In our practice assisting multi-state manufacturing and retail clients, corporate tax teams routinely confront audit queries regarding headquarters overheads. Large corporate entities hold registered intellectual property, trade names, logos, and proprietary operating methodologies at their corporate headquarters. When regional branch offices and manufacturing plants operate under that unified corporate banner, tax authorities frequently question whether the corporate head office (HO) has charged an arm length royalty or brand fee to its operational units. For corporate controllers and compliance teams managing multiple GSTINs under a single PAN, understanding the precise boundary between statutory cross charge obligations and Input Service Distributor (ISD) mandates prevents unwanted tax demands.
Distinct persons and the Schedule I mandate
Under Section 25(4) of the CGST Act, an entity that has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State, is treated as distinct persons for all purposes of the GST law. Every separate state registration operates as an independent taxable unit.
Ordinarily, GST applies only to supplies made for a consideration under Section 7(1)(a). However, Entry 2 of Schedule I carves out an exception for internal corporate activities:
“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: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.” CGST Act, Schedule I, Entry 2
Because the head office holds title to corporate trademarks, brand design assets, and marketing goodwill, allowing sister branches to use those brand assets constitutes a supply of service between distinct persons. Even if no cash flows between accounting divisions, the activity falls squarely inside the GST net under Schedule I.
Valuation mechanics under Rule 28 of the CGST Rules
Where a supply occurs between distinct persons without consideration or without an arm length commercial invoice, valuation cannot be determined under standard transaction value provisions of Section 15(1). Instead, parties must follow Rule 28 of the CGST Rules.
Rule 28 establishes sequential methods for valuation: open market value, value of like kind and quality, or cost plus 10 percent markup under Rule 30. However, for corporate brand royalties and internal cross charges, the critical statutory provision is the second proviso to Rule 28:
“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.” CGST Rules, Rule 28, Second Proviso
This proviso provides a complete safe harbour. If the recipient branch office makes exclusively taxable outward supplies and is eligible for 100 percent input tax credit, the revenue suffers zero loss. Whatever figure the corporate head office writes on the cross charge tax invoice is deemed to be open market value, eliminating valuation disputes with audit officers.
Revenue neutrality protection: If your operational branch does not produce exempt supplies or operate under composition schemes, this statutory valuation concession applies in full force. The tax officer cannot demand an external valuation report or transfer pricing benchmarking study to recalculate the brand royalty.
CBIC Circular 199/11/2023-GST: internally generated services vs third-party costs
Corporate taxpayers endured years of litigation over whether corporate overheads, managerial salaries, and intellectual property maintenance had to be compulsorily invoiced to branches. The Central Board of Indirect Taxes and Customs resolved these controversies through CBIC Circular No. 199/11/2023-GST.
The circular clarified three fundamental principles for head office cross charges:
- No mandatory salary inclusion: Head office is not mandatorily required to compute or include employee salary costs in the taxable value of internally generated services. Salaries remain non-supplies under Schedule III.
- Deemed Nil valuation: Where the recipient branch office is eligible for full input tax credit, if the head office decides not to issue an invoice for internal support services, the value of such services is deemed to be Nil, and that Nil value is recognized as open market value under the valuation rules.
- Flexibility in invoicing: If the corporate office chooses to raise an invoice, any declared amount (whether covering partial costs, nominal overheads, or flat license fees) is accepted as open market value.
Exempt supply restriction: If a recipient branch office manufactures or trades in exempt goods (such as unprocessed agricultural items, healthcare services, or petroleum products), that branch is not eligible for full input tax credit. In such situations, the safe harbour does not apply, and valuation must reflect cost plus 10 percent or open market value.
Mandatory ISD registration vs internal cross charge after 1 April 2025
A vital distinction must be maintained between internally generated corporate support and third-party vendor expenses. Many enterprises historically lumped third-party marketing agency bills, national advertising campaigns, and legal trademark registration retainers into a single corporate cross charge invoice. That practice is no longer permitted.
