(A) GST is applicable only if there is Supply, so let us understand the Scope of Supply.
(I) Scope of Supply (Sec. 7):-
(1) There is inclusive definition of Supply. i.e. Supply includes:-
(a) All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) Import of services for a consideration whether or not in the course or furtherance of business;
(c) The activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) The activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(B) Now understand the Activities Specify in Schedule I
(ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION)
(1) Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
(2) 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 (However 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.)
(3) Supply of goods by principal to his agent & Vice Versa.
(4) Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
(C) As per schedule I of CGST Act, any supply between different GST registrations having the same PAN (distinct persons) shall be treated as 'supply' even when made without consideration.
(D) Further, section 25(5) of the CGST Act states that 'A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union Territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
(E) It is the combined reading of Schedule 1 and the Sec 25(5) concept of distinct persons that gives rise to the need to cross charge. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity shall be termed as a supply and shall attract GST. In line with the said provisions, every supply between distinct persons result in cross charge between such entities. Such supply shall be Undertaken by issue of appropriate documents. Further, the receiver of the supply shall be entitled to GST credit.
(F) For better understanding of Cross Charge Let's understand below mentioned Example:-
Amit Limited has Head office in Maharashtra, and having centralized billing and payment mechanism. Amit Limited has 2 registrations at Gujarat and Delhi. HO i.e Maharashtra has availed certain audit services & IT Solution Services on payment of IGST. However, such audit services & IT Solution Services shall be used at both the locations i.e. Gujarat & Delhi. Thus, when the HO charges for the said audit services & IT Solution Services to respective locations, it shall be required to supply under an appropriate invoice and cross charge the value of audit services & IT Solution Services accordingly.
(G) Value of supply of goods or services or both between distinct or related persons, other than through an agent (Sec 15):-
As per the section 15 of CGST Act, value of supply, in case of distinct person, shall be determined as per Rule 28 of CGST Rules which prescribes the methods to determine the value.
Rule 28:- The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall be:-
(a) The open market value of such supply.
(b) If the open market value is not available, be the value of supply of goods or services of like kind and quality.
(c) If the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order.
Rule 30:- Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.
Rule 31:- Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the
general provisions of section 15.
Based on the above provision, HO shall be required to discharge GST on the following value.
(a) Open market value of such supply.
(b) Value of supply of like kind or quality.
(c) 110% of cost of acquisition of such goods or cost of provision of such services.
(d) Any other reasonable means.
(H) Cross charge to SEZ units:-
A situation may be such that one of the units of entity is situated in SEZ then also cross charge is require to a unit located in SEZ. Since supply to a Special Economic Zone is considered as a zero rated supply, cross charge may be required to be considered as export under both the options i.e. on payment of IGST or under LUT without payment of IGST.