In a recent decision, the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) of Mumbai granted partial relief to Godrej Consumer Products Ltd. ( GCPL ) in a dispute over the availment of CENVAT credit on advertising services. The Tribunal rejected the retrospective CENVAT credit reversal but ordered the recalculation of credits post the 2011 amendment of the CENVAT Credits Rules.
The case centered on whether GCPL could claim full CENVAT credit for service tax paid on advertising their HIT insecticide brand, despite part of their business involving trading activities.
The assessee, GCPL, is a major player in the aerosol-based product market, including the HIT brand, which is primarily manufactured by third-party contract manufacturers located in Vapi and Jammu. These contract manufacturers clear the goods after paying excise duties and ship them to the assessee’s depots for distribution. The assessee, as the brand owner, incurs substantial advertising costs to promote HIT and avails CENVAT credit on the service tax paid for these advertising services. This credit was distributed to their manufacturing unit in Goa, following the CENVAT Credit Rules, 2004.
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However, the Commissioner of Central Excise and Service Tax, Goa challenged the assessee’s claims, arguing that their trading activities should be considered an “exempt service” as per the CENVAT Credit Rules amended on April 1, 2011. The rules mandate that credits associated with exempt services need to be either reversed or proportionally availed. The Commissioner asserted that the assessee had failed to maintain separate accounts for goods manufactured and those traded, leading to a demand for the reversal of CENVAT credits.
The Commissioner, before the CESTAT, specifically sought a reversal of credits totaling ₹99,59,147 for the period before April 1, 2011, when trading was not officially classified as an exempt service. For the period after the amendment, totaling ₹1,89,22,839, the demand was based on the new classification of trading as an exempt service.
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The assessee countered by arguing that they were entitled to full CENVAT credit on advertising expenses as they bore the excise duties on products manufactured by third parties. They referenced several legal precedents, including the cases of Colgate Palmolive v. Commissioner of Central Excise and Coca Cola India v. Commissioner of Central Excise, to support their claim. The assessee maintained that the definition of an “input service distributor” in the pre-amendment rules did not limit credit distribution to goods manufactured in their own facilities.
Additionally, the assessee cited the Krishna Food Products case, which allowed credit distribution to contract manufacturers even before the 2011 rule amendments.
On the other hand, the Revenue represented by the Commissioner, argued that trading should have been classified as an exempt service even before the April 1, 2011, amendment. They referenced the Mercedes Benz India Pvt. Ltd. v. Commissioner of Central Excise case to justify the demand for the reversal of credits associated with traded goods.
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The two member bench of Mr Ajay Sharma and Mr C J Mathew, after examining the case in detail, agreed that trading could not be classified as an exempt service before April 1, 2011, thereby invalidating the demand for the reversal of CENVAT credits for the period prior to the amendment. The Tribunal upheld previous legal precedents, such as the Trent Hypermarket and Lenovo (India) cases, confirming that trading was not considered an exempt service before the legislative change. Consequently, the Tribunal ruled that the Commissioner’s demand for the pre-2011 reversal could not be upheld.
However, the Tribunal concurred with the Revenue’s position regarding the period after April 1, 2011. It was observed that the assessee should have proportionally reversed the CENVAT credits based on the turnover from traded goods. Thus, the case was remanded to the adjudicating authority to recalculate the necessary reversal for the post-2011 period in line with the proportion of traded versus manufactured goods.
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