2026 (2) TMI 180 - AT - Central Excise

Distribution of CENVAT credit by Input Service Distributor clarified; Rule 7 pre2012 not requiring branch booking, appeals allowed.

Distribution of CENVAT credit by an Input Service Distributor raises whether recipient units lose credit when invoices are raised at head office; the ... Distribution of CENVAT credit by Input Service Distributor (ISD) - Mens rea requirement for demand - Validity of credit in recipient's hands where invoices are raised in head office - Scope and applicability of Rule 7 of the CENVAT Credit Rules, 2004 (pre-1.4.2012) - Non-applicability of proviso to Rule 3(4) where credit is availed on ISD invoices - Revenue's jurisdiction to question correctness of credit at the recipient unit - HELD THAT:- The Rule 7 does not provide that the CENVAT Credit availed by the branch should be booked for in their books of account. We find that no provision which is not provided in the rules, can be brought/read into the impugned issue. We find that Rule 7 of the CENVAT Credit Rules, 2004, during the period prior to 01.04.2012, though applied by the Revenue for subsequent period. We further find that the issue is no longer res integra and has been settled by this Tribunal in the case of CCE, Chandigarh-I vs. M/s Brillion Consumer Products Pvt Ltd. [2024 (10) TMI 6 - CESTAT CHANDIGARH] Thus, we find that neither the impugned SCNs nor the impugned order can be sustained in the eyes of law and thus, are liable to be set aside. Accordingly, we set aside the impugned order and allow all the three appeals of the Appellants with consequential relief, if any, as per law. Issues: Whether the appellant is entitled to CENVAT credit of input services distributed by its Head Office (Input Service Distributor) although the expenditure was not booked in the books of the branch/unit, and whether the proviso to Rule 3(4) or Rule 7 (prior to amendment w.e.f. 01.04.2012) prevents such distribution.Analysis: The Tribunal examined Rule 7 of the CENVAT Credit Rules, 2004 as it stood prior to 01.04.2012 and the related CBEC clarifications and circulars concerning the functioning of an Input Service Distributor (ISD). The Court reviewed authorities establishing that (i) Rule 7 did not mandate that expenses be booked in the books of a particular manufacturing unit for credit to be availed, (ii) prior to 01.04.2012 there was no statutory requirement for pro rata distribution by ISD, and (iii) recipients of credit who merely avail credit distributed by ISD are not liable to have eligibility re-opened by the department where the distributor bears the incidence of tax. The Tribunal also considered precedents holding that the proviso to Rule 3(4) does not apply to credits availed on ISD invoices and that absence of mens rea or allegations of suppression negates the basis for demand where distribution followed the ISD mechanism.Conclusion: The impugned show cause notices and the Order-in-Original confirming demand are unsustainable. The appellant is entitled to the CENVAT credit distributed by its Head Office (ISD) for the periods in question; the proviso to Rule 3(4) and the pre-01.04.2012 text of Rule 7 do not bar such credit. The departmental demand is set aside and the appeals are allowed with consequential relief, if any, as per law.