Cross-utilization of ITC between Trading and Restaurant vertical under same GSTIN (Notification 11/2

The existing reply has the right answer. To add some practical clarity on why it works:

Section 49(4) of the CGST Act says the ITC balance in the Electronic Credit Ledger can be used to pay OUTPUT TAX on any supply made under that GSTIN. There is no vertical-specific restriction on utilization.

Notification 11/2017-CT(Rate), which fixes restaurant services at 5%, restricts the AVAILMENT of ITC on inputs used in the restaurant business. It does not stop you from using credit legitimately availed on trading inputs.

So the structure works:
- Trading business avails ITC on its inputs (permissible, correct)
- That ITC sits in your ECL as available credit
- You use the ECL balance to pay the 5% output tax of the restaurant (permissible under Section 49(4))
- No separate ITC is claimed on restaurant inputs (correct, per Notification 11/2017)

One practical note: if you face a scrutiny or audit, keep clean records showing ECL balance comes entirely from trading inputs and no restaurant-specific ITC was availed. The legal position is sound but an auditor unfamiliar with vertical structures may raise a query.

For the full ITC eligibility and Section 49 utilization sequence, this [GST input tax credit guide](https://taxgarden.in/blog/gst-input-tax-credit-eligibility-gstr-2b-reconciliation) covers the Section 17(5) blocked credit list and utilization order.

