ISD distribution of Cenvat credit upheld where rule was discretionary then, rendering demand and penalties unsustainable.

Validity of ISD distribution of Cenvat credit turned on statutory interpretation of Rule 7's wording during the relevant period: because Rule 7 used discretionary language ('may') then, proportionate distribution was not mandatory and the appellant's CA-certified turnover-based allocations were legally effective. Prior final departmental orders in the appellant's favour precluded reversing the distribution for the same assessee. Consequentially, demands, interest and penalties premised on denial of the distributed credit were unsustainable and set aside, and the appeal was allowed with consequential relief as per law.

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Issues: Whether the Cenvat credit distributed by the appellant's Input Service Distributors (ISDs) for the period May 2013 to October 2015 was valid under Rule 7 of the Cenvat Credit Rules and whether the demand, interest and penalty confirmed under Rule 14 read with Section 11A(1) of the Central Excise Act, 1944 and penalties under Rule 15 of the Cenvat Credit Rules and Rule 25 of the Central Excise Rules, 2002 is sustainable.

Analysis: The relevant statutory framework shows that during the period May 2013 to October 2015 Rule 7 of the Cenvat Credit Rules used the word 'may' and made distribution by an ISD subject to conditions that were discretionary; w.e.f. 01.04.2016 Rule 7 was amended to use 'shall' and prescribe mandatory conditions. The appellant produced CA certificates certifying distribution of credit to its units on the basis of turnover. The appellate authority had earlier allowed similar distributions for the appellant for previous and subsequent periods and those orders have attained finality; the revenue did not appeal against them. The show cause notice and impugned order did not dispute eligibility of the underlying credit or challenge distribution at the ISD's end. The Tribunal relied on the settled principle that distribution by an ISD can be questioned at the ISD's end and not at the recipient's end, and on precedent precluding the revenue from taking a contrary stand where prior final orders in favour of the assessee exist. Applying these legal principles to the facts, the Tribunal found that (a) Rule 7 in the relevant period did not mandate proportionate distribution, (b) the appellant's CA certificates evidenced distribution based on turnover, and (c) departmental final orders in the appellant's favour precluded a contrary contention for the same assessee.

Conclusion: The Cenvat credit distributed by the ISDs to the appellant for the period May 2013 to October 2015 was valid and the demand, interest and penalty based on denial of that distributed credit are not sustainable; the impugned order is set aside and the appeal is allowed in favour of the appellant with consequential relief, if any, as per law.

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