Principal manufacturer allowed to distribute cenvat of service tax to Contract Manufacturing Unit

M.B. Industries Pvt. Limited Vs Commissioner of Central Goods And Service Tax & Central Excise (CESTAT Delhi)

CESTAT Delhi held that in terms of the provisions of Rule 2(m) and Rule 7 of the CENVAT Rules, before 01.04.2016, the Principal Manufacturer as an Input Service Distributor is facilitated to distribute cenvat credit in respect of service tax paid on the input services to its Contract Manufacturing Unit working on job work basis.

Facts-

The common issues involved in the instant appeals are whether input service credit distributed by M/s Parle Biscuits Pvt. Ltd., the principal manufacturer (PBPL in short) as an Input Service Distributor (ISD) to M/s M. B. Industries Pvt. Ltd., /M/s M. B. Foods Pvt. Ltd., (appellants in short) working on job work basis, known as “Contract Manufacturing Unit” (CMU), is deniable on the ground that CMU is not a manufacturing unit of PBPL and the credit could be distributed by ISD only to its own manufacturing units as per Rule 7 of CCR and whether extended period of limitation and penal provisions are invocable in the absence of any conscious or deliberate suppression of facts or mis-statement on the part of the appellants.

Conclusion-

Larger bench in the case of Krishna Food Products have held that in terms of the provisions of Rule 2(m) and Rule 7 of the CENVAT Rules, before 01.04.2016, the Appellants could distribute CENVAT credit in respect of the service tax paid on inputs services to its manufacturing units, including job workers.

Held that based on the view expressed by the Larger bench on the very same question, we follow the same and allow these appeals and set aside the impugned orders. Accordingly, these appeals are allowed with consequential benefits.

FULL TEXT OF THE CESTAT DELHI ORDER

The issue involved in this batch of appeals is – whether issuance of Input Service Distributor (ISD) invoice by M/s Parle Biscuits Pvt. Limited to its contract manufacturing unit (M/s M.B. Industries Pvt. Ltd.,) is legal and correct when the contract manufacturing is carried in terms of Notification No. 36/2001-CE (NT).

2. The details of appeals are as follows:-

3. The common issues involved in the instant appeals are whether input service credit distributed by M/s Parle Biscuits Pvt. Ltd., the principal manufacturer (PBPL in short) as an Input Service Distributor (ISD) to M/s M. B. Industries Pvt. Ltd., /M/s M. B. Foods Pvt. Ltd., (appellants in short) working on job work basis, known as “Contract Manufacturing Unit” (CMU), is deniable on the ground that CMU is not a manufacturing unit of PBPL and the credit could be distributed by ISD only to its own manufacturing units as per Rule 7 of CCR and whether extended period of limitation and penal provisions are invocable in the absence of any conscious or deliberate suppression of facts or mis-statement on the part of the appellants.

4. Learned Counsel Sh. Sachin Chitnis appearing for the appellants assailing the impugned order(s) makes the following submissions:-

i. Commissioner (Appeals) has held that Rule 7 leaves no ambiguity that ISD can distribute credit to its own manufacturing units and that ^„an outsourced manufacturing units^‟ as defined in Explanation 4 have been newly inserted in Rule 7 of CCR w.e.f. 1.4.2016 and not clarificatory in nature and by no stretch of imagination can be applied retrospectively.

ii. In this connection, the Appellants submit that Rule 9(1) of the 2001 Rules provide for registration of every person, who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods.

iii. Rule 9(2) provides that the Board, may by notification, and subject to such conditions or limitations as may be specified in the notification, specify person or class of persons who may not require such registration.

iv. Notification No.36/2001-CE (NT) dated 26.6.2001 has been issued under Rule 9(2) of the 2001 Rules and provides exemption from registration to the Contract Manufacturing Unit subject to conditions and stipulations.

v. Rule 2(m) read with Rule 7 of CCR, 2004, provides a facility to an office of manufacturer of final product to distribute cenvat credit in respect of service tax paid on the input service to its manufacturing unit, wherein manufacturing unit need not be owned by the input service distributor and the expression ^„its manufacturing unit‟  would also include a manufacturer manufacturing on behalf of the principal manufacturer.

vi. The Appellants are engaged in manufacture of Biscuits falling under Heading 1905 of the erstwhile Central Excise Tariff exclusively for PBPL, under their brand name as a CMU, in terms of Clause (ii) of Notification No.36/2001-CE (NT) dated 26.6.2001

vii. Accordingly, PBPL filed an authorisation/letter dated 27.07.2012 (Page No. 94)/23.11.2009 (Page No. 94) as required under the Notification, with the jurisdictional Central Excise Authorities. Appellants vide letter dated 10.12.2009, also informed the Dept. (acknowledged by Asst. Commr.) regarding the Authorisation by PBPL under Notification No.36/2001-CE (NT) dated 26.6.2001

viii. Notification No.36/2001-CE (NT) dated 26.6.2001, under which the Biscuits were manufactured and cleared by the Appellants, for and on behalf of PBPL, mandated that when goods are manufactured on account of any other person, such person has to authorise the manufacturer, who actually manufactures the goods, to comply with all procedural formalities under Central Excise Act & the Rules made thereunder, also to furnish all the information to enable determination of value of said goods, under Section 4A, and to discharge all liabilities under the Act and Rules made thereunder.

ix. Therefore, in view of the obligation cast under Clause (ii) of Notification No.36/2001-CE (NT) dated 26.6.2001, the Appellants complied with all the procedural formalities; such as maintenance of records of the goods manufactured, credit taken and utilized under Cenvat Credit Rules, payment of excise duty on finished goods, filing of Returns and furnishing of necessary information to the Department, as and when called for, etc. on behalf of the Principal Manufacturer (PBPL) and the Appellants were complying with the same in toto.

x. Since the Biscuits, Confectioneries, etc. are manufactured not only in the factories of PBPL, but also in the factories of CMUs, as a business strategy, the advertisement, market research, sales promotion & marketing, etc. were centralized and was/is being handled by their Corporate Office at Bahadurgarh being registered as an “Input Service Distributor” (PBPL-ISD) with Service Tax Dept. in terms of Service Tax Rules, 1994 (STR, for short). Service tax paid on input services like marketing, sales promotions, market research, etc. related to final products being manufactured in each of their factories was being distributed to these factories of CM Us.

xi. Since the CMUs/job-workers were/are manufacturing the Parle­branded products and paying central excise duty on the sales price (RSP/MRP) of PBPL, in terms of authorization given under Clause (ii) of Notification No.36/2001-CE (NT) dated 26.6.2001, CMUs, including the Appellants, are extended arm/ factory of PBPL for all central excise purposes, PBPL-ISD were also distributing proportional credit of the aforesaid services to each of the CMUs, including the Appellants, based on the turnover of each of the CMUs. The factories of PBPL as well as CMUs were accounting the credit under ISD invoices and utilising the same for payment of central excise duty on the clearance of final products being manufactured by each of the

 xii. PBPL-ISD distributed the specified amount of credit of service tax paid on input services like marketing, sales promotions, market research, etc. inter-alia to the Appellants, during the period June 2013 to March 2015, under the cover of ISD invoices, issued under Rule 4A of STR and the Appellants took credit of the same in their Cenvat Account and utilized the same for payment of excise duty on the Biscuits exclusively manufactured and cleared to PBPL. Then Appellants understand that PBPL-ISD had distributed such proportional credit to other CMUs also, alike the Appellants. The credit taken and utilized was reflected in the Cenvat Account and periodical Returns (ER-1 & ST-3) filed from time to time.

xiii. Thus, the inputs required for manufacture of the Biscuits on contract manufacturing basis are procured by PBPL, which were supplied by the manufacturer-suppliers directly to the Appellants^‟ factory on payment of excise duty. The invoices of the suppliers were showing the Appellants as the “consignee” and PBPL as the “buyer” and the Appellants were taking credit of duty paid on the inputs and were utilizing the same for payment of duty on the Biscuits manufactured and cleared to PBPL. Similarly, credit of central excise duty paid on capital goods and service tax paid on input services, used in or in relation to the manufacture of the Biscuits, was also taken by the Appellants under and in accordance with provisions of Cenvat Credit Rules.

xiv. The Biscuits being manufactured for PBPL were cleared from the Appellants^‟ factory on payment of appropriate duty on the Retail Sale Price/Maximum Retail Price (RSP/MRP) declared by PBPL which was printed on the packages of the Biscuits (less applicable abatement). Further, the quantum of Biscuits manufactured by the Appellants was also reflected in Balance Sheets of PBPL, as the goods were manufactured by the Appellants on behalf of PBPL and sold/marketed by PBPL. Similarly, the excise duty paid on the Biscuits cleared from Appellants^‟ factory was also accounted in Balance Sheets of PBPL, as duty paid by them.

