Input service credit distribution under Rule 7 was discretionary for the relevant period; recipient unit disallowance was unsustainable.

For the period from May 2013 to October 2015, Rule 7 of the Cenvat Credit Rules, 2004 used permissive language for Input Service Distributor allocation, so proportionate turnover-based distribution was not mandatory; the credit distribution was therefore valid and the demand for alleged non-proportional distribution was not sustainable. Credit also could not be denied at the recipient unit's end when the distribution at the Input Service Distributor's end and the admissibility of the input services were not in dispute, because correctness of distribution had to be examined at the distributor's end. The demand, interest, and penalty were set aside.

---

---

Issues: (i) Whether, during the relevant period, an Input Service Distributor was required to distribute Cenvat credit only proportionately on turnover basis under Rule 7 of the Cenvat Credit Rules, 2004. (ii) Whether the credit distributed by the Input Service Distributor could be disallowed at the recipient unit's end when the distribution at the Input Service Distributor's end was not questioned.

Issue (i): Whether, during the relevant period, an Input Service Distributor was required to distribute Cenvat credit only proportionately on turnover basis under Rule 7 of the Cenvat Credit Rules, 2004.

Analysis: For the period from May 2013 to October 2015, Rule 7 used the expression that the Input Service Distributor "may" distribute credit and the conditions then prescribed were discretionary. The later amendment with effect from 01.04.2016 replaced that position with a mandatory regime using "shall". The appellant also produced Chartered Accountant certificates showing distribution on turnover basis, and the same method had been accepted in the appellant's own cases for earlier and later periods, which had attained finality.

Conclusion: The credit distribution was valid for the relevant period and the demand based on alleged non-proportional distribution was not sustainable.

Issue (ii): Whether the credit distributed by the Input Service Distributor could be disallowed at the recipient unit's end when the distribution at the Input Service Distributor's end was not questioned.

Analysis: The show cause notice and the impugned order did not dispute the admissibility of the credit at the Input Service Distributor's end or the eligibility of the input services themselves. The settled principle applied was that the correctness of distribution is to be examined at the Input Service Distributor's end and not by disallowing credit at the recipient's end. On that basis, the attempt to deny credit at the appellant's end could not survive.

Conclusion: The disallowance of credit at the recipient unit's end was unsustainable.

Final Conclusion: The impugned demand, interest, and penalty were set aside and the appeal succeeded with consequential relief.

Ratio Decidendi: For the relevant period, distribution of input service credit by an Input Service Distributor under Rule 7 of the Cenvat Credit Rules, 2004 was discretionary, and credit cannot be denied at the recipient's end where the distribution at the Input Service Distributor's end is not under challenge.

---