2025 (9) TMI 728 - AAR - GST

ISD registration now required to receive common input service invoices and distribute ITC under Sections 2(61), 20 and Rule 54(1A)

AAR held that following amendments to Sections 2(61) and 20 of the CGST Act (effective 1 Apr 2025), common input service invoices intended for ... Distribution of Input Tax Credit - ISD - Compliance with the amended provisions of Section 2(61) and Section 20 of CGST Act, 2017 as amended by Notification no. 16/2024-CT dated 06.08.2024 by following the procedure under Rule 54(1A) of CGST Rules, 2017 - Applicant can continue to receive the Input Service Invoices issued by the Service Provider/Supplier of Service for the Common Input Service or not - HELD THAT:- The Applicant is holding Regular GST Registration for the state of Tamilnadu as well as GST ISD Registration for distribution of Input Tax Credit availed on common input services to the respective States. They are receiving various input services that are attributable to and consumed across multiple States including Tamil Nadu. However, the invoices/bills for these services are raised by the suppliers against the Applicant’s regular GST registration and issued in the name of the Applicant’s Head Office located in Chennai. Their Head Office is mentioned as Additional place of business for the regular registration. The Applicant’s Head Office has been distributing eligible ITC relating to such common inputs attributable to one or more States by issuing GST invoices under Section 31 of the CGST Act from their regular registration to the respective States following Rule 54 (1A) as clarified by Board Circular no.199/11/2023-GST dated 17.07.2023. It is found that till March 2025, the applicant’s Head Office has been following the procedure of distributing eligible ITC relating to such common input services attributable to one or more States by issuing invoices under Section 31 of CGST Act, from the regular registration to the respective States. They have been following the procedure as clarified by Board Circular no. 199/11/2023-GST dated 17.07.2023 wherein it was stated that the Head Office may alternatively issue tax invoices to their Branches including internally generated services provided by the HO to BO like the cost of salary of employees of the HO involved in providing the said services to the BO. The amendment carried out in Section 11 of the Finance Act, (8 of 2024), 2024, has defined the Input Service Distributor as one who receives invoices of the input services and distributes the credit of such input invoices as prescribed under Section 20 of CGST Act, 2017. Amendment carried out in Section 12 of the Finance Act, (8 of 2024), 2024, has amended Section 20 of CGST Act, 2017 wherein the receiver of common input service invoices shall be required to be registered as Input Service Distributor and thereby distribute the credit of such common input services to the branches. The said amendment was notified as coming into force from I st day of April 2025 vide Notification no. 16/2024-Central Tax dated 06.08.2024 - As such, it appears that from 1st April 2025, to receive common input service invoices, for distribution to other branches/States, the taxpayer should necessarily be registered as an Input Service Distributor. It is found that with the amendment to Section 2(61) and Section 20 of the CGST Act vide Notification no. 16/2024-Central Tax dated 06.08.2024, it has been made mandatory to receive and distribute such Input Tax Credit of common input services only through ISD mechanism. ISSUES PRESENTED AND CONSIDERED 1. Whether, in view of the amendments to Section 2(61) and Section 20 of the CGST Act (Finance Act amendments notified by Notification No.16/2024-CT), the procedure under Rule 54(1A) of the CGST Rules, 2017 can be followed for transfer of credit of common input services from a regular registration to an ISD registration. 2. Whether a Head Office which receives input service invoices issued in the name of its regular registration can continue to issue tax invoices under Section 31 (cross-charge) to distinct branches/units and thereby enable those branches to avail ITC, instead of receiving and distributing such credit through an ISD registered office, from 1 April 2025 onward. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity and applicability of Rule 54(1A) for transferring common input service credit to an ISD after amendments to Sections 2(61) and 20 Legal framework: Rule 54(1A) (Tax invoice in special cases) permits a registered person having the same PAN and State code as an ISD to issue an invoice/credit/debit note to transfer the credit of common input services to the ISD, specifying particulars (GSTIN of supplier, original invoice number, taxable value, amount of credit etc.). Sections 2(61) and 20 (as substituted by the Finance Act amendments) define 'Input Service Distributor' and prescribe that any office receiving tax invoices towards input services for/distinct persons must be registered as an ISD and shall distribute the input tax credit in the manner provided in Section 20; the amendments were notified effective 1 April 2025. Precedent Treatment: No judicial precedents are cited in the ruling; reliance is on statutory provisions, the Board Circular No. 199/11/2023-GST (clarifying pre-amendment permissibility of HO issuing tax invoices to BOs as an alternative to ISD), and the legislative amendment in the Finance Act and its notification. Interpretation and reasoning: The substituted Section 2(61) narrows the concept of ISD to an office which 'receives tax invoices' towards receipt of input services and is 'liable to distribute' the input tax credit per Section 20. The substituted Section 20 makes it mandatory that any office which receives tax invoices towards input services for distinct persons must be registered as