Under Section 20 of the CGST Act, as substituted by the Finance Act 2024 and brought into force from 1 April 2025 vide Notification No. 16/2024-Central Tax, any office receiving tax invoices for input services procured on behalf of distinct persons must mandatorily register as an Input Service Distributor:
| Aspect | Head office cross charge | Input Service Distributor (ISD) |
|---|---|---|
| Nature of service | Internally generated services (corporate brand licensing, leadership support, IT architecture) | Third-party vendor input services (media house ads, external brand consultancies, legal firms) |
| Statutory basis | Schedule I Entry 2, Section 25(4), Rule 28 | Section 20 of CGST Act, Rule 39 of CGST Rules |
| Document issued | Standard tax invoice under Section 31 and Rule 46 | ISD invoice under Rule 54(1) |
| Reporting return | Form GSTR-1 and Form GSTR-3B by supplying HO | Form GSTR-6 filed monthly by the 13th |
| Recipient reflection | Form GSTR-2B Table 3 (B2B invoices) → GSTR-3B Table 4(A)(5) | Form GSTR-2B Table 4(A)(4) (Inward supplies from ISD) |
For detailed comparisons between central vendor distribution and internal corporate billing, refer to our guide on cross charge vs Input Service Distributor rules under GST.
Step-by-step corporate workflow for brand royalty cross charge
To establish a clean audit trail that withstands scrutiny from both state and central tax jurisdictions, accounting departments should follow this systematic execution workflow:
- Step 1: Verify branch credit eligibility
Check whether the recipient branch incurs any exempt supplies under Section 17(2) or blocked credits. If the branch makes 100 percent taxable supplies, confirm safe harbour eligibility under Rule 28. - Step 2: Document corporate cost sharing or brand license policy
Draft an internal corporate memo or inter-unit agreement defining the intellectual property usage parameters, brand maintenance support, and agreed billing cadence (monthly or quarterly). - Step 3: Issue standard tax invoice from head office
Generate a GST tax invoice under Section 31 containing full particulars: serial number up to 16 characters, HO GSTIN, branch GSTIN, SAC 99733 (Licensing services for the right to use intellectual property and similar products) or SAC 998311 (Management consulting), and applicable IGST rate (18 percent). - Step 4: Report outward supply in Form GSTR-1
Upload invoice details in Table 4A of Form GSTR-1 on or before the 11th of the succeeding month. If adjustments are required before GSTR-3B filing, use Form GSTR-1A. - Step 5: Verify appearance in recipient branch Form GSTR-2B
On the 14th of the month, verify that the cross charge invoice is visible in the recipient branch GSTR-2B under B2B invoices. Ensure the status is active and not marked as invalid or reverse charge. - Step 6: Avail credit in Form GSTR-3B
Take the input tax credit in Table 4(A)(5) for All other ITC. If managing multiple branches across different states, review our SOP on GSTR-2B reconciliation for multiple GSTINs.
Worked calculation: cross charge tax impact with full branch ITC
For example, take a client scenario we frequently model: Alpha Consumer Goods Ltd, having its corporate head office in Mumbai (Maharashtra GSTIN: 27AAAAA1234A1Z5) and a regional packaging and distribution hub in Bengaluru (Karnataka GSTIN: 29AAAAA1234A1Z1). The head office holds the proprietary trademark and brand assets, valued internally for corporate brand support at ₹15,00,000 for the quarter.
The Bengaluru branch sells exclusively taxable goods, making it eligible for 100 percent input tax credit. The head office raises an inter-state cross charge invoice applying 18 percent IGST.
| Document | Taxable value | IGST (18%) | Total invoice | Branch GSTR-2B status | Net tax cost |
|---|---|---|---|---|---|
| HO Cross Charge INV-2026-084 | ₹15,00,000 | ₹2,70,000 | ₹17,70,000 | Appears in Table 3 (B2B) | ₹0 (Full ITC in 3B) |
The Mumbai head office reports the invoice in Table 4A of Form GSTR-1 and pays ₹2,70,000 IGST via its monthly Form GSTR-3B. On the 14th, the invoice auto-populates into the Bengaluru branch GSTR-2B. Bengaluru avails the entire ₹2,70,000 in Table 4(A)(5) to set off against its outward IGST liabilities. The entire transaction is tax-neutral for the company as a whole.
