity. Conclusions: Captive mines belonging to the same legal entity as manufacturing units constitute an integrated unit; consequently, input services used at those mines are treatable as services of the manufacturer and credit may be distributed accordingly. Issue 3 - Whether non-dutiable status of mined goods at the mine-level prevents ISD distribution of credit Legal framework: Rule 7(b) was interpreted in context of eligibility to distribute credit by an office that is engaged in manufacture of exempted goods versus offices whose outputs are not dutiable at the mine level. Precedent Treatment: Earlier decisions that denied distribution where the distributing office itself manufactured exempted goods were distinguished from situations where the mine is a captive supplier to a downstream dutiable manufacturing unit of the same legal entity. Interpretation and reasoning: The Tribunal rejected the reasoning that because bauxite (or other mined goods) are not dutiable at the mine level, the mines cannot distribute credit. The correct test is whether the services used at the mines have direct nexus to manufacture of downstream dutiable goods. Non-dutiability of the mined product per se does not sever the nexus where the mined material serves as an intermediate consumed in manufacture of dutiable products by the same legal entity. Ratio vs. Obiter: Ratio - non-dutiability of goods produced at a mine does not automatically preclude the distribution of credit by that mine to downstream dutiable manufacturing units, provided the requisite nexus and legal unity exist. Obiter - none beyond clarification of nexus principle. Conclusions: The non-dutiable status of raw material at the mine does not, by itself, render ISD distribution impermissible where the mine supplies raw material to, and is integrally linked with, a downstream dutiable manufacturing unit. Issue 4 - Effect of parallel or prior adjudications against manufacturing units on proceedings against mines; res judicata/issue estoppel considerations Legal framework: Principles of consistency and binding effect of Tribunal decisions on identical issues and same legal entity were applied; the doctrine that an issue once settled by the Tribunal on identical facts becomes no longer res integra. Precedent Treatment: The Tribunal relied on its own prior decisions addressing identical facts and holding in favour of entitlement to credit where captive mines distributed ISD credits to manufacturing units. Those antecedent rulings were treated as binding for the same or closely similar fact patterns. Interpretation and reasoning: The Tribunal observed that the issue had been conclusively decided in prior appeals involving the same or closely analogous arrangements, and therefore the present adjudication could not sustain demands contrary to those findings. Parallel proceedings against manufacturing units that upheld the credit supported the conclusion that corresponding proceedings against the mines were unsustainable. Ratio vs. Obiter: Ratio - where the Tribunal has decided the identical legal issue on substantially similar facts in favour of the taxpayer, subsequent demands on the same issue between co-related entities of the same legal entity are unsustainable. Obiter - none significant beyond application of settled precedent. Conclusions: Prior favorable Tribunal determinations on identical issues remove the controversy from being res integra; consequent demands and penalties against the mines are to be set aside when those determinations establish entitlement to ISD-distributed credit. Overall Conclusion The Tribunal held that (a) captive mines and downstream manufacturing units belonging to the same legal entity constitute an integrated unit for purposes of the CENVAT Credit Rules, 2004; (b) input services availed at such captive mines that bear a direct nexus to manufacture of downstream dutiable goods qualify as input services and may be distributed via ISD invoices under Rule 7(b); (c) the non-dutiable status of the mined product at the mine does not, by itself, preclude such distribution; and (d) prior Tribunal decisions on identical facts having decided the matter in favour of the taxpayer render the impugned demands unsustainable, leading to setting aside of the contested orders.