Mere Technical Defects In Supplier Invoices Not Enough To Deny ISD Credit: CESTAT Chennai Sets Aside 'Draconian' Penalty

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside the denial of service tax credit distributed by the assessee, as an Input Service Distributor (ISD), to its unit. The Tribunal found that although invoices were issued in the name of the Branch Office, such invoices were “received” by the Head Office of the assessee, making it eligible to avail and distribute credit.

The Bench comprising Mr. M. Ajit Kumar (Technical Member) and Mr. Ajayan T.V. (Judicial Member), on a perusal of connected documents such as contractual letters, delivery/performance certificates, debit notes, ledger vouchers, bank payment details and other supporting documents, noted that there was a “lack of nexus” to indicate shell suppliers or circular payments. Thus, “mere technical defects in supplier invoices (invoice addressed to another unit; absence of non-essential particulars) are not sufficient to disallow ISD distributed credit despite this issue emanating out of investigation proceeding”. Further, the CESTAT, terming the penalty imposed on the ISD on the ground of ineligible credit as “draconian”, set aside the same.

The dispute pertains to denial of CENVAT credit of Rs. 78,17,595 distributed by the ISD to the Ambattur unit.

The assessee manufactured re-rolled steel products and was registered as an ISD. It availed Service Tax credit during the years 2009–10 and 2010–11 based on invoices issued by its ISD.

The Department disallowed credit on the ground that the services in question were actually used in the Furnace Division and Rolling Division of the Gummidipoondi plant and not by the ISD, i.e., the Ambattur unit. A show cause notice was issued seeking to disallow a total credit of Rs. 90,34,015 in the hands of the Ambattur unit.

On the co-relation between input service and unit under Rule 7, the CESTAT held that “the invoices on which credit is taken and distributed relates to debit notes and that all required details are available in the original invoices linked to the debit notes”.

The CESTAT clarified that distribution of credit by the ISD to the Ambattur Unit was only a “consumption of credit” claimed to be available with the ISD. Therefore, “So, in the absence of any dispute as to the eligibility of credits availed by the ISD, the same cannot be questioned at the receiver's end, who only sought for consumption of the same.”

Applying CESTAT Mumbai's rationale in the Mahindra & Mahindra case, it was clarified that denial of credit to the ISD merely on the ground that input services were not used/received in relation to manufacture of goods in a particular unit was “procedural” and that “distribution by the ISD to Ambattur is not automatically invalid”.

On the issue of non-furnishing service provider details, the CESTAT noted the assessee's explanation that Clearing and Forwarding services were provided to the assessee by a Cargo Service Provider and that “these services are procured through Alwin Cargo Services…. But the details of the actual service providers are very much available in the Debit Notes and its enclosures”. In this regard, the CESTAT illustrated that credit can be disallowed only when all essential invoice particulars (supplier identity, address, description of service, amount, tax particulars) are absent.

The CESTAT also upheld credit distribution not merely on ledger entries, but where ledger entries were supported by vouchers, supplier invoices (even if imperfect), bank remittances, and performance proof.

Thus, CESTAT held in favour of the assessee on all counts, viz.:

• Missing original service provider details
• CWIP ledger where invoices lacked supplier details
• Extended period of limitation

In view of the above, the CESTAT allowed the appeals of the assessee.