xv. Thus, from the forgoing submissions, it is clear that the Appellants step into the shoes of PBPL, since the duty is paid by the Appellants, it follows that the credits are also claimed by the Appellants. It is pertinent to note that the Department has not objected to the availment of credits by the Appellant on various inputs procured by PBPL.

xvi. Thus, even in terms of the provisions of Rule 2(m) and Rule 7 of the CENVAT Rules, prior to 01.04.2016, the Appellants could distribute CENVAT credit in respect of the service tax paid on inputs services to its manufacturing units, including a job workers.

xvii. Without prejudice, Rule 7 of CCR was substituted w.e.f. 1.4.2016, wherein a specific provision was made for an ISD to distribute the credit of input services even to outsource manufacturers/job­workers/contract manufacturers, manufacturing goods on their behalf and paying duty on their sales price/MRP. This amendment by “substitution” of Rule 7 of CCR was made only to correct the possible mistake/lacuna in the earlier Rule and, hence, the same would have retrospective effect from the inception of CCR, 2004.

xiii. In any case, the issue whether input service credit distributed by M/s.Parle Biscuits Pvt. Ltd., the Principal Manufacturer as an Input Service Distributor (ISD) to Contract Manufacturing Unit working on job-work basis, is admissible and could be distributed by ISD only to its own manufacturing units as per Rule 7 of CCR, which would include Contract Manufacturing Unit is no more res-integra based on larger bench of Hon^‟ble CESTAT in the case of Krishna Food Products – 2021-TIOL-294-CESTAT-DEL-LB.

xix. In any case, once the issue was referred to larger bench, extended period as well as penal provisions are not invokable, hence the demand for the period June 2013 to May 2015 is barred by limitation.

xx. In view of the above submissions and those made in grounds of appeal, the Appellants pray for allowing their appeals with consequential relief.

5. Learned Authorised Representative for the Revenue relies on the impugned order.

6. Having considered the rival contentions, we find that the issue herein is squarely covered in favour of the appellant by the Larger Bench ruling of this Tribunal in the case of Krishna Food Products (supra). Under similar facts and circumstances, the Division Bench of this Tribunal had referred the following questions for consideration by the Larger Bench:-

“(i) Whether issuance of Input Service Distributors^‟ invoice by Parle to its contract manufacturing unit is legal and correct when the contract manufacturing is carried out in terms of Notification No.36/2001-CE (NT) dated 26.6.2001.

(ii) Irrespective of the position that whether issuance of Input Service Distributors^‟ invoice by Parle to Krishna is correct or otherwise, whether Krishna still is entitled for cenvat credit when the input service is attributed to the goods on which excise duty is paid includes the cost of services on which credit was taken.”

7. The Larger Bench have answered the questions as follows:-

“41. As noticed above, CENVAT is a beneficial scheme with the stated purpose of allowing CENVAT credit of all taxes paid on inputs and services so as to avoid cascading effect of taxes and duties.

42. Thus, even in terms of the provisions of Rule 2(m) and Rule 7 of the CENVAT Rules, as they stood prior to 01.04.2016, the appellant company can distribute CENVAT credit in respect of the service tax paid on inputs services to its manufacturing units, including a job worker.

43. Such being the position, we also find substance in the contention advance by learned Counsel appearing for the appellant that if amended provisions of rule 2(m) and rule 7 of the CENVAT Rules, after the 01.04.2016, merely seek to rectify the lacuna in the unamended rules and, therefore, would have effect from the inception of the rules.

44. The answer to the first issue referred to by the Division bench would, therefore, be that Parle was justified in distributing credits on input services attributable to the final product on a pro-rata basis, proportionate to the turnover of each unit between the manufacturing plants Parle and its contract manufacturing units, including the appellant, under rule 7(d) of the CENVAT Rules.

45. In view of the answer to the first issue in favour of the appellant, it would not be necessary to answer the second issue referred by the Division Bench. This issue is whether the appellant would, irrespective of the answer to the first issue, be entitled to avail CENVAT credit when input service is attributed to the goods on which excise duty is paid and includes the cost of services on which credit was taken.

46. The matter may now be placed before the Division bench for disposal of the appeal.”

8. In view of the aforementioned view expressed by the Larger bench on the very same question, we follow the same and allow these appeals and set aside the impugned orders. Accordingly, these appeals are allowed with consequential benefits.