As per Section 2(61) of the CGST Act,2017 “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20.
In summary, the three key elements to qualify as an ISD are as follows
- An office of the Supplier
- Which received tax invoice towards receipt of input services
- For or on behalf of distinct persons
As per the Cambridge Dictionary, the term ‘on behalf of someone’ has been defined to mean done for another person’s benefit or support, or because you are representing the interests of that person.
In the instant case, there are various expenses which are incurred by the HO, which is for or on behalf of its branches located PAN India. Hence, there is no dispute on the fact that the HO location (in case of a registered person having multiple GSTIN) satisfies the definition of an ISD.
Once an office of the Supplier is identified to qualify as an ISD, the mechanism of distribution of ITC shall be done in accordance with Section 20 of the CGST Act, 2017. Section 20(2)(e) of the CGST Act,2017 provides as follows:
(e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.
The provision dealing with distribution of ITC under ISD has used the term ‘input services attributable’ as a measure to determine/identify the transactions which would require distribution under ISD. The term ‘attributable’ has a wider application as compared to the term ‘related to’, which has a narrower scope. The provision has given a broader coverage of input services, wherein the distribution would be mandatory if any input service received by the ISD location, is having any direct/indirect benefit flowing to the branch locations.
As per The Law Lexicon by P.Ramanatha Iyer, the term ‘Attributable’ has been defined to mean as follows
It is a plain English word involving some casual connection between the loss of employment and that to which the loss is said to be attributable. This connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory casual connection is quite sufficient.
Further, The Law Lexicon by P.Ramanatha Iyer has provided that the expression ‘Attributable to’ has a wider import than the expression ‘derived from’.
The expression of wider import, namely, “attributable to”, was used when the legislature intended to cover receipts from sources other than the actual conduct of the business. [Cambay Electric Supply Industrial Co. Ltd. v. C.I.T. (113 ITR 840) – Supreme Court]
It is also pertinent to note that the minutes of the 50th GST Council meeting has also clearly provided that all input services procured by the HO (and not merely a case where HO just receives the tax invoice) and which are attributable to branches, would be mandatorily require ISD compliance.
Accordingly, it would be safe to conclude that any input service which is received by the HO and which has even an element of casual contributory connection with the other State locations, would require distribution of ITC under ISD.
The Head Office acts as the Central Office to monitor and manage the affairs of the business being carried on PAN India. In such a scenario, the various input services received at the HO (example rent paid for the HO, housekeeping of HO) could also be considered as an input service attributable to all the distinct persons of that entity (having an indirect nexus/benefit for the branch locations).
Concept of ISD under Erstwhile regime:
The concept of ISD is not a new phenomenon in the Indirect tax regime. Even under the erstwhile central excise and service tax regime, the concept of ISD existed. The term input services’ distributor as per Rule 2(m) is reproduced herein as under:
“(m) “input service distributor” means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.”
The concept of ISD under the GST regime also indicates that the office of the supplier would be required to distribute ITC to various distinct persons, when such expenses are attributable to the distinct persons.
In the case of BALKRISHNA INDUSTRIES LTD. Versus COMMISSIONER OF C. EX., JAIPUR [2015 (39) S.T.R. 861 (Tri. – Del.)], the CESTAT had allowed distribution of CENVAT credit in relation to the head office rent, to its factory location. The Tribunal
5. From the above provision, it is coming out that the inputs service distributor is the office of manufacturer or producer of final product. Therefore, it cannot be said that input service distributor is not the manufacturer. It merely means office of the manufacturer and as per Rule 7 of the Cenvat Credit Rules which provides manner of distribution of Cenvat credit
The Hon’ble High Court of Karnataka in the case of COMMISSIONER OF C. EX., BANGALORE-I Versus ECOF INDUSTRIES PVT. LTD [2011 (271) E.L.T. 58 (Kar.)] wherein the Hon’ble High Court has observed as under :
8. It is in this context, the definition of input service distributor makes it clear that a manufacturer or a producer of a final product or a provider of output service may have more than one unit and may be distributed in various parts of the country. It is in this background the definition of service distributor is defined as office of the manufacturer or producer of a final product or provider of output service which receives invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be. Therefore, the law mandates that the manufacturer who wants to avail the benefit of this service tax if he has more than one unit he should also get registered himself as a service provider and then, he would be able to collect all the input service tax paid in all its units and accumulate them at its head office and distribute the said credit to its various units.
In summary, one needs to understand the extent of distribution to be done by carefully evaluating the various input services received (for a location which qualifies as an ISD), to ensure that the mandatory compliance of ISD distribution is duly complied with and avoid future tax disputes with the Department.
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