Facts of the Case

M/s. Micro Labs Limited, a pharmaceutical manufacturer headquartered in Bangalore and registered under the CGST Act in 20 States, was also registered as an Input Service Distributor (ISD) under Section 20 of the CGST Act in Karnataka for distributing common input tax credit to units in other States. Common input services on which GST was paid under Forward Charge Mechanism (FCM) were distributed through the ISD mechanism. However, common services on which GST was payable under Reverse Charge Mechanism (RCM) — including legal consultancy, GTA, sponsorship, government and OIDAR services — could not be reported by the ISD due to the pre-amendment definition of "Input Service Distributor" under Section 2(61) of the CGST Act, and were instead distributed by the Head Office to its units by cross-charging through tax invoices under Section 31. Following a DGGI investigation into the petitioner's Amritsar unit, a common show cause notice dated 08.05.2023 was issued demanding reversal of the ITC so distributed across all units, culminating in an Order-in-Original dated 24.01.2025 confirming the demand, penalty and interest under Sections 74, 122 of the CGST Act and Section 20 of the IGST Act.

Issues Involved

  1. Whether distribution of common ITC through the ISD mechanism was mandatory, or whether cross-charging by way of tax invoices under Section 31 was equally permissible.
  2. Whether the pre-amendment definition of "Input Service Distributor" under Section 2(61) barred the ISD from distributing credit on RCM-paid common services, justifying cross-charge instead.
  3. Whether CBIC Circular No.199/11/2023-GST, clarifying that ISD distribution was not mandatory, was binding on the respondents and had been properly applied.

Petitioner's Arguments

  • At the relevant time, the petitioner had the option to choose between the ISD and cross-charging mechanisms to distribute ITC relating to common input services.
  • The pre-amendment definition of ISD under Section 2(61) did not permit distribution of credit on RCM-paid input services through the ISD route, making cross-charge under Section 31 the only available mechanism.
  • CBIC Circular No.199/11/2023-GST dated 17.07.2023 clarified that distribution of common credit through ISD is not mandatory and can be transferred by raising tax invoices under Section 31 — binding on the Department per Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries.
  • Interest under Section 50 and multiple penalties under Sections 74/122 of the CGST Act and Section 20 of the IGST Act were consequently not exigible.

Respondent's Arguments

  • The Department contended that common credit had to be necessarily transferred through the ISD mechanism, and that the petitioner's cross-charging of common RCM credit through regular tax invoices, without an underlying supply, was impermissible.

Court Order / Findings

  • The Court examined the pre- and post-amendment definitions of "Input Service Distributor" under Section 2(61) and found that, during the disputed period (2017-18 to 2021-22), the ISD could not have procured or distributed credit relating to RCM-taxable input services, given the specific statutory bar.
  • Consequently, distribution of such RCM-related common credit through cross-charge invoices under Section 31 was the only legally available route, expressly recognised by CBIC Circular No.199/11/2023-GST.
  • The Circular, being binding on the respondents, had been completely disregarded while passing the impugned order, rendering it illegal, arbitrary and without jurisdiction.
  • The petition was allowed and the impugned Order-in-Original dated 24.01.2025 was quashed.

Important Clarification

  • Prior to the amendment of Section 2(61) (effective 01.04.2025), an ISD could not distribute credit relating to common input services taxable under RCM; such credit had necessarily to be transferred by the Head Office to its units through cross-charge tax invoices under Section 31 — a position clarified by CBIC Circular No.199/11/2023-GST and binding on field formations.

Sections Involved

  • Section 2(61) of the CGST Act, 2017 (pre- and post-amendment) — defines "Input Service Distributor".
  • Section 20 of the CGST Act, 2017 read with Rule 39 of the CGST Rules, 2017 — the ISD distribution mechanism.
  • Section 31 of the CGST Act, 2017 — governs issuance of tax invoices, including for cross-charge.
  • Section 74 and Section 122 of the CGST Act, 2017, and Section 20 of the IGST Act, 2017 — invoked for demand of tax, interest and penalty.

Decision – In Favour of

Assessee. The Order-in-Original confirming the demand was quashed in its entirety.

Case Details

High Court of Karnataka at Bengaluru; WP No. 8409 of 2025 (T-RES); Coram: Justice S.R. Krishna Kumar; Order dated 09.12.2025.

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