Alerts & Updates 24th Jul 2023

The Legal Maze Solved: Finally, a clarification on the long-disputed issue of ISD vs. Cross Charge


Gourav Sogani Partner | Mumbai
Pavni Lakhanpal Senior Associate | Mumbai

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CBIC has issued a series of clarifications pursuant to the GST Council’s 50th meeting held on 11.07.2023 in New Delhi. Among these clarifications, a particularly reassuring one which has provided relief to industry, is provided in Circular No. 199/07/2023-GST dated 17.07.2023 (‘Circular’). This Circular aims to address the taxability and valuation of transactions involving common input services undertaken between an office of an entity in one State and the office of the same entity in another State, both being distinct persons under the provisions of the GST Law.

  • As one in aware, several companies operate across multiple states in India. As per GST Law, each office of these entities is required to hold separate GST registrations in different states. Within this framework, certain goods and services, are utilized by the legal entity across these states. In this context, taxpayers have been adopting either the “Input Service Distributor” (ISD) mechanism outlined in Section 20 of the CGST Act, read with Rule 39 of the CGST Rules, or the cross-charge mechanism derived from Section 25(4) read with Schedule I of the GST Act.

    Conceptually, ISD involves distribution of input tax credit (‘ITC’) for the input services received by one distinct person for or on behalf of another distinct person(s). While cross charge refers to issuing separate invoices for supplies made to distinct person(s) who directly or indirectly benefit from those supplies.

    The ISD mechanism existed even under the Service Tax regime. However, the concept of distinct persons and cross-charge mechanism was introduced under GST Law. Since the inception of GST, there has been doubt and  debate on the applicability and implementation of these two mechanisms –  the question plaguing industry was whether ITC should be distributed through the ISD mechanism or the cross-charge to the distinct person(s) route. The lack of clarity in this regard had led to a sense of indecision among taxpayers, creating a ‘kya karein kya na karein’ situation.

    Moreover, even though taxpayers were deriving the value of cross-charge supplies in accordance with Rule 28 of the GST Rules, it remained a subject of contention and dispute.

    Of late, the chaos surrounding ISD and cross-charge was exacerbated by the initiation of numerous GST investigations by authorities. Taxpayers found themselves facing allegations of incorrectly cross-charging supplies where ITC distribution through ISD should have been applied, and vice versa. Some advance rulings have also contributed to the confusion by providing parameters for adopting ISD and cross-charge mechanisms.[1]

    Amidst the looming ambiguity and the consequential harassment faced by taxpayers in relation to the ISD vs. cross charge debate, the issuance of the Circular by CBIC is a godsend offering significant relief to taxpayers. The Circular has effectively settled some major concerns of taxpayers regarding these two mechanisms. A brief of the clarifications provided in the Circular is given below:

    • The taxpayer has the flexibility to choose between ISD and Cross Charge for the common input services received from third parties, which ultimately resolves all the confusion, disputes, and chaos surrounding the adoption of these two mechanisms.
    • In cases where the recipient is eligible for full ITC, the value adopted for ‘internally generated services’ in the Cross Charge invoice will be deemed to be the open market value. While the valuation aspect was relatively clear due to the second proviso to Rule 28 of the CGST Rules, the Circular further reinforces it. Notably, the Circular goes even further by clarifying that even in situations where no invoice is raised for ‘internally generated services‘ the value can be deemed as NIL and still be considered as the open market value.
    • In cases where the recipient is not eligible for full ITC, it is clarified that it is not mandatory to include the cost of salary of employees while computing the taxable value of the supply of such services.

    The Circular has indeed ironed out some major concerns regarding the ISD vs. cross charge dispute. However, certain aspects still require careful examination.

    The Circular has introduced a new term – ‘internally generated services‘ which is not defined in GST Law as well as the Circular. Consequently, it is crucial to delve into the scope and extent of the said term to gain a comprehensive understanding of its implications. The interpretation of this new term by the industry players or GST Authorities will have to be observed over time to gauge its practical implications.

    Another area of deliberation is whether the concept of deemed Nil open market value, which has been provided for ‘internally generated services‘, can also be applied to input services received from third parties. Looking at it logically and fundamentally, considering that the second proviso to Rule 28 will apply in both the scenarios where recipient is eligible for full ITC, one can argue that the concept of deemed Nil open market value may be extended even for such third party supplies. However, if read strictly it could potentially result in interpretational issues.

    Further, a critical aspect that also demands analysis is whether the flexibility to choose between ISD and Cross Charge for the common input services received from third parties, will apply when the same service is cross charged in one period and ISD mechanism is applied in another and vice versa. Given that the Circular offers the option to choose either mechanism, one can argue that even in such a scenario the freedom to opt for any approach should continue. However, given the past experiences, exercising this flexibility may require caution.

    Some other points of evaluation include:

    • The valuation mechanism to be adopted for cross-charge invoices to the recipient not eligible for full ITC, still remains open for interpretation.
    • The applicability of the principle outlined in the Circular to transactions between the offices of the same legal entity in India and foreign territories, may also be analyzed.

    Though there may be certain unresolved aspects in the Circular, it is undeniably a major step forward and has been received with great enthusiasm by taxpayers. Notably, the issuance of these clarifications through a clarificatory Circular rather than a Notification provides an additional advantage – retrospective application[2].  This allows taxpayers to benefit from the clarifications for past transactions as well, further enhancing their relief.

    Despite the Government’s good intentions in addressing taxpayer concerns, there are instances where the implementation of such measures falls short. However, the taxpayer hopes that the Circular will be interpreted with the same positive spirit in which it was issued, ultimately achieving the intended goals of providing clarity and resolving the issues.

    We hope you have found this information useful. For any queries/clarifications please write to us at  or write to our authors:

    Gourav Sogani, Partner – Email –
    Pavni Lakhanpal, Senior Associate – Email –  

  • References

    [1] M/s Cummins India Limited ;2022 (1) TMI 660 – Appellate Authority for Advance Ruling, Maharashtra & M/s Columbia Asia Hospital Private Limited (Karnataka AAAR Order No. KAR/AAAR/05/2018-19)
    [2] S. Sundaram Pillai vs. V.R. Pattabiraman, A.I.R. 1985 SC 582

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.