2009 (10) TMI 171 - AT - Service Tax

Service tax credit distribution under Rule 7 upheld; no unit-wise restriction where tax paid and not exempt

CESTAT held that, under Rule 7 of the CENVAT Credit Rules, 2004 read with the clarificatory circular dated 23-8-2007, only two restrictions apply to ... Manner of distribution of credit by input service distributor - allowability of CENVAT/service tax credit to manufacturer/provider as a whole - limits on distribution - credit not to exceed service tax paid - exclusion for services used in unit exclusively engaged in manufacture of exempted goods or providing exempted services - interpretation of Rule 7 of the CENVAT Credit Rules, 2004Manner of distribution of credit by input service distributor - allowability of CENVAT/service tax credit to manufacturer/provider as a whole - limits on distribution - credit not to exceed service tax paid - exclusion for services used in unit exclusively engaged in manufacture of exempted goods or providing exempted services - Whether an input service distributor may distribute service tax/CENVAT credit from one unit of a manufacturer/provider to another unit and whether the Department can restrict distribution because the services were used by a different unit - HELD THAT: - The Tribunal examined Rule 3, Rule 7 of the CENVAT Credit Rules, 2004 and paragraph 2.3 of the Master Circular dated 23-8-2007. Rule 3 permits a manufacturer or provider to take credit of input services received by the manufacturer/provider as a whole and does not confine availability of credit to a particular unit. Rule 7 prescribes the manner of distribution by an input service distributor and, read with the Master Circular, imposes only two express restrictions: (a) credit distributed against a document shall not exceed the service tax paid thereon; and (b) credit attributable to services used in a unit exclusively manufacturing exempted goods or exclusively providing exempted services shall not be distributed. No provision in the Rules or the Circular prevents distribution of credit from one unit to another unit of the same manufacturer/provider merely because the invoice relates to services used by a different unit. The departmental restriction applied in the impugned order is therefore not supported by the relevant rules; any broader restriction would require amendment of the rule. [Paras 5, 6, 7, 8]The distribution of service tax/CENVAT credit by the input service distributor across the appellant's units is permissible subject only to the two restrictions in Rule 7 and the Master Circular; the departmental limitation rejecting distribution on the ground that services were used by another unit is not upheld and the appeals are allowed.Final Conclusion: Appeals allowed; distribution of service tax/CENVAT credit by the input service distributor to different units of the same manufacturer/provider is permissible within the two express restrictions in Rule 7 and the Master Circular; the Department may seek any additional restriction only by amending the rule. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether CENVAT credit of service tax paid on input services used in one unit can be distributed by an input service distributor to another manufacturing unit of the same assessee under Rule 7 of the CENVAT Credit Rules, 2004. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Distribution of CENVAT credit of input services between different units of the same assessee Legal framework 2.1.1 Rule 3 of the CENVAT Credit Rules, 2004 provides that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of any input services received by the manufacturer of such final products or provider of output services. 2.1.2 Rule 7 of the CENVAT Credit Rules, 2004, governing the manner of distribution by an 'input service distributor', permits distribution of CENVAT credit of service tax paid on input services to the distributor's manufacturing units or units providing output service, subject only to: (a) credit distributed against a document not exceeding the service tax paid thereon; and (b) no distribution of credit attributable to services used in a unit exclusively engaged in manufacture of exempted goods or providing exempted services. 2.1.3 Para 2.3 of the Master Circular dated 23-8-2007 clarifies that an input service distributor receives tax-paid invoices of input services and distributes such credits to its units providing taxable services or manufacturing excisable goods, subject to the same two conditions as in Rule 7. Interpretation and reasoning 2.1.4 The Court construed Rule 3 to mean that availability of credit is linked to the manufacturer or provider of output services as a whole, and is not confined to or restricted by reference to any particular unit of such manufacturer or provider. 2.1.5 On a combined reading of Rule 7 and para 2.3 of the Master Circular, the Court held that the statutory and circular regime contemplates only two restrictions on distribution of credit by an input service distributor: (i) quantum of credit not exceeding the tax actually paid; and (ii) prohibition on distribution of credit attributable to services used in units exclusively manufacturing exempted goods or providing exempted services. 2.1.6 The Court found no provision in Rule 3, Rule 7, or the Master Circular that bars distribution of credit relating to services used in one unit to another unit of the same manufacturer/service provider. The Department's reliance on Rule 3 to argue that credit 'relating to one unit should not be distributed to another' was rejected as unsupported by the text of the rule. 2.1.7 The restriction imposed by the Department and affirmed in the impugned appellate order-namely, that the credit of service tax paid on services used by the Cuttack Unit could not be distributed to the Malur Unit-was held to be extra-statutory, as such a limitation finds no mention in the applicable rules or in the clarificatory circular. 2.1.8 The Court observed that, if the Department intends to impose such a restriction on inter-unit distribution of credit by an input service distributor, an amendment to the rules would be necessary; such a limitation cannot be read into the existing provisions. Conclusions 2.1.9 Distribution of CENVAT credit of service tax by the head office, registered as input service distributor, from services used in one unit to another manufacturing unit of the same assessee is permissible so long as the two conditions under Rule 7 are satisfied. 2.1.10 There is no legal bar, under the then applicable CENVAT Credit Rules, 2004 or the Master Circular dated 23-8-2007, against distributing service tax credit relating to one unit to another unit of the same manufacturer/service provider. 2.1.11 The Departmental restriction disallowing such distribution, as upheld by the lower appellate authority, being unsupported by the rules and circular, is unsustainable, and the appeals are accordingly allowed.