No Invoice Can Mean Nil Cross-Charge Value, Not Proof of Tax Evasion

A Supply Between Branches Does Not Automatically Create GST Liability

GST law treats different registrations of the same organisation as distinct persons. Services a head office provides to separately registered branches may therefore constitute supplies, even without consideration. However, identifying a supply is only the first step. The Department must also determine its value under the applicable rules. If the Department invokes the extended demand provisions on allegations of fraud or suppression, those allegations require a separate factual foundation.

These distinctions were central to M/s. Gujarat Co-Operative Milk Marketing Federation Limited Versus Union Of India & Ors.-2026 (10) TMI 1158 - GUJARAT HIGH COURT. The Gujarat High Court at Ahmedabad, comprising Hon'ble Mr Justice A.S. Supehia and Hon'ble Ms Justice Vaibhavi D. Nanavati, decided R/Special Civil Application No.7085 of 2025. The dispute concerned an IGST demand of Rs. 43,12,441, with interest and penalty, arising from the alleged failure to cross-charge common head-office expenditure to branches and depots. The judgment recognised the distinct-person framework but rejected the demand after examining the nil valuation and the unsupported invocation of Section 74 of the CGST Act, 2017.

Common Expenditure Must Be Examined Against the Registration Structure

The petitioner Federation, popularly known as Amul, markets dairy products manufactured by milk co-operatives in Gujarat. Its head office is in Anand, where it manages and supervises its corporate activities. It held an Input Service Distributor registration for the head office and a common GST registration covering its branches and depots within Gujarat. Its establishments outside Gujarat held separate GST registrations. The head office incurred expenditure on advertising, publicity, information technology, annual maintenance, legal services, litigation and employee salaries. These activities benefited the Federation and its wider operational network.

The disputed period was July 2017 to March 2019. During that period, the Federation did not allocate the expenditure to its branches and depots through cross-charging, although it recorded the expenditure in its books, ledgers, and balance sheets. Following investigation, a show-cause notice dated 31.08.2022 proposed a demand under Section 74 of the CGST Act, 2017. The petitioner replied on 13.09.2022. During adjudication, CBIC issued two relevant valuation circulars, which the petitioner relied upon. Nevertheless, the Order-in-Original dated 01.01.2025 confirmed the IGST demand. The controversy therefore required examination of the registration structure, the applicable valuation treatment and the grounds for alleging deliberate tax evasion.

Separate Registrations Can Create Distinct Persons Within One Organisation

Section 25(4) of the CGST Act, 2017 treats a person who holds, or is required to hold, more than one registration as distinct persons for each registration. Section 25(5) of the CGST Act, 2017 also addresses establishments situated in different States or Union territories. Entry 2 of Schedule I to the CGST Act, 2017 brings qualifying supplies between related or distinct persons within GST even without consideration, when made in the course or furtherance of business. Common ownership therefore does not remove every transaction between establishments from GST.

The High Court accepted that the Federation's separately registered branches and depots across India fell within this framework. At the same time, offices operating under a single GST registration did not become distinct persons merely because they occupied different locations. For example, two depots under one registration differ from establishments with separate registrations in Gujarat and Maharashtra. Their physical separation alone does not answer the tax question. The relevant registration structure must first be identified. The judgment cannot therefore be read as either exempting every internal service or requiring every physical branch to be treated as a separate taxable person.

The Value of a Supply Must Be Determined Separately

Once a transaction falls within the distinct-person framework, its taxable value must still be determined. Rule 28 of the CGST Rules, 2017 governs valuation of the relevant supplies between distinct or related persons. It provides a valuation framework that begins with open market value and, where necessary, proceeds through the prescribed alternatives. However, its second proviso includes an important qualification: where the recipient is eligible for full input tax credit, the invoice value is deemed the open market value.

This qualification prevents the valuation exercise from being reduced to a simple allocation of expenditure. An officer cannot identify a head-office cost, distribute it according to branch turnover and assume that the resulting figure must be taxable without considering the applicable proviso. The existence of expenditure and the value recognised for GST purposes are separate matters. In this case, the High Court rejected proportionate valuation merely because the Federation had not adopted cross-charging. A method of allocating costs cannot displace the valuation treatment recognised by the governing rules and clarification.

