Contract manufacturing cenvat credit entitlement clarified; distributed input service credit allowed to contract manufacturer under Rules 2(m) and 7

Whether a contract manufacturer can claim cenvat credit distributed by the main manufacturer under the Cenvat Credit Rules. The tribunal applied the Larger Bench precedent that manufacturing carried out through a contract manufacturer constitutes part of the main manufacturing activity for Rule 2(m) purposes, permitting distribution of input service credit. On that basis the distributed input service credit was held claimable by the contract manufacturing unit and the appeal was allowed on merits with consequential relief for the assessee.

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Issues: Whether a contract manufacturer engaged by the main manufacturer is entitled to claim cenvat credit distributed by the main manufacturer as input service distribution.

Analysis: The issue concerns the scope of entitlement to cenvat credit under the Cenvat Credit Rules, 2004, particularly the interpretation of Rule 2(m) and Rule 7 regarding the definition and treatment of a manufacturing unit and distribution of input service credit. The Court applies the precedent of the Larger Bench decision in Krishna Food Products (as cited) which holds that manufacturing performed through a contract manufacturing unit is to be regarded as part of the main manufacturing activity for the purposes of the Rules, and that input service credit distributed by the main manufacturer can be treated as allowable to the unit performing the manufacturing. On that basis the Court concludes that the factual position of contract manufacture falls within the legal framework of Rules 2(m) and 7 and that the distributed input service credit is claimable by the contract manufacturing unit.

Conclusion: The appeal is allowed on merits and the entitlement to cenvat credit distributed by the main manufacturer to the contract manufacturer is upheld in favour of the assessee; consequential relief is granted.

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