AUGUST 13, 2014

By Narendra Pati, Khaitan & Co

SINCE inception the concept of "Input Service Distribution (ISD)" has passed through several amendments and clarifications to come up to the present level. The latest clarification comes in the form of Board Circular 178/4/2014-ST, Dated: July 11, 2014. But is it sufficient?

Let me explain this by discussing the following situation where multiple sectorial businesses take place from the same complex through a cobweb of subsidiaries and units.

SCENARIO

In a corporate complex, receiving input services, the business group ABC has 5 divisions (D1, D2, D3, D4, D5) and 5 subsidiaries (S1, S2, S3, S4, S5). How does he optimise the credit or distribute the credit? Input services here means few CENVATable ones like Electrical maintenance, Security services, few non-CENVATable ones like Canteen, Construction, Spa and few supply of goods like water, electricity etc.

For credit distribution an ISD registration will be mandatory. So for discussion let us assume that the parent company ABC has an ISD registration which is referred to as ABC-ISD. Also let us assume that it is a business compulsion to get consolidated bills from all its vendors. Practically also vendors provide a consolidated input service and it is impossible to ascertain the actual consumption of each such divisions & subsidiaries. In such a scenario the following options are available:

Option -1

Take the credits on vendor bills in ABC-ISD and distribute to divisions & subsidiaries?

As readers may be aware "Input service Distributor' has been defined as an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4a of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case maybe, 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." (Emphasis supplied) The word 'such' in the definition of ISD clarifies that the manufacturer or producer or provider as appearing in the second part of the definition is one and the same as appearing in the first part of the definition. Also by referring to other provisions it can be concluded that, an ISD can only distribute the credit but cannot issue fresh service invoices for services rendered.

So this is not a workable model.

Option - 2

Take the credits on vendor bills in one division and distribute to divisions & subsidiaries?

ABC is not registered as an ISD and hence cannot distribute the credit. It can only issue service invoices to subsidiaries. This division of ABC not being an independent service provider cannot issue service invoices on its own division either.

It is also important to discuss the definition of 'Service' here. 'Service' has been defined in Finance Act as -

Section 66B (44) "service" means any activity carried out by a person for another for consideration, and...

Support of ABC to its own divisions is not an activity for another for consideration and hence cannot be a 'service' under the Finance Act. So if someone attempts to issue invoice, Credit will be denied on such an invoice of ABC.

So there seems to be deadlock. If someone follows Option-1, he loses CENVAT credit on the portion of credit pertaining to subsidiaries. Alternatively if Option-2 is followed, he loses CENVAT credit on the portion of credit pertaining to its divisions.

Suggestion:

CENVAT credit can first be taken in the books of ABC-ISD and distributed to all its divisions. One of the divisions can assume the responsibility to issue service invoice to its subsidiaries. A pictorial representation of the suggested structure is given below for better appreciation of the matter.

While implementing this, one has to ensure alignment of the operations & documentations to this structuring, which are very critical to make this sustainable in court of law. With proper planning it is also possible to avail credit on the so called non CENVATable services and to avoid double taxation.