Full ITC Eligibility Was Central to Nil Valuation

Circular No.199/11/2023-GST dated 17.07.2023 clarified the treatment of internally generated services supplied by a head office to its branches. Where the recipient branch is eligible for full ITC, the invoice value is accepted as the open market value. The clarification also addresses situations where the head office has issued no invoice for the particular service: its value may be deemed declared as Nil and accepted accordingly. The Gujarat High Court applied this clarification to the disputed services.

The judgment should nevertheless be read with the condition that makes this treatment possible. Absence of an invoice is not, by itself, a universal exemption from GST. Full ITC eligibility is essential to the clarification. For example, a head office may provide internal administrative support to a separately registered branch that can claim the full corresponding credit. That situation differs from one where the recipient's credit is restricted or unavailable. The Nil-value conclusion cannot automatically carry over from the first situation to the second. Nor does Nil valuation necessarily mean that no supply exists. It means that the applicable valuation treatment produces no taxable amount for the covered supply.

Full Credit Eligibility Is Different From Exclusive Allocation to One Branch

The Department argued that the circulars applied only where the recipient was eligible for full ITC and that the petitioner had not established the necessary conditions. The adjudicating authority brushed aside the clarification, saying the petitioner had not shown that the entire ITC in an invoice was to be passed to only one branch or depot. The High Court found that the circulars had been referred to cursorily without properly examining their effect on the disputed services.

Two different questions must be kept separate. One concerns how a common expense benefits several establishments. The other concerns whether the recipient can claim full credit for the supply attributable to it. A common service benefiting multiple branches does not necessarily mean that each branch is ineligible for full credit on the supply attributable to it. Conversely, the existence of several registered recipients does not automatically establish full eligibility. The correct inquiry must address the relevant supply, recipient and statutory restrictions. A conclusion about the number of branches benefiting from an expense cannot substitute for an examination of credit eligibility. The judgment does not provide a detailed branch-wise analysis of every possible restriction, and should not be presented as resolving such questions for all businesses.

Employee Costs Cannot Be Added Without Examining the Valuation Clarification

Employee salaries formed an important part of the Department's case. The allegation was that head-office employees supported the branches and that their salary expenditure should be included in the value of services supplied to those distinct persons. However, identifying an employee cost does not determine how to value the corresponding head-office service. The circular's treatment had to be considered before including that cost in the demand.

For full-credit recipients, the clarification recognises the declared value regardless of whether a component, such as employee cost, is included. For additional context, Circular No.199/11/2023-GST dated 17.07.2023 also states that head-office employee salaries are not mandatorily includible in the valuation of internally generated services, even where the recipient does not have full ITC. That separate clarification must not be confused with an automatic entitlement to Nil valuation. The present controversy concerned valuation of services between establishments, not a general proposition that every salary payment is taxable or that every service performed with employee involvement falls outside GST. The character of the supply and the applicable valuation treatment remain decisive.

Different Transactions Can Follow the Same Valuation Principle

The Gujarat High Court referred to Metal One Corporation India Pvt. Ltd., Idemitsu Lube India Pvt. Ltd., Sony India Private Limited, Petronas Energy India Pvt. Ltd., Mitsui And Co India Private Limited Versus Union of India & Ors. Directorate General of GST Intelligence & Ors., Additional Commissioner, CGST Audit-II, Delhi & Ors. - 2024 (10) TMI 1534 - DELHI HIGH COURT. That case concerned alleged imported services involving employees deputed by overseas group companies to Indian entities. It did not concern domestic head-office services to branches. However, the valuation issue was similar: the recipient was eligible for full ITC, and no invoices had been generated for the disputed services. Applying the relevant Circular No.199/11/2023-GST dated 17.07.2023, the Delhi High Court treated the service value as Nil, leaving no basis to continue the disputed demands. This supported the valuation reasoning in the Federation's case.

Circular No.199/11/2023-GST dated 17.07.2023 addresses services between domestic head offices and branches. Circular No.210/4/2024-GST dated 26.06.2024 extends the corresponding valuation approach to services received from related foreign persons where the Indian recipient is eligible for full ITC. Thus, the circulars address different situations but share the relevant Nil-valuation principle.

For example, administrative support from a Gujarat head office to its Maharashtra branch differs from support from a foreign group company to an Indian company. The applicable supply and tax-payment provisions may differ. Nevertheless, the relevant clarification may produce Nil valuation in either setting when its conditions are satisfied. The common point is valuation, not identical treatment of every legal issue. Neither decision should therefore be read as declaring all head-office support or employee-deputation arrangements outside GST.

