S.S. Garg ORDER
S.S. Garg, Member (J)
1. The present appeal is directed against the impugned order dated 18.09.2019 passed by the Commissioner of Central Tax (Appeals) whereby the Commissioner has rejected the appeal of the appellant and confirmed the demand of Rs. 16,40,610/- under Rule 14 of CENVAT Credit Rules, 2004 read with Section 11A(4) of Central Excise Act, 1944 and also imposed penalty under Rule 15(3) of CCR, 2004 read with Section 11AC(1)(a) of Central Excise Act, 1944.
2. Briefly the facts of the present case are that the appellant is engaged in manufacture of automobile parts falling under Chapters 8413, 8411 and 8479 of Central Excise Tariff Act, 1985 and are also registered under Finance Act, 1994 as service provider and service receiver and input tax distributor. The appellant are also availing CENVAT credit on capital goods, inputs and input services and utilizing the same for payment of Central Excise duty. During the course of Audit undertaken by the Department, it was observed that the appellants have availed irregular CENVAT credit inasmuch as the appellants, as an ISD, failed to distribute credit on certain common input services. Accordingly, Audit Report No. 1082/2017-18 dated 03.04.2018 was issued to the appellants requiring them to reverse ineligible CENVAT credit of Rs. 16,40,610/- availed by them in violation of Rule 7 of CENVAT Credit Rules, 2004. The details of ineligible credit as mentioned in the audit report are tabulated below, bifurcated:
2.1. The appellants vide their letter dated 23.02.2018 submitted that all the 9 units are based in the State of Karnataka under one registration GSTIN 29AABCM8269R1ZF under GST Law and the appellants have filed Form GST TRAN-1 and have carried forward the balance CENVAT credit as available in their ER-1 and ST-3 Returns for the period up to June 2017 into their Electronic Credit Ledger; that even if the credits were to be distributed to the respective units, the same would have flown back into the Electronic Credit Ledger under the GST regime. The appellants also submitted in the reply that they are not liable to reverse credit as the overall exercise would amount to revenue neutrality.
2.2. Thereafter, a SCN dated 07.05.2018 was issued to the appellants on the grounds that the appellants were liable to distribute the credit of common input service to each of the recipient units as per the provisions of Rule 7 of CENVAT Credit Rules, 2004 read with sub-rule (2) of Rule 4A of Service Tax Rules, 1994, and that the appellants have availed the entire credit pertaining to common input services at their unit located at B-165 instead. The appellants vide their reply dated 03.10.2018 submitted that the proposal to demand CENVAT credit of Rs. 16,40,610/- is not sustainable as the entire exercise is revenue neutral and that the disputed credit has been carried forward in one common pool of transitional credit, under the GST regime; that the appellants are eligible for the credit of Rs. 1,22,145/- on common input services availed by all units which have been received from other service providers, including the appellants (the head office), to which they are eligible on a pro-rata basis. The Assistant Commissioner after following the due process vide Order-in-Original dated 10.01.2019 confirmed the demand of CENVAT credit and interest and penalty mainly on the ground that the appellants ought to have distributed credits on common input services as per the provisions of Rule 7 of CENVAT Credit Rules, 2004 and instead have availed all the credits as the ISD. The original authority has also not accepted the contention of the appellant regarding revenue neutrality. Aggrieved by the order of the original authority, the appellant filed appeal before the Commissioner (Appeals) who vide the impugned order has rejected the appeal on the similar grounds. Aggrieved by the same, the appellant is before Tribunal. Hence, the present appeal.
3. Heard both the parties and perused the records of the case.
4. Learned Counsel for the appellants submitted that the impugned order is not sustainable in law as the same has been passed without properly appreciating the facts and the law regarding revenue neutrality as held by various Courts. She further submitted that after the implementation of GST with effect from 01.07.2017, the appellants have taken a single registration vide GSTIN 29AABCM8269R1ZF for all the 9 units in the State of Karnataka in terms of Section 25 of the CGST Act, 2017 wherein it prescribes for a single registration in a State. She further submitted that the unutilized credit from ER-1 Returns and ST-3 Returns which also contains the disputed credit has been transferred to Form GST TRAN-1 in terms of Section 140 of the CGST Act, 2017 read with Rule 117 of CGST Rules, 2017 which provide for carry forward of credit from erstwhile regime into the electronic credit ledger of the GST regime. She further submitted that the credit pertaining to other units is also merged in the electronic credit ledger and shall be utilized as a single unit and therefore there shall be no bifurcation of credit pertaining to different units and the same shall be considered as credit belonging to a single unit. She further submitted that the demand in the present case is not sustainable as the entire transaction is revenue neutral, as the credit even if distributed by the appellants to their other units and availed by such units, the credit in turn shall remain within the Appellants' Company only as the Appellants have a single registration under GST for the State of Karnataka. Therefore, as per the learned Counsel, the payment of tax under the present demand would merely result in a revenue neutral situation and would not cause any loss to the exchequer. She further submitted that the net effect of such transactions will be NIL because the credit not distributed by the appellant will be available to the other units of the appellants. She further submitted that the Department has not disputed the admissibility and eligibility of the credit and therefore, the exercise of reversal of credit will merely be in the nature of re-allocation or re-distribution of credit by the ISD. She further submitted that it has been consistently held by various Courts that non-distribution of credit by the ISD is a condonable procedural lapse, in cases where the situation is rendered revenue neutral. In support of this submission, she relied upon the following decisions:
• Doshion Ltd. v. CCE, Ahmedabad, reported in MANU/CS/0335/2012 : 2013 (288) E.L.T. 291 (Tri. - Ahmd.) affirmed by the Hon'ble High Court of Gujarat in MANU/GJ/0820/2014 : 2014 (36) STR 972 (Guj.) and MANU/GJ/0287/2016 : 2016 (41) STR 884 (Guj.)
