🔹 Introduction

Multi-location businesses often face confusion about whether to use Cross Charge or Input Service Distributor (ISD) for allocating expenses across branches. Both mechanisms exist under GST but apply in different contexts. Choosing the right one ensures correct ITC flow and prevents departmental disputes.

(Reference: Sec. 20 of CGST Act, Rule 28 & Rule 39 of CGST Rules, CBIC clarifications till 2025)

🔹 What is Cross Charge?

• Cross charge applies when one branch (distinct person) provides services to another branch under the same PAN but located in a different state.

• Treated as a supply of service under Schedule I, even without consideration.

• Requires tax invoice and payment of GST (CGST+SGST or IGST).

• Receiving branch can claim ITC.

Example: Head Office in Delhi provides HR & IT support to its Mumbai branch. HO must cross charge service value + GST.

🔹 What is ISD (Input Service Distributor)?

• ISD is a mechanism to distribute ITC of common input services received at Head Office (e.g., audit fees, software license, ad expenses) to multiple branches.

• Distribution based on turnover ratio.

• ISD issues ISD invoices, not tax invoices.

• Only applies to input services, not goods or capital goods.

Example: HO receives audit invoice ₹12 lakh + GST ₹2.16 lakh. ITC distributed to 3 branches proportionately as ISD credit.

🔹 Key Differences – Cross Charge vs ISD

🔹 When to Use Cross Charge vs ISD

• Use Cross Charge when:

  • HO provides actual services (HR, accounting, IT support) to branches.

  • Value of supply must be determined under Rule 28 (open market value or cost + 10%).

• Use ISD when:

  • HO receives invoice for common services (audit, advertising, software license).

  • Credit to be distributed proportionately to branches.

🔹 Practical Examples

Example 1: Audit Fees (ISD Case)
HO receives audit bill ₹10 lakh + GST. ITC distributed to branches via ISD.

Example 2: HR & Payroll Services (Cross Charge Case)
HO provides HR management to branches. Cross charge invoice raised for ₹5 lakh + GST.

Example 3: IT Infrastructure (Mixed Case)
Software license invoice received at HO (ISD case). HO IT team provides maintenance support to branches (Cross charge case).

🔹 Common Mistakes

• Using ISD for goods or capital goods (not allowed).

• Ignoring cross charge requirement for HO services → risk of demand notice.

• Not maintaining turnover-based distribution working papers.

• Misreporting in wrong GST return (GSTR-1 vs GSTR-6).

🔹 Penalties

• Wrong ITC distribution or missed cross charge → Demand + Interest u/s 50 + Penalty u/s 74A (from FY 2024-25).

• Non-filing of GSTR-6 (ISD return) → Late fee ₹50/day.

🔹 Best Practices

• ✅ Distinguish clearly between services rendered (cross charge) & common invoices (ISD).

• ✅ Maintain branch turnover records for ITC distribution.

• ✅ Automate ITC allocation in ERP.

• ✅ File GSTR-6 (ISD) & GSTR-1/3B (Cross charge) correctly.

🔹 FAQs

Q1. Can HO avoid cross charge by using ISD?
➡️ No, ISD only for distributing ITC, not for services rendered by HO.

Q2. Is valuation mandatory for cross charge?
➡️ Yes, Rule 28 requires valuation (OMV, cost+10%).

Q3. Can ISD distribute ITC of goods?
➡️ No, only input services.

Q4. Can one company have both ISD & cross charge?
➡️ Yes, many corporates use both depending on the situation.

Q5. Which return covers ISD distribution?
➡️ GSTR-6 (filed monthly by ISD).

🔹 Conclusion

Both Cross Charge and ISD are important tools for GST compliance, but they serve different purposes. Businesses must apply them correctly to avoid ITC disputes and departmental litigation.

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