I have received the same SCN from GST department and below mentioned is my reply. BEFORE THE DICTUM OF THE LEARNED ASSISTANT COMMISSIONER OF GST, In the Matter of: M/s. ____ address GSTIN: Subject: Reply to Show Cause Notice / Audit Observation Reference No. [ENTER REFERENCE NUMBER] dated [ENTER DATE] for the Financial Year 20_______. ________________________________________ MOST RESPECTFULLY SUBMITS: 1. PRELIMINARY SUBMISSIONS & BACKGROUND 1.1 The Noticee operates hospitality establishment comprising hotel accommodation services and an in-house restaurant facility under a single GST registration (GSTIN) 1.2 During the Financial Year 2022–2023, the maximum declared room tariff at the Noticee's premises was ₹3,000 per day. Accordingly, the accommodation services were taxed at the legally prescribed rates enabling the legitimate availment of Input Tax Credit (ITC) under the Central Goods and Services Tax Act, 2017 ("the Act"). 1.3 Concurrently, the restaurant service was taxable at the concessional rate of 5% GST under Serial No. 7(ii) of Notification No. 11/2017-Central Tax (Rate). 1.4 The Noticee submits this reply to contest the allegation that the utilization of legally accumulated room-service ITC to discharge the 5% outward GST liability of the restaurant constitutes an ineligible or wrongful utilization of credit. ________________________________________ 2. STATUTORY ENTITLEMENT & FUNGIBILITY OF ITC UNDER SECTION 16(1) AND SECTION 49(4) 2.1 Absence of Direct Nexus: The Noticee places reliance on Section 16(1) of the CGST Act, 2017. The statutory provision explicitly entitles a registered person to take credit of input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business. 2.2 The architecture of Section 16(1) does not impose a narrow, item-to-item, or vertical-to-vertical correlation between a specific inward supply and a specific outward supply. Once an input or input service is consumed for the business as a whole, the right to credit vests absolutely. 2.3 Statutory Right of Utilization: Under Section 49(4) of the Act, any amount available in the Electronic Credit Ledger may be utilized for making payment towards any outward tax liability under the provisions of the Act or the rules made thereunder. 2.4 Once a credit is validly availed and enters the Electronic Credit Ledger, it loses its specific identity (e.g., as "room-related credit") and morphs into a common, fungible pool of legal tender available to settle any valid tax liability of the registered entity under that specific GSTIN. ________________________________________ 3. RELIANCE ON ESTABLISHED JUDICIAL PRECEDENTS ON THE FUNGIBILITY OF CREDIT The principle that legally availed credit enters a single, indivisible, common credit pool and loses its individual commodity-wise identity has been firmly settled by multiple judicial forums: 3.1 Aristo Bullion Pvt. Ltd., In re [2022 (1) TMI 1056 (AAAR-Gujarat)]: The Appellate Authority for Advance Ruling (AAAR) categorically modified the lower authority's order to hold that once ITC is legally availed, it merges into a common pool in the Electronic Credit Ledger. The AAAR confirmed that the ITC balance could be utilized for payment of GST on any outward supply, irrespective of the nexus between inputs and outputs, explicitly emphasizing that ITC is not required to be maintained business-vertical-wise. 3.2 Coca-Cola India Pvt. Ltd. v. CCE [2009 (8) TMI 50 (Bombay HC)]: The Hon’ble Bombay High Court ruled that once credit is availed, it forms part of a common credit pool and need not have a one-to-one correlation with the outward supply. This reinforces the inherent principle of the fungibility of credit within a single registration. 3.3 CCE v. Lakshmi Technology & Engineering Indus Ltd. [2011 (23) STR 265 (Tri. – Chennai)]: The Tribunal ruled that credit utilized for different business segments need not be maintained separately, directly validating the seamless utilization of credit across varied business operations. 3.4 Nitin Spinners Ltd. v. CCE [2016 (11) TMI 1287 (CESTAT – Delhi)]: The Tribunal reaffirmed that credit accumulated from inputs used across various business activities can be freely utilized against any outward tax liability. The Tribunal reinforced that credit does not require a direct transaction-specific correlation and is meant for overall business use. 3.5 Sumita Tex Spin Pvt. Ltd. v. CCE [2015 (39) STR 502 (Tri. – Ahmedabad)] & CCE v. V. Thangavel & Sons Pvt. Ltd. [2015 (37) STR 144 (Tri. – Chennai)]: Both Tribunals consistently affirmed the overarching legal rule that once credit is validly availed, it forms a common pool that allows cross-utilization between different tax liabilities under the law. ________________________________________ 4. STRICT COMPLIANCE WITH CONDITION OF NOTIFICATION NO. 11/2017-CENTRAL TAX (RATE) 4.1 The department's allegation hinges on a misinterpretation of the condition attached to Serial No. 7(ii) of Notification No. 11/2017-Central Tax (Rate), which reads: “...provided that credit of input tax charged on goods and services used in supplying the service has not been taken.” 4.2 "Availment" is distinct from "Utilization": Guided by the judicial framework in Aristo Bullion, the restriction embedded in the notification is confined strictly to the availment (taking) of credit on inputs directly consumed or used in supplying the restaurant service. 4.3 The Noticee explicitly affirms that zero Input Tax Credit was availed or taken on goods, raw ingredients, cooking gas, or specific equipment used to supply the restaurant services during FY 2022–2023. The accounting books and purchase ledgers were maintained distinctly to ensure zero direct credit intake on restaurant supplies, satisfying the condition of the notification in letter and spirit. 4.4 Omission of Cash-Only Mandate: It is a vital principle of statutory interpretation that the legislature includes or excludes words by design. A comparison with other entries within the very same Notification No. 11/2017 (such as entries relating to specific construction services) reveals that where the legislature intended to mandate cash payments, it explicitly stated: “...shall be paid in cash, that is, by debiting the electronic cash ledger only.” 4.5 The conspicuous omission of the phrase "shall be paid by debiting the electronic cash ledger only" in Serial No. 7(ii) establishes that while taking fresh credit on food inputs is restricted, the utilization of an independent, validly existing balance in the Electronic Credit Ledger to clear the output liability is not legally prohibited. ________________________________________ ________________________________________ 5. PRAYER In light of the statutory provisions, explicit judicial principles, and factual compliance detailed above, the Noticee most respectfully prays that: • The proposed demand, along with interest and penalties, regarding the cross-utilization of credit for restaurant liability be dropped in its entirety. • The utilization of the Electronic Credit Ledger for the settlement of the outward tax liability under Serial No. 7(ii) of Notification No. 11/2017-Central Tax (Rate) be held as valid and lawful. • An opportunity for a personal hearing be granted before any adverse order is passed. Place: Date: [DATE] For M/s. [Proprietor]