Summary
The Kerala High Court has held that prior to the amendment of Section 20 of the CGST Act (effective from 1 April 2025), obtaining registration as an Input Service Distributor (“ISD”) was not mandatory for distributing Input Tax Credit (“ITC”) among distinct persons. The Court further held that a self-invoice raised by a person liable to pay tax under reverse charge mechanism (“RCM”) can form the basis for availment of ITC. Accordingly, the Court quashed the GST demand and penalty imposed on the Petitioner on allegations of wrongful availment of ITC and distribution of ITC without obtaining ISD registration.
Facts
- The Petitioner is a multinational company having multiple GST registrations across different States in India.
- During July 2017 to March 2019, the Petitioner’s foreign parent company provided email, virus protection, IT management and infrastructure services along with other IT support services to the Petitioner and its other units across the country.
- The foreign supplier issued invoices in the name of the Petitioner’s Delhi office, which was the corporate office of the company. However, the payment against such invoices was made by the Petitioner and the Petitioner discharged GST under RCM by issuing self-invoices and subsequently availed ITC.
- As the services provided by the foreign company were availed by all the units of the company across the country, the Petitioner cross-charged the value and credit to the respective units.
- Pursuant to a GST audit, the Department alleged that:
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- ITC was wrongly availed by the Petitioner as the foreign supplier’s invoice was issued in the name of the Delhi unit having separate GST registration; and
- The Petitioner distributed ITC among other units without obtaining registration as an ISD.
- The adjudicating authority passed an impugned order confirming demand of Rs. 1.31 crore along with equivalent penalty under Section 74 of the CGST Act.
- Aggrieved by the impugned order, the Petitioner filed a writ petition before the Kerala High Court.
Issues before the High Court
- Whether the Petitioner was entitled to avail ITC on services imported from its foreign parent company based on self-invoices issued under the RCM?
- Whether, prior to 1 April 2025, distribution of ITC among distinct persons without obtaining ISD registration was permissible under the CGST Act?
Discussion & Ruling
The Hon’ble Kerala High Court quashed the demand and penalty on the following grounds:
- Section 9(3) of the CGST Act provides for collection of tax on reverse charge basis by the recipient of services. A conjoint reading of Sections 16(2), 31(3)(f) of the CGST Act and Rule 36 of the CGST Rules show that when a person liable to pay tax under Section 9(3) raises an invoice under RCM, such invoice can form the basis for availment of ITC.
- The Petitioner discharged the entire liability towards consideration and also paid tax in respect of the transaction and therefore qualified as the “recipient” under Section 2(93) of the CGST Act.
- Since the invoice issued by the foreign company was not issued by a registered supplier, the same could not be treated as the relevant document for the purpose of availing ITC. The relevant document was the self-invoice raised by the Petitioner in accordance with the statutory provisions.
- The unamended Section 20 of the CGST Act was only an enabling provision providing for distribution of ITC through the ISD mechanism. There was nothing in the provision to indicate that distribution had to be made only through an ISD registered under the Act.
- The amendment made by the Finance Act, 2024 with effect from 1 April 2025 specifically introduced a mandatory requirement for registration as an ISD, which indicates that such requirement did not exist under the unamended provision.
- The GST Council, in its 50th meeting, had also noted that there was no intent in the then existing provisions to make the ISD mechanism mandatory and recommended making the requirement mandatory prospectively.
- The Court also relied upon the CBIC FAQ clarifying that the ISD provisions were not mandatory and merely provided a mechanism for distribution of ITC.
- Further, reliance was placed on the Karnataka High Court decision in Micro Labs Ltd. which supported the view that distribution of ITC without ISD registration was permissible under the pre-amended law.
- The Court also observed that no loss was caused to the Government as the tax payable in respect of the transaction had already been discharged and the entire arrangement was revenue neutral.
- Accordingly, the High Court quashed the demand and the corresponding penalty, holding that the Petitioner had validly availed ITC and that distribution of ITC without ISD registration prior to 01 April 2025 could not be treated as illegal.