The debate between the Input Service Distributor
(ISD) vs. Cross Charge mechanism has been
ongoing since the introduction of the GST regime.
Before this debate gained momentum, the Central
Board of Indirect Taxes and Customs (CBIC) FAQ on
IT and ITES released on 18 August 2017 inter alia
clarified that ISD provision under the CGST Act,
2017, is not mandatory. Extracts of relevant FAQ
reproduced hereunder:

Question 26: Is the requirement of transferring
credit through the ISD mechanism mandatory?

Answer: The ISD provision under the CGST Act, 2017
is not mandatory. It only provides the manner of
distribution of Input Tax Credit (ITC) wherever the
business entity wishes to distribute the ITC as an
Input Service Distributor.
Despite the FAQ, decisions by the Authority of
Advance Ruling (AAR) and Appellate Authority for
Advance Ruling (AAAR) went against the applicants.
Key decisions by AAR/AAAR:

• In Cummins India Ltd. {2022 (58) G.S.T.L. 549
  (App. A.A.R. – GST – Mah.)} – Head Office not
  being entitled to avail and utilize ITC of tax paid
  to third-party service vendors for common input
  services received by it on behalf of branch
  offices/units, appellant bound to take ISD
  registration if it intends to distribute such credit –
  Decision given by AAR {2019 (23) G.S.T.L. 559
  (A.A.R. – GST)} was upheld.
• In Tata Sia Airlines Ltd. {2021 (49) G.S.T.L. 195
  (A.A.R. – GST – Haryana)} – ITC pertaining to
  services only on the procurement made by HO
  towards maintenance of aircraft (including lease
  thereof) shall be distributed by way of ISD
  mechanism.

Taking note of the issue and the increasing litigation on the topic, the GST Council, in its 50th meeting on 11 July 2023, recommended a significant change by affirming that GST law does not mandate ISD registration. However, the Council hinted at prospective amendments to make the ISD mechanism mandatory for distributing ITC of common input services from third parties. In this relation, Circular No. 199/11/2023-GST was issued on 17 July 2023 by the CBIC, which inter alia clarified that the common charges and GST thereon can be transferred through a tax invoice by adopting the Cross Charging mechanism.