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Cross Charge in GST

Practical aspects of Cross Charge you should know as a consultant

What is Cross Charge?

At the outset it is important to understand what cross charge is. Cross Charge is nothing but a recovery of expenses by the head office from its branches. To put it simply, since the branches/factories are the revenue centers and head office acts as a cost center, it apportions the expenses consumed at head office amongst the branches  

How is different from Input Service Distributor (ISD)?

ISD is altogether a different concept than the cross charge. In case of ISD services are received by the branches/factories whereas the invoices are issued in the name of the head office. Further these expenses are apportioned in the ration of volume of supply undertaken by the branches/factories. Whereas in case of cross charge Invoice and services/goods both are received by the head office itself. Under these circumstances recovery of expenses by the head office from the branches/factories shall be treated as supply.

What if there is no consideration?

As per Section 7 of Central Goods and Services Tax Act 2017, consideration is a necessary ingredient of supply. Where an activity does not have a consideration, it shall not be taxed under GST. However, there are certain exceptions to this provision provided under Schedule 1 of CGST Act 2017. Schedule 1 specifies certain activities to be treated as supply even if there is no consideration. As per Entry No 2 of Schedule 1 Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business shall be treated as supply. For the purposes of GST Act entities having the same PAN are called distinct person. Hence cross charge becomes taxable as per Schedule 1.

Legal proposition:

There have been number of Advance Rulings which have called for tax on cross charge transaction. Out of all, the most crucial had been in the case M/s Columbia Asia Hospital where it was first established that cross charge is leviable to tax under GST. After the matter was decided by the AAR, the appellant went on to appeal to Appellate Authority which also upheld the order of AAR pronouncing that in case of goods and services consumed at the corporate/head office it shall create a deeming fiction that they are the services rendered to the branches. Hence, Head office shall be liable to issue invoice to the branches and deposit GST with the government. The ruling also held that in case of ISD, situation is entirely different because under ISD the services are consumed by the branches, and it is merely distribution of ITC amongst the branches.

Few Examples of Cross Charge:

  1. The corporate office of Agami Limited in Mumbai paid GST of Rs. 9 lacs on the rent of its corporate office of Rs. 50 lakhs during FY 2020-21. Now it is recovering or charging the same from its factory site situated in Baddi, Himachal Pradesh. The said transaction would be covered under the provisions of cross charge. This would mean that Head Office would raise tax invoice on Baddi and pay GST on the same.
  2. Agami limited appointed a consultant to design the structure of plants for its plants in Baddi and Faridabad at a fees of Rs. 10 lakhs. The invoice for the same had been issued to the head office situated in Mumbai. Now the head office is apportioning such expenses to the branches, it shall be treated an ISD transaction.
  3. Agami Limited and Rishi Private Limited are sister concerns. Invoice in respect of consultancy services consumed by latter was received in the name of the former. Now, under these circumstances, former recovers the expense from the latter. In this example, since the service is consumed by Rishi Private Limited whereas invoice is issued in name of Agami Limited, the condition of receipt of Services under section 16(2) is violated and hence No ITC could be claimed. Therefore, this transaction would neither be covered under cross charge nor under ISD. The said amount would be recovered by way of Journal entry in books of accounts.

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