an ISD and shall distribute such credit. The amendment therefore transforms the prior optionality (where HO could either distribute via ISD or issue tax invoices under Section 31) into a requirement that the receiver of common input service invoices be an ISD and distribute credit accordingly. Rule 54(1A) contemplates transfer from a registered person to an ISD where both share same PAN and State code; however, the legislative change makes receipt of invoices by a non-ISD office inconsistent with the mandated ISD-centric receipt-and-distribution model from 1 April 2025. The Authority reasons that continuing to receive invoices in the name of a regular registration (not the ISD) and then using Rule 54(1A) to transfer credit to the ISD is not consistent with the statutory mandate that the office receiving the invoices must itself be an ISD. Ratio vs. Obiter: Ratio - the amendment to Sections 2(61) and 20 mandates that the office receiving invoices for input services for distinct persons must be ISD-registered and distribute credit; therefore the procedure under Rule 54(1A) cannot be used to circumvent the statutory requirement by first receiving invoices in the regular registration and thereafter transferring credit to the ISD. Obiter - explanatory references to Board Circular No.199/11/2023-GST and historical practice are treated as context for pre-amendment position rather than dispositive authority for post-amendment application. Conclusion: From 1 April 2025, following the substituted Sections 2(61) and 20, the use of Rule 54(1A) to receive invoices in the name of a regular registration and then transfer credit to an ISD is not consistent with the statutory position; receipt and distribution of common input service invoices must be effected through the ISD mechanism (i.e., the office receiving such invoices must be registered as an ISD and distribute the credit as prescribed). Issue 2: Permissibility of Head Office issuing Section 31 invoices (cross-charge) to distinct branches as an alternative to ISD mechanism after the amendments Legal framework: Section 31 permits issuance of tax invoices by a supplier, and prior Board clarification (Circular No.199/11/2023-GST dated 17.07.2023) had stated that HO may either distribute ITC via ISD or issue tax invoices under Section 31 to BOs for common input services procured by HO, and BOs could then avail ITC subject to Sections 16/17. The Finance Act amendments and Notification No.16/2024-CT substitute Section 20 to require registration as ISD by any office that receives tax invoices for input services for distinct persons and to distribute credit as prescribed. Precedent Treatment: The Authority refers to the Board Circular for the pre-amendment optional approach. No judicial authorities are cited addressing the post-amendment conflict between the Circular and the substituted statutory provisions. Interpretation and reasoning: The Authority reasons that the Board Circular reflected the law prior to the substitution of Sections 2(61) and 20 and permitted HO alternatives. The substituted Section 20 removes that optionality by mandating ISD registration for any office receiving input service invoices for distinct persons and by requiring distribution of credit through the mechanism provided in Section 20. Consequently, the practice of HO receiving invoices in the name of its regular registration and issuing cross-charge invoices under Section 31 to BOs (thereby enabling BOs to avail ITC) is incompatible with the amended statutory requirement commencing 1 April 2025. The Authority treats the Circular as clarificatory of the pre-amendment legal position but concludes it cannot override or neutralize the subsequent statutory amendment and notification fixing the effective date. Ratio vs. Obiter: Ratio - post-amendment, the prior practice of cross-charging under Section 31 in lieu of ISD distribution is not permissible where the invoices are received in the name of the regular registration rather than by an ISD; the statutory mandate requires ISD registration and distribution. Obiter - the Authority's observations on administrative practices and the continuity of registrations are contextual and do not constitute binding legal precedent beyond this ruling. Conclusion: From 1 April 2025, a Head Office cannot, consistently with the amended Sections 2(61) and 20, continue to receive input service invoices in the name of its regular registration and then enable branch ITC by issuing Section 31 cross-charge invoices instead of ensuring that the office receiving such invoices is ISD-registered and performs distribution under the ISD mechanism. Cross-reference Whereas Rule 54(1A) permits transfer of common input service credit from a registered person to an ISD (subject matter and format requirements), the substituted Sections 2(61) and 20 (effective 1 April 2025) impose a primary statutory obligation that the recipient of input service invoices for or on behalf of distinct persons must itself be an ISD and distribute credit; thus Rule 54(1A) cannot be used to validate a practice of invoice receipt by a non-ISD regular registration followed by transfer to an ISD. Overall Ruling (Concise) 1. Following the substitution of Sections 2(61) and 20 of the CGST Act (effective 1 April 2025), the procedure of receiving common input service invoices in the name of a regular registration and then transferring the credit to an ISD under Rule 54(1A) is inconsistent with the statutory position. 2. The practice of continuing to receive input service invoices in the name of the regular registration and subsequently transferring them under Rule 54(1A) for distribution through the ISD mechanism is not permissible from 1 April 2025; the office receiving such invoices must be registered as an ISD and distribute credit as required by the amended Section 20.