CENVAT CREDIT: INPUT SERVICE DISTRIBUTION

[Dr. Sanjiv Agarwal]

Input service distributor is an intermediary or an office which manages the business of manufacturer or producer of final products or output service provider and undertakes to

perform or performs the following –—

a)    receives invoice issued under Service Tax Rules toward purchase of input services.

b)    Issues invoice / bill / challan for the purpose of distributing the credit of service tax paid on such services to manufacturer/producer or service provider.

CBEC had videCircular No. 97 dated 23.8.2007 clarified that input service distributor is an office or premises of the manufacturer or taxable service provider which receives bills / invoices etc., of input services. The input service distributor can distribute the eligible credit to any unit of the manufacturer or any premises/office of taxable service provider.

Input service distributor is the office of the manufacturer of final products or the provider of taxable services. The residence of any employee of manufacturer or service provider or its guest house can not be called input service distributor (ISD). Any ISD can distribute only the service tax credit and not the central excise or customs credit.

Following are the key criteria for any input service distributor (ISD);—

(i)   It has an office as the manufacturer or producer of final products or provider of output service. Any office of manufacturer of excisable goods or taxable service provider can be registered as input services distributor.

(ii)  It should receive invoice towards purchase of service. The services might have been received by one of the units manufacturing goods or premises providing services or other offices.

(iii)  It should issue invoice or bill or challan for the purpose of distributing the credit of service tax paid on the service to the manufacturing unit or service providing unit.

An ISD could be any head office, registered office, corporate office, administrative office, branch office, regional/divisional/zonal office, depot, plant etc. Also, a service provider can have more than one ISD registrations.

In Ecof Industries Pvt. Ltd. v. CCE, Bangalore 2009 (10) TMI 171 - CESTAT, BANGALORE , it was held that the availability of credit is related to manufacturer of goods or provider of output services as a whole and is not restricted to any particular unit or manufacturer or service provider. Where assessee distribut credit of service tax in respect of its one unit even though service tax had been paid in respect of services used by its another unit and lower appellate authority denied distribut of service tax credit on the ground that service tax credit relating to one unit should not be distribut to other unit, it was held that restricting distribution of service tax credit can not be upheld.

Distribution of Credit by Input Service Distributor

The facility of registering as an input service distributor exists to allow businesses to operate at their convenience and allow centralized procurement of services and the distribution of credit to units where such services are used. The provisions have been amended by Finance Act, 2012 to align the practice with the intent stated above.

Credit of only 'input services' can be distributed. Hence a service procured needs to be assessed whether it is an 'input service' at any of the units of the ISD. Only if it qualifies as an "input service" it can be distributed. Further the credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services cannot be distributed.

While the status of the service as 'input service's ascertained, the units where it is used is also ascertained. The credit of a service used exclusively in one unit can be distributed only to that unit. If it is used in more than one unit, the credit can be distributed proportionate to the turnover of the units. The total turnover shall be determined in the same manner as determined under rule 5 and shall be determined for the month previous to the month during which the Cenvat credit is distributed. In case if any of its unit pays tax or duty on quarterly basis as provided in rule 6 of Service Tax Rules,1994 or rule 8 of Central Excise Rules, 2002 then the relevant period shall be the quarter previous to the quarter during which the CENVAT credit is distributed. The turnover so calculated would be ex-duty i.e, not inclusive of the taxes and duties on the goods and services supplied.

In case of an assessee who does not have any total turnover in the said period as in the case of a new company, the ISD shall distribute any credit only after the end of such relevant period wherein the total turnover of its units are available. In case of a new unit wherein any credit is exclusively used, the credit can be distributed in total to such unit.

Rule 7 for input service distributors has been amended to provide that credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit  and that the credit of service tax attributable to service used in more than one unit shall be  distributed pro rata on the basis of the turnover of the concerned unit to the sum total  of the turnover of all the units to which the service relates.          

For example, in case of services by way of advertisement-                              

(i)  if the advertisement is for a product or service provided from only one unit, the said  credit shall be distributed only to that unit; and if two units, the said credit shall be distributed only to those two units, in proportion to the respective turnovers;

(ii)  if the advertisement is for the company as such, the said credit shall be distributed only to the extent of the turnover of units registered and entitled to avail Cenvat credit to the total turnover of the company including unregistered units.

Similarly, where a company manufactures fans in 2 units and other appliances in 2 other units, advertisement services for fans would qualify as an input service for the units manufacturing fans and hence could be distributed to such units based on the turnover of the previous month of the 2 units.

Credit so distributed is availed on the strength of a challan issued by the ISD. It shall be subject to rule 6 of Cenvat Credit Rules 2004 and depending upon the option exercised under the rule 6 due reversals will be required to be effected by the unit to which the credit has been distributed.

 

 

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