Procedural lapse in Rule 7 of CCR, 2004 cannot be ground to deny substantial benefits of cenvat credit

India Cements Limited Vs Commissioner of Central Tax, Tirupati-GST (CESTAT Hyderabad)

CESTAT Hyderabad held that rule 7 of Cenvat Credit Rules, 2004 (CCR 2004) is just a procedure and procedural lapse cannot be ground to deny the substantial benefit of Cenvat Credit.

Facts- M/s. India Cements Limited and all its units, the appellants herein are engaged in the manufacture of cement and clinker. During the course of audit of the accounts of appellants conducted in December 2013, the department observed that the appellants have availed the service tax credit on the basis of ISD challans. From the scrutiny of ISD invoices/challans issued by the said five offices, the department observed that they have distributed the service tax credit in three forms: i.e. plant specific, turnover basis and quantity basis.

Department alleged that the credit availed on quantity-based distribution is in violation of amended Rule 7 of Cenvat Credit Rules, 2004 (CCR, 2004). Resultantly, the show cause notices as mentioned in the table above were served upon the appellants alleging the credit availed on quantity basis to be irregular and was proposed to be recovered from the appellants. The said proposal was confirmed. Accordingly, being aggrieved, the present appeal is filed.

Conclusion- Rule 7 of CCR, 2004 is a procedure and the procedural lapse cannot be a ground to deny the substantial benefit of Cenvat credit. The procedural irregularities are held to be ignored when there is no apparent loss to the revenue nor any apparent benefit to the assessee.

We finally observe that there is no dispute of receipt of services, eligibility of services for credit nor any dispute that the invoices are raised by the ISD/Corporate Office of three of the appellants, which was eligible to distribute the credit to their units/factory. We further find that there is no proposal to issue any show cause notice to the said ISD for alleged wrong distribution of the credit.

We hold that the demand even for the normal period is also not sustainable. We accordingly hold that the interests and penalties has wrongly been invoked. Resultantly, we hereby set aside the respective orders under challenge.

FULL TEXT OF THE CESTAT HYDERABAD ORDER

Present order disposes of three appeals. The Appellants therein being three different units of one and the same company and the issue involved in three of the appeals is also same. The details of three of the appeals are as follows:

1.1 Facts in brief for the present adjudication are as follows:

M/s. India Cements Limited and all its units/the appellants herein are engaged in the manufacture of cement and clinker. They are availing Cenvat credit of excise duty paid on the inputs, service tax paid on input services used in relation to the manufacture of cement and clinker and also of excise duty paid on capital goods. However, during the course of audit of the accounts of appellants conducted in December 2013 for the respective periods as mentioned in the above table, the department observed that the appellants have availed the service tax credit on the basis of ISD challans raised by their Corporate Office situated in Chennai and four Regional Offices situated in Hyderabad, Bangalore, Chennai and Cochin. From the scrutiny of ISD invoices/challans issued by the said five offices, the department observed that they have distributed the service tax credit in three forms: i.e.

(1) Plant specific,

(2) on turnover basis and

(3) on quantity basis.

1.2 Department alleged that the credit availed on quantity based distribution is in violation of amended Rule 7 of Cenvat Credit Rules, 2004 (CCR, 2004). Resultantly, the show cause notices as mentioned in the table above were served upon the appellants alleging the credit availed on quantity basis to be irregular and the respective amount in the above table was proposed to be recovered from the appellants. The proposal has been confirmed vide the respective orders in the above table in three of the appeals for such amount as mentioned above. Being aggrieved the appellant is before this Tribunal.

2. We have heard Shri Narendra Dave, leaned Advocate for the appellant and Shri A.V.L.N. Chary, Authorized Representative for the department.

