• Jun
  • 26
  • 2012

Input Service (Tax) Distribution under Service Tax Act

Posted In Service Tax | , | 5 Comments » Print Friendly and PDF

Dayal R Kundani

INPUT SERVICE DISTRIBUTOR – Process Note on ISD Credit Distribution

Definition of ‘Input Service Distributor’:


Rule 2(m) of CCR, 2004 defines “Input Service Distributor” thus –

“input service distributor” means 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 may be, 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;

 Rules governing ‘Input Service Distributor’:


Old Rule 7 of CCR, 2004: [Prior to 01/04/2012]

Rule 7. Manner of distribution of credit by input service distributor – The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:

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

(b) Credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

Analysis:

Provision of the above rules was simple and did not restrict transfer of entire Cenvat Credit to a single unit.

This made it easier for Regional office / Head office registered under ISD to transfer the credit under a single Invoice to a particular unit.     

The said rules have now been amended, putting strictures on the manner of Transfer of Cenvat Credit by an Input service Distributor which are clarified below.

Ref: Notification No. 18/2012 – Central Excise N.T.

Input Service Distributor’s choice taken away


Changes in Rule 7 by Budget, 2012: 

For Rule 7 of the said rules, the following rule is substituted:

‘7. Manner of distribution of credit by input service distributor – The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, 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)             Credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;

(c)            Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and

(d)           Credit of service tax attributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.

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

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

2. “Total turnover” means the sum total of the value of,-

(a)  all output services and exempted services provided, including value of services exported;

(b) all excisable and non excisable goods cleared, including the value of goods exported;

(c) The value of bought out goods sold, during the given period.

Analysis:

If regional office is availing services specifically to cater to a specific unit, then the credit shall be distributed only to that unit; and

In case the service is commonly utilized in 2 or 3 units [e.g. AD I/II], then the credit is to be distributed on the basis of turnover of the concerned unit compared to the sum total of the turnover of all the units to which the service relates.

This means that the distribution of Cenvat credit is linked to the turnover of the units in case of common service utilized in two or more units. This concept was not there before.

Earlier no criteria were fixed but now, the regional office registered as input service distributor has to ascertain the turnover of various units to which it caters and then distribute the credit to only those units (for which service was/is utilized).

Methodology to calculate Eligible Cenvat Credit by Regional Office /HO


 Taxable Turnover

———————                            = Eligible %

Total Turnover

 Taxable Turnover [Excluding Traded Sales]

Details Remarks
Sales of Dutiable Goods- Domestic Assessable Value
Stock Transfer of Dutiable Goods Assessable Value
Sale of Dutiable Goods – Exports Assessable Value
Sale of MRP valued Dutiable Goods Value would be Net of abatement
Service Income Taxable Services Provided
Sale of Dutiable Scarp Assessable Value

 Total Turnover [Includes Traded Margin]

Sales of Dutiable Goods- Domestic Assessable Value
Stock Transfer of Dutiable Goods Assessable Value
Sale of Dutiable Goods – Exports Assessable Value
Sale of MRP valued Dutiable Goods Value would be Net of abatement
Service Income Taxable Services Provided
Sale of Dutiable Scarp Assessable Value
Sale of Misc Non Dutiable Scrap Taxable Value- before Vat/CST
Sale of Asset Value contributing to Profit on sale of Asset
Margin of Traded Goods 10% of COGS or trading profit whichever is higher

 *****All the above values will be net of taxes and duties

***For Head office the Turnover details of entire Group to be applied

***For Regional Office the turnover details of the Region to be applied

The total Eligible Cenvat Credit will be

Cenvat Credit Availed X Eligible %       

Distribution of Cenvat Credit by Regional offices / HO

Distribution of Specific Services

Where services have been availed which is division specific then the same has to be transferred to that division to which the unit belongs.

 Example (1)

Technical services have been availed in relation to goods manufactured by HD, therefore credit for that service has to be transferred to HD only.

Example (2)

Advertisement has been placed for product manufactured by AD. Cenvat credit of service tax on such advertisement services availed will need to be transferred to AD only.

