ISD credit distribution: recovery from recipient unsustainable post-amendment absent action against ISD; pre-amendment demands barred on merits and limitation.

The note addresses liability for reversal of Cenvat credit distributed by an Input Service Distributor (ISD) and limitation for recovery. It summarises that pre-amendment an ISD had no mandatory proportional formula, distribution causing no net revenue loss is revenue neutral, and procedural non-proportionate allocation does not defeat substantive entitlement where invoices and receipt are undisputed; therefore demands for that period fail on merits and limitation. Post-amendment, recipients are not obliged to verify ISD distributions and recovery from recipients is unsustainable absent any action against the ISD.

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Issues: Whether the appellant is liable to reverse Cenvat credit distributed in excess by the Input Service Distributor (ISD) and whether the impugned demand and recovery (including invocation of extended period of limitation) are sustainable for the period April 2015 to January 2017.

Analysis: The Tribunal examined the Cenvat Credit Rules, 2004 (including Rule 7, Rule 9 and Rule 3(1)) and the surrounding statutory and judicial authority. The period in question spans before and after the amendment making proportional distribution mandatory w.e.f. 01.04.2016. For the pre-amendment period the Tribunal relied on precedents establishing that (i) there was no obligation on the ISD to follow a prescribed formula prior to the amendment, (ii) distribution by an ISD that results in no net loss to revenue is revenue neutral, and (iii) procedural lapses in distribution (such as non-proportionate allocation) do not defeat the substantive entitlement to Cenvat credit where invoices and receipt of services are undisputed. The Tribunal also considered limitation principles and found the department had knowledge of the distributed credit and there was no concealment or mala fide suppression to invoke extended limitation. For the post-amendment period (after 01.04.2016) the Tribunal held that a recipient unit is not required to verify the correctness of amounts distributed by the ISD and, in absence of action against the ISD, recovery from the recipient is unsustainable. The Tribunal applied these principles to the facts and concluded that the impugned demand is unsustainable both on merits and on limitation for the period prior to 01.04.2016, and unsustainable as against the recipient for the post-amendment period absent any action against the ISD.

Conclusion: The impugned order confirming demand and recovery of Cenvat credit distributed by the ISD is set aside and the appeal is allowed; the demand is unsustainable for the period prior to 01.04.2016 on merits and limitation, and for the period after 01.04.2016 the confirmation of demand against the appellant as recipient is unsustainable in absence of any action against the ISD.

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