Rule 7 – Manner of distribution of credit by input service distributor :
(1) In real life situations, many a times the bill/invoice is raised in the name of head office/regional office etc. for services which are actually received in the factory (or factories) or premises of service provider. In addition, the bill for services which are not specific for any factory/premises, such as advertising, market research, management consultancy etc. would also be received only in these offices. Rule 7 tends to provide a way to distribute such credit to the factory or the premises of the output service provider.
For instance, A Ltd has a corporate office at Bangalore and plants at Hosur and Doddaballapur. Advertisement bills are received by the Bangalore office and also paid there. By virtue of rule 7, Bangalore office can distribute such credit to its plants located at Hosur and Doddaballapur. The plants can take credit and utilize the same to pay excise duty as well as service tax.
(2) Rule 2(m) read with rule 7 defines an “input service distributor” as an office of manufacturer or provider of output service which receives invoices towards purchase of input services and issues invoice, bill or challan for the purpose of distributing the credit of service tax paid on the services to its manufacturing units or units providing output service.
Thus, the distributor is comparable to dealers under the CENVAT scheme of inputs and capital goods. The document issued by him is being accepted under law as eligible document under rule 9(1)(g) for availing credit.
To pass on the credit, the input service distributor has to obtain service tax registration, comply with rule 4A of Service Tax Rules and file half-yearly return with the Superintendent under rule 9(10) of CENVAT rules 2004.
(3) 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 by one or more such units 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 by a unit shall be distributed only to that unit; and
(d) credit of service tax attributable to service used
| Points to be noted:– For the purposes of rule 7,
(i) Unit includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or otherwise. (ii) Total turnover shall be determined in the same manner as determined under rule 5. (iii) Relevant period: For the purposes of this rule, the ‘relevant period’ shall be,- (a) If the assessee has turnover in the ‘financial year’ preceding to the year during which credit is to be distributed for month or quarter, as the case may be, the said financial year; or (b) If the assessee does not have turnover for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed. |
Manner of distribution of common input service credit under rule 7(d): It has been clarified vide Circular No. 178/4/2014 dated 11.07.2014 that rule 7(d) seeks to allow distribution of input service credit to all units in the ratio of their turnover of the previous year.
Example
An Input Service Distributor (ISD) has a total of 4 units namely ‘A’, ‘B’, ‘C’ and ‘D’, which are operational in the current year. How will the credit of input service pertaining to more than one unit be distributed?
Answer
Distribution to ‘A’= X/Y x Z
X = Turnover of unit ‘A’ during the relevant period
Y = Total turnover of all its unit i.e. ‘A’+’B’+’C’+’D’ during the relevant period
Z = Total credit of service tax attributable to services used by more than one unit
Similarly the credit shall be distributed to the other units ‘B’, ‘C’ and ‘D’.
Example
An ISD has a common input service credit of ` 12000 pertaining to more than one unit. The ISD has 4 units namely ‘A’, ‘B’, ‘C’ and ‘D’ which are operational in the current year.
| Unit | Turnover in the previous year (`) |
| A (Manufacturing excisable goods) | 25,00,000 |
| B (Manufacturing excisable and exempted goods) | 30,00,000 |
| C (providing exclusively exempted service) | 15,00,000 |
| D (providing taxable and exempted service) | 30,00,000 |
| Total | 1,00,00,000 |
The common input service relates to units ‘A’, ‘B’ and ‘C’. How will the credit be distributed?
Answer
The distribution of credit will be as under:
(i) Distribution to ‘A’
= 12,000 * 25,00,000/1,00,00,000
= 3,000
(ii) Distribution to ‘B’
= 12,000 * 30,00,000/1,00,00,000
= 3,600
(iii) Distribution to ‘C’
= 12,000 * 15,00,000/1,00,00,000
= 1,800
(iv) Distribution to ‘D’
= 12,000 * 30,00,000/1,00,00,000
= 3,600
The distribution for the purpose of rule 7(d) will be done in this ratio in all cases, irrespective of whether such common input services were used in all the units or in some of the units.