INPUT SERVICE DISTRIBUTOR
HISTORY:
The concept of Input Service Distributor(ISD) was found in erstwhile service tax law. The definition of ISD was in Rule 2(m) of Cenvat Credit Rule,2004. Rule 7 of Cenvat Credit Rules, 2004 is completely written down as per Notification No. 13/2016 C.E (N.T) dated 1st,March 2016 to allow an Input Service Distributer to distribute the input service credit to an outsourced manufacturing unit also in addition to its own manufacturing units. It had been provided that an Input Service Distributor shall distribute CENVAT credit in respect of service tax paid on the input services to its manufacturing units or units providing output service or to outsourced manufacturing units, subject to conditions.
GENERAL
While taxation of Services, Central Excise, Value Added Tax and other several other taxes subsumed in Goods and Service Tax Laws with effect from 1st July 2017, some concepts of taxation in each such laws are also found place in GST Law. One of such law was in respect of distribution of CENVAT Credit in respect of services, payment whereof was by head office or its branch for the benefit of different branches or head office. This concept is statutorily found in provisions regarding Input Service Distributor in GST Laws.
The concept of ISD is a facility made available to business having a large number of branches or unit which bear common expenditure and billing/payment is done from a centralized location. The mechanism is meant to simplify the credit using process for entities and the facility is meant to strengthen the seamless flow of credit under GST.
It is important to note that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods (inputs or capital goods).
A lots of concepts kept their ball rolling from the erstwhile service tax law to GST. Input Service Distributor “ISD” is one such concept. Further, a new theory of cross charge was also set in motion. The end result of both is apportionment of input taxes across multiple registered persons under the same PAN,
OBJECTIVE
Companies may have their head office at one place and units at other places which may be registered separately. The Head Office would be procuring certain services which would be for common utilization of all units across the country. The bills for such expenses would be raised on the Head Office. But the Head Office itself would or would not be providing any output supply so as to utilize the credit which gets accumulated on account of such input services. Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units. Moreover, the credit not attributable to ISD, can not be utilised for transactions of ISD.
ISD is one of the manners in which the credit is transferred to branches or beneficiary units. This distribution can be done through cross charge also. This is also necessitated as per standard accounting practices. If the head office is merely or mainly concerned with the administrator for all units or branches of the entity, and it has no turnover of supply or insufficient turnover of supply so as to be able to absorb credit or credit in full, it is required that different units who are beneficiary of services for which invoice is raised on head office, are enabled to enjoy ITC and that is the reason for which distribution of ITC is required.
The credit has to be distributed only to the unit to which the supply is directly attributable to. If input services are attributable to more than one recipient of credit, the distribution shall be in the pro-rata basis of turnover in the State/Union Territory.
ISD mechanism enables and mandatory also such proportionate distribution of credit of input services amongst all the consuming units
STATUTORY PROVISIONS
Definition
Input Service Distributor is defined in Section2(61):
“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.”
Thus ISD is a office of a supplier that receives invoices for services used by its branches. It distributes the tax paid known as the Input Tax Credit (ITC), to such branches on an actual or a proportional basis, which are beneficiaries of services. The distribution is by issuing ISD invoices with GST.
. The branches can have different GSTINs but must have the same PAN as that of ISD.
REGISTRATION
A registered taxable person desirous of distributing credit will have to take separate registration No . as ISD u/s 24(VII). An ISD will have to compulsorily take a separate registration as such ISD and apply for the same in form GST REG-1. There is no threshold limit for registration for an ISD. The other locations may be registered separately and one entity with one PAN No. can have multiple ISD registrations.
RETURNS
An ISD shall file the monthly return within thirteen days of the month u/s 39(4) and details furnished in FORM GSTR-6 but ISD are not required to file the Annual return since provision of section 44 are not applicable to ISD in respect of total credit distributed for the year.
PROCEDURE FOR DISTRIBUTION:
Examples of expenses which are incurred by a Distinct Person for the administration of all other distinct persons are Manpower Expenditure, Audit Fees, Marketing and Advertisement Expenses, Computer Software Expenses, Audit Expenses, Security Expenses etc. that are required to be distributed to concerned units.