• Commr. of C.T., Pune-I, Commissionerate v. Oerlikon Balzers Coating India P. Ltd. - MANU/MH/3775/2018 : 2019 (366) E.L.T. 624 (Bom.).
• Hindustan Zinc v. Commissioner of CGST, Udaipur reported in MANU/CE/0220/2019 : 2019 (4) TMI 475.
• Sri Krishna Pharmaceuticals Ltd. vs. CCE, Hyderabad, reported in MANU/CB/0015/2014 : 2015 (40) S.T.R. 1039 (Tri. - Bang.).
4.1. She further submitted that the appellant is eligible for credit of Rs. 1,22,145/- out of Rs. 6,04,338/- being the credit on common input services availed by all units which has been received from other services providers which is indicated in Table B cited supra. Learned Counsel further submitted that for the period up to 01.04.2016 i.e. for the period of April 2014 to March 2016, the appellants were not liable to distribute CENVAT credit pertaining to common input services used in more than one unit of the appellant company on pro-rata basis and the demand for the said period is liable to be set aside. She further submitted that the demand of CENVAT credit of Rs. 6,66,043/- for the period of April 2014 to March 2016 confirmed in the impugned order is without any authority of law and is liable to be set aside. She also submitted that Rule 7 of CCR, 2004 up till 31.03.2016 provided that the input service distributor (ISD) may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to certain conditions. The said Rule 7 of CCR, 2004 was amended vide Notification No. 13/2016-CE(NT) dated 01.03.2016 and the phrase "may distribute" was substituted with "shall distribute" with effect from 01.04.2016. In support of her submission that prior to 01.04.2016, the appellant was not required mandatorily to distribute the service tax paid to its units. For this submission, she relied upon the following decisions:
• Commr. of C.T., Pune-I, Commissionerate v. Oerlikon Balzers Coating India P. Ltd. - MANU/MH/3775/2018 : 2019 (366) E.L.T. 624 (Bom.).
• Hindustan Zinc v. Commissioner of CGST, Udaipur reported in MANU/CE/0220/2019 : 2019 (4) TMI 475 and MANU/CE/0428/2019 : 2019 (370) E.L.T. 1582 (Tri. - Del.).
• Gloster Cables Ltd. v. Commissioner of Central Tax, Medchal - MANU/CH/0177/2018 : 2018 (363) E.L.T. 1197 (Tri. - Hyd.)
4.2. The next submission of the learned Counsel for the appellant is that when the Department has not disputed the eligibility or entitlement of the credit then it is a settled law that substantial benefit of CENVAT credit cannot be denied on procedural lapse. Thus, the benefit of the disputed CENVAT credit cannot be denied on the ground that the appellants have failed to distribute the credit in terms of Rule 7 of the CENVAT Credit Rules, 2004. For this submission, she relied upon the following decisions:
• Trident Powercraft Pvt. Ltd. v. CCE, Bangalore, reported in MANU/CB/0201/2015 : 2016 (41) S.T.R. 687 (Tri. - Bang).
• Kemwell Bio Pharma Pvt. Ltd. v. Commissioner of Central Excise & Service Tax, Bangalore, reported in MANU/CB/0035/2016 : 2017 (47) S.T.R. 70 (Tri. - Bang.).
• Pricol Ltd. v. Commissioner of Central Excise, Coimbatore, reported in MANU/CC/0001/2015 : 2015 (38) S.T.R. 668 (Tri. - Chennai).
4.3. She also submitted that the extended period of limitation cannot be invoked as the appellants have not suppressed the facts with intention to evade payment of duty, rather the appellants provided all the documents to the Audit Department at the time of verification. She further submitted that the demand in the present case is revenue neutral and it is a settled law that extended period of limitation cannot be invoked and penalty cannot be imposed in situation resulting in revenue neutrality.