Example (3)

Commission paid to an agency by HO in relation to export of goods manufactured by AD, then credit for that services has to be transferred by HO to AD only.

Distribution of Cenvat related to Common Services

Common services such as:

- security services

- Rent paid for Regional office

- Telephone Services

- Auditing Fees

The Credit is to be distributed prorata on the basis of the turnover of the concerned units.

Unit/Division wise Transfer

As an example

We have AD Division which comprises of following Units

- Unit -I, III,IV V& Spares

- Unit II

When effecting transfer to AD, it would be based on Unit wise turnover determined.[to be cross checked with units]

Reason being every unit has a separate Central Excise Registration

Similarly for HD division which comprise of following units

- HD I

- HD II

- HD IV

CA certificate should be obtained for determining the Cenvat ratio and transfer ratio from service tax audit perspective.

-  Example for transfer of credit to AD

Excisable Turnover of Domestic sales =350000

Excisable Stock Transfer                     =  35000

Export of own goods                          =  50000

Taxable Services Provided                   =  15000

Traded Turnover                                 =100000

COGS of traded goods                        =  73000

Profit on traded goods                        =  27000 [i.e 37%]

10% of COGS of traded goods            =    7300

 Total Cenvat Credit Availed = Basic 15000 +Ed. Cess 300 +SHE Cess 150

           450000

= ________________ = 94%

      450000+27000

Cenvat Eligible for Availing and Transfer = 15450*94%= 14523

[10% of COGS or Margins whichever is higher has to be considered hence 27000 considered]

It is the responsibility of the Regional Office  / HO to ascertain the eligibility and transfer the credit using the above method so that the unit receives credit which need not be attributed further.

Distribution Methodology for Common Input services

Taxable turnover of the Region 450000

 For HD- Unit wise distribution to be done in line with example of AD

Invoice format for distribution of credit to units

                          {LOGO }

Original (for registered person)

 Duplicate (for taking credit)

Triplicate (for Office Use)


(                                 )

___________________

Name

Manager Accounts

INVOICE FOR DISTRIBUTION

(Challan for distribution of input services from registered office under Rule 7 of CENVAT Credit Rules, 2004)

 

M/s Abc Limited  (Input Service Distributor)

Deep Mandir,

A Marathe Marg,

Prabhadevi, Mumbai – 400 025

 

Service Tax Regn. No. ABCDE1234MST001

RANGE – Service Tax Cell
DIVISION – III
Commissionerate : Service Tax I MumbaiSUPDT.GROUP NO –  VIII
INVOICE NO : 01/2012-2013
DATE : June 5, 2012

 

Name & Address of locationwhere credit is transferred :M/s Abc Limited,AD- Unit-I,MIDC Industrial Area,

Allahabad – 430 212.

Transferee’s STC NO.- ABCDE1234MST012

Range : TOWN RANGE II, ALLAHABAD  DIVISION ICommissionerate: ALLAHABAD
Name and Address of person providing input services &Regn No. As per Annexure – A attached.
Sr. No and date of input service provider’s invoice       ————– do ————
Description of input services       ————– do ————
Rate of Duty: Service Tax: ………….  Education Cess……….. H & S Cess…………………….       ————– do ————
Amount of Service Tax:  Education Cess……… H & S Cess……………       ————– do ————
Amount of service tax paid on input services Rs. 2,115.00 (Service Tax)Rs.     42.00 (Education Cess)Rs.     21.00 (Higher & Secondary Education Cess) 

Net Rs.2,178.00

Amount in words: Two Thousand One Hundred Seventy Eight only.

Date of payment of value of input services including service tax As per Annexure – A attached.
Certified that the credit of service tax transferred under this challan has not been transferred earlier and shall not be transferred to any other unit / location in future.

