DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR- (PART-2) - CBEC Clarifications

[Dr. Sanjiv Agarwal]

Input service distributor can distribute Cenvat Credit of Service Tax on input services as per Rule 7 of Cenvat Credit Rules. Rule 7 provides for the mechanism of distribution of common input service credit by the Input Service Distributor to its manufacturing units or to units providing output services. An amendment was carried out vide Notification no. 05/2014-CE (N.T.) dated 24th February, 2014, amending inter-alia rule 7(d) providing for distribution of common input service credit among all units in their turnover ratio of the relevant period. Rule 7(d), after the amendment, reads as under:

‘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’

In order to clarify on the manner and extent of distribution of common input service credit in terms of amended rule 7(d) and use of words, 'such unit', there are doubts that due to the use of the term ‘such unit’, the distribution of the credit would be restricted to only those units where the services are used. There is also a doubt that in view of the amended rule 7(d) of the CCR, the credit available for distribution would get reduced by the proportion of the turnover of those units where the services are not used.

A Circular No. 178/4/2014-ST dated 11.07.2014 has been issued by the CBEC clarifying the manner of distribution of common input service credit under Rule 7(d) of the Cenvat Credit Rules, 2004. The clarification given is in relation to the amendment made vide Notification No. 05/2014-CE (NT) dated 24.02.2014 by way of an illustration which is as follows :-

An Input Service Distributor (ISD) has a total of 4 units namely ‘A’, “B’, ‘C’ and ‘D’, which are operational in the current year. The credit of input service pertaining to more than one unit shall be distributed as follows:

Distribution to ‘A’ = X/Y * Z

X = Turnover of unit ‘A’ during the relevant period

Y = Total turnover of all its unit i.e. ‘A’+’B’+’C’+’D’ during the relevant period

Z = Total credit of service tax attributable to services used by more than one unit

Similarly the credit shall be distributed to the other units ‘B’, ‘C’ and ‘D’.

Illustration:

An ISD has a common input service credit of ₹ 12000 pertaining to more than one unit. The ISD has 4 units namely ‘A’, ‘B’, ‘C’ and ‘D’ which are operational in the current year.

Unit	Turnover in the previous year (in Rs.)
A (Manufacturing excisable goods)	25,00,000
B (Manufacturing excisable and exempted goods)	30,00,000
C (providing exclusively exempted service)	15,00,000
D (providing taxable and exempted service)	30,00,000
Total	1,00,00,000

The common input service relates to units 'A', 'B' and 'C', the distribution will be as under:

(i) Distribution to 'A' = 12000 * 2500000 / 10000000 = 3000

(ii) Distribution to ‘B’ = 12000 * 3000000/10000000  =  3600

(iii) Distribution to ‘C’ = 12000 * 1500000/10000000  = 1800

(iv) Distribution to ‘D’ = 12000 * 3000000/10000000  = 3600

The distribution for the purpose of Rule 7(d), will be done in this ratio in all cases, irrespective of whether such common input services were used in all the units or in some of the units.

In Hindustan Zinc Ltd. v. CC&CE, Jaipur- II (2013) 2012 (3) TMI 367 - CESTAT NEW DELHI where receipt of input service and use thereof and the identity of service provider and service recipient were established, it was held that Cenvat credit could not be denied to the assessee merely because invoice thereof bears address of Head Office, which was not registered as ISD.

In Rohit Surfactants (P) Ltd. v. CCE, Jaipur ((2013) 29 STR 175; (Cestat, New Delhi), assessee took credit of service tax paid under reverse charge on GTA’s services based on invoice issued by their Head Office as input service distributor, it was held that substantial benefit, if otherwise available, could not be denied on technical and procedural grounds. [Also see: Sanghi Industries Ltd. v. CCE, Rajkot 2014 (2) TMI 278 - CESTAT AHMEDABAD; BSNL v. CCE, Salem (2013 (12) TMI 742 - CESTAT CHENNAI)].

In Elder Pharmaceuticals Ltd v. CCE, Belapur 2014 (9) TMI 804 - CESTAT MUMBAI it was held that Commissioner having jurisdiction of units receiving input service credit was not competent to adjudicate but commissioner having jurisdiction over input service Distributor (ISD) with whom the ISD registered was competent to decide the matter.

In Oil & Natural Gas Corpn. Ltd. v. CCE, Raigad (2013) 31 STR 214; (Cestat, Mumbai), 2013 (9) TMI 550 - CESTAT MUMBAI assessee was engaged in the manufacture of excisable goods for which raw materials such as natural gas and crude oil procured from the Oilfield of Mumbai Offshore were used on which Central Excise duty was paid and Cenvat credit was availed thereafter. Service Tax was paid on input services and distributed by the Input Service Distributor in terms of facility extended to the manufacturer of the excisable goods under the provisions of Cenvat Credit Rules. It was held that Cenvat credit of service tax paid by various ISDs on input services used in or in relation to manufacture of crude oil/natural gas was not available to assessee as crude oil/natural gas was exempted. Words ‘duty of excise’ referred in the definition of exempted goods and excisable goods refer to duty of excise as specified in Section 3 of Central Excise Act, 1944 and the contention that since cess was paid by assessee on the crude oil manufactured at Mumbai offshore, crude oil was duty paid and not exempted, was not acceptable. Hence, input services entirely being used in crude oil/natural gas, which were exempted from duty, credit was not admissible. Since Mumbai offshore was exclusively engaged in manufacture of exempted goods, credit of Service Tax paid on input services could not be distributed.

In Market Creators Ltd v. CCE & ST, Vadodara (2014 (7) TMI 704 - CESTAT AHMEDABAD), where Service Tax was not paid by rented premises as Head Office for all the branches and Service Tax registration is also not taken by assessee of such premises and issued credit taking document, it was held that assessee could not take credit of documents issued by a premises, which was not registered as an input service distributor under the Service Tax provisions.

In Moser Baer India Ltd v. CCE, Noida (2015 (1) TMI 1093 - CESTAT NEW DELHI it was held that basic requisite condition for distribution of credit is that head office receives invoices towards purchase of input service and pays service tax as registered input service provider. Therefore, head office was entitled to distribute credit to its manufacturing unit.

Distribution of Credit on Inputs by the Office or any Other Premises of Output Service Provider (Rule 7A)

There is no stipulation about the maintenance of any register in a prescribed format. However, they have to maintain adequate records showing the relevant details such as receipt, disposal, consumption and inventory of inputs and capital goods, the amount of credit taken, utilization of the credit amount etc.

Rule 7 allows distribution of CENVAT Credit w.e.f. 1.4.2007 in respect of service tax paid on inputs by an input service distributor. Rule 7A has been inserted to provide that an output service provider can take credit on inputs and capital goods received on the basis of an invoice issued by an office or premises of the output service provider, which receives the invoice towards purchase of inputs and capital goods. This rule is wide in scope and there does not appear to be any registration requirement for the other office for the purpose of distribution of credit in respect of inputs and capital goods. In various judgments of the Tribunal, it has been held that even if the invoice in respect of input is addressed to the corporate office, credit can be availed by the factory. Now, by virtue of Rule 7A, the other office can issue an invoice and CENVAT Credit could be claimed.

W.e.f. 1.4.2008, a new rule 7A has been inserted in CENVAT Credit Rules, 2004 which allows distribution of credit of input goods by the office of service providers to take care of situations where bills of inputs and capital goods are received at one office (say, head office) but services are actually provided from some other place. Now in such cases, credit can be distributed on such inputs and capital goods by way of an invoice. Such credit distributing office will have to be registered with the Central Excise Department, just like first or second stage dealers.

== = = = = = = =