If a taxable person receives an invoice for inward supply of service with GST charged on it and the services received are enjoyed by different units having separate registration under a common PAN, and for the purpose of distribution, the GST credit to a particular unit which is the sole beneficiary of service or more than one units are beneficiaries or all units are beneficiaries, the GST credit can be distributed to such units in the manner provided in Rule 54 read with section 20.
For the purposes of distributing the input tax credit, an ISD has to issue an ISD invoice on respective units with charging GST, as prescribed in rule 54(1) of the CGST Rules, 2017, clearly indicating in such invoice that it is issued only for distribution of input tax credit.
The principles of distribution of credit is as per following chart.
| Sr No. | Credit to be
Distributed |
To be Distributed as |
| 1 | Central Tax | Central Tax or Integrated Tax |
| 2 | Integrated Tax | Central Tax or Integrated Tax However Rule 39(1) (e) Integrated Tax Can be distributed as Integrated Tax only |
| 3 | Central Tax and State Tax,UT Tax | If the recipient is located in the same State or UT it will be Distributed as Central Tax and State Tax ,UT Tax |
| 4 | Central Tax and State Tax,UT Tax | If the recipient is located in other State or UT it will be Distributed as Integrated Tax |
Each type of tax must be distributed through a separate ISD invoice.
The amount of credit that can be distributed cannot exceed the credit available for distribution. By any ISD invoice distributed in excess of available credit is recoverable from recipient along with interest. Hence, no arbitrary distribution is permissible and ISD must have a basis and reason for distribution.
In case the credit is attributable to one unit, it will be distributed to that unit only and not to other units. The common expenses not related to the particular inward invoice of services, of the distinct person whose benefit is enjoyed commonly by all units cannot be distributed by ISD and it may be distributed through cross charge.
In cases where the benefit of service received is available to more than one unit or to all units, it shall be distributed among them in proportion to their turnover in the previous financial year in respective states and if there is no turnover in the previous year, then it shall be distributed in proportion to the turnover of the previous quarter to the month in which credit is to be distributed. The difficulty arises when the unit or units are new and have no turnover in previous quarter. In that case distribution cannot be differed to next or subsequent months in view of Rule 39(1)(a) which provides that input tax credit available for distribution in a month shall be distributed in the same month .When one unit has a turnover in the previous quarter and other units have turnover in the previous financial year, the turnover for the quarter for all practical purposes must be weighted to four times the quarterly turnover. There are no guidelines but it appears to be a practical solution.
The Turnover shall be determined after deducting from the value of excise duty, central sales tax , Excise Duty and Sales tax on Purchase tax on alcoholic liquor for human consumption and petroleum products. Turnover of supply of goods and services both must be taken into consideration.
Further, an ISD shall separately distribute both the amount of ineligible and eligible input tax credit. [Rule 39(1)(b)].
ISD has to be very careful that if for any reason or mistake, any credit is distributed in excess of what is eligible for distribution .The excess will be recovered from the units to which it was distributed along with applicable interest and provisions of section 73 and 74 and provisions of Section 122 will be attracted. If the ISD is also regular taxable person , the wrongly distributed credit will lapse since it can not be corrected and utilised by other units which are shortly distributed or as matter of fact the ISD cannot also utilise. However, if it is found that there is excess credit is distributed, the procedure for rectification as provided in Rule 39(1)(j) read with Rule 39(2) must be followed and things set right.
Any adjustment for a debit note or credit note received subsequently should be reciprocally issued to units which have received credit and must be so reflected in the monthly GSTR 6.
After the distribution by ISD, the credit will be reflected in the portal in their GSTR 2A or 2B. The recipients may include these in their GSTR-2 and take credit.
The provisions of ISD are made mutatis mutandis applicable to IGST provisions by virtue of section 20 of Integrated Goods and Services Tax, Act 2017 (“IGST Act”). The respective State Goods and Services Tax Acts also contain the provisions of ISD which are akin to provisions of CGST Act.
