Input service distribution, Service Tax

[K.Srinivasan Kuppuswamy]

Dear Tax Experts ,

Please provide your valuable opinion..

We are having our city office at Chennai wherein Marketing/Purchase/Commercial Finance functions being carried out for our two Factory ,duty paid godown and Export warehouse at Sholinghur
We are paying Rent to city office building and distribute the service tax to our Factories under Input service distributor. We have registered under ISD.
Please confirm whether it is correct and we are eligible for service tax credit.
Regards
K Srinivasan

Posts / Replies

[Himansu Sha]

As detailed by you, You have

a. two factories

b. One duty paid Godown

c. Export ware house

You can distribute the credit in proportion of the turnover of the four locations. Entire credit cannot be distributed to the factories

[MARIAPPAN GOVINDARAJAN]

I endorse the views of Shri Himanshu

[Rajagopalan Ranganathan]

Sir,

Rule 7 of Cenvat Credit Rules, 2004 prescribes the procedure to distribute credit if input service which is as under: -

7. Manner of distribution of credit by input service distributor.-The input service distributor shall distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or unit providing output service or an outsourced manufacturing units, as defined in Explanation 4, subject to the following conditions, namely :-

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

(b) the credit of service tax attributable as input service to a particular unit shall be distributed only to that unit;

(c) the credit of service tax attributable as input service to more than one unit but not to all the units shall be distributed only amongst such units to which the input service is attributable and such distribution shall be pro rata on the basis of the turnover of such units, during the relevant period, to the total turnover of all such units to which such input service is attributable and which are operational in the current year, during the said relevant period;

(d) the credit of service tax attributable as input service to all the units shall be distributed to all the units pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all the units, which are operational in the current year, during the said relevant period;

(e) outsourced manufacturing unit shall maintain separate account for input service credit received from each of the input service distributors and shall use it only for payment of duty on goods manufactured for the input service distributor concerned;

(f) credit of service tax paid on input services, available with the input service distributor, as on the 31st of March, 2016, shall not be transferred to any outsourced manufacturing unit and such credit shall be distributed amongst the units excluding the outsourced manufacturing units.

Explanation.-The provision of this clause shall, mutatis-mutandis, apply to any outsourced manufacturer commencing production of goods on or after the 1st of April, 2016;

(g) provisions of rule 6 shall apply to the units manufacturing goods or provider of output service and shall not apply to the input service distributor.

Explanation 1.- For the purposes of this rule, “unit” includes the premises of a provider of output service or the premises of a manufacturer including the factory, whether registered or otherwise or the premises of an outsourced manufacturing unit.

Explanation 2.–For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5:

Provided that the turnover of an outsourced manufacturing unit shall be the turnover of goods manufactured by such outsourced manufacturing unit for the input service distributor.

Explanation 3.– For the purposes of this rule, the 'relevant period‘ shall be, -

(a) if the assessee has turnover in the ‘financial year‘ preceding to the year during which credit is to be distributed for month or quarter, as the case maybe, the said financial year; or;

(b) if the assessee does not have turn over for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed.

Explanation 4. “For the purposes of this rule, “outsourced manufacturing unit” means a job-worker who is liable to pay duty on the value determined under rule 10A of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on the goods manufactured for the input service distributor or a manufacturer who manufactures goods, for the input service distributor under a contract, bearing the brand name of such input service distributor and is liable to pay duty on the value determined under section 4A of the Excise Act.

Please go through the above provisions and if you have any doubt come back with appropriate query.

[K.Srinivasan Kuppuswamy]

Respected sir,

My request is whether Rent of City office can be distributed to its manufacturing locations wherein production of goods and service providing activities takes place

Any specific CBEC circular regarding service tax on rent paid for city office / head office can be distributed to its manufacturing locations to avoid any audit issue.

regards

k srinivasan

[Himansu Sha]

Sir,

the s.tax paid on the rent paid towards the office is very much eligible for credit. There is no ambiguity at all.

[KASTURI SETHI]

I support the views of all experts.

[Himansu Sha]

Just to append little with my earlier view

You are eligible for taking the credit but in proportion of the turnover as per the rule cited by the esteemed expert. I reiterate, entire credit cannot be taken by the manufacturing entities because the renting service is common for all the locations. If it is solely used for any concern, then the entire credit can be taken by the said concern.

G

[K.Srinivasan Kuppuswamy]

Respected Experts

In the city office there is no out put service activities only finance / purchase/marketing/commercial functions being carried out for manufacturing locations.

Any specific CBEC circular regarding service tax on rent paid for city office / head office can be distributed to its manufacturing locations to avoid any audit issue.

regards

k srinivasan

[KASTURI SETHI]

Dear Querist,

Yes. Head-office/office registered as ISD can distribute input service tax credit to manufacturing units. Rule 7 and 7 A of Credit Rules are very much clear. However, here is relevant extract of Board's Circular No.334/8/2016-TRU dated 29.2.16:-

(j) Rule 7 of the Rules dealing with distribution of credit on input services by an Input Service Distributor is being completely rewritten to allow an Input Service Distributer to distribute the input service credit to an outsourced manufacturing unit also in addition to its own manufacturing units. Outsourced manufacturing unit is being defined to mean either a job-worker who is required to pay duty on the value determined under the provisions of rule 10A of the Central Excise Valuation (Determination of Price Of Excisable Goods) Rules, 2000, on the goods manufactured for the Input Service Distributor or a manufacturer who manufactures goods, for the Input Service Distributor under a contract, bearing the brand name of the Input Service Distributor and is required to pay duty on value determined under the provisions of section 4A of the Central Excise Act, 1944. (Amendment in rule 2(m) and rule 7 refers)

(k) Presently, rule 7 provides that credit of service tax attributable to service used by more than one unit shall be distributed pro rata, based on turnover, to all the units. It is now being provided that an Input Service Distributor shall distribute CENVAT credit in respect of service tax paid on the input services to its manufacturing units or units providing output service or to outsourced manufacturing units subject to, inter alia, the following conditions, , :

• credit attributable to a particular unit shall be attributed to that unit only.

• credit attributable to more than one unit but not all shall be to attributed to those units only and not to all units.

• credit attributable to all units shall be attributed to all the units.

Credit shall be distributed pro rata on the basis of turnover as is done in the present rules.

(l) It is also being provided that an outsourced manufacturing unit shall maintain separate account of credit received from each of the input service distributors and shall use it for payment of duty on goods manufactured for Input Service Distributor concerned. The credit of service tax paid on input services, available with the Input Service Distributor as on 31st of March, 2016 shall not be distributed to an outsourced manufacturing unit. Further, provisions of rule 6 of Cenvat Credit Rules, 2004 relating to reversal of credit in respect of inputs and input services used in manufacture of exempted goods or for provision of exempted services, shall apply to the units availing the CENVAT credit distributed by Input Service Distributor and not to the Input Service Distributor.

[Himansu Sha]

Correct sir