2025 (11) TMI 1092 - AT - Central Excise

ISD CENVAT credit allowed where Rule 7 CCR lacked specific findings, corroboration proved and limitation barred recovery

M/s. Tulsyan NEC Ltd. Versus Commissioner of GST and Central Excise, Chennai

CESTAT allowed the appeal, holding that denial of ISD-distributed CENVAT credit was unwarranted. The Tribunal found Revenue made no specific finding under ... Input Service Distribution (ISD) - Denial of Input Tax Credit (ITC) - supplier invoices were addressed to the Gummidipoondi unit (another Tulsyan unit) and not to the ISD - several invoices lacked details of the original service providers and relied upon internal ledger (CWIP) entries - Extended period of limitation - HELD THAT:- It is found from Rule 7 of CCR that two conditions are to be satisfied by an ISD and it is therefore, for the Revenue to give a finding as to the violation, if any, of any or both conditions of Rule 7. In the absence of any such specific findings, there cannot be any denial of the CENVAT credit distributed for consumption at the units. In the case on hand, without causing any investigation or enquiry as to the claim of the appellant, the Adjudicating Authority has doubted the availment of service tax credit by the ISD. Admittedly, the assessee-appellant has only sought for consumption of credit that was claimed to be available with the appellant’s ISD which was explained to have been passed on. So, in the absence of any dispute as to the eligibility of credits availed by the ISD, the same cannot be questioned at the receiver’s end, who only sought for consumption of the same. Whether distribution of credit by ISD, to Ambattur Unit of the appellant, even in cases, where the invoices are issued in the name of Gummidipoondi unit of the appellant is correct or not? - HELD THAT:- The Department has not done any exercise to show statutory exclusion or lack of nexus resulting in misuse or any evidence of fabricated invoices, shell suppliers or circular payments, mere technical defects in supplier invoices (invoice addressed to another unit; absence of non-essential particulars) are not sufficient to disallow ISD distributed credit despite this issue emanating out of investigation proceedings. The Appellant has relied upon the decision in the case of Mahindra & Mahindra Ltd. Vs. Commissioner [2015 (1) TMI 1086 - CESTAT MUMBAI], wherein it has been held that credit cannot be denied when invoices are issued in the name of the branch office, but accounted and paid from head office, which is registered as ISD. In the instant case also, the invoices are paid from the appellant's head office, which is registered as ISD - The above decision is squarely applicable to the situation on hand as the facts are similar and the Appellant has also submitted that payments are made by their head office which is registered as ISD and we are in agreement with the decision of the coordinate Bench of the Tribunal. Thus, question is answered in favour of the Appellant. Whether the distribution of credit by ISD, to Ambattur unit of the appellant, without furnishing the details of original service providers is correct? - HELD THAT:- It is found that all Essential invoice particulars (supplier identity, address, description of service, amount, tax particulars) are required in law; and absence of such details raises suspicion - Tribunal have not mechanically denied ISD distribution for missing nonessential particulars where genuineness could be established by other evidence (bank payments, contractual letters, delivery/performance certificates). If supplier identity is completely absent or supplier is found non-existent or a shell entity distribution must be disallowed and further penal action should follow. However, the invoices on which credit is taken and distributed relates to debit notes and that all required details are available in the original invoices linked to the debit notes. The Respondent has not given any findings on the genuineness or otherwise of the invoices. Whether distribution of credit on the basis of CWIP ledger where invoices lacking supplier details is legal? - HELD THAT:- It is found that Only Ledger proof is insufficient by itself; but ledger plus corroboration may sustain distribution. Internal ledger entries (CWIP/service tax ledger) show accounting treatment but do not by themselves prove external supply or payment to real service provider. Where ledger entries are backed by vouchers, supplier invoices (even if imperfect), bank remittances and performance proof, distribution can be upheld. If ledger entries were used to create artificial CENVAT credits, distribution must be disallowed and appropriate penalties considered. It is convinced by the submissions of the Appellant on this score that they pertained to GTA invoices on which RCM has been paid through cash vide Departmental Challans. As such, the Respondents stand is not tenable and the issue is answered in favour of