Sharing Input Tax Credit Is Different From Providing Head-Office Services

A head office may purchase services from an outside supplier or provide services to branches through its own staff. These are different situations and should be examined separately. ISD distributes eligible input tax credit between registrations. Cross-charging concerns a supply made by one registration to another.

For example, a company's head office receives an outside IT agency's invoice for Rs.1,00,000 plus GST of Rs.18,000. The agency's services benefit both the head office and separately registered branches. The question is how to distribute the eligible Rs.18,000 credit among the relevant registrations under the prescribed rules. The ISD mechanism deals with that distribution. It distributes the tax credit, not the service provider's fee.

Now consider a different example. The head office's own accounts team prepares reports and provides accounting support to separately registered branches. Here, the head office itself performs the work. The question is whether it supplies a service to the branches and, if so, how that service should be valued. This concerns internally generated services and cross-charging. Where the recipient branch is eligible for full ITC and no invoice has been issued for the covered service, the applicable clarification permits its value to be treated as Nil.

The distinction also matters because the law changed after the disputed period. From 01.04.2025, the amended Section 20 of the CGST Act, 2017 requires ISD registration and distribution of credit for the specified input-service invoices received for or on behalf of distinct persons. Thus, qualifying credit on an outside supplier's invoice cannot be dealt with merely by relying on the Nil-valuation clarification for internally generated services.

The present judgment concerned the period from July 2017 to March 2019. Its relief must therefore be understood under the framework applicable to that period. Nil valuation of a covered head-office service does not remove the separate obligation to distribute qualifying third-party input-service credit under the later ISD provisions. Each expense must first be identified correctly before deciding its GST treatment.

The Extended Period Requires Proof, Not Allegations of Fraud

Section 74 of the CGST Act, 2017 requires facts showing that the tax or credit default arose from fraud, wilful misstatement, or suppression of facts to evade tax. Non-payment alone does not establish these grounds, and merely repeating the statutory words is insufficient.

The Department argued that the facts emerged only through the DGGI investigation. However, neither the notice nor the adjudication order identified facts supporting deliberate evasion. Discovery during the investigation does not, in itself, prove concealment. Failure to cross-charge, without supporting evidence of wrongdoing, could not justify invoking the extended period.

Investigation Findings Alone Do Not Establish Fraud

Relying on M/s. Tata Steel Limited Versus Union of India through the Secretary Ministry of Finance and Ors. - 2026 (8) TMI 1587 - Supreme Court, the High Court emphasised that the competent officer must independently examine the grounds for proceedings. Under Section 74 of the CGST Act, 2017, identifying a short payment is not enough. The notice must state facts showing that fraud, wilful misstatement or suppression caused it.

Audit objections and investigation findings may support that examination, but cannot replace it. Failure to allocate common expenses, for example, does not by itself prove concealment to evade tax. Calling a disputed practice "suppression" cannot justify the extended limitation period. The necessary factual basis was missing in the Federation's case

Available Credit and Recorded Expenses Weakened the Allegation of Tax Evasion

Had the Federation cross-charged the services, the head office could have paid the tax using available ITC, and the branches could have claimed the corresponding credit. On the facts of this case, there would therefore have been no net revenue gain. The expenses were also recorded in the books, ledgers and balance sheets, and the authorities knew how the Federation operated. These circumstances weakened the allegation of deliberate tax evasion.

However, available credit and recorded expenses do not automatically rule out suppression or excuse non-compliance. The Department's reliance on cross-charging adopted from 01.04.2019 also did not, by itself, prove earlier fraud. An intention to evade tax required supporting facts, not merely a later change in compliance practice.

Setting Aside the Demand Did Not Remove Other GST Obligations

The writ petition was allowed, and the Order-in-Original dated 01.01.2025 was set aside, without remanding the matter. No refund amount, payment deadline or interest rate was specified. The relief concerned this particular demand; it did not exempt all future head-office services from GST.

Before raising a cross-charge demand, the Department must examine the registrations, services, recipient's ITC eligibility and applicable valuation rules. Taxpayers must retain supporting records. A supply must be identified, its value lawfully determined, and any allegation of fraud supported by facts. Neither common ownership nor the absence of invoices settles every GST obligation.

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