CESTAT Sets Aside Credit Demand as Eligibility of Input Service Credit Was Not Disputed

Exide Industries Ltd Vs Commissioner of Central Goods & Service Tax (CESTAT Chandigarh)

The appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, arose from an Order-in-Original dated 21.04.2016 passed by the Commissioner of Central Excise, Gurgaon. The Commissioner had confirmed a demand of ₹4,24,11,327 under Rule 14 of the CENVAT Credit Rules read with Section 11A(1) of the Central Excise Act, 1944, along with interest, and imposed an equal penalty under Rule 15 of the CENVAT Credit Rules and Rule 25 of the Central Excise Rules, 2002.

The appellant is engaged in manufacturing batteries for automobiles and other products falling under Chapter 86 of the Central Excise Tariff Act, 1985. The company operates five regional offices registered as Input Service Distributors (ISD), located in Kolkata (two offices), Delhi, Mumbai, and Chennai, and has eight manufacturing units including one at Bawal. The ISDs distribute service tax credit among the manufacturing units through invoices, and the units avail the distributed credit.

During an audit, it could not be determined how much expenditure incurred by the headquarters related to the Bawal unit. The audit therefore alleged that the CENVAT credit of service tax had been disproportionately distributed due to absence of proper description. Based on these allegations, show cause notices were issued for the period May 2013 to October 2015 proposing disallowance of CENVAT credit along with interest and penalty. The department alleged that input services distributed to the appellant were not used by the Bawal unit since the expenses were not recorded in its books of account. The adjudicating authority confirmed the demand on the basis that credit relating to input services used by more than one unit should be distributed proportionately under Rule 7 of the CENVAT Credit Rules.

The appellant challenged the order before the Tribunal, arguing that the impugned order was passed without proper appreciation of the facts, law, and binding judicial precedents. The appellant submitted that the distribution of credit was in accordance with Rule 7 of the CENVAT Credit Rules as applicable during the relevant period. It was argued that prior to 01.04.2016, Rule 7 used the word “may,” meaning that the ISD had discretion in distributing credit among manufacturing units or service-providing units. According to the appellant, the conditions under Rule 7 during that period were discretionary and not mandatory, and the requirement of proportionate distribution based on turnover was not compulsory.

The appellant further stated that from 01.04.2016, Rule 7 was amended and the word “may” was replaced with “shall,” making the distribution conditions mandatory. Since the disputed period was May 2013 to October 2015, the earlier discretionary provision applied. The appellant also submitted that the ISDs had in fact distributed credit proportionately based on turnover, which was supported by Chartered Accountant certificates provided on record.

It was also argued that the issue had already been decided in favour of the appellant in its own cases for earlier and later periods. The appellate authority had previously examined the Chartered Accountant certificates and held that credit distributed by the ISDs based on turnover was admissible. These orders covered the periods 2006-07 to 2011-12 and November 2015 to June 2017. Since the department did not challenge those orders, they had attained finality. The appellant contended that the department could not take a contrary stand on the same issue for the same assessee.

Another argument raised by the appellant was that the show cause notice did not dispute the eligibility or admissibility of the credit itself, nor did it question the distribution of credit at the ISD level. The appellant submitted that, as a settled principle of law, the distribution of credit can only be questioned at the ISD end and not at the recipient’s end.

The department, however, supported the findings of the impugned order. It argued that during the relevant period the appellant had availed CENVAT credit without recording the expenditure relating to the services in its books of account. The departmental representative also contended that the case law relied upon by the appellant was not applicable because the present dispute did not concern the eligibility of services at the ISD level. The department further suggested that the matter be remanded to the adjudicating authority for verification of whether the appellant had actually availed the services and whether the credit was proportionately distributed.

After considering the submissions of both sides and examining the records, the Tribunal observed that during the relevant period Rule 7 of the CENVAT Credit Rules permitted the ISD to distribute credit subject to certain conditions. The Tribunal noted that prior to 01.04.2016 these conditions were discretionary, whereas the amendment from that date made them mandatory by replacing the word “may” with “shall.” Since the dispute concerned the period May 2013 to October 2015, the Tribunal held that the conditions relating to distribution of credit were not mandatory at that time.

The Tribunal also noted that the appellant had produced Chartered Accountant certificates showing that the credit had been distributed to the units based on turnover. It further observed that earlier orders in the appellant’s own cases had allowed similar credit distribution and that those orders had attained finality because the department did not challenge them.

Additionally, the Tribunal found that neither the show cause notice nor the impugned order questioned the eligibility or admissibility of the credit itself or challenged the distribution of credit at the ISD level. The Tribunal reiterated the settled principle that the distribution of credit can only be questioned at the ISD end and not at the recipient’s end.

Considering these findings, the Tribunal concluded that the CENVAT credit had been correctly distributed to the appellant. Consequently, the Tribunal set aside the impugned order confirming the demand, interest, and penalty. The appeal was allowed with consequential relief in accordance with law.

