Case Law Details
Guala Closures (I) Pvt. Ltd. Vs Commissioner of Customs (CESTAT Mumbai)
CENVAT Credit Demand on ISD Set Aside Due to Lack of Legal Provision; Show-Cause Notice by Audit Commissioner Held Invalid for Lack of Authority; Recovery Proceedings Against ISD Declared Void Under CENVAT Credit Rules; CENVAT Credit Recovery Quashed Due to Jurisdictional and Legal Defects.
The appeals arose from orders passed by the Commissioner (Appeals) confirming recovery of CENVAT credit amounts of ₹24,74,511 and ₹7,24,447 under Rule 14 of the CENVAT Credit Rules, 2004. The demands were raised against both the Input Service Distributor (ISD) and the manufacturing unit, along with interest and equal penalty, including invocation of the extended period of limitation.
The appellants challenged the legality of these orders on multiple grounds. It was argued that recovery proceedings under Rule 14 can only be initiated against the manufacturer or service provider and not against an ISD. Reliance was placed on several tribunal decisions, including those in Indian Oil Corporation Ltd. and Mahindra & Mahindra Ltd., which held that ISDs are not liable for such recovery proceedings. Additionally, a CBEC clarification dated 10.03.2014 was cited, stating that there is no provision under the CENVAT Credit Rules, 2004 for issuing show-cause notices to ISDs.
The appellants also challenged the validity of the show-cause notices issued by the Audit Commissioner. They contended that as per CBEC Master Circular No. 1053/2/2017-CX dated 10.03.2017, only the jurisdictional Executive Commissioner is authorized to issue such notices for recovery of duty. Therefore, notices issued by the Audit Commissioner lacked legal authority.
On the issue of limitation, the appellants argued that the extended period could not be invoked since the demand was based on audit of records already maintained and disclosed. They contended that no suppression of facts could be alleged in such circumstances, and reliance was placed on tribunal decisions supporting this position.
The Department opposed these arguments, relying on the decision in Clariant Chemicals (I) Ltd., where it was observed that ISD offices and manufacturing units should not be treated as separate legal entities and both are responsible for resolving issues with the Department. The Department also argued that audit officers are empowered to issue show-cause notices, though no supporting circular was produced.
After examining the submissions and relevant legal provisions, the Tribunal held that the issue of raising demand against ISDs had already been settled through consistent judicial precedents. It reaffirmed that an ISD is neither a manufacturer nor a provider of output service, and therefore, recovery under Rule 14 cannot be initiated against an ISD. The Tribunal noted that the earlier decisions relied upon by the appellants were based on proper interpretation of law and aligned with the CBEC clarification.
The Tribunal distinguished the Clariant Chemicals (I) Ltd. decision, observing that it did not consider the relevant Board circular or the specific provisions of Rule 14. It further noted that the ratio of earlier binding decisions was not examined in that case. As such, the Tribunal declined to follow the reasoning in Clariant Chemicals (I) Ltd. and instead adhered to the consistent line of precedents holding that recovery notices cannot be issued to ISDs.
On the issue of jurisdiction, the Tribunal found that no authority had been shown to establish that Audit Commissioners are empowered to issue show-cause notices for recovery. In contrast, the Master Circular clearly assigns such power to the jurisdictional Executive Commissioner. Therefore, the notices issued by the Audit Commissioner were held to be without authority of law and invalid.
Regarding the invocation of the extended period of limitation, the Tribunal accepted the appellants’ contention that when the demand arises from audit of records maintained by the assessee, suppression of facts cannot be alleged. Consequently, the extended period was not invocable.
In view of these findings, the Tribunal allowed both appeals and set aside the impugned orders passed by the Commissioner (Appeals), granting consequential relief to the appellants.
FULL TEXT OF THE CESTAT MUMBAI ORDER
Confirmation of recovery of CENVAT Credit of 24,74,511/- and Rs. 7,24,447/- respectively against allegedly inadmissible credit by the Commissioner (Appeals) passed under Rule 14 of the CENVAT Credit Rules, 2004 in respect of both Input Service Distributors (ISD) as well as manufacturer of goods have given raise to these two appeals, in which both orders are assailed by the Appellant ISD as well as the manufacturer. Legality of invocation of extended period in confirming equal penalty alongwith interest on both is also questioned in these two appeals.