3. Learned Counsel for the appellant has submitted that three of the show cause notices have been issued invoking the extended period of limitation. It is submitted that the appellants were regularly filing their monthly ER-1 returns, mentioning all details of availment of Cenvat credit on the ISD challans. The documents were also shown to the audit team way back in the year 2013 itself. Hence, the allegations of suppression of facts are highly unreasonable and unjustified. In absence thereof, the department was not supposed to invoke the extended period of limitation. The orders under challenge are prayed to be set aside on this ground itself. It is further submitted that there is no dispute about the eligibility of the input services for which the Cenvat credit has been availed nor there is the dispute about the total amount distributed by ISD. The only dispute is that certain amount of credit is permissible to be availed in terms of Rule 7 of CCR, 2004 or not. It is impressed upon that in any case the situation is revenue neutral in which case malafide intention cannot be attributed to the assessee, question of invocation of extended period of limitation does not at all arises. Learned counsel has laid reliance upon the decision of this Tribunal in the case of Hindustan Zinc Ltd. Vs. Commissioner of CGST, Udaipur reported in 2019 (370) E.L.T. 1582 (Tri.-Del.).

3.1 While submitting on the merits, learned counsel has mentioned that violation of Rule 7 of CCR, 2004 has wrongly been held as the provision gives an option to the assessee whether to distribute input services tax available to it amongst its other manufacturing units which are providing output services also. It is evident from the use of word “may distribute the Cenvat credit” as found in Rule 7 both prior and also post its amendment in 2012. The distribution was made mandatory only w.e.f. 01.04.2016 i.e. after the period in question. Learned counsel has relied upon the decision of Hon’ble Bombay High Court in the case of The Commissioner, Central Tax Pune-I Commissionerate Vs. M/s. Oerlikon Balzers Coating India P. Ltd. reported in 2018-TIOL-2688-HC-MUM-CX.

3.2 It is further submitted that Cenvat credit is a substantial benefit which cannot be denied on ground of procedural lapses especially when the entire demand is revenue neutral. Learned counsel has relied upon the decision of this Tribunal in the case of Jet Airways (I) Ltd. Vs. Commissioner of Service Tax, Mumbai reported in 2016 (44) S.T.R. 465 and the decision of Hon’ble High Court of Gujarat in the case of Thermax Ltd. Vs. Union of India reported in 2019 (31) G.S.T.L. 60 (Guj.). Finally, it is submitted that compliance of Rule 7 of CCR, 2004 has to be ensured at the ISD’s end. Learned counsel has relied upon the decision of this Tribunal in the case of Indsil Energy Electro Chemicals Vs. Commissioner of Central Excise reported in 2017-TIOL-680-CESTAT-Del. With these submissions, the order under challenge is prayed to be held as hit by the principle of limitation and the findings on merits are also prayed to be set aside. Accordingly, three of the appeals are prayed to be allowed

4. While rebutting these submissions, learned DR has submitted that Rule 7 of CCR, 2004 was amended w.e.f. 01.04.2012 by a Notification No.18/2012-CE(NT) dated 17.03.2012 prescribing 4 conditions to be observed by the ISD while distributing the Cenvat credit in respect of service tax paid on the input service to its manufacturing units or units providing the output service. The conditions are as follows:

(i) The credit distributed against a document referred to in Rule 9 of CCR, 2004 does no exceed the amount of service tax paid thereon;

(ii) Credit of service tax attributable to service used by one or more units exclusively engaged in manufacture of exempted goods or providing or exempted services shall not be distributed;

(iii) Credit of service tax attributable to service used wholly by a unit shall be distribute only to that unit; and

(iv) Credit of Service Tax attributable to service used by more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period.

