Old Rule 7 of CCR, 2001:
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.
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.’
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;
Analysis:
As per the new Rule 7, in case the factory-unit has a head office, then for distributing the credit from head office to the factory, the head office will have to register itself as Input service distributor.
When there are two or more units of a concern and having separate office premises, the credit can be distributed only to that unit which has utilized the service in their factory premises. And in case the service is commonly utilized in 2 or 3 factories of a single entity, then the credit is to be distributed on pro-rata on the basis of turnover of the concerned factory unit compared to the sum total of the turnover of all the units to which the service relates.
Another change is 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 of a single entity. This concept was not there before.
Now, the registered input service distributor has to ascertain the turnover of his various units and then to distribute the credit to only those units wherein service is utilized. Earlier no criteria were fixed and it can be distributed on the basis of turnover or quantity manufactured or any other criteria. But now it has to be distributed on the basis of turnover only.
Secondly, earlier when there was only one office and one factory, the service tax bill was directly taken to the factory and credit was taken. But now it has to be distributed through the challan and the service tax distributor registration has to be taken at the head office.
Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]
Bharat Rathore
CAclubindia