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

The present appeal is directed against the impugned Order-in-Original dated 21.04.2016 passed by the Commissioner of Central Excise, Gurgaon, whereby, the learned Commissioner has confirmed the demand of Rs.4,24,11,327 under Rule 14 of the Credit Rulesread with Section 11A(1) of the Central Excise Act, 1944 along with interest and also imposed equal penalty under Rule 15 of the Cenvat Credit Rules and Rule 25 of the Central Excise Rules, 2002.

2. Briefly the facts of the present case are that the appellant is engaged in the manufacturing of batteries for automobiles and other products falling under Chapter 86 of the First Schedule to the Central Excise Tariff Act, 1985; it has five regional offices (2 in Kolkata, 1 each in Delhi, Mumbai and Chennai) which are registered as Input Service Distributor (‘ISD). Further, there are eight manufacturing units of Exide. One of the manufacturing units of the appellant is situated in Bawal; all five ISDs distribute the credit of service tax availed among the manufacturing units under the cover of invoice and the appellant avails the credit distributed by ISDs. During the audit, it could not be ascertained by the audit that how much amount has been spent by the Headquarters office of the appellant for their Bawal unit. Hence, the audit has observed that in the absence of proper description, the CENVAT Credit on service tax have been disproportionately distributed. On these allegations, various show cause notices were issued proposing to disallow the Cenvat credit for the period from May, 2013 to October, 2015 along with interest and penalty on the ground that the input services of which the credit is distributed to the appellant, are not used by the appellant as the expenses towards these services are not booked in its books of accounts. After following the due process, the adjudicating authority confirmed the demand on the basis that the credit on input services pertaining to more than one unit should be distributed proportionately under Rule 7 of the Cenvat Credit Rules. Aggrieved by the said order, the appellant has filed the present appeal.

3. Heard both the parties and perused the material on record.

4. Learned Counsel for the appellant submits that the impugned order is not sustainable in law and is liable to be set aside as the same has been passed without properly appreciating the facts and the law and binding judicial precedents.

4.1 She further submits that the credit distributed to the appellant is in accordance with Rule 7 of the Credit Rules as prevailing during the relevant period. She further submits that with effect from 01.04.2012, Rule 7 of the Credit Rules provided that ‘ISD may distribute Cenvat credit paid on input services to its manufacturing unit or units providing output service subject to the four conditions provided therein’. She further submits that with effect from 01.04.2016, Rule 7 was substituted to say that ISD shall distribute the Cenvat credit paid on input services to its manufacturing unit or units providing output service or an outsourced manufacturing unit subject to the seven conditions provided therein.

4.2 She further submits that that as per Rule 7, prevailing during the relevant period suggests that ISD was having the discretion in distributing the credit amongst the manufacturing units or units providing the output services. Further, the conditions provided under Rule 7 for distribution of credit were also discretionary. She further submits that conditions to distribute the credit proportionately based on turnover was also not compulsory. She further submits that assuming without admitting that even if the credit is not distributed proportionately, ISDs have not violated Rule 7. She further submits that the word ‘may’ was replaced with ‘shall’ in Rule 7 with effect from 01.04.2016. In support of her submissions, she relied upon the following decisions:

• The Commissioner, Central Tax, Pune-l Commissionerate v. M/S. Oerlikon Balzers Coating India P. Ltd., 2018 (12) TMI 1300-Bombay High Court, followed in its own case in 2025 (1) TMI 221-CESTAT Mumbai
• Philips Carbon Black Ltd. v. C.C.E. Bharuch, 2024 (10) TMI 1334 – CESTAT Ahmedabad
• Unifrax India Ltd v. C.C.E. & S.T.-Bhavnagar, 2023 (10) TMI 955 – CESTAT Ahmedabad
• M/S Shalimar Paints Ltd. v. Commissioner of CGST & Excise, Howrah, 2022 (8) TMI 469-CESTAT Kolkata
• Piramal Glass Pvt. Ltd. v. CCE&ST-Surat-1, 2021 (9) TMI 1198 CESTAT Ahmedabad
• Hindustan Zinc Ltd. v. Commissioner of CGST, Udaipur, 2019 (4) TMI 1843-CESTAT New Delhi

4.3 She further submits that it has been consistently held in the decisions (cited supra) that other conditions under Rule 7 were not mandatory during the relevant period and therefore, denying the credit based on violation of Rule 7 deserves to be set aside. She further submits that in the present case the ISDs have distributed the credit amongst its manufacturing units based on the turnover of the units, which is evident from the CA certificates enclosed by the appellant.