4.1 The manner of distribution of common input services in terms of Rule 7 of CCR of 2004 has been explained by CBEC Circular No. 178/04/2014-ST dated 11.07.2014. The circular explains that the distribution of credit in terms of Rule 7(d) will be done among all units which are operational during the relevant period irrespective of whether such common input services were used in all the units or in some of the units. M/s. India Cements Limited have been reported to have 9(Nine) manufacturing units and 6(six) service units. During the relevant period, the appellant has the credit as was distributed by their ISD based on the quantity. The quantity basis is nowhere provided in Rule 7, hence, the quantity base Cenvat credit has rightly been held as irregular, the availment thereof has rightly been denied. Learned DR has further impressed upon that when the statute provides a particular procedure to be followed the same has to be followed. Even the substantial benefit has to be denied when their occurs the procedural lapse. Learned DR has relied upon the decision of Hon’ble Apex Court in the case of Jagir Singh Vs. Ranbir Singh & Ans. Reported in AIR 1979 SC 381, wherein it was held that the provisions of an act of Parliament shall not be evaded by shift or contrivance. It was clarified what may not be done directly cannot be allowed to be done indirectly, that would be an evasion of the statute.

4.2 The plea of revenue neutrality has also been objected by learned DR by submitting that the concept of revenue neutrality is not derived from any statutory provision but it is a concept devised by the judicial forums and hence is applicable only in exceptional circumstances that too for examination of extended period of limitation. Learned DR has relied upon the decision of Five Member Bench of this Tribunal in the case of Jay Yushhin Ltd Vs. CCE, New Delhi reported in 2002-TIOL-126-CESTAT-DEL-LB, wherein it was held that revenue neutrality being a question of fact, the same has to be established in the facts of each case and not merely by showing the availability of an alternate scheme. Reliance has also been placed on the decision of this Tribunal Larger Bench in the case of Autolite (india) Ltd. Vs. CCE, Jaipur-I, reported in 2002 (146) ELT 345 (Tri.-Del.), wherein it was held that the existence of an alternative scheme to the assessee can hardly be a valid basis for a revenue neutrality plea in answer to the department’s allegation of ‘intent to evade payment of duty’ and in the case of M/s. Automotive Stampings and Assemblies Ltd. Vs. CCE, Pune-I, reported in 2015 (5) TMI 374 – CESTAT, Mumbai, about dealing with clearances to sister unit by not following the valuation in terms of Rule 8 of Central Excise Valuation Rules, 2000, has held as follows:

“The fact of incorrect valuation and consequent short payment of duty was clearly suppressed by the appellant from the department therefore proviso to Section 11A in demanding differential duty was correctly invoked.” On the argument of availing Cenvat credit Tribunal held “We do agree with this submission for the reason that in each and every case buyer is entitled for the Cenvat credit and if this is so then every manufacturer/supplier will be free to either pay or not to pay excise duty. No statute permit that if the buyer is entitled for Cenvat credit then the supplier can avoaid to pay excise duty.”

4.3 Finally submitting with respect to the plea of non-invocability of extended period of limitation, it is submitted that in terms of Rule 9(5) and Rule 9(6) of CCR, 2004 in the regime of self-aaessment, legally, the burden is caused upon the assessee to ensure that the credit availed by them is proper and legal. Even the ER-1 return contains a self-declaration that whatever the details given above and assessment made is true and correct. As such there is a great statutory obligation on the assessee itself to prove that the assessement is correct. The irregularities of the assesse would have gone unnoticed but for the verification of records by the department during the course of audit. Hence the extended period of limitation has rightly been invoked by the department. Learned DR has relied upon the decision of Chemfab Alkalis Ltd. Vs. CCE, Pondicherry, reported in 2010 (251) E.L.T 264 (Tri.-Chennai). The appellants herein have failed to follow the procedure under Rule 7(d) of CCR, 2004. They neither informed the department nor sought any advice from the department as to the manner of distribution of Cenvat credit in terms of the said rule.

The plea of bona fide belief is therefore not acceptable. Hence, the Cenvat credit is rightly held to have been irregularly distributed by the ISD and wrongly utilized by the appellant. The recovery thereof along with the interest and the consequential penalties is very much in compliance of the statute. Impressing upon no infirmity in the order, three of the appeals are prayed to be dismissed.

