Head Office to Branch Cross-Charge GST Exemption (Rule 28 & Sec 74): Complete Compliance Guide for CAs & CFOs
The Landmark Amul Ruling: Gujarat High Court Quashes ₹43.43 Crore IGST Demand
In a milestone judgment for multi-state corporate enterprises, the Division Bench of the Hon’ble Gujarat High Court comprising Justice A. S. Supehia and Justice Vaibhavi D. Nanavati has decisively quashed an Integrated Goods and Services Tax (IGST) demand of ₹43,43,12,441 along with equivalent interest and penalties against M/s Gujarat Co-Operative Milk Marketing Federation Limited (GCMMF / Amul) (Citation: 2026 TAXSCAN (HC) 1702).
The dispute originated from the Central GST authorities alleging that Amul’s Head Office (HO) located in Anand, Gujarat, had incurred common corporate overheads—including national advertising, legal advisory, information technology infrastructure, human resources, and senior executive compensation—that benefited its branch offices and distribution depots across multiple states between July 2017 and March 2019. Because distinct state registrations under Section 25(4) of the CGST Act, 2017 constitute "distinct persons", the department asserted that the HO was statutorily obligated to "cross-charge" these expenses with GST. The adjudicating authority unilaterally computed tax by allocating HO overheads and employee salaries proportionally to branch turnover, invoking the extended 5-year limitation period under Section 74(1) for alleged willful suppression of facts.
Setting aside the adjudication order dated January 1, 2025, the Gujarat High Court established binding jurisprudence on three critical fronts: the statutory binding force of the Second Proviso to Rule 28, the exclusion of employee salaries under Schedule III, and the legal invalidity of invoking Section 74 fraud penalties in revenue-neutral inter-branch transactions.
Core Statutory Takeaway for Corporate Tax Teams
Where a recipient branch office is eligible for full Input Tax Credit (ITC) under Section 16(1), the value declared by the Head Office in its invoice—even if declared as NIL, or where no invoice has been generated—must be accepted as the Open Market Value under the Second Proviso to Rule 28 of the CGST Rules, 2017. Tax authorities have no statutory jurisdiction to reconstruct taxable value on a proportionate turnover basis.
Statutory Framework: Deconstructing Cross-Charge vs Distinct Persons
Under the GST regime, multi-locational entities face a dual statutory architecture when managing head office administration:
1. Concept of Distinct Persons (Section 25(4) & Schedule I, Entry 2)
Under Section 25(4) of the CGST Act, establishments of the same legal entity registered in different States or Union Territories are treated as distinct persons. Consequently, under Schedule I, Entry 2, supplies of goods or services between distinct persons made in the course or furtherance of business are deemed taxable supplies even when made without consideration. This statutory fiction forms the root of all departmental cross-charge show cause notices.
2. The Valuation Mechanism Under Rule 28 of CGST Rules, 2017
Rule 28 prescribes how supplies between distinct or related persons (other than through an agent) must be valued. While Rule 28(a) directs reliance on Open Market Value (OMV), the rule contains two critical statutory provisos:
- First Proviso: Where goods are intended for further supply as such by the recipient, the value may equal 90% of the price charged to unrelated customers.
- Second Proviso (The Safe-Harbour Clause): "Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services."
This second proviso is non-negotiable. It establishes a statutory presumption: as long as the receiving branch has 100% ITC entitlement, the revenue incurs zero net loss. The law deliberately allows the enterprise complete latitude in determining invoice value.
| Compliance Parameter | Department's Position (Section 74 SCN) | Statutory Reality & Gujarat HC Ruling |
|---|---|---|
| Valuation of HO Overheads | Unilaterally allocated total corporate overheads to branches in proportion to branch turnover. | Illegal: Revenue cannot mandate proportionate allocation. Value is deemed Nil under Rule 28 Second Proviso if no invoice was issued. |
| Inclusion of HO Salaries | Demanded GST on corporate executive salaries by treating HO employees as providing services to branches. | Quashed: Employee salaries fall strictly under Schedule III (Entry 1) and are not supply. CBIC Circular 199/11/2023-GST explicitly bars salary loading. |
| Limitation & Fraud Invocation | Invoked Section 74(1) (5-year extended period) alleging intentional suppression of taxable cross-charges. | Invalid: All expenses were fully recorded in audited financials. Failure to cross-charge is an interpretative matter, not fraud or evasion. |
| Revenue Neutrality | Ignored ITC eligibility; demanded gross output IGST plus 100% mandatory penalty under Section 122. | Complete Defense: Recipient branches had 100% ITC entitlement under Section 16(1). The transaction was entirely revenue-neutral to the exchequer. |
| Input Service Distributor (ISD) vs Cross-Charge | Alleged non-distribution through ISD mechanism created an unrecoverable tax liability. | Separated: Internally generated services cannot be pushed through ISD. Circular 199/11/2023-GST clarified flexibility for prior periods. |
The Three Pillars of the Gujarat High Court Ruling
Pillar 1: The Binding Authority of CBIC Circulars 199/11/2023-GST & 210/4/2024-GST
Following years of widespread litigation across sectors, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 199/11/2023-GST on July 17, 2023, followed by Circular No. 210/4/2024-GST on June 26, 2024. In these circulars, the Board explicitly clarified:
- In respect of internally generated services provided by the HO to branch offices, the cost of salary of employees of the HO is NOT mandatory to be included while computing the taxable value, even if cost-allocation methods are adopted.
- Where the recipient branch is eligible for full ITC, whatever value is declared in the tax invoice by the HO shall be deemed to be the open market value.
