Beautiful Concept - Input Service Distributor

P.L. Subramanian

1.Introduction; ‘Input Service Distributor’ is the beautiful and utilitarian concept introduced by the CENVAT Credit Rules, 2004. In this article we shall discuss the provisions relating to ‘Input Service Distributor’ including amendment carried out bin 2008 and recent case laws. 

2.Definition: Rule 2(m) of CENVAT Credit Rules, 2004 defines ‘Input Service Distributor’  as under:

“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.”

3.Ingredient of Input Service Provider: Important ingredients of Input Service Provider are:

i.                     It an office of the manufacturer or producer of final products or provider of output service. In other words an office of manufacturer of excisable goods or taxable service provider can be registered as Input Service Distributor..

ii.                   It has to receive invoices towards purchase of services. The services might have been received by one of the unit manufacturing goods or premises providing services or other offices.

iii.                  It can issue invoice or bill or challan for the purposes of distributing the credit of service tax paid on the services to the manufacturing unit or service providing unit.

It is to be noted that the Input Service Provider can be Head Office, Registered Office, Branch, Depot, Regional Office, Zonal Office etc.

Regional marketing office was registered as Input Service Distributor and credit was distributed to manufacturing units. It was held by the Tribunal in its prima facie view, the distribution was in order. Japee Rewa Plant Vs. CCE (2007) 218 ELT 576 (Tri.)

It is possible that one company may have many Input service distributor.

4.Example: ABC Ltd. has three manufacturing units. Its’ Head Office has taken Fire Insurance Policy covering the manufacturing units and paid insurance premium and service tax of Rs.10300.  Head office can distribute the service tax paid by it to the manufacturing units and manufacturing units can take the credit on receipt of Invoice from the Head Office and utilise this amount like any other CENVAT Credit.

5.Conditions: Rule 7of CENVAT Credit Rules, 2004 deals with distribution of credit by Input Service Distributor. The Input Service Provider can distribute the service tax paid by it subject to the following conditions:

i.                     The credit distributed shall not exceed the amount of service tax paid by it. (Is it possible to distribute more than the credit availed?)

ii.                   The 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.

It is important to note that there is no requirement to distribute the credit proportionately. The Input Service Distributor can distribute to various units as the circumstances warrants. There is no rule regarding periodicity of distribution and it is advisable to distribute monthly.

6.Registration: Input Service Distributors have to obtain registration from the Service Tax Authorities. They have to apply in Form ST –1 and have to obtain Registration Certificate in Form ST-2.

7.Maintenance of Records: Rule 9 of CENVAT Credit Rules, 2004 deals with maintenance of records by the Input Service Distributor. The records maintained by the Input service distributor must contain the following:

i.                     serial number and date of the document on which the CENVAT credit is availed.

ii.                   Service Tax registration Number and name of input service provider.

iii.                  Description and value of input service.

iv.                 Service tax credit availed.

v.                   Basis of allocation/apportionment of credit amount.

vi.                 Service tax utilised for distributing the credit.

vii.                Balance credit available for distribution.

8.Issue of Invoice: After making the payment of service charges and Service tax, Input service distributor can avail the credit provided service received is input service and distribute it to various manufacturing units or service providing units.

Rule 4A(2) of the Service Tax Rules, 1994 deals with the issue of Invoice by the Input service distributor. The Invoice shall be serially numbered and contain the following particulars;

i.                     the name, address and registration number of the person providing input services and the serial number and date of invoice;

ii.                   the name and address of the Input service distributor;

iii.                  the name and address of the recipient of the credit distributed;

iv.                 the amount of the credit distributed.

If the Input distributor is a banking company or a financial institution, the invoice need not be serially numbered.

9.Submission of Half Yearly Return: Rule 9(10) CENVAT Credit Rule, 2004 deals with the submission of Half Yearly Return. The Input Service Distributor shall submit Half Yearly Return to the Range Superintendent within one month from the close of half year period. The Input Service Distributor has to file the half yearly return in form ST-3.

