ITC Distribution Without ISD Registration Valid for Pre-Amendment Period: Kerala HC Quashes Rs. 1.31 Cr GST Demand against Intertek [Read Order]

The Kerala High Court has set aside a Rs. 1.31 crore GST claim against Intertek India Pvt. Ltd. and ruled that distribution of Input Tax Credit (ITC) without Input Service Distributor (ISD) registration was permissible for the pre-amendment period. The Court found that the ISD mechanism under the unamended Section 20 of the CGST Act was only an enabling provision and not an obligatory obligation, allowing taxpayers to transfer credit through cross-charge invoices to their different branches.

The Single Judge Bench of Justice Ziyad Rahman A.A. has approved the writ petition, setting aside an adjudication ruling passed under Section 74 of the CGST Act, 2017. The Revenue Department had confirmed a claim on account of unlawful availment of ITC and illegal distribution of credit without ISD registration.

The petitioner, a multinational corporation, procured IT support services from its parent company in the USA. The invoice was raised to Delhi unit (corporate office), but payment was made by Kerala unit (petitioner). The Kerala unit paid tax and claimed ITC on the self-invoice raised under Reverse Charge Mechanism (RCM) under Section 9(3). Later, the services were employed by other branches all throughout India and the petitioner apportioned the credit by issuing cross charge invoices to these separate persons without getting ISD registration.

The Revenue stated that the invoice of the international corporation was addressed to the Delhi unit, and so the Kerala unit cannot claim ITC. But the Court considered the provisions of Section 2(93) (definition of “recipient”) and Section 16(2) read with Rule 36. Justice Rahman stated that as the petitioner paid the consideration and fulfilled the tax burden under RCM by way of a self-invoice (Section 31(3)(f)), the petitioner was the “recipient” and eligible for the credit.

Before the revision of Section 20, the Court considered the legislative intent of Section 20 vis-à-vis the distribution of ITC not registered under ISD. The Court stated that the unamended statute did not require ISD to register for distribution. It pointed to the Finance Act, 2024 amendment that had specifically added the required requirement and which therefore implied that it was not there before.

The Court has mainly relied on the minutes of the 50th GST Council meeting and departmental FAQs, which clearly stated that the ISD mechanism was optional before the change. The Court emphasised that the Revenue’s reliance on Section 24(viii) was inappropriate as this section only provides for registration where a business elects to function as an ISD, and not where it is obliged to act as an ISD. The sole meaning of the provision in section 24(viii) can be that if the office of the firm /entity registered under the service wants to serve as an ISD, it must have a registration.

“ In absence of any particular prohibition in the Act, the mentioned provision would not entail that the supplier or the person responsible to tax cannot distribute the ITC elsewhere than through the registered ISD," the Bench observed.

The Court also concurred with the petitioner’s position that the transaction was revenue-neutral, given the tax had been paid and there was no loss to the exchequer. The Court, relying on the decision of the Karnataka High Court in Micro Labs Limited v. State of Karnataka, noted that imposing a high penalty on technical grounds where no tax evasion had taken place was against the spirit of the GST Act. The writ petition was consequently disposed of, and the impugned order was quashed.

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