2. Learned Counsel for the Appellants Mr. C.S. Biradar submitted that Rule 14 recovery notice can only be sent to the manufacturer and not to the ISD unit as has been settled through several decisions, including those reported in 2014 (35) STR 411 (Tri. – Del.) in the case of Indian Oil Corporation Ltd. Vs. Commissioner of Central Excise, Delhi-II and reported in MANU/CM/0260/2017 in the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Service Tax, Mumbai and also clarified by the CBEC Board through clarificatory letter dated 10.03.2014 that states that there is no provision in the CENVAT Credit Rules, 2004 for issuing show-cause notice’s to the ISD (Para 3). Further, he questioned the authenticity of issuing show-cause notice on the Appellants by the Audit Commissioner as Master Circular No. 1053/2/2017-CX dated 10.03.2017 issued by the CBEC clearly stipulates under para 12.1 that such jurisdiction to issue a show-cause notice for demand of duty or recovery rests only on the Executive Commissioner. On invocation of extended period of limitation, in citing decisions of this Tribunal reported in 2020 (41) GSTL 520 (Tri. Bang.) in the case of Tally Solutions Pvt. Ltd. Vs. Commissioner of Central Excise, Bangalore and Final Order No. A/87941/2018 dated 20.11.2018 in the case of Thyssenkrupp Industries India Pvt. Ltd. Vs. CCE & ST, Pune-I, he further submitted that when show-cause notice is based on the audit of records maintained by the Appellants, suppression of fact can’t be alleged, for which extended period was not invocable and the purpose of EA-2000 Audit or CERA Audit being tendering advised to the Assessee to follow correct procedure so that no amount chargeable as duty under Central Excise law escapes from being taxed, as noted in the Thyssenkrupp Industries India Pvt. Ltd. decision, cited supra, invocation of extended period in such a scenario is contrary to the law.
3. Learned Authorised Representative Mr. Ranjan Kumar objects to such submissions. He mainly placed his reliance on the decision of this Tribunal passed in the case of Clariant Chemicals (i) Ltd. Vs. Commissioner of Central Excise, Raigad, as reported in 2015-TIOL-2510-CESTAT-MUM, in which at para 5 there was a clear findings that it was unnecessary to bifurcate ISD office and manufacturing unit as two different distinct legal entities as both are integrally connected and both of them are required to resolve the issue with the Department. He also argued that Audit Officer are equally empowered to issue show-cause notices on the Assessee for recovery of tax dues but failed to produce any circular authorising the Audit unit to issue such notice of show-cause.
4. I have gone through the appeal paper book and submissions made in writing by the adversaries alongwith other relevant provisions of law and case laws. At the outset, it is to be said that issue concerning raising of demand of alleged inadmissible credit against the ISD has been settled long back by this Tribunal which is consistent in its decision that ISD is not a manufacturer or provider of output service against whom demand under CENVAT Credit Rules, 2004 or Finance Act, 1994 or Central Excise Act, 1944 can be raised and three of those decisions have been relied upon by learned Counsel for the Appellant, as referred above. On this point, there cannot be any departure from the judicial precedent which is set after proper interpretation of the provision of law governing duty demand /recoveries of credits etc. But in the instant case a contrary decision in the case of Clariant Chemicals (I) Ltd. is placed on record by learned Authorised Representative that was decided in 2015. However, going by the said decision it can be said that controversy relating to that decision was that manufacturer itself was noticed for recovery but it challenged the said notice on the ground that ISD was not noticed instead, which was nullified in para 5 of the said order, as discussed above. Further, going by the judgment cited by the Appellant namely Indian Oil Corporation Ltd. and Mahindra & Mahindra Ltd. cited supra, it can be said that Mahindra & Mahindra Ltd. decision was primarily based on the decision of Indian Oil Corporation Ltd. that was decided on 11.03.2014 giving a clear finding that demand for recovery can’t be raised against Input Service Provider under Rule 14 of the CENVAT Credit Rules, 2004, which is also in conformity to the Board’s Clarificatory Circular letter dated 10.03.2014 but the ratio of this judgment was not taken into consideration while deciding Clariant Chemicals (I) Ltd., apparently for the reason that it was not argued before the Bench. Apart from the above distinction, it is also to be placed on record that neither the Board Circular nor provision of Rule 14 of CENVAT Credit Rules, 2004 were taken into consideration in making an observation in Clariant Chemicals (I) Ltd. decision that they should not be considered as two different distinct legal entities but such an observation that went to the mind of Hon’ble Members had not prompted them to say with definite terms as to who should be noticed for such recovery, since the ultimate conclusion was that both of them should unitedly resolve the issue with the Department. Therefore, such an observation can’t even be considered as an obiter dicta since ratio decidendi of Indian Oil Corporation Ltd. decision is followed consistently after its pronouncement that recovery notice can’t be sent to the ISD for realisation of allegedly inadmissible CENVAT Credit and therefore, the said notice is a nullity. Further, when no authority is produced by the Respondent-Department to the effect that Audit Commissioners are entitled to issue notice for recovery and Board Master Circular No. 1053/2/2017-CX that compiled previous circulars on the issue has clearly authorised the Executive Commissioner namely the Jurisdictional Commissioner to issue such show-cause notice for recovery, the notice sent by the Audit Commissioner to the manufacturing unit can’t be treated at par with recovery notice under Section 73 of the Finance Act, 1994, since it was sent without the authority of law. The argument led by learned Counsel for the Appellant concerning invocation of extended period as not maintainable, as discussed in the preceding para, also carries force. Hence the order.
THE ORDER
5. The appeals are allowed and the order passed by the Commissioner of CGST & Customs (Appeals), Goa vide Order-in-Appeal Nos. GOA-EXCUS-000-APP-045(VNT)-2021-22 dated 22.11.2021 and GOA-EXCUS-000-APP-043(VNT)-2021-22 dated 22.11.2021 are hereby set aside with consequential relief, if any.
(Order pronounced in the open court on 16.04.2026)
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