When a head office incurs common expenses that benefit its branches, the transaction is treated as a supply between distinct persons. Rule 28 of the CGST Rules governs the valuation of such supplies. The second proviso to Rule 28(1) provides that where the recipient branch is eligible for full ITC, the invoice value declared by the HO is deemed to be the open market value — even if it is nil.
This article explains the cross-charge valuation framework.
The Second Proviso to Rule 28(1)
The second proviso provides that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value. CBIC Circular No. 199/11/2023-GST clarifies that in such cases, the HO may issue a nil-value invoice, and it will be legally accepted as the OMV.
Delhi High Court Ruling (KEI Industries)
The Delhi High Court in KEI Industries Ltd. Vs. Union of India held that where the recipient branch is entitled to full ITC, the value of supply of services between distinct persons shall be deemed to be nil under the second proviso to Rule 28. The court set aside a demand based on cross-charges where the department failed to apply the CBIC circular and judicial precedent.
When Cross-Charge Is Required
Cross-charge is required where:
- The HO provides internally generated services to branches.
- The branch is not eligible for full ITC.
- The transaction involves distinct persons under Section 25(4).
Practical Implications
- Where full ITC is available, HO can issue nil-value invoices.
- Where full ITC is not available, valuation must be at open market value.
- The ISD mechanism is mandatory for distributing ITC on common input services from April 2025.
Conclusion
The cross-charge valuation framework under Rule 28 has been clarified by the CBIC circular and the Delhi High Court. Where full ITC is available, nil-value invoices are acceptable.
At Anuj Desai & Associates, we provide expert advisory services on cross-charge valuation and compliance. Our team can help you structure your inter-branch transactions.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.