5. Having heard the rival contentions and perusing the entire records.

6. We observe that the orders of adjudicating authorities below confirming recovery of Cenvat credit availed by the appellants upholding the alleged violation of Rule 7 of CCR, 2004 has not merely been challenged on merits but much emphasis has been laid on the show cause notice itself being barred by limitation. We feel that if challenge to the extended period of limitation, the appellants are bound to succeed, we foremost proceed adjudicating the said plea. We observe that Section 11A of Central Excise Act, 1944 empowers the Central Excise Officer to initiate proceedings where duty has not been levied or short levied within 6 months from the relevant date but this period to commence proceedings under proviso to the said section stands extended to 5 years if the duty could not be levied or it was short levied due to fraud, collusion, willful misstatement or suppression of facts. The proviso to Section 11A reads as under:

“Provided that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder, with intent to evade payment of duty, by such person or his agent, the provisions of this sub-section shall have effect, as if for the words “Central Excise Officer”, the words “Collector of Central Excise and for the words “six months”, the words “five years were substituted.”

A bare reading of the proviso indicates that it is in nature of an exception to the principal clause. Therefore, its exercise is hedged on one hand with existence of such situations as have been visualised by the proviso by using such strong expression as fraud, collusion etc. and on the other hand it should have been with intention to evade payment of duty. Both must concur to enable the Excise Officer to proceed under this proviso and invoke the exceptional power. Since the proviso extends the period of limitation from six months to five years, it has to be construed strictly. The initial burden is on the Department to prove that the situations visualised by the proviso exists but once the Department is able to bring on record material to show that the appellant was guilty of any of those situations which are visualised by the Section, the burden shifts upon the assessee. However, it is the settled cannon of decision that when the law requires an intention to evade payment of duty then it is not mere failure to pay duty. It must be something more.

7. We observe that Hon’ble Apex Court in the case of Tamil Nadu Housing Board Vs. Collector of Central Excise, Madras, reported in 1994 (74) E.L.T. 9 (SC), while relying upon its earlier decision in the case reported as 1989 (43) E.L.T. 195 (SC) has held that to invoke Section 11A of Central Excise Act, 1944, the law requires an intention to evade payment of duty. Hence, it has to be not a mere failure to pay the same rather it has to be something more than that. It was clarified that the assessee must be aware that the duty was leviable and it must deliberately avoid paying it. The Hon’ble Apex Court further explained that the word “evade” in the context to mean ‘defeating the provision of law of paying duty.’ It is made more stringent by use of the word “intent”. In its another decision in the case of Pushpam Pharmaceuticals Company Vs. Collector of C.Ex., Bombay, reported in 1995 (78) E.L.T. 401 (S.C.), it was also held that a perusal of proviso to Section 11A indicates that the expression “Suppression of fact” has been used in company of such strong words as fraud, collusion or willful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression. It was also held that Section 11A empowers the Department to re-open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different than what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. As already discussed above ‘suppression’ is used in company of strong words as fraud, collusion or willful default and it is the burden of department to prove the existence of any or all of these circumstances prior invoking the extended period of limitation.

8. Later in the year 2007 while deciding a case of Continental Foundation Jt. Venture Vs. Commr. of C.Ex., Chandigarh-I, reported in 2007 (216) E.L.T. 177 (S.C.), The Apex Court held that as far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the work ‘wilful’, preceding the words “mis­statement or suppression of facts” which means with intent to evade duty. The next set of words ‘contravention of any of the provisions of this Act or Rules’ are again qualified by the immediately following words ‘with intent to evade payment of duty.’ Therefore, there cannot be suppression or mis-statement of fact, which is not willful and yet constitute a permissible ground for the purpose of the proviso to Section 11A. Mis-statement of fact must be wilful.

9. Reverting to the facts of the present case, we observe following to be the admitted facts:

(i) The audit of three of the appellants was conducted in December, 2013

(ii) All the documents as that of ISD invoices and the copies of ER-1 returns were provided to the audit team itself.

(iii) Appellants were regular in filing their ER-1 returns mentioning all details of the amount availed by them as Cenvat credit, consequent of being distributed by their ISD.

(iv) The services for which the Cenvat credit was distributed by the ISD have all being the eligible input services.

