ISD Credit Distribution Not Mandatory Before 2016: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, has held that the distribution of CENVAT credit by Input Service Distributors (ISDs) was not mandatory in proportion to turnover under Rule 7 of the CENVAT Credit Rules during the period prior to April 1, 2016. The bench of S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) ruled in favour of the battery manufacturer and quashed the demand, along with interest and penalty, imposed by the Commissioner of Central Excise & Service Tax, Gurgaon. Exide Industries, a major manufacturer of automobile batteries and related products, operates multiple manufacturing units across India along with five regional offices functioning as Input Service Distributors (ISDs). These ISDs distribute service tax credit related to input services among the company’s manufacturing units. During an audit, the tax department alleged that it was unable to determine the amount of expenses incurred by the company’s headquarters that related specifically to its Bawal manufacturing unit in Haryana. Based on this, the department claimed that the service tax credit had been disproportionately distributed among the units. Consequently, several show cause notices were issued covering the period May 2013 to October 2015, proposing to deny CENVAT credit on the ground that the input services for which credit was distributed were not directly used by the Bawal unit and the corresponding expenses were not recorded in its books of accounts. The adjudicating authority later confirmed a demand of ₹4,24,11,327, along with interest and equal penalty under the CENVAT Credit Rules and Central Excise Rules. Exide argued that the credit distribution by its ISDs fully complied with Rule 7 of the CENVAT Credit Rules as it existed during the relevant period. The company emphasized that the rule used the term “may distribute”, which meant that the conditions governing distribution were discretionary rather than mandatory. The company further pointed out that the rule was amended only from April 1, 2016, when the word “may” was replaced with “shall”, making proportional distribution mandatory under specified conditions. Exide also submitted Chartered Accountant certificates demonstrating that the credit had in fact been distributed broadly in proportion to the turnover of the units. Another key argument raised by the company was that similar disputes for earlier and later periods had already been decided in its favour, and those decisions were not challenged by the department. Therefore, the revenue authorities could not adopt a contrary position for the same issue involving the same assessee. After examining the record, the tribunal observed that during the relevant period, Rule 7 did not mandate proportional distribution of credit among manufacturing units. The bench noted that the requirement became mandatory only after the rule was amended in 2016. The tribunal also accepted the CA certificates submitted by the company as evidence showing that credit distribution was linked to the turnover of the units. Importantly, the bench held that the department had not questioned the eligibility of the credit or its distribution at the ISD level, which is the appropriate stage to examine such issues. Instead, the dispute had been raised at the recipient unit’s end, which the tribunal found legally unsustainable. Allowing the appeal, CESTAT held that the CENVAT credit had been rightly distributed to Exide Industries and that the demand confirmed by the adjudicating authority could not be sustained. The tribunal accordingly set aside the order confirming the tax demand, interest, and penalty, granting consequential relief to the company in accordance with law. Case Details Case Title: M/s Exide Industries Ltd Versus Commissioner of Central Goods & Service Tax Citation: JURISHOUR-279-CES-2026(CHAND) Case No.: Excise Appeal No. 60195 of 2016 Date: 09.03.2026 Counsel For Appellant: Krati Singh Counsel For Respondent: Siddharth Jaiswal Click Here To Read Order Read More: DGGI Hyderabad | Fino Payments Bank CEO Rishi Gupta Granted 2 Day Custody

ISD Credit Distribution Not Mandatory Before 2016: CESTAT

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