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 gganeshan.k@gmail.com.This article is for academy purpose only).

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One response to “Distributing the Credit of Service Tax through Input Service Distribution (ISD)”

  1. Santiswarup says:

    Sir,

    We are a manufacturing company and also we produce or manufacture of finish goods through Job work. Already we have service tax registration as service recipient. Now my question is:

    Can we amend our service tax registration as Input service distributor?
    please advice

  2. Thejus Subramanian says:

    Sir,
    I would like to get a clarification on the following issue.
    There are 3 Manufacturing units and 20 branches. So all the branches receiving input service is transferring cenvat credit as ISD to the main manufacturing unit and the main manufacturing unit in turn transfer cenvat credit to the other 2 manufacturing units through ISD based on turnover. This is being done for convenience of administration. As such there is no revenue gain or loss. Whether this is a correct procedure being followed.?

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