(v) In maximum cases/invoices, the credit was distributed as per the eligibility of the service rendered i.e. either on the basis of unit specific or on the basis of turnover.

Except that in few of the statements by ISD invoices in one of the columns, the credit was distributed by specifying turnover as “quantity based” and in some other it was on “allocation weight”. We observe in terms of Circular No. 178/4/2004-S.T. dated 11.07.2014 as relied upon by the department, the distribution as per allocation weight is also based on turnover, hence, apparently such distribution is also in compliance of Rule 7(d) of CCR, 2004.

10. All these admissions when seen in the light of above discussed law on the ground of limitation, we hold that there is no willful intent of any of the three appellants to evade their duty/tax liability. Hence, there cannot be suppression on the part of the appellant as alleged and confirmed. The appellant was availing and utilizing such amount of Cenvat credit as was distributed by their ISD. The question of suppression or evasion does at all arise in such a case at least against the appellants who were the receivers of the distributed Cenvat credit. They otherwise were regularly mentioning the availment/utilized amount in their ER returns. In light of these findings, we hold that the department was not entitled to invoke the extended period of limitation. Hence, the major demand for the period w.e.f. August, 2012 to March 2016 is liable to be set aside.

11. We further observe that there is also no denial to the fact that there is no loss of revenue to the department, the exercise being entirely revenue neutral. Except that the department mentioned principle of revenue neutrality as irrelevant for the purpose of setting aside the demand. But we rely upon the decision of this Tribunal in the case of Hindustan Zinc Ltd. (supra) as relied upon by the appellant wherein it was held that any mala fide intention cannot be attributed to the assessee when the entire exercise is revenue neutral. Resultantly, the entire demand of Appeal No. E/30841/2018 and Appeal No. E/30151/2019 which pertains to the period August, 2012 to December 2015, we hereby set aside on the ground of limitation itself. For the same reason, in appeal bearing No. E/30578/2021 also, the demand pertaining to the period from August, 2012 to December, 2015 of Show Cause Notice dated 17.04.2017 gets hit by the principle of limitation. We accordingly set aside the part said of demand of this appeal also.

12. For the demand of remaining period from October, 2015 till March 2017, in this Appeal No. E/30151/2019 of Show Cause Notice dated 07.11.2017, we hereby proceed to adjudicate the merits.

13. We will first take up the plea of revenue neutrality. We observe that Hon’ble Apex Court in the case of Commissioner of C.Ex., Pune Vs. Coca-Cola India Pvt. Ltd. reported in 2007 (213) E.L.T. 490 (S.C.), has held when the duty payable by the assessee is modvatable/cenvitable, there lies no revenue implication. In a recent decision of Jet Airways (I) Limited Vs. Commissioner of Service Tax, Mumbai reported in 2017 (7) GSTL 35 (SC), Hon’ble Apex Court again held that when the services are such as being available as credit for discharging tax on other services, the entire issue is revenue neutral, hence, the demand and consequential interest and penalty is not sustainable. This Tribunal also in the case of Rajasthan Patrika Pvt. Ltd. Vs. Commissioner of C. Ex. & CGST, Jaipur reported in 2020 (34) G.S.T.L. 226 (Tri.-Del.) has dealt with the issue of confirming the demand for wrongfully availed Cenvat credit on the ground that the issue is revenue neutral. Hence, we hold that question of confirmation of that leftover portion of demand gets hit by the principle of revenue neutrality.

