Often Suppliers of taxable goods or services have various offices which avail various inputs services and pay GST. Such offices do not have any output tax liabilities. These input credits will remain unused and become part of cost unless these are allowed to distribute it in value chain. Since these offices facilitates the places of business and fixed establishment, they are allowed to distributes their input tax credit to other place of businesses from where outward supplies are made in the regular course of business by the Supplier.
These offices which are distributes their input tax credit are legally termed as Input Service Distributors commonly known as ISD.
Input Service Distributor defined under Section 2(54)
“Input Service Distributor” means an office of the supplier of goods and / or services which receives tax invoices issued under section 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.
1.1 Elements of ISD
a.it must be an office of a supplier;
b.it distributes credits of GST paid on services received among the other place of business and establishment of the supplier;
Office of a supplier
A Supplier of taxable goods or Services may have various offices such as a head office, registered office, regional office, marketing office, branch, godown, sales depot etc. which avail various input services such as security services, communication charges, courier expenses, housekeeping expenses to name a few, and pay service tax. Such units and premises may obtain registration as an Input Service Distributor for availment of Input tax credits on such input services and distribution of credit to premises of an output supply to resolve the challenge of efficient utilization of accumulated input GST credit.
1.The distribution of input tax credit only to the taxpayers having same PAN
Distribution only allowed to the location which are registered on the basis of same PAN number.
The registration number given by the common portal contains PAN number and if PAN number is different, the credit cannot be distributed to that location. The distribution of credit can only be in respect of input tax paid on input services received at the office of Input Service Distributor.
As per income tax act, no two person can have same PAN and one person is not allow to hold two different PAN, the common PAN’s condition is to ensure that input tax cannot be distribute among different taxpayers.
2.Conditions for distribution of credit by ICD
The credit can be distributed against a prescribed document issued to each of the recipients
The distribution of Input tax is not allowed unless it is against prescribed documents issued to each recipient.
Rule 5(1) of Draft Invoice Rules prescribes a tax invoice issued by an ISD shall contain the following details:
(a) name, address and GSTIN of the Input Service Distributor;
(b) a consecutive serial number containing only alphabets and/or numerals, unique for a financial year;
(c) date of its issue;
(d) name, address and GSTIN of the supplier of services, the credit in respect of which is being distributed and the serial number and date of invoice issued by such supplier;
(e) name, address and GSTIN of the recipient to whom the credit is distributed;
(f) amount of the credit distributed; and
(g) signature or digital signature of the supplier or his authorized representative.
Tax invoice of ISD of Banking Company or FI or NBFC
Where the ISD is an office of a banking company or a financial institution or NBFC, a tax invoice shall include any document in lieu thereof, by whatever name called, whether or not serially numbered but containing the information as prescribed above.
3.The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient.
The credit of tax paid on input services attributable to a recipient shall be distributed only to that recipient.
Whether the input tax distributed is attributable or not is open to examine by Jurisdictional officer with whom ISD is registered.
The precedents under the CENVAT Credit Rules are guiding principal under GST.
In CCE, Bangalore-I v. Ecof Industries Pvt. Ltd 2011 (4) TMI 560 – KARNATAKA HIGH COURT, where Service Tax paid by head office pertaining to advertisement of product manufactured by unit ‘A’ was distributed to ‘B’. it was held that such distribution of credit was attributable hence permissible under rule 7 of CENVAT Credit Rules. Rule 7 does not mandate that the assessee is entitled to take credit only in unit where the product is manufactured.
In Ecof Industries Pvt. Ltd. v. CCE, Bangalore 2009 (10) TMI 171 – CESTAT, BANGALORE, it was held that the availability of credit is related to manufacturer of goods or provider of output services as a whole and is not restricted to any particular unit or manufacturer or service provider. Where assessee distribute credit of service tax in respect of its one unit even though service tax had been paid in respect of services used by its another unit and lower appellate authority denied distribute of service tax credit on the ground that service tax credit relating to one unit should not be distribute to other unit, it was held that restricting distribution of service tax credit cannot be upheld.
In Commissioner of Service Tax, Ahmedabad Vs Godfrey Philips India Ltd., 2009 (14) STR 375 (Tri. Ahd) the extract of the observation of Tribunal are as under:
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 documents issue 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, details and the amount. Obviously the eligibility or otherwise of the service tax credit has to be examined at the end of input service distributor only. This is further supported by the fact that both Central Excise assessees and Service Tax Assessees 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. Therefore the preliminary objection raised by the Id. Advocate has to be rejected and it has to be 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.”
4.Pro-rata distribution of input of Service tax in the case of more than one unit
As per clause (d) if the credit of tax paid on input services is attributable to more than one recipient, the credit shall be distributed among such recipient to whom the input services are attributable. Such distribution shall be on pro-rata basis of turnover of such recipient during the relevant period.
5.Recovery of credit wrongly distributed
Section 22 provides recovery of credit distributed in excess of credit distributed in excess of credit distributable to any location in terms of the Section 21 of the GST Law.
Section 22 is read as under
Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 21 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipient(s) along with interest, and the provisions of section 66 or 67, as the case may be, shall apply mutatis mutandis for effecting such recovery.
