The Hon’ble Karnataka High Court in the case of M/s. Micro Labs Limited v. Joint Commissioner of Central GST & Ors. [WP No. 8409 of 2025, order dated December 09, 2025] held that distribution of common input tax credit (ITC) through cross-charge mechanism by raising invoices under Section 31 of the CGST Act is permissible, and any order passed in disregard of the CBIC’s Circular No. 199/11/2023-GST dated July 17, 2023 is illegal, arbitrary, and without jurisdiction.
Facts:
M/s. Micro Labs Limited (‘the Petitioner’) is engaged in the manufacture and supply of pharmaceutical products and had distributed common ITC pertaining to input services to its branch offices by raising tax invoices under Section 31 of the CGST Act.
The Joint Commissioner of Central GST & Ors. (‘the Respondent’) passed an Order-in-Original dated January 24, 2025, disallowing such distribution of ITC, demanding interest under Section 50, and imposing penalties under Sections 74 and 122 of the CGST Act and Section 20 of the IGST Act.
The Petitioner contended that at the relevant time, it had the option to distribute common ITC either through the Input Service Distributor (ISD) mechanism or by cross-charging via tax invoices under Section 31 of the CGST Act. It was further contended that due to the restriction in the definition of “ISD” under Section 2(61) as stood prior to amendment effective April 1, 2025, ITC on services liable under reverse charge mechanism (RCM) could not be distributed through ISD, necessitating the use of cross-charge mechanism.
The Respondent contended that the Petitioner had improperly distributed ITC and that such distribution was not in accordance with the statutory framework, thereby justifying the demand of tax, interest, and penalties.
The Petitioner, aggrieved by the impugned Order-in-Original and alleging that the same was contrary to law and binding circulars, approached the Hon’ble High Court seeking quashing of the impugned order.
Issue:
Whether the Petitioner was entitled to distribute common input tax credit through cross-charge mechanism by issuing invoices under Section 31 of the CGST Act, and whether the impugned order passed in disregard of CBIC’s Circular No. 199/11/2023-GST dated July 17, 2023 is sustainable in law.
Held:
The Hon’ble Karnataka High Court in WP No. 8409 of 2025 held as under:
- Observed that, prior to the amendment effective April 1, 2025, the definition of ‘ISD’ under Section 2(61) of the CGST Act contained a specific bar/prohibition, due to which the Petitioner was unable to avail and distribute ITC of common services liable under reverse charge mechanism through ISD.
- Noted that, the Petitioner transferred such ITC by raising invoices under Section 31 of the CGST Act, and the ITC was otherwise eligible under Sections 16 and 17 of the CGST Act.
- Observed that, CBIC Circular dated July 17, 2023 clarifies that common ITC can be distributed either through ISD mechanism or by raising tax invoices under Section 31 of the CGST Act.
- Noted that, the common ITC distributed by the Petitioner to its branch offices was in accordance with the said Circular and was therefore legally valid.
- Observed that, the impugned order was passed in complete disregard of the binding Circular and is therefore illegal, arbitrary, and without jurisdiction or authority of law.
- Held that, such an order being contrary to the provisions of the CGST Act and binding Circular warrants interference under Article 226.
- Directed that, the writ petition is allowed and the impugned Order-in-Original dated January 24, 2025 is quashed.
Our Comments:
The judgment relied on the CBIC’s Circular No. 199/11/2023-GST dated July 17, 2023, which clarifies that distribution of common ITC may be effected either through ISD mechanism or by issuance of tax invoices under Section 31 of the CGST Act. The Court treats the Circular as binding on the Department and holds that any order passed in disregard of such Circular is without jurisdiction.
The Hon’ble Supreme Court in Commissioner of Central Excise, Bolpur vs. M/s. Ratan Melting & Wire Industries – [(2008) 13 SCC 1] held that while circulars issued by the Board are binding on the departmental authorities, they are not binding on courts, and if a circular is contrary to the statutory provisions, it has no existence in law. In the present case, the Court finds that the Circular dated July 17, 2023 is in consonance with the statutory framework, and therefore binding on the Department.
Relevant Provisions:
Section 2(61) of the CGST Act (pre-amendment until April 01, 2025)
“2. Definitions-
(61) “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under Section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, state tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office”
Section 2(61) of the CGST Act as amended through Finance Act, 2024 w.e.f. April 01, 2025 “2. Definitions-
(61) “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input service, including invoices in respect of services liable to tax under sub-section(3) or sub-section (4) of Section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20”
CBIC Circular No. 199/11/2023-GST dated July 17, 2023
“Subject: Clarification regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons.
Various representations have been received seeking clarification on the taxability of activities performed by an office of an organisation in one State to the office of that organisation in another State, which are regarded as distinct persons under section 25 of Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act’). The issues raised in the said representations have been examined and to ensure uniformity in the implementation of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST Act hereby clarifies the issue in succeeding paras.
…
Issue 1: Whether HO can avail the input tax credit (hereinafter referred to as ‘ITC’) in respect of common input services procured from a third party but attributable to both HO and BOs or exclusively to one or more BOs, issue tax invoices under section 31 to the said BOs for the said input services and the BOs can then avail the ITC for the same or whether is it mandatory for the HO to follow the Input Service Distributor (hereinafter referred to as ‘ISD’) mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and BOs or exclusively to one or more BOs?
Clarification: It is clarified that in respect of common input services procured by the HO from a third party but attributable to both HO and BOs or exclusively to one or more BOs, HO has an option to distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules’). However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such input tax credit by ISD mechanism. HO can also issue tax invoices under section 31 of CGST Act to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs and the BOs can then avail ITC on thesame subject to the provisions of section 16 and 17 of CGST Act.
In case, the HO distributes or wishes to distribute ITC to BOs in respect of such common input services through the ISD mechanism as per the provisions of section 20 of CGST Act read with rule 39 of the CGST Rules, HO is required to get itself registered mandatorily as an ISD in accordance with Section 24(viii) of the CGST Act.
Further, such distribution of the ITC in respect a common input services procured from a third party can be made by the HO to a BO through ISD mechanism only if the said input services are attributable to the said BO or have actually been provided to the said BO. Similarly, the HO can issue tax invoices under section 31 of CGST Act to the concerned BOs, in respect of any input services, procured by HO from a third party for on or behalf of a BO, only if the said services have actually been provided to the concerned BOs.
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