Commissioner of Central Excise Vs Hinduja Global Solutions Ltd. (Karnataka High Court)
Summary: The Karnataka High Court dismissed the Revenue’s appeal against Hinduja Global Solutions Ltd., holding that CENVAT credit distributed by an Input Service Distributor (ISD) could not be denied merely because the head office had obtained ISD registration after issuing the relevant invoices or debit notes. The dispute arose under the Input Service Distributor mechanism and concerned invoices issued during March, July and August 2006, whereas the head office secured registration only on 21 September 2006. The Court treated the registration lapse as procedural and curable rather than a defect that automatically extinguished the assessee’s substantive credit entitlement.
The assessee was a registered provider of services. During an audit of its service tax records, the Department found that it had availed and utilised CENVAT credit on input services based on invoices and debit notes issued by its head office before registration as an ISD. The Department issued a show-cause notice and subsequently denied the credit. According to the Revenue, Notification No. 27/2005-ST dated 7 June 2005 required ISDs to obtain registration under the Service Tax (Registration of Special Category of Persons) Rules, 2005. The Revenue maintained that credit distributed before such registration was impermissible. However, CESTAT Bengaluru allowed the assessee’s appeal, leading the Department to approach the Karnataka High Court under Section 35G of the Central Excise Act, 1944.
The High Court examined whether the Tribunal had disregarded the statutory provisions and whether invoices issued before ISD registration could support a valid CENVAT credit claim. The assessee relied on Commissioner of Central Excise v. Dashion Ltd., 2016 (41) S.T.R. 884 (Guj.), and Commissioner of Central Excise v. Pricol Ltd., 2021 TIOL 331 HC-MAD-CX. The Court noted that the Gujarat High Court had already held that the registration requirement did not automatically disentitle an ISD from distributing otherwise admissible credit, particularly where complete records were maintained and available for departmental verification. The Madras High Court had subsequently followed that approach.
A significant consideration was CBEC Circular No. 1063/2/2018-CX dated 16 February 2018. The Circular recorded the Department’s acceptance of the decisions in Dashion Ltd. and National Engineering Industries Ltd., recognising that substantive benefits should not be denied merely because of procedural irregularities. The High Court observed that the controversy was no longer res integra, particularly because the Department itself had accepted the governing judicial interpretation. The requirement of registration was therefore not treated as an independent basis for rejecting the credit on the facts of the case.
The Court further recognised that the central consideration was the substantive eligibility of the input service credit, rather than the timing of the ISD registration alone. The earlier Gujarat High Court ruling had emphasised that where relevant records were maintained and available for verification, the procedural lapse did not justify denying the entire credit. The Karnataka High Court applied this reasoning to the invoices and debit notes issued before 21 September 2006 and rejected the Revenue’s challenge to the Tribunal’s decision.
In conclusion, the Karnataka High Court answered the substantial questions of law in favour of Hinduja Global Solutions Ltd. and against the Revenue. It held that delayed ISD registration was a procedural irregularity and that CENVAT credit could not be denied solely on that ground. The Revenue’s appeal was accordingly dismissed, leaving the CESTAT order granting relief to the assessee undisturbed.
Cases Discussed
- Commissioner of Central Excise v. Dashion Ltd., 2016 (41) S.T.R. 884 (Gujarat High Court) — Followed. The requirement of ISD registration was held to be a curable procedural requirement, and substantive CENVAT credit could not automatically be denied where necessary records were maintained and available for verification.
- Commissioner of Central Excise v. Pricol Ltd., 2021 TIOL 331 HC-MAD-CX (Madras High Court) — Followed. The Madras High Court applied Dashion Ltd. and the Department’s acceptance of that decision to reject the Revenue’s objections.
- Commissioner, Central Excise Commissionerate, Jaipur v. National Engineering Industries Ltd., 2016 (42) S.T.R. 945 (Rajasthan High Court) — Referred to through the Board Circular dated 16 February 2018, recognising that substantive benefits should not be denied for procedural irregularities.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal is filed by the Revenue under Section 35G of the Central Excise Act, 1944 [‘Act’ for short] assailing the order No.20059/2016 dated 19.01.2016 passed by the Customs, Excise & Service Tax Appellate Tribunal, South Zonal Bench, Bengaluru [‘CESTAT’ for short].
