CESTAT Allows ISD Credit to Kansai Nerolac, Rejects Demand of ₹307 Crore

February 03, 2026 : 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 merely because the related expenditure was recorded in the books of the Head Office rather than in the factory’s accounts.

Allowing the appeals filed by Kansai Nerolac Paints Ltd., the Tribunal set aside a demand of ₹3,07,83,328 along with interest and an equal penalty. The Bench held that such a condition is not prescribed under Rule 7 of the CENVAT Credit Rules, 2004 and cannot be read into the law.

The matter arose from an audit conducted by the Accountant General, during which it was observed that the company 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 these services was booked in the Head Office accounts and not in the books of the manufacturing unit, the credit was wrongly availed.

Based on this objection, multiple show cause notices were issued covering the period from April 2006 to September 2013, alleging violation of Rule 7 and proposing recovery of over ₹307 crore. The adjudicating authority confirmed the demands, prompting the company to approach the Tribunal.

Before CESTAT, the appellant argued that neither Rule 7 nor any other provision requires expenses to be recorded in the books of the recipient manufacturing unit. It was contended that the ISD mechanism is specifically designed to allow Head Offices to centrally receive invoices for common input services such as advertising and distribute the eligible credit to manufacturing units. The company also relied on CBEC clarifications recognizing that such centrally procured services are eligible for ISD-based credit distribution.

The appellant further submitted that the eligibility of credit must be examined at the ISD level and not at the recipient unit’s end. It was also argued that the show cause notices were based purely on audit objections and did not establish any suppression, fraud, or intent to evade duty.

After hearing both sides, the Bench, comprising Judicial Member S. S. Garg and Technical Member P. Anjani Kumar, observed that during the relevant period Rule 7 imposed only two conditions for distribution of credit by an ISD: that the credit distributed should not exceed the service tax paid, and that credit attributable to services used exclusively for exempted goods or services should not be distributed.

The Tribunal held that there is no requirement under the rules for expenses to be booked in the accounts of the manufacturing unit receiving the credit. It emphasized that no condition not expressly provided in the statute can be imported into the law by interpretation. The Bench also noted the settled legal position that the Department cannot question the correctness of credit distributed by an ISD at the recipient unit’s end, as the recipient merely avails credit on the strength of invoices issued by the distributor.

In view of these findings, the Tribunal held that the show cause notices and the impugned order were unsustainable in law. Accordingly, the order was set aside and all three appeals were allowed with consequential relief to the appellant.

Cause Title: Kansai Nerolac Paints Ltd vs Commissioner of Central Excise, Goods & Service Tax, Faridabad
Case No.: Excise Appeal No. 55150 of 2014
Coram: S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member)