Where the Input Service Distributor distributes credit in contravention of Section 20

• Input Service Distributor (ISD):
  • Defined in Section 2(61), ISD is an office of the supplier which receives invoices for input services and distributes eligible ITC to other GST-registered units of the same PAN (state-wise registrations).
  • Example: Head office receives HR consultancy bills → distributes credit to branches proportionate to turnover.
• Section 20 lays down distribution rules:
  • Credit can be distributed only against valid documents (tax invoice).
  • Distribution must be done only to units having the same PAN.
  • The amount should be distributed in proportion to turnover of each unit during the relevant period.
  • Credit related to specific unit → must be distributed only to that unit.
• Contravention occurs when:

1. ISD distributes ITC to an ineligible unit (wrong recipient).
2. ISD distributes ITC which is not available under law(blocked credits under Section 17(5)).
3. Distribution is excessiveor not in proportion to turnover.
4. ISD takes ITC on invoices other than input services (illegal).

✅ Meaning: Any incorrect allocation in breach of Section 20 triggers Section 21.

Consequence: “Excess distribution of credit to one or more recipients”

• Recipient of credit = any branch, state office, or unit to which the ISD passes ITC.
• Excess ITC = when a unit receives more than its due share:
  • Example: ISD had ₹1 lakh consultancy service ITC; correct distribution was ₹40,000 to Unit A and ₹60,000 to Unit B. Instead, ISD passed ₹70,000 to A, only ₹30,000 to B.
    → Unit A has ₹30,000 excess ITC (benefit not allowed by law).

✅ This excess creates a liability because ITC is a concession/privilege and can only be availed as per the prescribed formula.

Liability: “Such excess credit shall be recovered from such recipients”

• Liability falls not on ISD office, but on the recipient branch/unit which wrongly availed it.
• Rationale: That unit has actually used/utilized the ITC against its GST liabilities.
• Unit benefiting from excess enjoys wrong credit → must undo the benefit.

✅ Compliance Tip: Each branch/unit must reconcile ITC received from ISD on a monthly basis with actual eligibility.

Interest: “Along with interest”

• Recovery is not only of wrong ITC but also interest under Section 50.
  • Interest @ 18% per annum (general cases) is payable from date of availment till the date of reversal/payment.
  • If “fraudulent availment,” interest can be higher (24%). [Depends on whether case falls under Sec. 74].

✅ Reason: To disallow unjust financial advantage (using wrong ITC instead of paying cash).

Recovery Provisions: “The provisions of Section 73, Section 74 or Section 74A, as the case may be, shall apply mutatis mutandis”

• Mutatis mutandis = with necessary changes applied contextually.
• Recovery procedure is not separately prescribed here — instead, it borrows the machinery of tax recovery provisions.

Let’s decode the 3 recovery routes:

(a) Section 73 – Recovery without fraud

• Used when excess ITC is due to error, oversight, or bona fide mistake.
• Period of limitation: 3 years from due date of return or from erroneous refund.
• Penalty: 10% of tax or ₹10,000, whichever is higher.

(b) Section 74 – Recovery with fraud/suppression

• Invoked when excess ITC is due to fraud, willful misstatement, suppression of facts.
• Period of limitation: 5 years.
• Penalty: 100% of tax amount.
• Interest rate may be higher (24%).

(c) Section 74A – Recovery in case of excess availment/utilisation without intent (inserted by Finance Act 2024, effective 1‑11‑2024)

• Middle path between Sec. 73 and 74.
• Applicable when ITC is wrongly availed/utilised but not due to fraud.
• Provides reduced penalty and faster dispute settlement.
• More taxpayer-friendly especially in ISD cases, since excess distribution is often technical rather than fraudulent.

✅ Thus, post‑Nov 2024, all ISD disputes can be fairly classified under correct recovery sections.

Procedural Flow for Recovery

1. Detection → Audit, Scrutiny, or Self-reporting by taxpayer.
2. Show-Cause Notice (SCN) → Issued under Section 73/74/74A (mutatis mutandis).
3. Reply & Hearing → Recipient can submit reconciliations, turnover data, etc.
4. Adjudication → Authority quantifies excess ITC + interest.
5. Recovery → Adjustment from Electronic Credit Ledger or enforced payment.

Illustration with Example

• Company ABC Ltd. has ISD (head office in Delhi).
• ITC of ₹12,00,000 (advertising service to promote all branches).
• Correct distribution based on turnover:
  • Maharashtra Branch (60%) → ₹7,20,000
  • Karnataka Branch (40%) → ₹4,80,000

Mistakenly ISD distributes:

• Maharashtra = ₹8,00,000 (excess ₹80,000)
• Karnataka = ₹4,00,000 (shortfall ₹80,000).

Impact:

• Recovery of ₹80,000 + interest from Maharashtra Branch (recipient of excess).
• Karnataka cannot “claim” shortfall legally unless ISD files correction.
• If error was intentional → Sec. 74 applies.
• If error was genuine → Sec. 73 / Sec. 74A after Nov 2024 applies.

Practical Compliance Aspects

• Monthly Reconciliation: Branches must reconcile GSTR-2B vs ISD distribution (GSTR-6).
• Audit Check: GST Department scrutinizes ISD distributions closely as many disputes arise in MNCs with shared services.
• Internal Controls: ISD desk must verify correct turnover ratios before distributing ITC.
• Risk Factor: Wrong ISD distribution has cascading effect → wrongful refunds, wrongful ITC utilization, and penalties.

Effect of 2024 Amendment

• Prior to Nov 2024, only Section 73 & 74 applied → taxpayers often faced harsh proceedings even for minor ISD mistakes.
• From 1‑11‑2024, Section 74A inclusion provides a relief channel → classifies procedural/technical errors separately, avoids penal treatments.

This change was notified via Finance Act, 2024 (Act 15 of 2024, s.120).