Input service distributor credit cannot be denied at recipient end where common services are covered by the inclusive definition and disclosure was made.

Common input-service credit distributed through an Input Service Distributor was held to remain available where the services fell within the inclusive limb of the definition of input service, and the second proviso to Rule 3(4) was confined to the specific class of services used in manufacture of final products cleared under the notified area-based exemption. The recipient unit was not required to verify the distributor's internal allocation, and credit could not be denied merely because the distributor had apportioned credit to other units. The extended limitation period was unavailable because returns disclosed the credit position and no suppression with intent to evade duty was shown; interest and penalty therefore also did not survive.

---

---

Issues: (i) Whether the second proviso to Rule 3(4) of the Cenvat Credit Rules, 2004 restricts distribution and utilisation of common input-service credit received through an Input Service Distributor where the services are covered by the inclusive part of the definition of input service; (ii) whether the recipient unit can be denied credit on the ground that the Input Service Distributor wrongly distributed credit attributable to other units and whether Rule 7 required proportional distribution during the relevant period; and (iii) whether the extended period of limitation could be invoked and interest and penalty sustained.

Issue (i): Whether the second proviso to Rule 3(4) of the Cenvat Credit Rules, 2004 restricts distribution and utilisation of common input-service credit received through an Input Service Distributor where the services are covered by the inclusive part of the definition of input service.

Analysis: The proviso was read as applying to input services used directly in manufacture of final products cleared after availing the specified area-based exemptions. The Tribunal distinguished between the means-clause and the inclusive clause in the definition of input service and held that common services such as advertisement, market research, manpower, legal and similar services, when received by the head office and falling within the inclusive limb, are not hit by that restriction in the manner suggested by Revenue.

Conclusion: The second proviso to Rule 3(4) does not apply to the credit distribution in the present case.

Issue (ii): Whether the recipient unit can be denied credit on the ground that the Input Service Distributor wrongly distributed credit attributable to other units and whether Rule 7 required proportional distribution during the relevant period.

Analysis: The recipient availed credit on invoices issued by the Input Service Distributor, and the scheme of credit distribution did not require the recipient to examine the correctness of allocation by the distributor. The show cause notices did not allege breach of the specific conditions of Rule 7, and the proportional distribution requirement was introduced only later, from 01.04.2012. The Tribunal also found that the services were common to all units and that the Guwahati units were not shown to be exclusively engaged in exempted clearances.

Conclusion: Revenue's objection on improper distribution under Rule 7 and denial of credit at the recipient end was not sustainable.

Issue (iii): Whether the extended period of limitation could be invoked and interest and penalty sustained.

Analysis: The respondent and the Input Service Distributor had been regularly filing returns and disclosing the credit position, and Revenue failed to show suppression of material facts with intent to evade duty. Since the demand itself failed, the consequential levy of interest and penalty also could not survive.

Conclusion: Extended limitation was unavailable and interest and penalty were not leviable.

Final Conclusion: The impugned order dropping the demand was upheld and the Revenue's appeal failed.

Ratio Decidendi: Where common input-service credit is received through an Input Service Distributor, the recipient is not required to test the distributor's allocation, and the restriction in the second proviso to Rule 3(4) applies only to the specific class of input services used in manufacture of final products cleared under the notified area-based exemption.

---