6.Practical issue related with Input Service Distributon
As per the Schedule V of Model GST Law, ISD have to be registered irrespective of its aggregate turnover. The Schedule also provides that an Input Service Distributor have to register separately for the purpose of Input Service Distribution. Thus if a taxpayer is registered for outward supply, it has to take a separate GSTIN for Input Distribution.
Such GSTIN should be mention in every purchase order for the services, in respect of input credit are intended to be distributed. So that the invoice received from the Service supplier accordingly.
6.2 Analysis for attribution and attribution must be substantiate with documentation
An Input Service Distributor (ISD) has a total of 4 units namely ‘A’, “B’, and ‘C’, which are operational in the current year. The credit of input service pertaining to more than one unit shall be distributed as follows:
Distribution to ‘A’ = Ta/Ts * Tc
Ta = Turnover of unit ‘A’ during the relevant period
Ts = Total turnover of all its unit i.e. ‘A’+’B’+’C’ during the relevant period
Tc = 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’.
An ISD has a common input service credit of ₹ 12000 pertaining to more than one unit. The ISD has 4 units namely ‘A’, ‘B’, and ‘C’ which are operational in the current year.
Unit Turnover in the previous year (in Rs.)
A (Manufacturing excisable goods) 40,00,000
B (Manufacturing excisable and exempted goods) 30,00,000
C (providing exclusively exempted service) 30,00,000
The common input service relates to units ‘A’, ‘B’ and ‘C’, the distribution will be as under:
(i) Distribution to ‘A’ = 12000 x 4000000 / 10000000 = 4800
(ii) Distribution to ‘B’ = 12000 x 3000000/10000000 = 3600
(iii) Distribution to ‘C’ = 12000 x 3000000/10000000 = 3600
Note: The distribution of input tax credit requires a logical appropriation with documentary support among the Units where it will be distributed, as it is always open for jurisdictional officer to challenge the basis of distribution of Input Tax.
Some important cases related with distribution of Input tax credit by an ISD which are as below
In Hindustan Zinc Ltd. v. CC&CE, Jaipur- II (2013) 2012 (3) TMI 367 – CESTAT NEW DELHI where receipt of input service and use thereof and the identity of service provider and service recipient were established, it was held that Cenvat credit could not be denied to the assessee merely because invoice thereof bears address of Head Office, which was not registered as ISD.
In Rohit Surfactants (P) Ltd. v. CCE, Jaipur ((2013) 29 STR 175; (Cestat, New Delhi), assessee took credit of service tax paid under reverse charge on GTA’s services based on invoice issued by their Head Office as input service distributor, it was held that substantial benefit, if otherwise available, could not be denied on technical and procedural grounds. [Also see: Sanghi Industries Ltd. v. CCE, Rajkot 2014 (2) TMI 278 – CESTAT AHMEDABAD; BSNL v. CCE, Salem (2013 (12) TMI 742 – CESTAT CHENNAI)].
In Oil & Natural Gas Corpn. Ltd. v. CCE, Raigad (2013) 31 STR 214; (Cestat, Mumbai), 2013 (9) TMI 550 – CESTAT MUMBAI assessee was engaged in the manufacture of excisable goods for which raw materials such as natural gas and crude oil procured from the Oilfield of Mumbai Offshore were used on which Central Excise duty was paid and Cenvat credit was availed thereafter. Service Tax was paid on input services and distributed by the Input Service Distributor in terms of facility extended to the manufacturer of the excisable goods under the provisions of Cenvat Credit Rules. It was held that Cenvat credit of service tax paid by various ISDs on input services used in or in relation to manufacture of crude oil/natural gas was not available to assessee as crude oil/natural gas was exempted. Words ‘duty of excise’ referred in the definition of exempted goods and excisable goods refer to duty of excise as specified in Section 3 of Central Excise Act, 1944 and the contention that since cess was paid by assessee on the crude oil manufactured at Mumbai offshore, crude oil was duty paid and not exempted, was not acceptable. Hence, input services entirely being used in crude oil/natural gas, which were exempted from duty, credit was not admissible. Since Mumbai offshore was exclusively engaged in manufacture of exempted goods, credit of Service Tax paid on input services could not be distributed.
In Market Creators Ltd v. CCE & ST, Vadodara (2014 (7) TMI 704 – CESTAT AHMEDABAD), where Service Tax was not paid by rented premises as Head Office for all the branches and Service Tax registration is also not taken by assessee of such premises and issued credit taking document, it was held that assessee could not take credit of documents issued by a premises, which was not registered as an input service distributor under the Service Tax provisions.
In Moser Baer India Ltd v. CCE, Noida (2015 (1) TMI 1093 – CESTAT NEW DELHI it was held that basic requisite condition for distribution of credit is that head office receives invoices towards purchase of input service and pays service tax as registered input service provider. Therefore, head office was entitled to distribute credit to its manufacturing unit.
6.4 Filing of return
As per section 34(4), Every taxable person registered as an Input Service Distributor shall, for every calendar month or part thereof, furnish, in GSTR-6 and in such manner as may be prescribed, a return, electronically, within thirteen days after the end of such month.