Appellant. There are only two limitations for distribution of credit by an ISD and in the case on hand, Revenue has not made out a case as to the non-satisfaction of the above two conditions. Consequently, there being no deficiency as to the eligibility of the ISD for distribution, no denial could be made in the hands of the recipient who has only consumed the same. In the absence of any evidence of fabricated invoices, shell suppliers or circular payments, mere technical defects in supplier invoices (invoice addressed to a unit; absence of non-essential particulars) are not sufficient to disallow ISD distributed credit. Time limitation - HELD THAT:- The demand is for recovery of ineligible CENVAT Credit for the period March 2010 to January 2011. During the relevant period, the normal period of limitation was 1 year. The SCN was issued only in 31.3.2015 invoking Sub Section (5) of Section 11A of Central Excise Act 1944 and Rule 14 of CENVAT Credit Rules 2004 for recovery of ineligible CENVAT Credit. As the ingredients for invoking extended period are not established or discussed in this case, the demand fails on the ground of limitation as the demand is ipso facto beyond the normal period of 1 year. Therefore, the demand crumbles on the grounds of limitation also. Thus, when the order itself fails to sustain both on merits and limitation, the demand of eligible CENVAT Credit and interest thereon and all the consequent penalties imposed stand vacated. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an Input Service Distributor (ISD) may lawfully distribute CENVAT/ISD credit to a recipient unit when supplier invoices are addressed to another unit of the same assessee (not to the ISD). 2. Whether ISD distribution is valid when the ISD invoice or ledger entries do not disclose details of original service providers. 3. Whether distribution of credit based on internal CWIP/service-tax ledger entries (where supplier details are lacking) sustains lawful ISD distribution. 4. Whether the extended period of limitation under Section 11A (and related imposition of penalty) is properly invocable where the department has not established fraud, suppression or mens rea, and whether penalties on both ISD (issuer) and recipient are justified. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of ISD distribution where supplier invoices are addressed to another unit (not to ISD) Legal framework: Definition of 'input service distributor' (Rule 2(m), CENVAT Credit Rules, 2004); distribution mechanism under Rule 7 CCR; Board Circular No.97/8/2007 describing centralised receipt, payment and distribution subject to conditions in Rule 7. Precedent treatment: Followed and applied coordinate decisions (Mahindra & Mahindra Tri-Mumbai; Dashion Ltd.; PRICOL; Hindustan Unilever) holding that technical defects in invoice addressee do not automatically disentitle credit where accounts/payments flow through Head Office/ISD and records permit verification. Interpretation and reasoning: The Tribunal emphasises substance over form. ISD mechanism contemplates centralised procurement and payment; the key enquiry is whether the ISD lawfully took credit (entered in CENVAT records), issued ISD invoices/statements and distributed as per Rule 7. Mere fact that supplier invoices bear another unit's name is not decisive where invoices were received/paid at the ISD/head office and documentary trail (bank vouchers, ledgers, POs) corroborates genuineness. Absence of departmental investigation showing statutory exclusion, lack of nexus, fabricated invoices or circular payments undermines denial based solely on invoice addressee. Ratio vs. Obiter: Ratio - ISD distribution is not automatically invalid due to supplier invoice being addressed to a unit if payment/accounting is by the ISD and documentary evidence supports genuineness. Obiter - remarks stressing the need for departmental enquiry before denial where facts may indicate misuse. Conclusion: Question answered for recipient - distribution permitted; denial on ground of invoice addressee alone is unjustified. Issue 2: Validity of ISD distribution where ISD invoices/doctrinal documents omit details of original service providers Legal framework: Rule 4A of Service Tax Rules (details to be indicated in documents issued by ISD); Rule 7 CCR; requirement for essential invoice particulars under law. Precedent treatment: Followed Tribunal decisions (PRICOL; Hindustan Unilever; Dashion) that have declined to deny ISD credit on hyper-technical grounds where annexures or available records permit verification of supplier particulars and genuineness. Interpretation and reasoning: The Tribunal distinguishes between non-essential/curable defects and essential deficiencies. Essential invoice particulars (supplier identity/address/registration, service description, tax particulars) are required; their absence raises suspicion. However, where original invoices, debit notes and annexures (or other corroborative