4.4 She further submits that the issue involved in the present case is no more res integra as the same has been decided in favour of the appellant in its own case for the previous as well as subsequent period. She further submits that the appellate authority considered the CA certificates certifying the details of the credit to the appellant’s units wherein, the credit has been distributed in proportionate to the turnover of the units and set aside the orders denying the credit distributed by ISDs. The details of the orders in favour of the appellant are given below:

4.5 She further submits that the department has not gone into appeal against the above stated Orders which have attained finality. She further submits that as per the settled law, the department cannot take contrary stands on the same issue for the same assesee. For this, she has relied upon the following judgments:

• Commissioner of Central Excise Pune-II Vs. SS Engineers, 2023 (386) E.L.T. 192 (S.C.).
• Rosmerta Technologies Ltd. Vs. Commissioner of Central Excise, 2020-TIOL-916-CESTAT-CHD affirmed by the Hon’ble Supreme Court in Civil Appeal No. 177/2021.

4.6 She further submits that the show cause notice for the impugned order has not disputed the eligibility or admissibility of the credit and the department has also not questioned the distribution of credit at the ISD’s end. She further submits that it is the settled principle of law that distribution of the credit can only be questioned at the ISD’s end and not the recipient’s end. For this, she relied upon the following decisions:

• Commissioner of Central Excise, Chandigarh-l v. M/S Brillion Consumer Products Pvt. Ltd., 2024 (10) TMI 6-CESTAT Chandigarh
• Commissioner of CGST & Central Excise, Durgapur v. M/S Durgapur Steel Plant, 2025 (3) TMI 428-CESTAT Kolkata
• M/S. Castrol India Limited v. Commissioner of Central Excise, Kolkata-VI, 2024 (6) TMI 761-CESTAT Kolkata, followed in its own case in 2024 (12) TMI 466-CESTAT Kolkata.

4.5 As regards the demand of interest and penalty, the learned Counsel submits that when the demand itself is not sustainable, the question of interest and penalty does not arise.

5. On the other hand, learned Authorized Representative for the Department reiterates the findings of the impugned order and submits that during the relevant period i.e. May, 2013 to October, 2015 without booking of expenditure incurred on such services in their books of account, the appellant cannot avail and utilize such disputed Cenvat credit. He further submits that the reliance placed by the appellant in the case CCE vs. M/s Oerlikon Balzers Coating India P. Ltd. (supra) does not appear appropriate, as the findings of the Hon’ble High Court in Para 9 are contradictory and also support the view of the respondent also. He further submits that the facts of the said case are different from the present one. He further submits that the case laws relied upon by the appellant on the issue that “credit distributed by the ISD cannot be questioned at recipient’s end”, are not relevant in the present appeal, because, in the present case, eligibility of credit of the services at the end of the ISD were never in question or under dispute, the department allegation is cleared from the para 7 of the OIO. The learned authorized representative for the department further submits that in the interest of justice, the present case may be remanded back to the original adjudicating authority to verify whether the appellant have availed such services and have availed credit of the same in proportionate to what they have availed.

6. We have considered the submissions made by both the parties and perused the material on record. We find that during the relevant period as per Rule 7 of the Credit Rules, the ISD may distribute the Cenvat credit paid on input services to its manufacturing unit or units providing output services subject to four conditions provided therein. We also find that w.e.f. 01.04.2016, Rule 7 was amended and it was made mandatory by the use of the word shall that ISD will distribute the Credit of input services to its manufacturing unit after fulfilling 7 conditions provided therein. We also note that the period involved in the present case is from May, 2013 to October, 2015 and during that time conditions provided under Rule, 7 for distribution of credit were discretionary and not mandatory. Further, we find that in the present case, the appellant has produced the CA certificate which certifies the details of distribution of credit to the appellant’s unit on the basis of turnover of the units. We also find that the appellate authority in the appellant’s own case for the previous and subsequent period has allowed the Cenvat credit distributed by ISD to the appellant on the basis of the CA certificates and the said decisions in favour of the appellant have not appealed against by the Revenue and the said orders have attained finality and as per the settled law, the department cannot take contrary stand on the same issue for the same assesse as held in the cases of Commissioner of Central Excise Pune-II Vs. SS Engineers (supra) and Rosmerta Technologies Ltd. Vs. Commissioner of Central Excise, (supra). Therefore, considering the CA certificates and the fact that during the relevant period, it was not mandatory for the ISD to distribute the credit proportionately on the basis of turnover, we hold that credit has been rightly distributed to the appellant.

7. Further, we also observe that the show cause notice and the impugned order have not disputed the eligibility and admissibility of the credit and have not questioned the distribution of the credit at the ISD end. We also find that it is a settled principle that distribution of credit can only be questioned at the ISD end and not at the end of the recipient as held in the cases cited supra, therefore, questioning the same at the end of the appellant is not sustainable in law.

8. In view of our discussion above and by following the ratio of the above decisions and by considering the CA certificates and the fact that Cenvat credit has been allowed on such service in the appellant’s own case for the previous as well as subsequent periods, we set aside the impugned order and allow the appeal of the appellant with consequential relief, if any, as per law.

(Order pronounced in the open court on 09.03.2026)