RESTRICTIONS REGARDING THE DISTRIBUTION OF CREDITS

[Mr. M. GOVINDARAJAN]

Rule 2(m) of the CENVAT Credit Rules, 2004 ('Rules' for short) defines 'input service distributor' as an office of the manufacturer or provider of final products or provider of output service, which receives invoices issued under Rule 4 of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.

Rule 4A (2) provides that every input service distributor distributing credit of taxable services shall, in respect of credit distributed, issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him, for each of the recipient of the credit distributed, and such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain the following namely:-

* The name, address and registration number of the person providing input services and the sl. No. and date of invoice, bill, or as the case may be, challan issued;

* The name and address of the said input service distributors;

* The name and address of the recipient of the credit distributed;

* The amount of the credit distributed.

Rule 7 deals with the manner of distribution of credit by input service distributor. It provides that the input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following conditions, namely:

* the credit distributed against a document referred to in Rule 9 does not exceed the amount of service tax paid thereon; or

* credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

In 'ECOF Industries Private Limited V. Commissioner of Central Excise, Bangalore' - 2010 (17) STR 515 (Tri. Bang) the appellant distributes the credit of service tax in respect of their Malur unit even though the service tax has been paid in respect of services used by Cuttack Unit. The same has been disallowed by the Department. The case after traveling through the usual channels came before the Tribunal.

The appellant states the following:

* the impugned service tax credit has been distributed by the head office of the appellants in Chennai conforming to the conditions specified under Rule 7 of the CENVAT Credit Rules, 2002;

* Para 2.3 of Master Circular of service tax dated 23.08.2007 has been followed by the appellants;

* Neither the circular nor the rule itself prohibits distribution of service tax credit relating to one unit of a manufacturer to another unit of the same manufacturer or service providers;

* There are only two conditions, firstly the service tax credit to be distributed against the document should not exceed the service tax paid and secondly, the credit of service tax should not be in respect of exempted finished goods and exempted output services.

The Department reiterated the findings of the lower authorities. The Department refers to Rule 3 of the Cenvat Credit Rules, 2004 to support the claim of the Department that service tax credit relating to one unit should not be distributed to another.

After hearing both sides, the Tribunal found that Rule 3 says that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of any input services received by the manufacturer of such final product or provider of output services. The availability of credit therefore is related to the manufacturer of goods or provider of output services as a whole and not restricted to any particular unit of the manufacturer/service provider.

The Tribunal analyzed the provisions of Rule 7 and Para 2.3 of the Master Circular.  Para 2.3 of the Master Circular provides that an 'output service distributor' is an office or establishment of a manufacturer of excisable goods or provider of taxable service. It receives tax paid invoices/bills of input services procured (on which Cenvat credits can be taken) and distributes such credits to its units providing taxable services or manufacturing excisable goods. The distribution of credit is subject to the conditions that - (a) the credit distributed against an eligible document shall not exceed the amount of service tax paid thereon, and (b) credit of service tax attributable to services used in a unit either exclusively manufacturing exempted goods or exclusively providing exempted services shall not be distributed. An input service distributor is required (under Section 69 of the Act read with Notification No.26/2005-ST) to take a separate registration.

The Tribunal held that the combined reading of Rule 7 and the clarificatory circular dated 23.08.2007 clearly shows that there are only two restrictions regarding the distribution of the credit. The first restriction is that the credit should not exceed the amount of service tax paid. The second restriction is that the credit should not be attributable to services used in manufacture of exempted goods or providing of exempted services. There are no other restrictions under the rules. The restrictions sought to be applied by the Department in this case in limiting the distribution of the service tax credit made in respect of the Malur Unit on the ground that the services used in respect of the Cuttak Unit finds no mention in the relevant rules. As such, the Tribunal held that restricting the distribution of service tax credit in a manner as has been done by the impugned order of the lower appellate authority cannot be upheld.