In business, it is often that some common input services are purchased by Depots/Region office/Head office pertaining to factories located in several States. The input CENVAT credit on such common input services can be distributed to respective manufacturing units through a mechanism called Input Service Distribution (ISD).Rule 2(m) of Cenvat Credit Rules, 2004 defines ‘Input Service Distributor’. The extract of said rule is given below:
As per Rule 2(m) of Cenvat Credit Rules, 2004, ‘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.
The above definition clarifies that Input Service Distributor is an office of a taxpayer, may it be Depots/Region office/Head office, which receives common service tax invoices from service providers and issues invoice, challan etc. to manufacturing units to distribute service tax credit on such services.The ISD has to obtain service tax registration number or it has to amend the registration number if already obtained for depots/region office/head office mentioning the locations to which the credit has to be distributed.
Rule 7 of Cenvat Credit Rules, 2004 provides for the Manner of distribution of credit by Input service distributor. Latest amendment vide notification no. 5/2014-C.E. (N.T.) in the said rule provides that credit relatable to a particular unit is to be distributed to that unit only. And in respect of common input services used by two or more units, credit has to be distributed to such units to which the service relates based on the turnover of the relevant unit to the turnover of all the units.
Thus, the taxpayer has to allocate the credit to units to which the service relates based on turnover of respective units. A taxpayer having multiple units has to identify the units to which a common service relates. This is a complicated task where the taxpayer is required to undertake a detailed scrutiny to identify the units having nexus with each & every service.
An illustration of the method of distribution to be followed is given in the Circular No.178/4/2014-ST dated 11th July, 2014.
The Input Service Distribution mechanism is a boon to the assessee whereby common input service tax credits could be distributed to the manufacturing units. However, it is essential to work out distributable credits to units appropriately to get through the departmental audits.
(The above article is authored by Ganeshan Kalyani and he can be reached via email on email@example.com.This article is for academy purpose only).