Nikhil Agarwal CA, B.com(Hons.)

Nikhil AgarwalWho is input Service Distributor?

“Input service distributor” is defined in Rule 2(m) of Cenvat Credit Rules, 2004.In simple words a input service distributor is a head office/intermediary office which controls the business of manufacturer or producer of final products or output service provider and performs following activities:-

  • Receives invoice issued under Service Tax Rules toward purchase of input services. and
  • Issues invoice / bill /challan for the purpose of distributing the credit of service tax paid on such services to manufacturer/producer or service provider and outsourced manufacturing unit.

To whom & how ISD can distribute its Credit?

Rule 7 of Cenvat Credit Rules, 2004 is completely written down vide Notification No. 13/2016 C.E (N.T) dated 1st,March 2016 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. Before amendment ISD used to distribute Cenvat credit in respect of input service credit only to manufacturing units and output service provider.

Old rule 7 provided 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 and manner:-

♠ Credit attributable to a service used by a particular unit shall be distributed only that unit.

For example- A Ltd. has 3 three units namely A,B & C. Suppose ABC Ltd receives a invoice of Rs.10,000 towards advertisement services provided exclusively to unit B than total credit of Rs.10,000 will be distributed to unit B only.

♠ Credit attributable to service used by more than one unit but not to all units shall be distributed on Pro rata basis of the turnover during the relevant period of such units to the total turnover of all units on which credit is attributable and which are operational in the current year.

For example- ABC Ltd. has four units namely A,B, C & D. Suppose ABC Ltd receives a invoice of Rs.10,000 towards repair services provided to unit B,C & D than total credit of Rs.10,000 will be distributed on Pro rata basis to unit  B,C & D only.

♠ Credit attributable to service used by all the units shall be distributed on Pro rata basis of the turnover during the relevant period of all the units to the total turnover of all units and which are operational in the current year.

For example- ABC Ltd. has four units namely A,B, C & D. Suppose ABC Ltd receives a invoice of Rs.10,000 towards repair services provided to unit A, B,C & D than total credit of Rs.10,000 will be distributed on Pro rata basis to all units A, B,C & D.

Concept of Outsourced manufacturing units

Concept of outsourced manufacturing units under Rule 7 of Cenvat Credit Rules, 2004 was introduced in 1st,March 2016 vide Notification No. 13/2016 C.E (N.T).

Outsourced manufacturing units are basically Job worker as defined Rule 10 Central Excise Valuation Rules, 2000.

Credit of service tax paid available with the input service distributor, as on the 31st of March,2016 shall not be transferred to any outsourced manufacturing units i.e. ISD can only transfer credit received after 31st of March,2016. from on or 1st April,2016.

Outsourced manufacturing unit shall maintain separate account for input service credit received from each ISD and shall use for payment of duty on goods manufactured for concerned ISD.

Concept of distribution of credit of inputs by warehouse of manufacturer

A new Rule 7B is being inserted in Cenvat Credit Rules, 2004 vide Notification No. 13/2016 C.E (N.T) dated 1st,March 2016 so as to enable manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units. It is also being provided that a manufacturer having one or more factories shall be allowed to take credit on inputs received under the cover of an invoice issued by a warehouse of the said manufacturer, which receives inputs under cover of an invoice towards the purchase of such inputs.

Rule 6 of CCR,2004 relating to reversal of credit shall apply to units and not to ISD.

Prior to amendment i.e. 1st March,2016 there was ambiguity whether provision of reversal w.r.t Rule 6 is applicable to ISD or not? The ambiguity is now removed by amending Rule 7 of Cenvat Credit Rules, 2004 .Provision of Rule 7 is now more clear with respect to 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 only to the units availing the CENVAT credit distributed by Input Service Distributor and not to the Input Service Distributor.

Author can be reached @kumar.nikkhil@gmail.com.

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