In the case of Cummins India Ltd AAAR(infra) has held that common input services received by a distinct person if used or consumed by another distinct person only, in course of or in furtherance of their business, and not by the distinct person who has received an invoice for services, the distinct person who receives such services is not entitled to enjoy ITC. Thus Input Services for other distinct person must be transferred to such distinct persons and not be enjoyed by distinct person who receives the invoice for such services.
CROSS CHARGE:
ISD and cross charge are different concepts. The two concepts are not alternatives to each although both of these concepts relate to distribution of ITC to distinct persons. In ISD there is transfer to credit attributable to beneficiary distinct person and cross charge there is charging of the goods or services to distinct persons who are beneficiary of services directly or indirectly and may not have any input service GST to be distributed. In ISD there is no services provided by any distinct person under same PAN but provided by third party.
Whereas the ISD is for services, invoices in nature of cross charge can be issued both for goods and services for distribution of credit without ISD registration. If taxable person is not registered as ISD , in that case distribution of credit must be made by cross charge invoice or debit note.
Cross charge is mandatory to be followed and GST discharged lest department determines and foists liability of GST u/s 74, with no opportunity to avail credit by the recipient in view of section 17(5)(i).
There are no specific provision in GST Act or Rules about levy of GST as cross charge. It is the term used when a taxable person provides goods or services to its own constituents having separate registration numbers. If in the course of furtherance of business, if taxable person, supplies any goods or services to any other person who is distinct person having registration under one PAN or to a related person as defined in Explanation to section 15, without consideration , as an exception to Section 7(c), it shall be supply liable to GST, if the limit of turnover exceeds threshold limit in respective States.
If the supply is for consideration to related persons , provisions of section 15 read with rule 28 will apply for determination of the value of supply..
In section 15 (1) provides for valuation of supply in case of Related Persons to be as per rules. But if the supply is for consideration to distinct persons , the valuation shall be as per transaction value. It is because , section does not provide for valuation to be as per rules in respect of supply to distinct person but only for related person. There is the valuation of supply to distinct person is in Rule 28 is ultra vires section 15, which does not provide for valuation of supply to distinct person. There are no rules framed in case of valuation of supply, where price is not the sole consideration.
Cross charge concept emanated from the provisions of Item 2 of Schedule 1 But cross charge will be applicable even when Item 3 of Sch. 1 is inapplicable. It provides that supply of goods or services or both between related persons or between distinct persons ,in the course or furtherance of business, even made without consideration , shall be treated as supply. Distinct person has been defined in Section 25(4) and (5) and Related Person is defined in Explanation to Section 15.
Section 25(4) and(5) of the CGST Act provide that a person who has obtained or is required to obtain more than one registration, whether in one State or Union Territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act and for each establishment in same State or another State or Union territory, such establishments shall be treated as establishments of distinct persons for the purposes of GST Act. Therefore a taxable person having different registrations in one state or other states are treated as distinct persons. In the pre GST era there was a concept of branches and transfer to branches of goods were not considered as sale unless movement was pursuant to a contract in hand. Now intra HO to Branches or Branches to Branches or Branches to HO are taxable, of course with availability of ITC.
The combined reading of Entry 2 of Schedule 1 and the concept of distinct persons in section 25(4) and (5) and related persons in Explanation to section 15, when supply is without consideration , gives rise to the taxability of supply even without consideration. The cross charge is used even when cross charge is with consideration .It means charge levied on distinct person by a distinct person. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity, even without consideration shall be termed as a supply and shall attract GST. In line with the said provisions, every supply between distinct persons or related persons, even without consideration, whether charged or not will be liable to GST. Although, the receiver of the supply shall be entitled to GST credit subject to conditions.
