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Input Service Distributor (ISD) – Whether mandatory to distribute credit through the ISD mechanism only?

The concept of Input Service Distributor (ISD) was present under the Service Tax regime also before the introduction of GST. This old concept is adopted under GST with some modifications. The purpose of the introduction of ISD is to distribute input tax credits on services among the units of the same entity having the same PAN which supplies goods or services or both.

ISD is a distinct office and it exists merely to distribute the input services related to an input tax credit which is received on behalf of the units of the same entity. It cannot normally be used in a situation where there is a liability to pay GST.

Generally, ISD is a concept used for the ‘distribution’ of ITC to one or more supplying units, whereas cross charge is the concept for the ‘accumulation’ of ITC scattered at a different location to a central location. The concept of cross charge, which is done due to the supply of taxable services, such as IT/accounting/HR/ by one branch to another branch having the same PAN but different GSTINs, enables the assessee to use the ITC effectively.


Input services distributor has been defined u/s 2(61) of CGST Act as under:

“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

Relevant extract of provisions

Section 20(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.

Section 20(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely…….

Whether ISD registration is mandatory or optional?

  • It is important to note that Section 20(2) of the CGST Act, 2017 provides that ITC through ISD “may” be distributed subject to the following conditions whereas Section 20(1) of the CGST Act, 2017 provides that the ISD shall distribute the ITC of CGST as CGST  or vice versa.
  • Due to the usage of ‘shall’ under section 20(1) and ‘may’ under section 20(2), there is confusion as to whether the distribution of ITC through the ISD mechanism is optional or compulsory.
  • It could be interpreted that registration of ISD is mandatory only when opting for the ISD mechanism and the choice of receiving input service invoices go hand in hand with each transaction.
  • In this regard, the case of Maini Precision[1] order of the Tribunal could be used to contend that the substantive provision for distribution of ITC through ISD is Section 20(2) of the CGST Act, 2017 whereas if one decides to distribute ITC through ISD then, it shall be in accordance with the Section 20(1) of the CGST Act, 2017.
  • Further, if one chooses not to distribute ITC through the ISD mechanism then subject to the eligibility of such ITC, the registered person cannot be asked to reverse the ITC which was not distributed through the ISD mechanism.
  • Thus, the distribution of ITC through ISD is optional and not mandatory.
  • Therefore, where one is cross-charging as per valuation rules to its branches for the services provided then may not have a requirement to have an ISD registration.

Clarification by CBIC on distribution of credit through the ISD mechanism

  • It has to be noted that FAQs issued by CBIC on Banking, Insurance and Stock Brokers Sector provide a clue which clarifies that ITC availed on services procured at a registration which are used for business in more than one State, should be appropriately invoiced through cross charging or distributed through the ISD mechanism to other states.
  • FAQ provides an option for the distribution of credit between Cross charge and ISD.
  • The relevant extract of the FAQ

17. Question

Would Input Tax Credit (ITC) be available to a GST registrant though the services procured from third party vendor are also directly used by various ‘distinct persons’? In such cases, is distribution of ITC required to be done mandatorily through Input Service Distributor mechanism?


Yes. Input Tax Credit (ITC) can be availed by a GST registrant in respect of the services procured in a consolidated manner from third party vendor which are directly used in the course or furtherance of business in more than one State, e.g. statutory audit fees, advertisement and marketing expenses, consultancy fees etc. The same needs to be appropriately invoiced or distributed through the ISD mechanism to the “distinct persons” who have actually used such services.

  • It has to be noted that FAQs issued by CBIC do not have legal validity under GST laws.

Department’s view on applicability of ISD registration

  • The issue of ISD was already examined by Law Committee (LC) and a draft circular was placed on agenda 6(iv) in the 35th council meeting held on 21.06.2019.
  • However, the same was not approved and kept in abeyance to date given some observations made by States.
  • Extract of Para 3.1 of draft circular as follows

3.1. Question

Is it mandatory to distribute input tax credit (hereinafter referred to as ‘ITC’) in respect of input services (IS-1), procured by HO but attributable to both HO and BOs, following the Input Service Distributor (ISD) procedure?


Yes, it is mandatory to follow ISD procedure laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules’) for distribution of ITC in respect of input services procured by HO from a third party but attributable to both HO and BO or exclusively to one or more BOs. 

Even if assuming but not admitting that the ISD mechanism is a mandatory procedure under GST, whether non-compliance would lead to denial of ITC which is cross charged through branches?

  • In this situation entire transaction is revenue neutral, as the credit is distributed by one branch to the other branch having the same PAN but different GSTIN and availed by such branch, the credit in turn shall remain within the entity.
  • Recently, CESTAT in the case of Transpek[2]held that failure to take ISD registration would not disentitle from the CENVAT Credit.
  • Further Gujarat High Court in one of the cases dismissed the department’s appeal holding that non-registration of ISD is only a procedural irregularity for which substantial benefit of CENVAT credit cannot be denied when all the necessary records have been maintained by the respondent. The said Order of Gujarat High Court has been accepted by the department and on which no review petition or SLP has been filed as clarified by dept vide Circular No. 1063/2/2018-CX dt.16.02.2018.
  • It has been consistently held by various Courts that non-distribution of credit by the ISD is a condonable procedural lapse, in cases where the situation is rendered revenue neutral. In support of this one could rely upon the following decisions

a. Doshion Ltd. v. CCE[3] affirmed by the Hon’ble High Court of Gujarat[4]

b. Commr. of C.T vs. Oerlikon Balzers Coating India P. Ltd[5]

c. Hindustan Zinc vs. Commissioner of CGST[6]

d. Sri Krishna Pharmaceuticals Ltd vs. CCE[7]

  • It is settled law that substantial benefit of credit cannot be denied on procedural lapse. Thus, the benefit of the disputed credit cannot be denied on the ground that the one has failed to distribute the credit in accordance with the Section 20 of the CGST Act. 


  • Hence on a final note, one can conclude that ISD and Cross charge are separate concepts having their separate requirements.
  • The requirement of registration of ISD is optional, the ISD procedure becomes mandatory only when one opts for the same.
  • CBIC should clarify the ambiguity and bring uniformity in the understanding of the Law to avoid unnecessary litigation.

Important reference links

  • CBIC FAQs on Insurance and Stock Brokers Sector –

GST on Insurance Sectors- 11 FAQs

GST on Stock Broking Services- 15 FAQs

GST on Banking Sectors- 65 FAQs

[1] M/S Maini Precision Products Ltd vs. Comm. of Central Tax [2021 (7) TMI 457 – CESTAT Bangalore]

[2] CESTAT Ahmedabad Transpek Silox Industry Ltd vs C.C.E. & S.T.-Vadodara-I Excise Appeal No.181 of 2012-SM

[3] 2013 (288) E.L.T. 291 (Tri. – Ahmd.)

[4] Affirmed in 2014 (36) STR 972 (Guj.) and 2016 (41) STR 884 (Guj.)

[5] 2019 (366) E.L.T. 624 (Bom.)

[6] 2019 (4) TMI 475

[7] 2015 (40) S.T.R. 1039 (Tri. – Bang.)


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June 2024