Manner of distribution of common input service credit under rule 7(d) of the Cenvat Credit Rules, 2004

Cir­cu­lar No. 178/4/2014-ST

Dat­ed: 11^th July’ 2014

Doubts have been raised regard­ing the man­ner and extent of the dis­tri­b­u­tion of

com­mon input ser­vice cred­it in terms of amend­ed rule 7 [espe­cial­ly rule 7(d)] of the

Cen­vat Cred­it Rules, 2004 (CCR). Rule 7 pro­vides for the mech­a­nism of dis­tri­b­u­tion of

com­mon input ser­vice cred­it by the Input Ser­vice Dis­trib­u­tor to its man­u­fac­tur­ing units

or to units pro­vid­ing out­put ser­vices. An amend­ment was car­ried out vide Notification

1. 05/2014-CE (N.T.) dat­ed 24th Feb­ru­ary, 2014, amend­ing inter-alia rule 7(d)

pro­vid­ing for dis­tri­b­u­tion of com­mon input ser­vice cred­it among all units in their

turnover ratio of the rel­e­vant peri­od. Rule 7(d), after the amend­ment, reads as under:

‘cred­it of ser­vice tax attrib­ut­able to ser­vice used by 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’

2. These doubts have arisen with respect to the mean­ing of the words ‘such unit’

used in rule 7(d). It has been stat­ed in the rep­re­sen­ta­tions that due to the use of the term

‘such unit’, the dis­tri­b­u­tion of the cred­it would be restrict­ed to only those units where

the ser­vices are used. It has been inter­pret­ed by the trade that in view of the amended

rule 7(d) of the CCR, the cred­it avail­able for dis­tri­b­u­tion would get reduced by the

pro­por­tion of the turnover of those units where the ser­vices are not used. 2 | P a g e

3. Rule 7 was amend­ed to sim­pli­fy the method of dis­tri­b­u­tion. Pri­or to this

amend­ment there were a few issues raised by the trade regard­ing dis­tri­b­u­tion of credit

under rule 7 such as deter­min­ing the turnover of each unit for each month and

dis­trib­ut­ing by fol­low­ing the nexus of the input ser­vices with the units to which such

ser­vices relate. The amend­ment in the said rule was car­ried out to address these issues.

The amend­ed rule 7(d) seeks to allow dis­tri­b­u­tion of input ser­vice cred­it to all units in

the ratio of their turnover of the pre­vi­ous year. To make the intent of the amend­ed rule

clear, illus­tra­tion of the method of dis­tri­b­u­tion to be fol­lowed is giv­en below.

4. An Input Ser­vice Dis­trib­u­tor (ISD) has a total of 4 units name­ly ‘A’, “B’, ‘C’ and

‘D’, which are oper­a­tional in the cur­rent year. The cred­it of input ser­vice per­tain­ing to

more than one unit shall be dis­trib­uted as follows:

X

Dis­tri­b­u­tion to ‘A’ =

• Z

Y

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’.

Illus­tra­tion:

An ISD has a com­mon input ser­vice cred­it of Rs. 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

(in Rs.)

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’, the dis­tri­b­u­tion will be as

under:

(i) Dis­tri­b­u­tion to ‘A’ = 12000 * 2500000/100000003 | P a g e

= 3000

(ii) Dis­tri­b­u­tion to ‘B’ = 12000 * 3000000/10000000

= 3600

(iii) Dis­tri­b­u­tion to ‘C’ = 12000 * 1500000/10000000

= 1800

(iv) Dis­tri­b­u­tion to ‘D’ = 12000 * 3000000/10000000

= 3600

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.