Kerala HC Holds ISD Optional Before 2024 Amendment; Quashes ₹1.31 Cr. GST Demand Against Intertek

On 8 June, the Kerala High Court held that, prior to the Finance Act, 2024 amendment to the Central Goods and Services Tax Act, companies were not required to distribute input tax credit (ITC) among distinct units through the Input Service Distributor (ISD) mechanism.

Justice Ziyad Rahman A.A. allowed a writ petition filed by Intertek India Pvt. Ltd. and quashed an order passed under Section 74 of the CGST Act that demanded over Rs.1.31 crore in GST and penalty on allegations of fraud, suppression of facts, and wilful misstatement. He held:

“The ITC claimed by the petitioner is in tune with the statutory stipulations under the CGST Act, and the findings contrary to the same in Ext.P1 are not legally sustainable.”

The adjudicating authority had directed Intertek India to reverse ITC amounting to Rs.1.31 crore and had imposed an equivalent penalty.

The dispute arose from services that Intertek USA Inc. provided to various Indian units of the company. Although the foreign entity addressed the invoice to the Delhi unit, the Kerala unit paid the consideration, raised a self-invoice under the reverse charge mechanism, and discharged the integrated GST liability. The Kerala unit later distributed the corresponding credit to other registered branches through cross-charging.

The GST department argued that the Kerala unit could not avail ITC because the original invoice stood in the name of the Delhi unit. The department also contended that the company should have obtained ISD registration before distributing credit to other branches.

Rejecting these contentions, the High Court held that Section 2(93) of the CGST Act defines the recipient of services as the person liable to pay consideration. Since the Kerala unit paid the consideration and discharged the tax liability, it qualified as the recipient and could avail ITC.

The Bench further held that, in reverse charge transactions involving unregistered foreign suppliers, taxpayers must rely on the self-invoice raised under Section 31(3)(f) of the CGST Act read with Rule 36 of the CGST Rules to claim ITC. The department therefore erred in treating the foreign supplier's invoice as the decisive document for determining eligibility.

Addressing the ISD issue, the Court examined the unamended Section 20 of the CGST Act and held that the provision merely enabled distribution of ITC through the ISD mechanism and did not mandate it. It noted that Parliament amended the provision through the Finance Act, 2024 to make ISD registration compulsory prospectively, indicating that no such requirement existed during the relevant period from July 2017 to March 2019.

The Bench also relied on the minutes of the 50th GST Council meeting and a Frequently Asked Questions document on IT and IT-enabled services, both of which clarified that taxpayers could choose whether to use the ISD mechanism before the amendment.

The judgment further noted that the transactions were revenue-neutral and caused no loss to the exchequer. Emphasising a purposive interpretation of tax laws in such circumstances, the Court observed:

“In such cases where there is no question of evasion of tax, a liberal approach ought to be taken while interpreting the statutory provisions, thereby providing maximum benefits possible to the bonafide taxpayers.”

Accordingly, the High Court quashed the findings in the adjudication order that treated the ITC as ineligible and declared the cross-charging mechanism illegal. It also set aside the corresponding tax demand and penalty.