2026 (1) TMI 1439 - AT - Central Excise

Distribution of Cenvat credit on input services in job work context upheld; procedural irregularity won't deny credit

Distribution of Cenvat credit on input services used in manufacture and job work is permissible; credit attributable to exempted goods remains ineligible, ... Distribution of Cenvat credit on input services - Eligibility of input service credit where unit performs job work - Ineligibility of credit attributable to exempted goods - Registration as Input Service Distributor - Substantial benefit not to be denied for procedural irregularity - Personal penalty on company officer - Invocation of extended period of limitation - Classification of job work notification under Central Excise Rules - Rule 7 of Cenvat Credit Rules, 2004 - Notification No. 214/1986-CE - Circular No. 1063/2/2018-CX - HELD THAT:- Rule 7 of Cenvat Credit Rules, 2004 prescribes procedure for distribution of credit on input services used by Head office / depots and units. Cenvat Credit on input service may be based on the turnover of the manufacturing units. Department’s allegation that respondent taken credit on exempted goods and services. Respondent stated that Unit-II was exclusively doing job work for Unit-I up to November, 2011, without any other manufacturing activity on its own and entire credit was taken at unit-I at the relevant period. All the input services mentioned in the impugned invoices were used in or in relation to the manufacture of final products on which Central Excise duty was paid. The services utilized in unit-II is paid by the manufacturer i.e., registered office. Unit-II has no independence existence and it is an extension of unit-I and some part of job work activity takes place as observed by Learned Commissioner. Therefore, no any ambiguity in the impugned order relating units. Hon’ble Gujarat High Court in the case of Commissioner of Central Excise Vs Dashion Ltd., [2016 (2) TMI 183 - GUJARAT HIGH COURT] held that Nothing in statutory rules to disentitle an unregistered input services distributor from availing Cenvat Credit. There is no any allegation that input services are not used in or in relation to the manufacture of final goods. Even, CBEC issued Circular No. 1063/2/2018-CX dated 16.02.2018 accepted the order of Supreme Court, High Courts and CESTAT holding that substantial benefit cannot be denied because of procedural irregularity and non registration of ISD is only a procedural irregularity for which substantial benefit of Cenvat Credit cannot be denied when all the necessary records have been maintained by the respondent. All the records were produced to the audit parties during the earlier audits and they were thoroughly audited and certified. Therefore, it is not a case of suppression, willful mis-statement. In these situations extended period was not invocable. It is settled law that when the company is not liable, personal penalties on the employees of the company cannot be imposed. There is no any illegality or irregularity in the impugned order. Therefore, appeal is liable to be dismissed. Issues: Whether the Cenvat Credit claimed by the assessee for services used by its head office/depots and Unit-II required distribution under Rule 7 of the Cenvat Credit Rules, 2004 and whether the department's appeal against the order dropping recovery and penalty is sustainable.Analysis: The Tribunal examined Rule 7 which prescribes distribution procedure for input services used by head office, depots and multiple units and considered whether Unit-II had independent existence and manufactured exempted goods making related service credit ineligible. The Tribunal noted that Unit-II operated as a job-work extension of Unit-I until late 2011, that most invoices were in the name of head office/registered office and that input services were used in relation to manufacture of dutiable final products. The Tribunal further considered prior audit/Show Cause Notices and found records were produced and audited earlier; held that earlier audit and earlier notice did not bar consideration of facts but also that extended period was not invocable given the circumstances. The Tribunal relied on authority and CBEC Circular No.1063/2/2018-CX that non-registration as an Input Service Distributor is a procedural irregularity and substantial benefit of Cenvat Credit cannot be denied where records are maintained. The Tribunal also applied settled law that personal penalties cannot be imposed on officers when the company is not liable.Conclusion: The finding that Unit-II was not an independent, separately registered unit for the relevant period and that the impugned Cenvat Credit related to services used in manufacture of dutiable goods was upheld; procedural non-registration did not disentitle the assessee to credit; appeal by the Department is dismissed and the decision is in favour of the assessee.