- Most importantly: If the HO has not issued a tax invoice for internally generated services, the value of such services may be deemed to be declared as NIL, and may be treated as the open market value in terms of the Second Proviso to Rule 28.
The Gujarat High Court underscored that CBIC circulars are strictly binding on departmental officers. When the GST department admitted that Amul’s HO had not issued tax invoices to its depots and branches, the statutory consequence was automatic: the value of services was required to be treated as NIL under Rule 28. Hence, no taxable liability could legally survive.
Pillar 2: Section 74 Cannot Be Invoked Without Tangible Proof of Fraudulent Intent
The GST department routinely resorts to Section 74(1) simply because the standard 3-year limitation window under Section 73 has expired. In Amul's case, the show cause notice for FY 2017-18 and FY 2018-19 was issued years later under Section 74 by alleging "wilful misstatement and suppression of facts."
The High Court dismantled this practice, holding that discovery of accounting transactions during a departmental audit or investigation does not convert a bona fide compliance view into fraudulent tax evasion. Amul’s administrative, IT, and marketing expenses were fully captured in its audited general ledgers, Form 3CD, and published balance sheets. The Bench observed:
"Mere allegation that the petitioner failed to adopt cross-charging in respect of internally generated services provided by the Head Office to its branch offices cannot ipso facto lead to the conclusion that the petitioner wilfully or fraudulently evaded payment of tax or suppressed material facts with such intent."
Without independent, positive evidence demonstrating deliberate contumacious conduct to conceal tax, invoking Section 74 is legally fatal to the department's demand.
Pillar 3: The Indisputable Principle of Revenue Neutrality
The High Court accepted Amul's core financial reality: even if the Head Office had issued an IGST invoice for ₹43.43 Crore to its multi-state depots, those depots were engaged in taxable supplies of dairy and consumer goods. Every single rupee of IGST paid by the Anand Head Office would have been simultaneously credited into the Electronic Credit Ledgers of the branches under Section 16(1) and set off against outward tax liabilities.
Because the transaction resulted in zero net tax loss to the Consolidated Fund of India, initiating penal recovery under Section 74 was completely irrational and contrary to the design of the Goods and Services Tax.
Interaction with Mandatory ISD Under Amended Section 20
CFOs and corporate controllers must carefully distinguish between two separate corporate workflows:
- Internally Generated Services (Cross-Charge Domain): Services performed by HO employees (centralized IT engineering, internal audit, corporate legal, brand leadership). These cannot be routed through the Input Service Distributor (ISD) route because the HO is not distributing third-party vendor invoices. The Gujarat HC Amul ruling applies directly here.
- Third-Party Common Inward Supplies (ISD Domain): Procurements from third-party vendors billed to the HO but benefiting multiple GSTINs (such as nationwide ERP licenses, statutory audit fees, cloud hosting, or corporate security). Under the amended Section 20 of the CGST Act (notified via Finance Act, 2024), distributing these common third-party input services through the ISD mechanism is now strictly mandatory.
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Launch Free GSTR-2B Reconciler →Actionable 5-Point Compliance Checklist for CAs & CFOs
Tax teams and audit practitioners should immediately execute this 5-point audit protocol to protect their corporate structure from cross-charge scrutiny and Section 74 notices:
Corporate Cross-Charge Implementation Checklist
- ✔ 1. Audit Recipient Branch ITC Eligibility Under Section 16: Conduct an entity-wide check across all state GSTINs. Confirm that recipient units are not engaged in exempt supplies (e.g. healthcare, agricultural raw output) or subject to Section 17(5) apportionment. Full ITC eligibility is the mandatory pre-condition to trigger the Rule 28 Second Proviso.
- ✔ 2. Establish Clear Segregation Between ISD and Cross-Charge: Separate vendor invoices for common services (software subscriptions, external consultants, facility management) and register an ISD GSTIN under Section 20. Do not mix third-party vendor credit distribution with internal management charges.
- ✔ 3. Purge Employee Salary Component From Internal Cost Allocations: In accordance with CBIC Circular 199/11/2023-GST and the Amul ruling, ensure that internal management accounting models do not artificially inflate cross-charge billing with HO payroll costs. Salary is non-taxable under Schedule III.
- ✔ 4. Document Formal Inter-Unit Invoicing Policy: Decide whether your corporate enterprise will adopt nominal invoice values under the Rule 28 Second Proviso or maintain a zero-invoice (Nil valuation) posture for internally generated services. Maintain a written Board/Management Transfer Pricing Policy substantiating the chosen methodology.
- ✔ 5. Draft Standardized Section 74 Rebuttal Dossier: For any pending audit observations or show cause notices for legacy periods (FY 2017-18 to FY 2023-24), file preliminary objections citing Gujarat High Court in GCMMF (Amul) [2026 TAXSCAN (HC) 1702], CBIC Circular 199/11/2023-GST, and established Supreme Court jurisprudence on revenue neutrality and extended limitation.
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Verify that internal cross-charge invoices match across your ERP sales registers and GSTR-1 returns to eliminate tax mismatch notices.
Reconcile Sales Registers →Conclusion: Restoring Balance in Multi-State Corporate GST Compliance
The Gujarat High Court’s ruling in the Amul case represents a decisive victory against aggressive departmental tax assessments that seek to fabricate artificial tax demands out of revenue-neutral accounting entries. By reaffirming that Rule 28 gives full commercial freedom to businesses where credit is unblocked, and by striking down the casual invocation of Section 74 fraud provisions, the judiciary has provided chartered accountants and corporate tax directors with an impenetrable legal precedent.
Corporate finance leaders should evaluate their multi-state footprint, streamline ISD processes for third-party bills, and leverage this landmark ruling to successfully close ongoing audit inquiries and appellate disputes.