APRIL 17, 2020

By Anshul Mathur, Partner & Arushi Jain, Senior Associate, Lakshmikumaran & Sridharan

THE concept of Input Service Distributor ("ISD") was first introduced under the erstwhile service tax regime. The rationale behind introducing this concept was to enable the industries having multi-state presence and centralised procurements to distribute the credit in respect of various services from head office to the units where such services were actually received despite the fact that the invoices were issued in the name of head office. It is on the same premise that this concept of ISD has been carried forward in the GST regime.

Under the GST law, an ISD has been defined under Section 2(61) of the Central Goods and Services Tax Act, 2017 ("CGST Act"). The basic features emanating from the aforesaid definition are listed as under:-

a) ISD is an office which receives tax invoices in respect of various input services;

b) It distributes the credit in respect of these invoices to suppliers of goods or services;

c) The credit can be distributed to only those suppliers which have the same PAN as that of such office.

From the aforementioned features, it can be discerned that an organisation having multiple offices can follow the ISD route for the purpose of ensuring availability of input tax credit to its units which have received and consumed the services but have not received the tax invoices. However, for this purpose, the office intending to distribute the input tax credit is required to obtain a separate registration as an ISD and undertake all the necessary compliances such as issue of ISD invoices, filing of monthly returns etc.

Given the fact that the ISD mechanism has been borrowed from the erstwhile service tax regime, it appears to be simple and easy to implement. However, till date, there is a widespread uncertainty amongst the organisations regarding the relevance and consequent adoption of this mechanism. The root cause of this uncertainty lies in the concept of distinct persons given under Section 25 of the CGST Act whereby the units of an entity, located in different States, whether or not registered, are deemed as distinct persons. Further, Section 7(1)(c) of the CGST Act read with Serial No. 2 of Schedule I deems the activity of supply of goods or services between distinct persons as supply, even without consideration, thereby, making the same leviable to GST.

Thus, the organisations face the dilemma as to whether the credit in respect of various services is to be distributed through ISD or it is to be considered that one unit is providing support to the other units wherein such services are to be taken into account for cross-charging the support services by such unit. This dilemma has led to a perception that ISD and cross-charging mechanism are overlapping concepts and thus, the organisations have the option to either distribute the credit through ISD mechanism or to consider the same while cross-charging the amount of support services to the branches. Due to this, the organisations may prefer to opt for the cross-charging mechanism in order to reduce the additional compliances that come with an ISD registration and may render the ISD mechanism irrelevant.

Here, it is important to understand that the requirement to obtain registration as an ISD and subsequent distribution of credit emerges from Section 20 and Section 24 of the CGST Act, respectively. On the other hand, a service is deemed to be supplied by one unit to another by virtue of Section 7(1)(c) of the CGST Act read with Serial No. 2 of Schedule I. As the ISD mechanism and cross-charging mechanism are governed by different statutory provisions, it becomes difficult to comprehend as to how the two are overlapping. This is because both the mechanisms have their own independent existence.

Moreover, there is no straitjacket formula to determine when ISD mechanism will be applicable and when the cross-charging mechanism will be adopted. The application of these mechanisms need to be analysed on the basis of the nature of a particular transaction. However, the basic principle that distinguishes the ISD mechanism from cross charging mechanism is that in case of ISD, a unit is merely receiving the tax invoices for the input services wherein the services are directly received and consumed by other units. On the contrary, cross-charging mechanism is applicable in cases where one unit is receiving the input services in the course of providing support to the other units.

Having said that, even if it is assumed that the organisations can opt for ISD or cross-charging mechanism as per their own volition, then, in cases where merely tax invoice is received by a particular unit without receipt of services, it will not be possible for such unit to take input tax credit in respect of such services. However, here a question may come up that whether in such a case credit can be taken on the basis of Explanation (ii) to Section 16(2)(b) of the CGST Act ("Explanation"). The Explanation creates a deeming fiction whereby it is deemed that a registered person has received the services in case where services are provided by the supplier to any person on the direction of such person.

It is worth noting that the aforesaid Explanation was inserted w.e.f. 01.02.2019 vide Central Goods and Services Tax (Amendment) Act, 2018. The main objective behind introducing this amendment was to extend the deeming fiction of receipt in case of bill-to-ship-to transactions of goods to services also. Further, the Explanation only creates a deeming fiction for the purpose of taking credit and does not deem that the services are being supplied by a person. Therefore, to say that cross-charging mechanism can be adopted even in case where a unit is merely receiving tax invoices and not making any supply to the other units by solely relying on the Explanation appears to be absurd. This is because the main essence of cross-charging mechanism is provision of support services by one unit to another.

Thus, it can be said that the concept of ISD is still relevant under the GST regime as was in the erstwhile regime. However, it becomes critical for the organisations to analyse the nature of transactions entered into with the vendors in order to determine whether credit is to be distributed through ISD mechanism or such transactions have to be taken into account for cross-charging the support services provided to the other units/branches.

[The views expressed are strictly personal.]