2. The appeal was admitted by this Court on 25.07.2017 to consider the following substantial questions of law:
“1. Whether on the facts and in the circumstances of the case Tribunal was correct in overlooking the statutory provisions enacted by parliament which would amount to rewriting of the provision and recorded perverse finding?
2. Whether on the facts and in the circumstances the Tribunal was right in holding that CENVAT credit is eligible to be availed on invoices/debit notes issued by ‘Input Service Distributor’ [ISD] prior to their registration under the Service Tax [Registration of Special Category of Persons] Rules, 2005 without proper appreciation of the scheme and recorded perverse finding?”
3. The respondent/assessee is registered taxable provider of services and is registered with the jurisdictional service authorities for providing taxable services.
4. During the course of audit of the service tax records of the assessee, the department having found that the assessee has availed and utilized CENVAT credit on input services based on invoices/debit notes issued by the head office during March, July and August 2006 but the head office having got registered under the Service Tax [Registration of Special Category of Persons] Rules, 2005 [‘Rules’ for short] as ‘Input Service Distributor’ [ISD] on 21.09.2006, issued show- cause notice. The Commissioner after considering the reply filed by the assessee and on examination of the various provisions and notifications issued from time to time on the disputed issue arrived at a conclusion that the assessee is not entitled for CENVAT credit and ordered recovery of the same. Being aggrieved, the assessee has preferred appeal before the CESTAT which came to be allowed. Hence, this appeal by the Revenue.
5. Learned counsel appearing for the Revenue submitted that vide notification No.27/2005-ST dated 07.06.2005, Rules were notified. These Rules provided for an ISD to make an application to the Jurisdictional Central Excise Superintendent for obtaining registration within a period of 30 days from the commencement of business or 16th day of June-2005 whichever is later. With the issue of notification No.27/2005-ST dated 07.06.2005 it was made mandatory for registration of ISD and they alone would be entitled to avail CENVAT Credit of input services. Based on the said notification, Department has held that the respondent – assessee was not entitled to avail the CENVAT credit on the invoices/debit notes issued by the head office during March, July and August 2006. The CESTAT without appreciating this aspect of the head office having registered under the Rules as ISD on 21.09.2006, proceeded to give reliefs to the assessee. Accordingly, seeks to answer the substantial questions of law in favour of the Revenue allowing the appeal.
6. Learned Senior Counsel representing the respondent has placed reliance on the judgment of the Hon’ble High Court of Gujarat in the case of Commissioner of Central Excise V/s. Dashion Ltd., [2016 [41] S.T.R. 884 (Guj.)] and the Circular dated 16.02.2018 issued by the Ministry of Finance [Department of Revenue], Central Board of Excise & Customs, New Delhi. Further, the order of the Hon’ble High Court of Madras in the case of The Commissioner of Central Excise V/s. M/s. Pricol Ltd., [2021 TIOL 331 HC-MAD-CX] was referred, to contend that the Rules would not disentitle an ISD from availing CENVAT Credit unless and until such registration was applied and granted. It was argued that the requirement of registration under the Rules was procedural and curable. The judgment of the Hon’ble High Court of Gujarat was accepted by the Department in terms of the Circular dated 16.02.2018, in the case of Dashion Ltd., supra.
7. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.
8. The dispute involved herein is no more res integra in view of the judgment of the Hon’ble High Court of Gujarat in the case Dashion Ltd., supra which has been accepted by the Department in terms of the Circular dated 16.02.2018. The relevant paragraphs of the judgment of Dashion Ltd., supra is quoted hereunder for ready reference:
“7. The second objection of the Revenue as noted was with respect of non- registration of the unit as input service distributor. It is true that the Government had framed Rules of 2005 for registration of input service distributors, who would have to make application to the jurisdictional Superintendent of Central Excise in terms of Rule 3 thereof. Sub-rule (2) of Rule 3 further required any provider of taxable service whose aggregate value of taxable service exceeds certain limit to make an application for registration within the time prescribed. However, there is nothing in the said Rules of 2005 or in the Rules of 2004 which would automatically and without any additional reasons disentitle an input service distributor from availing Cenvat credit unless and until such registration was applied and granted. It was in this background that the Tribunal viewed the requirement as curable. Particularly when it was found that full records were maintained and the irregularity, if at all, was procedural and when it was further found that the records were available for the Revenue to verify the correctness, the Tribunal, in our opinion, rightly did not disentitle the assessee from the entire Cenvat credit availed for payment of duty. Question No.1 therefore shall have to be answered in favour of the respondent and against the assessee.”
