CENVAT Credit Can’t Be Denied Merely Because Expenses Are Booked at Head Office: CESTAT

The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that CENVAT credit distributed through an Input Service Distributor (ISD) cannot be denied to a manufacturing unit solely on the ground that the related expenses were booked in the books of the Head Office and not in the accounts of the factory receiving the credit. Setting aside a demand exceeding ₹3.07 crore along with interest and penalty, the bench of S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) held that such a condition is not prescribed under Rule 7 of the CENVAT Credit Rules, 2004 and cannot be read into the law by the Department. The dispute arose following an audit conducted by the Accountant General, which observed that a manufacturing unit had availed CENVAT credit on advertisement agency services distributed by its Head Office acting as an ISD. The Department alleged that since the expenditure on advertisement services was booked at the Head Office level and not reflected in the books of the manufacturing unit, the credit was wrongly availed. Based on this objection, multiple show cause notices were issued covering periods from April 2006 to September 2013, alleging violation of Rule 7 of the CENVAT Credit Rules and proposing recovery of ₹3.07 crore along with interest and equal penalty. These demands were confirmed by the adjudicating authority, leading to appeals before the Tribunal. The assessee argued that there is no requirement under the CENVAT Credit Rules mandating that expenses must be recorded in the books of the recipient manufacturing unit. It was contended that the ISD mechanism specifically allows Head Offices to receive invoices for common input services and distribute the credit to manufacturing units. Reliance was placed on CBEC clarifications and circulars which recognize that services such as advertising, market research and consultancy are often procured centrally and their credit can be distributed to operational units through the ISD route. It was also submitted that the eligibility of credit must be examined at the ISD level and not at the level of the recipient unit. The assessee further contended that for part of the disputed period, the Department relied on the unamended provisions of Rule 7 despite statutory amendments coming into force from 1 April 2012. It was also argued that the entire exercise was revenue neutral, as denial of credit to one unit would result in availability of credit to another unit of the same entity. The Tribunal observed that Rule 7 of the CENVAT Credit Rules, as applicable during the relevant period, imposed only two conditions for distribution of credit by an ISD: first, that the credit distributed should not exceed the service tax paid, and second, that credit attributable to services used exclusively for exempted goods or services should not be distributed. It held that the rule does not require expenses to be booked in the accounts of the manufacturing unit receiving the credit. The Bench emphasized that no additional condition, not expressly provided in the statute, can be imposed by the Department. The Tribunal also reiterated the settled position that the Department cannot question the correctness of ISD credit distribution at the recipient unit’s end. If at all there is any dispute regarding eligibility or distribution, proceedings must be initiated against the ISD and not against the unit merely availing the credit. Further, the Bench noted that the show cause notices did not properly allege violation of the amended Rule 7 for the post-2012 period and were largely based on audit objections without establishing suppression, fraud or intent to evade tax. Holding that the demands were legally unsustainable, the Tribunal set aside the impugned order in its entirety and allowed the appeals with consequential relief. Case Details Case Title: Kansai Nerolac Paints Ltd Versus Commissioner of Central Excise, Goods & Service Tax, Faridabad Case No.: Excise Appeal No. 55150 of 2014 Date: 02.02.2026 Counsel For Appellant: Mehul Jivani, C.A. Counsel For Respondent: Goverdhan Dass Bansal Click Here To Read Order Read More: Services to Foreign Universities Are Export, Not Intermediary Services: CESTAT

CENVAT Credit Can’t Be Denied Merely Because Expenses Are Booked at Head Office: CESTAT

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