An important point is that in the case of the inter related persons or distinct persons, any supply or deemed supply (supply without raising invoice for cross charge) even without consideration will be treated as supply and will be taxed on the basis of valuation as per Rule 28. The Rule 28 does not speak of supply without consideration but speaks only supplies between distinct person or related persons. In all cases that is to say supply with or without consideration it is advisable that the taxable persons raises invoices on the basis of principles of valuation u/r 28 and 30, lest Departmental Assessors are given opportunity of valuation and levy tax on the value based on Rule 28 and 30 and recover tax from the taxable person At the time of levy, it is too late for the recipient to claim of ITC since the claim of ITC is governed by time limitation and also claim of ITC is ineligible u/s 17(5)(i). The prudent practice has to first determine whether benefit of supply of goods and /or services are to other distinct person under same PAN directly or indirectly and secondly to value the same as per principles as per Rule 28, raise invoice on the value and collect GST, and issue tax invoice on the recipient, so that though tax is paid, the recipient is enabled to avail ITC. A taxable person raising invoice on its distinct person may any value if recipient is entitled to full ITC, as provided in 2nd Proviso to Rule 28.
VALUATION
As per the section 15 of CGST Act, value of supply to a related person, shall be determined as per Rule 28 to 31 of CGST Rules which prescribes the methods to determine the value of supply.
The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall
a) be the open market value of such supply;
b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order. Rule 30 provides for value as 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.
Rule 31 provides value shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter if valuation is feasible under Rule 27 to 30
One important point to be noted is that while fixing value of supply between related persons or distinct persons , the First Proviso gives option to determine the value at 90% of the value that would be for supply to a person which is not related person. But in the case of distinct person, this option is not available, since language of Rule 28 First Proviso only speaks of related persons and not distinct persons.
One more important point is that if the recipient is eligible for full ITC on such supply, there is no need to determine value on the principles of Rule 28 and 30, but the value shown in the invoice shall be the open market value of the goods or services. This means it is necessary to prepare notional invoice for some value may be Rs 100.00 and that will be deemed to be market value so as not to block working capital of taxable person by first paying GST and the same is claimed as ITC by recipient. Hence, it is practically mandatory to prepare an invoice to take advantage of this Second Proviso.
If the valuation is not possible to make valuation of supply between related or distinct persons by prescribed by means under Rule 28 and 29, in that case , as per Rule 30 , cost of production or cost of acquisition plus 10 % thereof added to it, may be treated as valuation of supply.
Message that can be inferred looking at the provisions of Entry 2 of Schedule 1 , Rule 25(4) and Rule 25(5), Explanation to Section 15, Rule 28 to 31, is that no deemed supply should be without raising invoice and collection of GST from recipient, so that even if GST is leviable , still it is available as ITC in the hands of the recipient.
However, if recipient is not eligible for full ITC for any reason, for example, supply side of recipient is not eligible for full or partial ITC; in case of supply is of exempt goods; or recipient is under composition levy, where ITC is not available (Restaurants) ( in case of related persons) or supply of taxable and exempt goods or services or both ; to construction services sector where, ITC is not available , the taxable person should value the supply on the basis of market price of similar goods or services.
The distribution of ITC can be under ISD route or cross charge route, as may be advantageous and preferable on the basis of facts and circumstances of each case.
ISD route may be resorted in case of supply by between distinct person is also for distribution of ITC if inward supply of supplier is with GST charged by its supplier. However, it is optional for the taxable person to use ISD or cross charge method. If there is no registration as ISD, cross charge method can be adopted in sporadic cases. If there is no cost of inward supply determinable for supply between distinct persons, cross charge route is preferable.
If the concept of cross charge is not appreciated and no such invoicing practice followed, there is possibility of wide spread disputes arising between taxable person and department.
A situation may arise wherein a location might require to cross charge to a unit located in SEZ. Since supply to a Special Economic Zone is considered as a zero rated supply, cross charge may be required to be considered as export under both the options i.e. on payment of IGST or under LUT without payment of IGST.
Further, an ISD may distribute credit attributable to SEZ under an invoice and SEZ shall be eligible to avail the credit on the same.
Certain other important aspects pertinent to ISD and cross charge are:
1. A person can obtain registration under GST as normal taxable person and also as Input Service Distributor.
2. An ISD has to distribute the input tax credit to its concerned units in the same month in which such inward supplies have been received.