10.CST, Ahmedabad Vs, Godfrey Philips India Ltd. (CESTAT-Ahd) (2009): In this case the Tribunal has explained the concept very clearly in the following words:

4.2. the definition of the input service distributor clearly says that he is not merely a dealer. The input service distributor has to be a office of the manufacturer or producer of final products or provider of output service who will distribute the credit to his manufacturing units or service providing units as the case may be. The dealer buys the manufactured goods on which duties have been paid and passes on the actual duty paid by issue of an invoice. He does not take any responsibility as regards eligibility of CENVAT credit by his buyers. He may not even be aware as to whether buyer avails the CENVAT Credit or not. He does not produce any input services which he is required to distribute among others. Whereas an input service distributor independently receives invoice and in fact he could be compared to a buyer of goods or service from the manufacturer or a output service provider. The concept of input service distributor has been introduced in view of the fact that definition of input service includes “includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.” The definition shows that many of services could be performed in places other than where the manufacturer or receiver of the service might have been located and quite often a single manufacturer may be having several branches and services can be received in several places.”

The Tribunal held that it is the responsibility of the jurisdictional officer with whom Input Service Distributor has registered to decide the dispute regarding eligibility or otherwise of the Service tax credit that the input service distributor has taken and proposes to pass on to others. It provided the following reasons to come to this conclusion: ”When we look at the functions of the input service distributor and the documents to be issued by him for passing on the credit, it becomes quite clear that the document issued by him for passing on the credit does not contain the nature of service provided and the details of services. It contains the service provider’s details, distributors details and the amount. Obviously the eligibility or otherwise of the Service tax credit has to e examined at the end of input service distributor only. This is further supported by the fact that both Central excise assesses and Service tax assesses are under the regime of self-assessment and therefore it is the assessee himself who has to specify that the credit availed by him is admissible. Therefore the input service distributor cannot say that he is not required to prove the eligibility or otherwise of the Service tax credit since at the receiver’s end which could be a branch or a factory of the distributor, no details would be available regarding the nature of service.”

11.Option Under Rule 6(3) Not Applicable: Rule 6(3) deals with utilisation of CENVAT credit by a service provider who provides taxable and exempted service. The Board vide Circular No. 868/2008-CX dated 9-5-2008 has clarified that the Input Service Distributor does not provide any service and he is like a trader, therefore, the question of availing either of the options provided under rule 6(3) would not arise.

12.Insertion of Rule 7A in 2008: By the CENVAT Credit (Amendment) Rules, 2008 Rule 7A has been inserted with effect from 1-4-2008 vide Notification No.10/2008-CE (NT) dated 1-3-2008. Rule 7A reads as under:

7A. Distribution of credit on inputs by the office or any other premises of output service provider:

1)      A provider of output service shall be allowed to take credit on inputs and capital goods received, on the basis of an invoice or a bill or a challan issued by an office or premises of the said provider of output service, which receives invoices, issued in terms of the provisions of the Central Excise Rules, 2002, towards the purchase of inputs and capital goods.

2)      The provisions of these rules or any other rules made under the Central Excise Act, 1944, as made applicable to a first stage dealer or a second stage dealer, shall mutates mutandis apply to such office or premises of the provider of output service.

13.Distribution of Excise Duty Paid: Rule 7A enables the service provider to transfer the Excise duty paid on the capital goods and inputs. As discussed in the previous paragraphs, the offices of manufactures and service providers can obtain Input Service Distributor registration and can transfer the credit for service tax paid to their manufacturing units and/or service providing units. However only the service provider can transfer the credit for Excise duty on capital goods and inputs.

If the office of the Service provider has received invoice for capital goods or inputs, which is delivered to the service providing unit i.e. premises from which service is provided, it can issue invoice for transferring the credit the service providing units  like Input Service Distributor. However Rule 7A(2) provides that rules applicable to a first stage dealer or a second stage dealer shall apply to the office or premises of the provider of output service when he transfer the Wxcise duty paid on inputs or capital goods. The Department has not issued any clarification in this regard till date. Circular, dated 29-2-2008 states the objective of the insertion of Rule7A in the following words:

“A new Rule 7A is being inserted to prescribe a procedure to enable the provider of output services to take credit on inputs and capital goods on the basis of invoice/bill/challan issued by its other office. This change shall come into effect from 1st April, 2008.”