documents such as payment trail, POs, contracts) contain the requisite supplier details and the department has not disputed the genuineness, distribution should not be denied for omission in ISD invoice itself. If supplier identity is wholly absent or supplier is a shell/non-existent, distribution must be disallowed and penalties considered. Ratio vs. Obiter: Ratio - ISD credit should not be denied for mere procedural omissions in ISD invoices when the underlying supplier details are verifiable from connected documents; denial is warranted only where essential particulars are missing or supplier is non-existent. Obiter - emphasis on departmental ability and duty to verify annexures and the advisability of filing annexures with ISD invoices going forward. Conclusion: Question answered for recipient - distribution upheld where underlying supplier details were available in linked documents and department did not demonstrate forgery or non-existence. Issue 3: Distribution on basis of CWIP/service-tax ledger entries where invoices lack supplier details Legal framework: Requirement that ISD distributes credit against eligible documents and proper records (Rule 7 CCR; Rule 4A STR); legal distinction between internal accounting entries and external documentary proof. Precedent treatment: Applied principles from Tribunal decisions (PRICOL, Dashion, Hindustan Unilever) that ledger entries alone are insufficient but ledger plus corroborative external evidence can sustain credit. Interpretation and reasoning: Internal CWIP/service-tax ledger entries only show accounting treatment and do not, by themselves, prove external supply or payment. Where ledger entries are supported by supplier invoices, bank remittances, purchase orders, performance/completion evidence and other vouchers, ISD distribution can be sustained. Conversely, if ledger entries are used to fabricate credits absent an external trail, distribution must be disallowed and penalties may follow. In the present record, disputed items related to GTA invoices paid under reverse charge via departmental challans and supported by payment documents; department failed to show fabrication or absence of payment. Ratio vs. Obiter: Ratio - ledger entries without corroboration are insufficient; with corroboration they may sustain lawful distribution. Obiter - caution that ledger-only proof could indicate artificial credit and attract penalties. Conclusion: Question answered for recipient - distribution based on CWIP ledger upheld where corroborated by external vouchers; denied only if evidence shows artificial creation of credit. Issue 4: Invocation of extended limitation period and imposition of penalty on ISD and recipient Legal framework: Section 11A and Section 11AC of the Central Excise Act (extended limitation and penalty provisions), Rule 14 CCR (interest), Rule 15 CCR (penalty), Rule 26(2)(ii) Central Excise Rules (penalty on issuer), burden of proof on department to establish fraud/suppression/mens rea; ER-1 returns and filing obligations noted. Precedent treatment: Applied binding Apex/tribunal principles (Uniworth Textiles SC; Dashion; other Tribunal rulings) that burden to prove mala fide lies on revenue and mere non-payment or procedural lapses do not suffice to invoke extended period or mandatory penalties unless mens rea established. Interpretation and reasoning: The Tribunal finds the impugned order failed to discuss or establish the ingredients for invoking the extended period (fraud, suppression, wilful misstatement). The department bears the burden of proof; conjecture or suspicion is insufficient. Where claims are recorded in statutory returns (ER-1) and the department has not demonstrated deliberate evasion, invocation of extended limitation and imposition of mandatory penalties is not justified. The impugned adjudication did not address these elements adequately and therefore the demand and penalties crumble on limitation and lack of mens rea. Ratio vs. Obiter: Ratio - extended limitation and mandatory penalty cannot be sustained absent cogent findings/evidence of fraud, suppression or mens rea; burden rests on revenue. Obiter - observations on need for detailed enquiry before levying draconian penalties. Conclusion: Invocation of extended period and penalties set aside; demand and penalties vacated for lack of requisite proof and on limitation grounds. Cross-references and overarching conclusions All issues converge on a unifying principle: ISD distributed credit should not be denied on mere technicalities where the substantive documentary trail establishes genuine receipt of services and lawful distribution. Denial is warranted only upon proof of essential deficiencies (no supplier identity, no payment trail, forged documents) or deliberate misuse. Where department fails to establish such misuse, and where extended limitation/penalty is invoked without proof of fraud or suppression, both the demand and penalties must be set aside.