Input service distributors could distribute CENVAT credit to contract manufacturers under pre-2016 Rule 7 provisions

CESTAT Mumbai held that prior to 01.04.2016, Rule 7 of CENVAT Credit Rules, 2004 permitted input service distributors to distribute credit to contract manufacturers/job workers. The term "its manufacturing units" was interpreted broadly to include outside manufacturing units and job workers, not just owned units. The court relied on statutory interpretation principles and precedent from a larger bench decision in Krishna Food Products case, which established that credit distribution to job workers was permissible under the pre-2016 provisions. The appeal was allowed and impugned order set aside.

---

---

Issues involved:
The appeal challenges the Commissioner's rejection of the appellant's appeal regarding the distribution of ISD credit prior to 31.03.2016 by an "inputs service distributor" to its own units providing taxable service or manufacturing goods.

Details of the judgment:
The appellant, a contractual manufacturer/job worker, received credit from the "inputs service distributor," M/s. Parle Biscuit Private Ltd., for the period before 01.04.2016. The appellant utilized this credit for duty payments on biscuits manufactured for Parle Biscuits. The department issued a show cause notice questioning the admissibility of the credit distributed to the appellant. The Adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld this decision.

Interpretation of Rule 7:
The Tribunal analyzed Rule 7 of the CENVAT Credit Rules, 2004 before and after 01.04.2016. The rule allows the distribution of credit by an input service distributor to its manufacturing units. The term "its manufacturing units" was interpreted to include outside manufacturing units or job workers. The Tribunal referred to the Registration Exemption Notification of 2001, supporting the distribution of credit to job workers. Previous decisions and a Larger Bench ruling affirmed the distribution of credit to job workers even before 01.04.2016.

Precedents and Rulings:
Several decisions by the Tribunal supported the distribution of credit to job workers before 01.04.2016. The Tribunal emphasized the beneficial nature of the CENVAT scheme to avoid cascading effects of taxes. The Larger Bench's decision and subsequent rulings upheld the distribution of credit to job workers. The Tribunal noted that earlier decisions contrary to this view were rendered before the Larger Bench's ruling.

Conclusion:
Based on the interpretations of Rule 7 and the precedents cited, the Tribunal concluded that M/s. Parle Biscuits Pvt Ltd. rightfully distributed credit to the appellant. The impugned order was set aside, and the appeal by the appellant was allowed.

Final Decision:
The Tribunal pronounced the judgment on 24.04.2024, allowing the appeal and overturning the decision of the Commissioner (Appeals) regarding the distribution of ISD credit by M/s. Parle Biscuits Pvt Ltd. to the appellant.

---