9. Considering this judgment, the Department in the Circular dated 16.02.2018, has observed thus:
“2.(a) Decision of the Hon’ble High Court of Gujarat dated 08.01.2016 in the matter of Commissioner of Central Excise v. Dashion Ltd in Tax Appeal No. 415 of 2013 & 662 of 2014 [2016-TIOL-111- HC-AHM-ST = 2016 (41) S.T.R. 884 (Guj] (b) Decision of the Hon’ble High Court of Rajasthan dated 08.02.2016 in the matter of Commissioner Central Excise Commissionerate, Jaipur v. National Engineering Industries Ltd CEA No. 3/2016 [2016-TIOL-922-HC- RAJ-CX = 2016 (42) S.T.R. 945 (Raj.)].
2.1 Department has accepted the judgments where the Hon’ble High Courts dismissed the Department’s appeal inter alia holding that substantial benefit cannot be denied because of procedural irregularity.
2.2 In the case of Dashion Ltd., the assessee was engaged in manufacture of water treatment plant and other connected items and was availing benefit of CENVAT credit on the duty paid on inputs, capital goods and input services as permissible under CENVAT Credit Rules, 2004. The assessee had five manufacturing units and had its registered office at Vatva, Ahmedabad. The assessee was also providing several taxable services such as erection and commissioning, repairing and maintenance of water treatment plant, etc.
2.3 The revenue authorities, during scrutiny of the records of the assessee, noticed that it was availing the credit of service tax paid for various services by one unit for the purpose of clearance of other unit. After gathering details from the assessee, the adjudicating authority issued show cause notice calling upon the assessee as to why the CENVAT credit of service tax on input service should not be recovered with interest and penalties. In the show cause notice itself, the adjudicating authority had referred to sub-rule (3) of Rule 15 of the Rules of 2004 as basis for such proposal. Two primary objections of the Department werethat the assessee had not registered itself under the Service Tax (Registration of Special Category of Persons), Rules 2005 and that the tax credit from one unit was utilized for discharging tax liability of another unit instead of pro rata distribution amongst different units. The adjudicating authority confirmed the duty demands with interest and penalties.
2.4 Therefore, the points of law examined were that the assessee had utilized credit from one unit for the purpose of duty liability of its other unit without pro rata distribution by the input service distributor and further the assessee had not registered itself under the Service Tax (Registration of Special Category of Persons), Rules 2005.
2.5 Hon’ble High Court dismissed the department’s appeal holding that such view was not sustainable as there was no previous restriction of this nature under Rule 7 of the CENVAT Credit Rules, 2004. Further non- registration of ISD is only a procedural irregularity for which substantial benefit of CENVAT credit cannot be denied when all the necessary records have been maintained by the respondent.”
10. The Hon’ble High Court of Madras referring to the judgment of Dashion Ltd., supra, in M/s. Pricol Ltd., supra has held thus:
“4. The above decision has been accepted by the Central Board of Excise and Customs, vide Circular dated 16.02.2018. Therefore, the above questions have to be decided against the Revenue and accordingly, decided so.”
11. In view of the aforesaid, it is clear that the CENVAT Credit claimed by the respondent-assessee on the basis of the Invoices/Debit notes issued by the head office for the months of March, July and August 2006 prior to its registration as ISD on 21.09.2006 being procedural irregularity and the view of the Hon’ble High Court of Gujarat being accepted by the Department, input tax credit cannot be denied. Accordingly, substantial questions of law are answered in favour of the assessee and against the Revenue.
Hence, Appeal stands dismissed.
