Reverse charge input tax credit and ISD registration: self-invoice credit upheld, and pre-amendment credit distribution treated as permissible.

Input tax credit on services received from a foreign supplier under reverse charge was treated as admissible where the recipient issued the self-invoice and discharged the tax liability, because the relevant credit document was the self-invoice under the GST rules rather than the supplier's invoice. Distribution of common input service credit to other registered units was also treated as not illegal for the period July 2017 to March 2019, since the unamended GST provision was enabling and did not then make Input Service Distributor registration mandatory; the later amendment was prospective. The demand and penalty based on ineligible credit and alleged unlawful distribution therefore could not be sustained, and the impugned order was quashed to that extent.

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Issues: (i) Whether the input tax credit claimed on services received from a foreign supplier under reverse charge was legally admissible when the self-invoice and tax payment were made by the petitioner. (ii) Whether distribution of such input tax credit to other registered units without obtaining Input Service Distributor registration was illegal for the period July 2017 to March 2019.

Issue (i): Whether the input tax credit claimed on services received from a foreign supplier under reverse charge was legally admissible when the self-invoice and tax payment were made by the petitioner.

Analysis: The liability to pay tax on services from a non-taxable territory arose under section 9(3) of the Central Goods and Services Tax Act, 2017 read with Notification No. 10/2017-Integrated Tax (Rate) dated 28.6.2017. A registered person is entitled to input tax credit under section 16 when supported by prescribed tax-paying documents. Rule 36 of the Central Goods and Services Tax Rules, 2017 permits credit on an invoice issued under section 31(3)(f), which applies where tax is payable under reverse charge on services received from an unregistered supplier. The petitioner, being the recipient, issued the self-invoice, discharged the tax liability, and claimed credit on that basis. The foreign supplier's invoice could not be treated as the relevant document for credit.

Conclusion: The input tax credit was admissible and the contrary finding was unsustainable.

Issue (ii): Whether distribution of such input tax credit to other registered units without obtaining Input Service Distributor registration was illegal for the period July 2017 to March 2019.

Analysis: The unamended section 20 of the Central Goods and Services Tax Act, 2017 was treated as enabling in nature and did not then make Input Service Distributor registration mandatory for all distribution of credit. The later amendment in the Finance Act, 2024 showed that mandatory registration was introduced prospectively. The statutory position was also supported by the GST Council's expressed view and the administrative FAQ stating that ISD was not mandatory. In the circumstances, the distribution of credit among distinct persons without ISD registration did not amount to illegality, and the transaction was revenue neutral.

Conclusion: The distribution of credit without ISD registration was not illegal for the relevant period.

Final Conclusion: The demand and penalty founded on ineligible credit and alleged unlawful distribution of credit could not stand, and the impugned order was quashed to that extent.

Ratio Decidendi: Where tax is duly paid under reverse charge and the prescribed self-invoice is used, credit cannot be denied on the basis of the foreign supplier's invoice; and for the period prior to the prospective statutory amendment, distribution of common input service credit was not confined exclusively to a mandatory Input Service Distributor mechanism.

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