Suppose Alpha Consumer Goods Ltd had chosen not to invoice this internal brand service at all. Under Paragraph 4 of CBIC Circular No. 199/11/2023-GST, because Bengaluru is eligible for full credit, the deemed Nil invoice value is legally recognized as open market value. The tax department cannot demand differential GST on an alleged omitted supply.
Common compliance mistakes to avoid
Even though the legal framework offers flexibility, tax practitioners frequently encounter avoidable errors during departmental scrutiny:
Common mistake 1: Mixing vendor bills into cross charge. Procuring national media advertisements or third-party trademark lawyer services under the HO GSTIN and recovering those costs through a consolidated cross charge invoice violates substituted Section 20. Central third-party services must be distributed through the ISD route.
Common mistake 2: Omitting e-invoicing where turnover exceeds ₹5 crore. If the entity aggregate turnover exceeds ₹5 crore, inter-state cross charge invoices between distinct persons are B2B supplies requiring mandatory IRN generation under Rule 48(4). An invoice without an IRN is invalid under Rule 48(5).
Common mistake 3: Overlooking branch exempt turnover. Applying deemed Nil valuation when a branch generates exempt outward supplies exposes the business to demands under Section 74A. Calculate actual cost allocations whenever recipient units do not enjoy 100 percent credit eligibility.
To master general credit entitlement prerequisites and documentation mandates, review our reference guide on ITC claim rules under GST.
Related guides
- How to calculate input tax credit and the order in which it is set off
- ITC kya hai? Input tax credit ka matlab, shartein aur GSTR-2B se rishta
- Pharma expired medicine ITC reversal: circular rules and procedure
- ITC on demolition and reconstruction of building: plant vs civil structure rules
Frequently asked questions
Is a head office required to cross charge brand royalty to branch offices?
Yes, when an entity chooses to internally bill its operational units for corporate brand usage. Under Schedule I of the CGST Act, supplies between distinct persons in the course or furtherance of business are deemed supplies even without consideration. However, if the recipient branch is entitled to full input tax credit, Rule 28 permits the head office to declare any invoice value, including zero or Nil.
Can a head office declare a nominal or Nil value for trademark cross charge?
Yes. Under the second proviso to Rule 28 of the CGST Rules, as clarified by CBIC Circular No. 199/11/2023-GST, where the recipient branch office is eligible for full input tax credit, whatever value is declared on the invoice by the head office is deemed to be the open market value. If no invoice is issued, the value is deemed to be Nil.
Can third-party trademark legal fees or brand agency costs be cross charged?
No. Effective 1 April 2025, third-party vendor input services procured centrally on behalf of multiple distinct persons must be distributed through mandatory Input Service Distributor registration under substituted Section 20 of the CGST Act. Cross charge is restricted to internally generated services.
Where does the recipient branch claim ITC on cross charge invoices in Form GSTR-3B?
When the head office issues a valid tax invoice with IGST or CGST and SGST and reports it in Form GSTR-1, the record appears in the recipient branch GSTR-2B. The branch avails the credit in Table 4(A)(5) for All other ITC in Form GSTR-3B.
Reconcile branch GSTR-2B records instantly
When managing multi-state operations with monthly cross charge invoices and third-party vendor bills, manual matching across GSTINs creates filing delays. Our reconciliation tool reads your GSTR-2B and purchase register directly in your browser. Your files are read in your browser and never uploaded to any server.
Last checked: 19 October 2026. Sources: CGST Act Section 25, CGST Rules Rule 28, CBIC Circular No. 199/11/2023-GST.