Vague Allegations against manufacturing unit without disputing Credit availed by ISD: CESTAT quashes Denial of Central VAT Credit [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) has quashed the denial of Central VAT Credit, alleging ineligibility at the manufacturer's end without disputing credit availed by the Input Service Distributor ( ISD ) duly registered with the Central Excise Department.

The appellant availed input service credit based on the Input Distributor Service Invoices issued by their Input Service Distributor ( ISD ) namely “Cost Centres”. The appellant had a corporate office at New Delhi, Power Sector Marketing Office at New Delhi, Industry Sector Marketing Office at New Delhi, Regional Operations Divisions and International Operations Division at New Delhi.

These were called by the appellant as “Cost Centres”, which had obtained Input Service Distributor for distributing the input service credit. The appellant had availed credit of service tax on the invoices issued by these Cost Centres ( ISD invoices ). The department was of the view that the services availed by the appellant on the invoices distributed by the ISD do not have any nexus with the manufacturing activity of the appellant, and therefore is not eligible for credit.

The department noted that the Cost Centres ( the offices of the appellant ) are registered with the Central Excise department as Input Service Distributor and they distribute service tax credit to various manufacturing units and erection divisions based on turnover as per Rule 7 (c) or (d) of Cenvat Credit Rules, 2004.  These Cost Centres do not have any turnover but only serve the manufacturing units by getting orders from customers, giving guidelines on policy matters to the units, arranging for funds required by the units. 

The department was of the view that the appellant has not established that the services received through the ISD invoices are used in relation to manufacture of final products by them.  

Thus, a show cause notice dated 08.10.2014 was issued to the appellant proposing to deny the credit availed on input services for the period from September 2013 to July 2014 and proposing to recover the same along with the interest and for imposing penalties.  After due process of law, the original authority disallowed the credit and confirmed the demand along with interest and imposed a penalty of Rs.20,00,000/- under Rule 15 (1) of Cenvat Credit Rule 2004.  Aggrieved by such order, the appellant approached the Customs, Excise and Service Tax Appellate Tribunal.

It is submitted that the credit has been denied alleging that the appellant has not established that the input services were used for manufacturing activities. It is an admitted fact that the input tax credit has been distributed to the appellant as per rules laid down in terms of Rule 7 of Cenvat Credit Rules 2004. The appellant has 4 Cost Centres which are registered as input service distributors. The appellant has availed credit only through the invoices issued by these input service distributors.

The provision for registering as an input service distributor is to facilitate procurement of credit on services centrally and for distribution to various units. These units use the services directly or indirectly with the manufacturing activity or for providing taxable output service. All the services received have a nexus with the manufacture and clearance of final products of the manufacturing units and erection divisions.

The payments for procuring the input services which were commonly utilised by all the units were maintained by the Cost Centres registered as an ISD. These Cost Centres having registered as ISD have distributed the credit which qualifies as an input service in terms of Rule 2 (l) of Cenvat Credit Rules 2004, these Cost Centres are subject to verification and audit by their jurisdictional officers.

The department has sought to deny the credit that has been distributed to the appellant which is a manufacturing unit alleging that the input service credit availed by the ISD registered Cost Centres is not used either directly or indirectly or in relation to the manufacture and clearance of final products by the appellant.

It was submitted that this allegation is erroneous. It was also contended that the allegation in the show cause notice is that the appellant has not produced documentary evidence to prove as to how these services have been used by the appellant so as to qualify as input services. 

The invoice for each service is available at the input service distributor and the credit after having been distributed to the appellant is availed by them. The invoices clearly show the nature of services availed.  All these services are used directly or indirectly or in relation to the manufacturing activity and therefore eligible, the appellant counsel added.

AR Shri. N. Satyanarayanan, appeared and argued for the department.  It is argued that the appellant has to establish that the services are used directly or indirectly for manufacturing activity. The credit has been correctly disallowed by the adjudicating authority.  It was prayed that the appeal may be dismissed.

The bench noted that the only allegation raised in the show cause notice to disallow input service credit is that the appellant has not established that these services have been used directly or indirectly or in relation to the manufacturing of final products.

It was observed that, “On perusal of the impugned order, other than alleging that these services are not used directly or indirectly or in relation to manufacture of final products, there is no specific finding to deny the credit. As correctly argued by the Ld. Counsel for appellant, the Cost Centres which are registered as input service distributors have to file periodical returns declaring the credit availed by them. These ISDs are subject to verification and audit by the jurisdictional authorities. There has been no dispute raised against these Cost Centres ( ISDs ) alleging that they have availed ineligible credit.”

It was conclusively observed that, “The credit cannot be denied on such vague allegations at the end of the manufacturing unit without disputing the credit availed by the input service distributor.  For these reasons we find that the impugned order cannot sustain, holding all the services to be eligible input services.”

The tribunal bench of Vasa Seshagiri Rao, Member ( Technical ) and Sulekha Beevi C S, Member ( Judicial ) thus set aside the impugned order of denial of Cenvat Credit availed using invoices raised by the ISD -  Cost Centres.

To Read the full text of the Order CLICK HERE

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