The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, has held that manufacturers cannot be denied CENVAT credit merely because the tax paid under the reverse charge mechanism (RCM) through a centralized registration was not distributed through the Input Service Distributor (ISD) mechanism when the services were exclusively received by a single manufacturing unit. 

The bench of S. S. Garg (Judicial  Member) and P. Anjani Kumar (Technical Member) whale setting aside excise demands aggregating to more than ₹4.37 crore, along with interest and penalties imposed by the department. 

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The appellant manufactures CFL lamps, fluorescent tubes and tungsten filaments at its Mohali facility. Its head office in Chennai held a centralized service tax registration and was also registered as an Input Service Distributor (ISD). The dispute related to service tax paid under the reverse charge mechanism on various input services such as Goods Transport Agency (GTA) services, Legal services, Business support services, Information technology software services, Technical testing and analysis, Management, maintenance and repair services, Manpower supply services, and Sea freight services

The company paid service tax on these services through GAR-7 challans using its centralized registration and availed CENVAT credit. 

However, the department alleged that since the head office was also registered as an ISD, the credit ought to have been distributed through the ISD mechanism rather than being directly availed by the Mohali manufacturing unit. Based on this premise, multiple show cause notices were issued covering the period from June 2009 to June 2017. 

The appellant argued that the department had misunderstood the factual position.

It contended that the services were actually received only by the Mohali manufacturing unit. The invoices were raised directly in the name of the Mohali unit. Service tax was discharged through the centralized registration and not through the ISD registration. GAR-7 challans are recognized documents for availing CENVAT credit under Rule 9(1)(e) of the CENVAT Credit Rules. Since the services were not common to multiple manufacturing units, there was no legal requirement to distribute the credit through the ISD route. 

The company also relied upon several earlier Tribunal and High Court decisions recognizing GAR-7 challans as valid documents for taking CENVAT credit. 

A Bench found that the department had proceeded on an incorrect understanding of the transaction.

The Tribunal noted that there was no dispute regarding actual receipt of the input services by the Mohali unit, invoices being issued in the name of the Mohali unit, and payment of service tax under the reverse charge mechanism through the centralized registration. 

According to the Bench, the department wrongly assumed that because the head office was also registered as an ISD, every credit necessarily had to pass through the ISD mechanism.

The Tribunal emphasized that the ISD mechanism becomes relevant primarily where common input services are received and credit has to be distributed among multiple units.

In the present case, however, the disputed services were received only by the Mohali manufacturing unit.

Accordingly, the Bench held that there was no requirement in law for routing the credit through the ISD registration merely because such registration also existed. 

The Tribunal further held that GAR-7 challans evidencing payment of service tax under reverse charge constitute valid documents under Rule 9(1)(e) of the CENVAT Credit Rules.

Since the service tax had been correctly discharged through the centralized registration, the appellant was fully entitled to avail the corresponding CENVAT credit on the strength of those challans. 

The Bench relied extensively on its earlier decision in Luminous Power Technologies Pvt. Ltd., where it had already held that denial of CENVAT credit merely because the head office was not registered as an ISD was unsustainable.

The Tribunal also referred to the Gujarat High Court’s judgment in Commissioner of Central Excise v. Dashion Ltd., which held that absence of ISD registration is at best a procedural irregularity and cannot defeat a substantive entitlement to CENVAT credit where complete records are maintained and the transactions are revenue neutral. 

Holding that the service tax had been properly paid through the centralized registration and that GAR-7 challans were legally valid documents for availing credit, the Tribunal concluded that the departmental orders were unsustainable.

Accordingly, CESTAT set aside all three impugned orders and allowed the appeals with consequential relief in favour of Signify Innovations India Limited.

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