CASE LAW
(1) The contention of the respondents that as the petitioner is not the supplier of the goods and services, the petitioner would not be entitled to file application for refund has been rejected.
(2) A supplier of goods and services can not file a refund application to claim the refund of the input tax credit distributed by ISD. Therefore, contention that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit is rejected.
(3) The contention of the respondents that as the petitioner is not the supplier of the goods and services, the petitioner would not be entitled to file application for refund is rejected because in facts of the present case, input service distributor i.e. ISD as defined under section 2(61) of the CGST Act is an office of the supplier of goods and services which receives tax invoices issued under section 31 of the CGST Act towards the receipt of input services and issues a prescribed document for the purpose of distributing the credit of CGST, SGST Or IGST paid on such goods or services.
(4) Therefore, in facts of the case, it is not possible for a supplier of goods and services to file a refund application to claim the refund of the input tax credit distributed by ISD. Therefore, the stance of the department that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit is not tenable.
CIRCULAR
Circular dt 26h Oct 2018, bearing F. No. 349/94/2018-GST ,CBIC has clarified as follows:
1. According to Section 21 of the CGST Act where the ISD distributes the credit in contravention of the provisions contained in section 20 of the CGST Act resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest and penalty if any.
2. The recipient unit(s) who have received excess credit from ISD may deposit the said excess amount voluntarily along with interest if any by Circular No. 71/45/2018-GST Page 3 of 3 using FORM GST DRC-03.
3. If the said recipient unit(s) does not come forward voluntarily, necessary proceedings may be initiated against the said unit(s) under the provisions of section 73 or 74 of the CGST Act as the case may be. FORM GST DRC-07 can be used by the tax authorities in such cases.
4. It is further clarified that the ISD would also be liable to a general penalty under the provisions contained in section 122(1)(ix) of the CGST Act.
DECISIONS OF ADVANCE RULING AUTHORITIES:
Columbia Asia Hospitals Pvt. Ltd
In M/s. Columbia Asia Hospitals Pvt. Ltd (GST AAAR Karnataka) Appeal Number: Order No. KAR/AAAR/Appeal-05/2018 Date of Judgment/Order: 12/12/2018 it has been held that the India Management (IMO) office of the Appellant Columbia Asia Hospitals Pvt Ltd in providing services to its other distinct units by way carrying out activities such as accounting, administrative work etc. with the use of services of the employees working in the IMO, which is for benefits all other units is a taxable supply as per Entry 2 of Sch I. The AAAR held that in arriving at the cost of provision of service by the IMO, the cost of employees working in the IMO has to be included. The AAAR explained that in the case of a cross charge, there is an element of service. rendered by the person who cross charges his other units even though they belong to the same legal entity. On the other hand, in the case of ISD, there is no element of service at all, but a mere distribution of credit. Various expenses in maintaining and operating head office cannot be distributed as ISD but should follow the route of cross charge on the other distinct person. In ISD there should be services and not goods whose ITC is attributable to the distinct unit but when there is a cross charge, there need not be an element of ITC by Head Office and there can be involvement of goods or services or both. The Employees stationed at the location of a particular establishment of a distinct person and not to any other distinct person are deemed to be rendering their services to that establishment of other distinct person.
Cummins India Limited
In Cummins India Limited Maharashtra Appellate for Advance Ruling has by its order dt. 21.12.2021 has held that expenses on employment employees employed by head office whose expenses are charged to branches are liable to GST. In their case the costs incurred by head office /units for procurement of common input services, are allocated and recovered proportionately from each recipient units to determine office./plant wise profitability.
It is further held that if the head office acting only as an agent as per Rule 33 in procurement of services for its branches or units and no GST is not to be collected.
The issue of valuation is decided by the AAAR. It held that allocation and recovery of the cost of the employees of Head Office will attract GST. It held that entry I of Sch. III will not be applicable since the service of employees are not to employer by supply of services from Head Office to Branches/Units. However, it held that the invoice value will be value for valuation purpose as per provisions of clause(c) of Rule 28.
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