CENVAT Credit Across Multiple Units: Key Takeaways from Kirloskar Toyota Textile Machinery Pvt. Ltd. Vs Commissioner of Central Excise (CESTAT Bangalore)

The decision in Kirloskar Toyota Textile Machinery Pvt. Ltd. Vs Commissioner of Central Excise (CESTAT Bangalore) deals with a recurring controversy: whether an assessee can avail and utilize CENVAT credit of common input services across different units (DTA, 100% EOU, and trading unit) located within the same premises, particularly when the invoices are issued to only one unit.

The Tribunal analysed the legal framework under the CENVAT Credit Rules, 2004, the concept of centralized registration under the Service Tax Rules, 1994, and relied heavily on the precedent laid down in M/s ECOF Industries (P) Ltd. Vs. Commissioner of Central Excise, Bangalore, as affirmed by the Karnataka High Court. It ultimately held that, in the absence of an express statutory bar, CENVAT credit on common input services can be distributed across units subject to limited conditions under Rule 7.

Background: Assessee’s Business Structure and Department’s Objection

The assessee, Kirloskar Toyota Textile Machinery Pvt. Ltd., was engaged in:

  • Manufacturing textile machinery in a DTA unit;
  • Operating a 100% EOU at Bangalore engaged in the manufacture of automobile parts under CETH 8708; and
  • Running a trading unit registered for excise/service tax purposes.

All three units functioned from the same compound and followed a centralized billing and accounting system. During investigation, the Department observed that common input services were used for all three activities (DTA manufacturing, 100% EOU manufacturing, and trading), although the invoices for such services were largely addressed to the DTA unit.

Show Cause Notices and Adjudication

Two show cause notices were issued:

  1. First SCN dated 07.05.2013 – covering the period 2008-09 to December 2012;
  2. Second SCN dated 04.02.2014 – covering the period January 2013 to December 2013.

The Department alleged that:

  • The services on which CENVAT credit was taken did not qualify as “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004 because they were commonly used, including for trading and the 100% EOU; and
  • Credit was wrongly availed on invoices raised in the name of the DTA unit, despite usage across multiple units.

The Adjudicating Authority:

  • Disallowed the CENVAT credit;
  • Confirmed the duty demand; and
  • Imposed penalty (at least in respect of the first SCN).

The assessee challenged this order before the CESTAT, Bangalore.

Centralized Registration and Credit Utilisation: Assessee’s Position

The assessee argued that its approach to credit availment and utilisation was entirely consistent with law and had been transparently disclosed to the Department.

Intimation to the Department

The assessee had:

  • Obtained centralized service tax registration under Rule 4(2) of the Service Tax Rules, 1994;
  • Vide communication dated 08.06.2011, intimated surrender of the earlier service tax registration for the 100% EOU, explaining that:
    • Centralized registration had been obtained;
    • The CENVAT credit balance of the surrendered registration would be merged with the centralized registration; and
    • The consolidated credit would be utilised for payment of excise duty and service tax on clearances and services from the common premises.
  • Via letter dated 12.07.2011, informed the Department about consolidating CENVAT credit balances of central excise and service tax for the other units as well.

The assessee also relied on CBEC Circular No. 799/32/2004-CX dated 23.09.2004 to submit that CENVAT credit availed by an EOU can be utilised by the DTA unit in accordance with the rules, when there is centralized registration and accounting.

The assessee placed strong reliance on:

  • Rule 7 of the CENVAT Credit Rules, 2004 dealing with distribution of credit by an input service distributor; and
  • The judgment in M/s ECOF Industries (P) Ltd. Vs. Commissioner of Central Excise, Bangalore – 2010 (17) STR 515 (Bangalore – CESTAT), as affirmed by the Karnataka High Court in Commissioner of Central Excise, Bangalore I Commissionerate Vs. M/s ECOF Industries (P) Ltd. – [2012] 34 STT 327 (Karnataka).

In ECOF Industries, the Tribunal had held (and the High Court confirmed) that:

  • Rule 3 allows a manufacturer or provider of output service to take credit of any input service received;
  • Rule 7 only prescribes two conditions for distribution of credit by an input service distributor:
    1. The credit distributed against a document under Rule 9 must not exceed the service tax paid; and
    2. Credit attributable to services used exclusively in the manufacture of exempted goods or provision of exempted services cannot be distributed.

Crucially, there is no restriction in the rules that credit can only be distributed to the unit where the service is actually used or where the product advertised is manufactured.

The assessee argued that this ratio squarely applied, as it:

  • Had valid centralized registration;
  • Used common input services for overall business operations; and
  • Distributed/used credit in a manner that did not violate the two restrictions under Rule 7.

Challenge to Extended Period

The Department had invoked the extended period on the ground of suppression and alleged wilful contravention. The assessee countered that: