In a recent judgment, the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) of Ahmedabad quashed the demand for reversal of CENVAT credit distributed by the head office of a manufacturing company, citing the lack of any revenue loss to the government.
The case began following an audit conducted by the Central Excise and Service Tax Department, which scrutinized how the assessee/appellant company, Covestro India Pvt Ltd’s Thane head office—acting as an Input Service Distributor ( ISD )—allocated CENVAT credit to its units in Ankleshwar, Gujarat; Semmankuppam, Tamil Nadu; and Surajpur, Uttar Pradesh. The department contended that the Thane office had improperly distributed excess credit to these units by failing to consider its own output service needs, allegedly resulting in an excessive allocation to the manufacturing locations.
As a result, the department issued a show-cause notice on June 15, 2020, invoking Rule 14 of the CENVAT Credit Rules, 2004, and Section 111A(4) of the Central Excise Act, 1994, to demand the reversal of Rs. 26,67,661 in CENVAT credit along with associated penalties and interest. Despite the company’s appeal to the Commissioner (Appeals), the ruling upheld the department’s stance, prompting the appellant to elevate the case to CESTAT.
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Represented by Mr. Vinay Kansara, the appellant argued before CESTAT that similar cases had already been ruled in its favor, particularly by the CESTAT benches in Chennai and Allahabad. The defense highlighted that the credit distribution approach taken by the Thane office did not create any revenue loss, as all involved units were meeting their service tax liabilities. Furthermore, the counsel argued, there was no evidence of any “willful suppression” or “intent to evade tax,” which would justify the extended period of limitation under tax law.
In reaching its decision, CESTAT bench of Mr. C.L. Mahar, Technical Member drew on a 2023 ruling by CESTAT Chennai, which found that the appellant’s actions created a “revenue neutral” situation, affirming that there was no actual financial impact on government revenues. The tribunal noted that the assessee-company’s head office regularly met its tax liabilities through cash payments, thus nullifying any alleged revenue loss and rendering the reversal demand without merit.
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Additionally, CESTAT referenced judicial precedents supporting that recovery demands cannot be levied on recipient units under similar circumstances, unless there is demonstrable involvement or intent by the recipient in misallocating credits. CESTAT observed that the head office’s allocation practices were consistent with regulatory standards and did not constitute grounds for disallowance. Thus, the tribunal set aside the earlier demand for reversal and to provide full relief to the appellant.
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