Introduction:-
Budget 2016 has been introduced and it has bought some major changes in the Cenvat credit scheme by amending the Cenvat Credit rules, 2004. One such change has been introduced in the rule 7 which relates to the input service distributer. With a view to improve credit flows between different manufacturing / service locations, Rule 7 dealing with distribution of credit on input services by an Input Service Distributor is being completely rewritten by way of substitution of the existing Rule 7 of the CCR. Also, a new rule 7B has been inserted providing the distribution of credit by warehouse. This article is an insight on the amendments so made w.e.f. 1.4.2016.
Existing rule 7 of CCR:-
The existing language of rule 7 of CCR reads as follows:
"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:-
++ The credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;
++ Credit of service tax attributable to service used by one or more units exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;
++ Credit of service tax attributable to service used wholly by a unit shall be distributed only to that unit; and
++ Credit of service tax attributable to service used in more than one unit shall be distributed pro-rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units which are operational in the current year, during the said relevant period.
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.”
Explanation 3. – for the purpose 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 of quarter for which credit is to be distributed.
The computation of “total turnover” is laid down in the new rule 5 which too has been substituted by the captioned notification 18/2012-CE(NT) and the same is defined thus –
“(E) “Total Turnover” means sum total of the value of –
(a) All excisable goods cleared during the relevant period including exempted goods, dutiable goods and excisable goods exported;
(b) Export turnover of services determined in terms of clause (D) of sub-rule (1) above and the value of all other services, during the relevant period; and
(c) All inputs removed as such under sub-rule (5) of rule 3 against an invoice, during the period for which the claim is filed.”
This rule is applicable as on the date and will continue to be applicable till 31.3.2016.
Amended rule 7 as applicable from 1.4.2016:-
The new rule 7 as amended by the notification no. 13/2016-CE(NT) dated 01/03/2016 which is applicable w.e.f. 1.4.2016 is as follows:
―7. Manner of distribution of credit by input service distributor.-The input service distributor shall distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or unit providing output service or an outsourced manufacturing units, as defined in Explanation 4, 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) the credit of service tax attributable as input service to a particular unit shall be distributed only to that unit;
(c) the credit of service tax attributable as input service to more than one unit but not to all the units shall be distributed only amongst such units to which the input service is attributable and such distribution shall be pro rata on the basis of the turnover of such units, during the relevant period, to the total turnover of all such units to which such input service is attributable and which are operational in the current year, during the said relevant period;
(d) the credit of service tax attributable as input service to all the units shall be distributed to all the units pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all the units, which are operational in the current year, during the said relevant period;
(e) outsourced manufacturing unit shall maintain separate account for input service credit received from each of the input service distributors and shall use it only for payment of duty on goods manufactured for the input service distributor concerned;
(f) credit of service tax paid on input services, available with the input service distributor, as on the 31st of March, 2016, shall not be transferred to any outsourced manufacturing unit and such credit shall be distributed amongst the units excluding the outsourced manufacturing units.
Explanation.-The provision of this clause shall, mutatis-mutandis, apply to any outsourced manufacturer commencing production of goods on or after the 1st of April, 2016;
(g) provisions of rule 6 shall apply to the units manufacturing goods or provider of output service and shall not apply to the input service distributor.
Explanation 1.- For the purposes of this rule, ―unit includes the premises of a provider of output service or the premises of a manufacturer including the factory, whether registered or otherwise or the premises of an outsourced manufacturing unit.
Explanation 2.–For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5:
Provided that the turnover of an outsourced manufacturing unit shall be the turnover of goods manufactured by such outsourced manufacturing unit for the input service distributor.
Explanation 3.– 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 maybe, the said financial year; or;
(b) if the assessee does not have turn over 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.
Explanation 4.– For the purposes of this rule, ―outsourced manufacturing unit means a job-worker who is liable to pay duty on the value determined under rule 10A of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on the goods manufactured for the input service distributor or a manufacturer who manufactures goods, for the input service distributor under a contract, bearing the brand name of such input service distributor and is liable to pay duty on the value determined under section 4A of the Excise Act.
Analysis of amendment:-
The new rule 7 is analyzed as follows:-
· The main amendment brought by the new rule is allowing the distribution of credit by Input Service Distributor to outsourced manufacturing units. It is interesting to note that The Hon’ble Tribunal in the case of Sunbell Alloys Co. Of India Ltd. vs. CCE, BELAPUR [2014 (34) STR 597 (Tri. - Mumbai)] denied the availment of CENVAT Credit by a jobber against the ISD invoice issued by the principal manufacturer. The amendment has the effect of overcoming the impact of the said decision. The amendment is a forward step in extending the benefit to job-workers/manufacturer and ensuring the free flow of credits.
· The new rule also clarifies that the provisions of Rule 6 of the Cenvat Credit Rules, 2004 relating to reversal of credit in respect of inputs and input services used in manufacture of exempted goods or for provision of exempted services, shall not apply to the Input service distributor. Earlier, there prevailed doubts as to the inter-play between the operation of Rule 6 and Rule 7. It was not clear whether the amounts are to be distributed firstly as per Rule 7 and then, the CENVAT Credit entitlement under Rule 6 is to be determined by the recipient unit to whom the credit has been distributed. The amendment seeks to dispel the confusion by unambiguously stating that Rule 6 is not to be applied by an ISD while distributing the credit. It is the unit to whom the credit has been distributed, is to apply Rule 6 upon receiving the distributed credit.
· The existing language of rule 7 indicates that if the Cenvat was attributable to more than one units, then the Cenvat is to be distributed in all the units of the manufacturer irrespective of the fact that the Cenvat is attributable to all the units or not. This anomaly is rectified by new rule which specifically states that the credit will be distributed only in those units in which that service is actually utilized.
While ending:-
The amendment made in rule 7 seeks to clarify some anomalies prevailing in the existing language of the rule. Further, the provision inserted in respect of outsourced manufacturing units is a welcome step and is outcome of several judgments. Also, the newly inserted rule 7B also extends the facility of free flow of credit and will reduce the litigation. Thus, overview of the amendment makes it clear that this whole exercise has been done to reduce the litigation and may this intention of law makers fulfilled and taken positively by the department.
An article by
CA Pradeep Jain
CA Preeti Parihar
CA Vaibhav Bothra
CAclubindia
