Input Service Credit not to be Denied on the Ground That It was Availed by Contract Manufacturing Unit: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has in a recent appeal filed before it, held that input service credit cannot be denied on the ground that it was availed by contract manufacturing unit.

The aforesaid observation was made by the Tribunal when an appeal was preferred before it by M/s. Shahi Food Product , as against the order of the Commissioner (Appeals),with the question involved in the appeal being as to whether input service credit distributed by M/s. Parle Biscuits Pvt. Ltd. to M/s. Shahi Food Product, can be denied on the ground that credit could be distributed by Parle only to its own manufacturing unit under rule 7 of the CENVAT Credit Rules, 2004, and not to the appellant which is not a manufacturing unit of Parle.

The facts of the case were that the appellant was engaged in the manufacturing of Poppins and Kismi Toffee, exclusively for Parle, as a contract manufacturing unit, on the basis of an authorization submitted by Parle through a letter dated 03.12.2010.

It has been stated that the inputs required for the manufacture of the products were procured by Parle and supplied directly to the factory of the appellanton the payment of excise duty, and further that though Parlepayed for the inputs, it was the appellant who took credit of the same and utilized the credit for the payment of duty on the products cleared on account of Parle.

As the said product was manufactured not only in the factory of Parle but also in other factories of the contract manufacturing units such as that of the appellant’s, the advertisement, market research, sales promotion and marketing were centralized and were being handled by the Corporate Office of Parle, with service tax paid on input services being subsequently distributed to these contract manufacturing units.

However, a show cause notice dated 06.09.2019 was issued to the appellant, proposing the denial of the credit on the ground that Credit of Rs. 10,92,349/- was irregularly taken on Input Service Distributor by Parle to the appellant, as Parle could distribute, as an Input Service Distributor, only to its own manufacturing units.

And though the appellant filed a reply to the aforesaid show cause notice, the Assistant Commissioner, by order dated 11.01.2018, confirmed the CENVAT credit amounting to Rs. 23,05,508/- with interest and penalty.

 Feeling aggrieved, the appellant subsequently   filed an appeal before the Commissioner (Appeals), who by order dated 25.03.2019, upheld the confirmation of credit on Input Service Distributor but allowed the appellant to take credit relating to service tax paid on Goods and Transport Agency service on outward transportation of the final product, and it is this order of the Commissioner (Appeal) that has been assailed in the present appeal before the Tribunal.

With Shri J.M. Sharma, learned consultant for the appellant submitting that Parle was justified in distributing credits on input services attributable to the final product on a pro rata basis proportionate to the turnover between the manufacturing plants of Parle and its contract manufacturing units under rule 7(d) of the CENVAT Rules, in view of the decision of the Larger Bench of the Tribunal in M/s. Krishna Food Products vs. the Additional Commissioner of CGST and Central Excise, Indore Commissionerate, Shri Rakesh Agarwal, the authorized representative appearing for the Department , however supported the order of  the department authorities.

Hearing the opposing contentions of both the sides and perusing the materials available on record, the Tribunal consisting of Justice Dilip Gupta, the President, along with P. V Subba Rao, the technical memberheld:

“In view of the aforesaid decision of the Larger Bench of Tribunal in Krishna Food Products, it has to be held that the Commissioner (Appeals) was not justified in denying CENVAT credit distributed by Parle prior to 01.04.2016. The order dated 25.03.2019 passed by the Commissioner (Appeals) to the extent that it is has denied such benefit is, therefore, set aside and the appeal is allowed.”

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