(_____________________)

Name

Manager Accounts

 Note: The above credit represents __15___% credit availability for the unit

It would be ideal for Regional office to seek a certificate from a CA for certifying the eligible % of Cenvat Credit as per format below:

——————————————-

CERTIFICATE

We have verified Books of Accounts and other relevant records of M/s. ABC Limited having its office at (Address) for the year ended 31-3-2012. On the basis of our examinations, clarifications and explanations given to us, we certify hereunder the calculation for proportionate credit attributable to the Taxable and exempt goods / services arrived under rule 6(3A)(c) of the Cenvat Credit Rules 2004:

Detailed working as per Annexure ‘A’ for the financial year 2011-2012

For XYZ

Chartered Accountants

Membership No. XXXXXXX

Date  :  _ _/_ _/2012

Place : Mumbai

————————————————-

Annexure ‘A’

Period 2011-12
 
Excisable  Sales working

Rs.

Gross  sales & service                   550,000.00
Gross Sales                   550,000.00
Less: Excise duty
Less: COGS of Traded Goods     73000.00
Net sales                   477,000.00

Unit Wise

Mfgd

Traded

Service income

AD I-III-IV-V-Spares

202500.00

DD

87000.00

CD

0.00

 100000.00

DD

195750.00

ED

43500.00

0.00

SRO

0.00

 15000.00

LEU II

 0.00

435000.00

100000.00

15000.00

Mfgd  Non-excisable sales

0.00

0.00

0.00

0.00

Total

0.00

Mfgd  Excisable sales
Of Unit & Taxable service income

450000.00

Total

450000.00

% to excisable to total sales

94.%

Note:
If gross amount considered then Less Excise Duty
If net considered Then Excise Duty =0

Author
Dayal R Kundani
dayalkundani@gmail.com


5 Responses to “Input Service (Tax) Distribution under Service Tax Act”

  1. Sameer Bhasin says:

    1. Whether, the turnover of goods procured from the job worker and further sold from branches would be considered as the turnover of the factory for the purposes of calculating the eligible CENVAT under Rule 7 of the CCR Rules?

    2. If the answer to the above is in negative, would that turnover be considered as the turnover of the branches under Rule 7 of the CCR Rules?

    3. Whether the turnover of goods manufactured from Oriflame India’s factory would be considered as turnover of the factory for the purposes of distributing credit under Rule 7 of the CCR Rules, or would it be considered as turnover of the branches?

  2. MANAN PANDYA says:

    we are manufacturer and we are selling finished goods (duty paid goods) to our branch and other third party but if they send back those goods after 1 year because poor condition for repairing in this case how can i take these credit of my duty paid goods because in budget 2014 our F.M. has amended rule 9 of cenvat credit rule 2004 and limit has been binded only for 6 month . so in there any way out because it is not possible that goods comes within a six months because if i provide warranty then they can send after 6 months .

    for example. i (ho) sends excisable duty paid goods sends to my branch jaipur on dated: 1/12/13 and branch sales the same goods to its customer as a local sales on dated: 15/12/13 but customer sends back this goods to branch on dated: 15/9/14 and same goods branch sends back to me (ho) for repairing purpose so in this case what is the way to take credit back on sales return goods . what should i do for this case ? because we received sales return after 6 month and branch will make commercial invoice in the name of ho.

    other issue is that on which date should be consider for sales return goods for take credit ?

    1) when goods are sent after paying excise duty (modvat copy date) or

    2) branch will send and make commercial invoice of gr. (commercial invoice gr. date)

    let me clear for taking credit which date should be considered?

    it’s very critical issue and i am sure every business entity will have this same problem.

    i just hope that i will get resolve as early as possible with positive.

  3. Mahen says:

    If the company is manufacturer and producer of final products but NOT A SERVICE PROVIDER and paying 75% service duty than Can they registered them as ISD.

    Mahen A Thakkar
    Advocate

  4. Dayal Kundani says:

    If it is possible for deriving Monthly/Quarterly you may opt for the same

  5. S N JHA says:

    Once the turnover ration is calculated for previous year, i.e. 2011-12, Is this ratio applicable for whole year of 2012-13 or should be changed on monthly/quarterly basis?

Leave a Reply

GET FREE EMAIL UPDATES