Relief to Johnson & Johnson: CESTAT Allows CENVAT Credit Distribution through ISD for Both Manufacturing & Trading Units [Read Order]

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) recently granted relief to Johnson & Johnson Pvt. Ltd., holding that the company’s head office can function as an Input Service Distributor (ISD) for the distribution of Central Value Added Tax (CENVAT) credit to its manufacturing units, provided that statutory conditions and reversal obligations are duly fulfilled.

The present dispute arose from a show cause notice (SCN) issued by the Commissioner of Central Excise, Belapur Commissionerate to M/s Johnson & Johnson Pvt. Ltd. The notice alleged that the company’s head office, registered as an ISD, had irregularly distributed CENVAT credit to two of its manufacturing units without proper apportionment as required under the CENVAT Credit Rules, 2004.

The Commissioner thus confirmed demands of ₹3,36,76,422 and ₹2,49,34,792 against the two manufacturing units and ordered recovery of the same with interest under Section 11AB of the Central Excise Act, 1944, read with Rule 14 of the CENVAT Credit Rules, 2004. Penalties were also imposed under Rule 15(2) of the CENVAT Credit Rules read with Section 11AC of the Central Excise Act and Section 78 of the Finance Act, 1994.

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Aggrieved by the demands and penalties, the assessee filed an appeal before the Tribunal. Gopal Mundhra, appearing for the appellant, argued that the head office was duly registered as an ISD; that the manufacturing units had filed ER-1 returns with the Central Excise authorities, and that the head office had filed ST-3 returns only in its capacity as the service provider/ISD.

He submitted that the head office had fully complied with statutory provisions by reversing the proportionate CENVAT credit attributable to the exempted trading activities, thereby nullifying any discrepancy under Rule 6 of the CENVAT Credit Rules, 2004 and that Rule 14 could not be invoked for recovery of the demands raised.

Xavier Mascarenhas, appearing for the Revenue, argued that the appellant had failed to produce relevant documents before the adjudicating authority and relied on the Tribunal’s earlier decision in Clariant Chemicals (I) Ltd. vs. Commissioner of Central Excise, Raigad (2015) to contend that an ISD can be treated as an assessee under the CENVAT statute for ensuring statutory compliance.

The Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) examined the statutory scheme under the CENVAT Credit Rules, particularly Rule 3, which permits manufacturers of excisable goods to take CENVAT credit on input services received by manufacturing units.

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The Bench held that the embargo under Rule 6 for maintaining separate accounts or payment of a specified amount did not apply in this case, as the manufacturing units were not engaged in trading.

The Tribunal also noted that the Department had not established any irregular availment or utilisation of credit by the appellant nor was there evidence of collusion or fraud.

Accordingly, CESTAT concluded that Rule 14 was not attracted in the circumstances and that penalties could not be sustained where proper records were maintained and proportionate reversals were made. The Tribunal set aside the impugned demands and penalties insofar as they pertained to the manufacturing units that had duly complied with the requirements of the CENVAT Credit scheme.

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