5. On the other hand, learned AR defended the impugned order.
6. After considering the submissions of both the parties and perusal of the material on record, I find that in the present case, the learned Commissioner has confirmed the demand of CENVAT credit on the grounds that the appellant has failed to distribute the credit to its various units regarding common input service. The defence of the appellant that after the implementation of GST with effect from 01.07.2017, the appellants have taken single registration for all the 9 units working in the State of Karnataka in terms of Section 25 of the CGST Act, 2017. Further, I find that the unutilized credit from ER-1 Returns and ST-3 Returns were transferred to Form GST TRAN-1 in terms of Section 140 of the CGST Act 2017 read with Rule 117 of CGST Rules 2017 and the same was further taken to Electronic Credit Ledger. Further, I find that the net effect of not distributing the credit to various units and availed by the ISD will be NIL after coming into force of GST because the Department has not disputed its admissibility and eligibility. Further, I find that this issue of revenue neutrality has been considered by the various Courts and it has been held that non-distribution of credit is condonable as procedural lapse, especially in situation which is revenue neutral. Further, I find that in the case of Doshion Ltd. v. CCE, Ahmedabad (supra) wherein it has been held that procedural irregularity in the case of ISD distribution is a revenue neutral situation and there is no loss to the Revenue. Similarly, in the case of Commr. of C.T., Pune-I, Commissionerate v. Oerlikon Balzers Coating India P. Ltd. (supra), it has been held by the Hon'ble High court of Bombay that the entire exercise in the case of non-distribution of credit by an ISD would be revenue neutral, as the distribution of CENVAT credit to the various units would result in lesser service tax being paid by cash on their taxable activity, as they would have utilized the CENVAT credit available for distribution for such payments. Further, Tribunal in the case of Hindustan Zinc v. Commissioner of CGST (supra) quashed the proceedings initiated by the Department on account of non-distribution of proportionate credit by an ISD on the ground that the said transaction is revenue neutral. Further, I find that for the period prior to 01.04.2016 i.e. for the period April 2014 to March 2016, the appellants were not liable to distribute CENVAT credit pertaining to common input services used in more than one unit of the appellants' company on pro-rata basis as Rule 7 of CENVAT Credit Rules, 2004 was amended vide Notification No. 13/2016 dated 01.03.2016 wherein the phrase "may distribute" was substituted with "shall distribute" with effect from 01.04.2016, but both the authorities have not considered the amendment effected from 01.04.2016 and wrongly confirmed the demand for the period prior to 01.04.2016. Further, I find that in the case of Commr. of C.T., Pune-I, Commissionerate v. Oerlikon Balzers (supra), it has been held that for the period prior to 01.04.2016, the assessee was entitled to avail and utilize the CENVAT credit pertaining to common input services at one unit without distribution of the same on pro-rata basis to the relevant units consuming the said input service. The Hon'ble High Court also noted that Rule 7 of CCR, 2004 merely gave an option to the assessee to distribute input service credit as evidenced by the word "may distribute". The decision of the Hon'ble High Court was followed by the Tribunal in the case of Hindustan Zinc v. Commissioner of CGST (supra) wherein the Tribunal held that proportionate distribution of credit was not mandatory prior to amendment with effect from 01.04.2016 in Rule 7 of CENVAT Credit Rule, 2004 and quashed the proceedings on the ground of revenue neutrality. Further, I also find that once the Department has not disputed the eligibility or entitlement of credit then the failure of the appellant to distribute the same and transition to GST after coming into force of GST is only a procedural lapse and it will not affect the substantive right of the appellant because the failure to comply with the provisions of ISD are at best may be termed as procedural irregularity and it has been consistently held by various Courts that substantive right cannot be denied merely on procedural irregularity. Similarly, the extended period of limitation invoked by the Department is not sustainable in the present case because the appellant has not concealed any information from the Department and all the documents were provided by the appellant to the Audit Party and on the basis of Audit Report, the SCN was issued. Further the entire demand in the present case results into revenue neutral because even if the appellant had distributed the credit, it would have been available for utilization by appellant post GST regime in terms of Section 25 of the CGST Act, 2017.
6.1. Further, I find that pre-requisite of revenue neutrality is that there is no extra benefit to the assessee and no loss is caused to the Revenue and these two pre-requisites are fulfilled in the present case because even if the disputed credit was distributed to the units at a pro-rata basis, net effect of such transaction would have been NIL and in the present case, the SCN was issued to the appellant after the introduction of GST that at which point the issue has become revenue neutral because the appellant has taken one registration.
7. In view of my discussion above and by following the ratios of various decisions relied upon by the appellant cited supra, I am of the considered view that the impugned order is not sustainable in law because in the present case, the entire situation is revenue neutral and therefore the demand is not sustainable and I set aside the same by allowing the appeal of the appellant.
(Order pronounced in Open Court on 12/07/2021)
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