1. M/s XYZ was served a show cause notice dated XX December 2023, denying the distribution of common ITC
2. On the verification of the same, it was found that the Department has denied distribution of common ITC because the Noticee has not distributed the same through ISD mechanism.
NOTICEE SUBMISSIONS
At the outset, the Noticee submits that the allegation made is incorrect and unsustainable on the basis of the following grounds and submissions which are independent and without prejudice to each other.
THE NOTICEE HAS NOT VIOLATED ANY PROVISIONS IN LAW AS THERE IS NO NEED TO TAKE SEPARATE ISD REGISTRATION
1. It is submitted by the Noticee that the Noticee has availed input tax credit in respect of common input services procured from third parties but attributable to both its head office and its branch offices by raising invoice under Section 31 of The CGST Act,2017 to the said branch offices for the said input services. However, the Department has allegedly denied distribution of common ITC because the Noticee has not distributed the same through ISD mechanism.
2. It is reiterated that the distribution of common ITC by raising an invoice under Section 31 of The CGST Act,2017 is valid in law and distribution through ISD mechanism is not mandatory as per the provisions of The CGST Act,2017.
3. Reliance in this regard is placed on Circular No. 199/11/2023-GST dated 17 July 2023 wherein the similar issues were taken up and it was clarified that the Head Office has an option to distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20 of The CGST Act,2017 read with Rule 39 of The Central Goods and Services Tax Rules, 2017. It is not mandatory for the Head Office to distribute such Input Tax Credit by ISD Mechanism. Thus, the Head office can also issue tax invoices under Section 31 of The CGST Act,2017 to the concerned Branch offices in respect of such common input services.
4. Further, it is submitted that the ISD registration is only a procedural issue and does not affect the distribution of common ITC to the branch offices. Similar view has been taken in the Central Excise regime vide Cenvat Credit Rule 2004 wherein the concept of ISD was introduced for the first time.
5. Reliance in this regard is placed in the matter of Jai Balaji Industries Ltd. V. Commr. of C. Ex., Bolpur [Final Order No. 75547/KOL/2021 in Appeal No. E/36/2011], wherein Hon’ble CESTAT Kolkata held as follows:
“8. We have carefully gone through the facts of the case and the legal position. We have also perused the various judgments relied upon by the Learned Advocate in support of his submissions. We find that the only allegation levelled in the show cause notice was that bills/photo copies of bills produced were raised in the address of the head office at 5, Bentinck Street, Kolkata-700001 and the said office did not follow the procedure of getting registered as input service distributor as required under Rule 9 of the Cenvat Credit Rules, 2004 for distribution of credit on the documents in the name of the head office. In the first place we may point out that even the show cause notice in opening para stated that M/s. Jai Balaji Industries Ltd. (Unit TV) was earlier known as Shri Ramrupai Balaji Steels Ltd. The appellant in reply to the show cause notice has categorically stated that the present appellant had taken over this unit only w.e.f. 23-7-2007. Upto that point there was only one head office and one manufacturing unit. So there is no justification to deny the Cenvat credit up to the said date. Even subsequent to 23-7-2007 there is neither any allegation in the show cause notice nor any finding in the Order-in-Original that the Cenvat credit on input services was utilized in more than one unit. It is our considered view that if the Revenue was of the opinion that there was any misutilisation of the credit from the head office to the manufacturing unit, the onus was upon them to have proved the said fact with concrete evidence. No such exercise was ever conducted by the Department. Now the question which remained for consideration is that whether the Cenvat credit on input services can be denied to the appellant merely on the ground that the head office was not registered as input service distributor as required under Rule 9 of the Cenvat Credit Rules, 2004 for distribution of credit on the documents in the name of the head office. This question has been answered by the various judgments of High Courts. The first judgment relied upon by the Ld. Advocate is the case of Commissioner of Central Excise v. Dashion Ltd. Reported in MANU/GJ/0287/2016 : 2016 (41) S.T.R. 884 (Guj.) wherein the Hon'ble Gujarat High Court has held in clear terms that there is nothing in the statutory rules to disentitle an unregistered input service distributor from availing Cenvat credit. It has further been held that non-registration of the unit as input service distributor is only a procedural irregularity for which the Cenvat credit cannot be denied. It has been held that when the assessee is maintaining full records of credit received and distributed which was duly verified by the department, the credit could not be denied to them.”
6. It is submitted that presently in the GST regime, in the 50th Council Meeting held on 11 July 2023, the Council recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively for the distribution of input tax credit of such common input services procured from third parties.
7. Continuing from the 50th Council Meeting's recommendation to mandate ISD Registration, the Council, in its 52nd Meeting held on 7 October, 2023, suggested amendments to refine the definition of ISD and regulations in Section 20 of The CGST Act 2017, as well as Rule 39 of the CGST Rules.
8. Further, to give effect to the recommendations of the 50th and 52 Council Meeting, the said amendment has been introduced in Finance Act 2024, to substitute the definition of “ISD” to make the registration of an Input Service Distributor mandatory, however, relevant notification which shall provide the effective date of such provisions is yet to be issued by the government.
9. Thus, even if the department has to challenge the cross charge mechanism, it can only allege the same once the relevant notification becomes effective.
Conclusion
10. Therefore, the above facts clearly substantiate that the common ITC distribution through cross charge cannot be challenged merely because it has not been done through ISD mechanism. The treatment of distribution of common ITC through cross charge is valid and is done as per compliance with law.
11. Accordingly, it is kindly submitted before the office of your good self to drop the proceedings upon the Noticee.