14. We further observe that alleged violation of Rule 7 of CCR, 2004, in the given facts and circumstances, is nothing more than the procedural lapse. We rely upon the decision of Hon’ble High Court Gujarat in the case of Commissioner of Central Excise Vs. Dashion Ltd. reported in 2016 (41) S.T.R. 884 (Guj.) wherein it is held that when the invoices for input services are not disputed by the Revenue, the availment of Cenvat credit by the unit of an ISD Distributor cannot be denied on the ground that the service was availed by some other unit, it being merely a procedural deficiency. It is emphasized by the court that substantial benefit of the Cenvat credit provision should not be denied on the mere ground of procedural lapse. In the present case also there is no dispute about the invoices raised by the ISD, also there is no dispute that major amount of the credit has been distributed on pro rata distribution basis only, except that in some invoices it was distributed on the quantity basis. Rule 7 of CCR, 2004 is a procedure. As already discussed above the procedural lapse cannot be a ground to deny the substantial benefit of Cenvat credit. Also the situation is discussed to be revenue neutral. Question of demanding interest and imposition of penalty does not at all arises. This Tribnual, Ahmedaba Bench in the case of Doshion Ltd. Vs. Commissioner of Central Excise, Ahmedabad reported in 2013 (288) E.L.T. 291 (Tri.-Ahmd.) has held as follows:

“5. We have considered the submissions made by both sides. We find considerable force in the arguments advanced by the learned counsel. The registered office and Vatva office both are located in the same place and appellant has simply utilised the credit at Vatva instead of distributing it to various units. As submitted by the learned counsel, during the relevant period, there was no restriction for utilisation of such credit without allocating proportionately to various units. The omission to take registration as an Input Service Distributor can at best be considered as procedural irregularity and in view of the decisions cited, has to be considered sympathetically. Further, it is also noticed that appellant has not got any extra benefit by doing this. In fact from the statement of Shri Chandresh C. Shah, as explained that above Cenvat credit available to them, 20% of service tax payable only was paid and balance was paid in cash. In fact, proper distribution would have enabled them to utilise full credit. It would show that the exercise is totally Revenue neutral and no loss has been caused to the Revenue (infact Revenue has gained). In the absence of any legal requirement to avail credit based on the services received during the relevant time and in the light of the decision cited by the learned counsel, the procedural irregularity has to be ignored and the demand confirmed has to be set-aside on this ground. In the result, demand for Cenvat credit of Rs. 1,07,07,142/- with interest and penalty equal to the same imposed under Section 11AC of Central Excise Act, 1944 are set-aside.”

The procedural irregularities are held to be ignored when there is no apparent loss to the revenue nor any apparent benefit to the assessee.

15. We finally observe that there is no dispute of receipt of services, eligibility of services for credit nor any dispute that the invoices are raised by the ISD/Corporate Office of three of the appellants, which was eligible to distribute the credit to their units/factory. We further find that there is no proposal to issue any show cause notice to the said ISD for alleged wrong distribution of the credit. This situation has been dealt with by this Tribunal in the case of M/s. Indsil Energy Electro Chemicals (supra) as relied upon by the appellants. Following findings have been recorded:

“When we look at the functions of the input service distributor and the documents to be issued by him for passing on the credit, it becomes quite clear that the document issued by him for passing on the credit does not contain the nature of service provided and the details of services. It contains the service provider’s details, distributor’s details and the amount. Obviously the eligibility or otherwise of the service tax credit has to be examined at the end of input service distributor only. This is further supported by the fact that both Central Excise assessees and Service Tax assessees are under the regime of self-assessment and therefore it is the assessee himself who has to specify that the credit availed by him is admissible. Therefore the input service distributor cannot say that he is not required to prove the eligibility or otherwise of the service tax credit once at the receiver’s end which could be a branch or a factory of the distributor, no details would be available regarding the nature of service. Therefore the preliminary objection raised by the ld. Advocate has to be rejected and it has to be held that it is the responsibility of the jurisdictional officer with whom input service distributor has registered to decide the dispute regarding eligibility or otherwise of the service tax credit that the input service distributor has taken and proposes to pass on to others.”

16. With these findings, we hold that the demand even for the normal period in Appeal No. E/30578/2021 is also not sustainable. We accordingly hold that the interests and penalties has wrongly been invoked. Resultantly, we hereby set aside the respective orders under challenge with respect to three of the appeals as have been mentioned in the table above. Consequent thereto, three of the appeals stands allowed.

[Order pronounced in the open Court on 27.02.2023]