A GST notice on cross-charge between group entities—head office to branch, parent to subsidiary, one GSTIN to another under the same PAN—alleges that common costs (rent, salaries, management support, IT infrastructure) were not cross-charged with GST, or were under-valued. The defence has two branches: the pre-April 2025 position, where the德里 High Court’s KEI Industries ruling permits zero valuation where full ITC is available, and the post-April 2025 position, where the Input Service Distributor mechanism has become mandatory for common input services across distinct persons under the same PAN.
The KEI Industries Zero-Value Principle
In KEI Industries Ltd v. Union of India, the德里 High Court quashed an IGST demand on expenses that the petitioner had not cross-charged to its other entities. The Court, following Circular No. 199/11/2023-GST, held that un-invoiced services can be valued at zero where full input tax credit is available. The principle is revenue-neutrality: if the recipient can claim full credit, a positive cross-charge valuation merely shifts credit from one entity to another without net revenue to the government. The taxpayer facing a pre-April 2025 cross-charge notice should lead with the recipient’s full-ITC position and the KEI Industries ruling.
The Intertek Position on Pre-2025 ISD
The Kerala High Court in Intertek India Pvt. Ltd. v. Assistant Commissioner addressed the pre-April 2025 position on ISD registration. The ruling, read with the broader jurisprudential trend, indicates that ISD registration was not mandatory before 1 April 2025. A taxpayer facing a pre-2025 notice alleging failure to use the ISD route can rely on this position to resist a penalty or a demand premised on a mandatory-ISD theory.
The Post-April 2025 Mandatory ISD Regime
From 1 April 2025, the amended ISD provisions require eligible common input-service credits received for distinct persons under the same PAN to be distributed through the ISD mechanism. The ISD registration is separate, and GSTR-6 filing is required. Non-compliance can result in loss of credit, interest and penalty. The cross-charge versus ISD choice is no longer optional for common input services; the statutory architecture now channels the credit through the ISD.
For notices covering periods after 1 April 2025, the taxpayer’s defence shifts: the question is not whether cross-charge was correctly valued, but whether the common input services were routed through the ISD. A notice alleging non-cross-charge after that date should be examined against the ISD compliance record.
The Documentation That Separates the Legs
The cross-charge notice should be answered with the expense ledger, the identification of common versus entity-specific costs, the ISD registration and GSTR-6 where applicable, the recipient’s ITC eligibility, and the valuation basis. The reply should distinguish services that are naturally cross-charged (management fees, shared services) from those that are purely internal cost allocations without a supply character.
What the Taxpayer Should Control
The cross-charge outcome depends on three variables: whether the notice period falls before or after 1 April 2025; whether the recipient’s ITC position supports zero or declared value; and whether the reply maps each expense to the cross-charge or ISD route. The taxpayer that controls these variables converts a valuation dispute into a documentation exercise.
Call to Action: We advise corporate groups on cross-charge notices, KEI Industries-based zero-value defences and the mandatory ISD transition. For a group-structure review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.