Distribution of Credit by an ISD
OCTOBER 29, 2014
By S Radhakrishnan, Advocate
INPUT SERVICE DISTRIBUTOR:
Input Service Distributor is defined in Rule 2(m) of CENVAT credit Rules, 2004 (CCR). As per the above rule, it means an office of the manufacturer of final products or provider of output service, which receives invoices towards purchase of input services. It takes the credit and in turn issues invoice for the purpose of distributing the credit of service tax paid to such manufacturer or provider.
Manner of distribution of credit:
Rule 7 of CCR provides the manner of distribution of credit. As per Rule 7, the distribution of credit is subject to the following conditions:
1.Credit distributed should not exceed the amount of service tax paid.
2. Credit of service tax attributable to service used by "one or more units exclusively engaged in the manufacture of exempted goods or providing exempted services" shall not be distributed.
3. Credit of service tax attributable to service used "wholly by a unit" shall be distributed only to that unit
4. Credit of service tax attributable to service used "by more than one unit" shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period
Unit:
Explanation 1 to Rule 7 defines "Unit". It includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or not.
Analysis of distribution of credit -Unit-wise:
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Unit
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7(b)
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7(c)
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7(d)
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Rule
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Service used -
by one or more units exclusively engaged in manufactured of exempted goods or providing of exempted services
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Service used -
"wholly" by a unit
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Service used -
by more than one unit
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Unit 1 - Exempted goods + Exempted service
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Technically, credit can be distributed as it is not exclusively engaged in the manufacture of exempted goods or exempted services. The word used is "or" and not "and". However, Unit cannot take the credit.
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Credit can be distributed. The word used is "or" and not "and". However, Unit cannot take the credit.
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Credit can be distributed as per formula. However, Unit cannot take the credit.
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Unit 2 - Exempted goods + Taxable service
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Credit can be distributed to this unit. However, it is not clear whether entire credit can be adjusted against the output service tax payable.
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Credit can be distributed to this unit. However, it is not clear whether entire credit can be adjusted against the output service tax payable.
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Credit can be distributed as per formula. However, it is not clear whether entire credit can be adjusted against the output service tax payable.
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Unit 3 - Dutiable goods + Exempted service
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Same as Unit 2
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Same as Unit 2
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Same as Unit 2
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Unit 4 - Dutiable goods + Taxable Service
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Credit can be distributed to this unit. But not clear whether credit has to be adjusted 50% for dutiable goods and 50% for taxable services or on pro rata based on turnover of Unit-4
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Credit can be distributed to this unit. But not clear whether credit has to be adjusted 50% for dutiable goods and 50% for taxable services or on pro rata based on turnover of Unit-4
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Credit can be distributed as per formula. But not clear whether credit has to be adjusted 50% for dutiable goods and 50% for taxable services or on pro rata based on turnover of Unit-4
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Unit 5 - Only exempted goods
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Credit cannot be distributed
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Credit cannot be distributed
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Credit can be distributed but Unit cannot take the credit.
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Unit 6 - Only exempted service
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Credit cannot be distributed
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Credit cannot be distributed
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Credit can be distributed but Unit cannot take the credit
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Unit 7 - Only dutiable goods
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Credit can be distributed
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Credit can be distributed
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Credit can be distributed
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Unit 8 - Only taxable service
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Same as Unit-7
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Same as Unit-7
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Same as Unit-7
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From the above table, it can be seen that if a unit is exclusively engaged in the manufacture of exempted goods and/or exempted services OR dutiable goods and/or taxable services, as far as the distribution and availment of CENVAT credit is concerned, there may not be any difficulty. However, when a particular unit itself is engaged in the manufacture dutiable& exempted goods and/or providing taxable or exempted services, then there could be a problem with regard to the availment of input service tax credit distributed by ISD. The question is, in the absence of any rule, whether the unit would be justified in availing the entire credit distributed by ISD against the duty/service tax payable by the Unit. A conservative approach would be to not take a portion of the credit "attributable" to exempted goods or services manufactured/rendered by the Unit.
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