Library / Goods and Services Tax: The Professional's Master Guide

53. Case Study 9: Group Cross Charge, Corporate Guarantee, Secondment and Directors

53.1 Facts

Vardhan Industries Ltd. has its head office in Mumbai, Maharashtra, with plants in Gujarat and Tamil Nadu under the same PAN. All three make fully taxable supplies. Its subsidiary, Vardhan Auto Components Pvt. Ltd., is in Gujarat. Its own parent is Kessler Holding AG, Switzerland. Events in FY 2026-27:

Item	Amount (Rs.)
Audit, ERP licence and legal services billed to head office	30,00,000 + GST 5,40,000
Head office staff salaries and costs supporting plants	1,20,00,000
Corporate guarantee to a bank for the subsidiary's loan, 3 years from 1 July 2026	20,00,00,000
Engineer seconded by Kessler, cost recharged yearly	72,00,000
Sitting fees and commission to four independent directors	30,00,000

Turnover in FY 2025-26: Maharashtra Rs. 40 crore, Gujarat Rs. 90 crore, Tamil Nadu Rs. 70 crore.

53.2 Issues

ISD or cross charge for head office costs, and valuation.
Valuation of the corporate guarantee under rule 28(2).
Secondment from the foreign parent and Circular 210/4/2024.
Directors' fees under reverse charge.

53.3 Analysis and computation

Third-party services. The audit, ERP and legal services are common input services bought from outside. From 1 April 2025 they must be distributed through an ISD registration in proportion to the turnover of the units.

Unit	Share	ITC distributed	Form of credit
Maharashtra (head office GSTIN)	20%	1,08,000	CGST 54,000 + SGST 54,000
Gujarat plant	45%	2,43,000	IGST
Tamil Nadu plant	35%	1,89,000	IGST
Total	100%	5,40,000

Internal services. Head office staff supporting the plants is a supply between distinct persons under Schedule I. Circular 199/11/2023 clarified that where the receiving unit is entitled to full credit, the value declared in the invoice is accepted as open market value, and where no invoice is issued the value may be treated as nil. Salary cost need not be included in such cases. Vardhan cross charges Rs. 50,00,000 to Gujarat, with IGST Rs. 9,00,000 that Gujarat takes as credit: revenue neutral. If a plant made exempt supplies, rule 28 and rule 30 (cost plus 10%) would apply in full.

Illustration 219: Corporate guarantee for the subsidiary

Step 1: Rule 28(2) values a guarantee to a bank for a related person at 1% of the amount guaranteed per year, or the actual consideration, whichever is higher.

Step 2: For a three-year guarantee, Circular 225/19/2024 takes 1% for each year, taxed when the guarantee is given: 20,00,00,000 x 1% x 3 = Rs. 60,00,000.

Step 3: Mumbai to Gujarat is inter-State: IGST 18% = Rs. 10,80,000, paid by Vardhan, which may use its credit ledger.

Step 4: The subsidiary is eligible for full credit. The proviso to rule 28(2), inserted in 2024, accepts the invoice value in such a case, but Vardhan invoices at the rule 28(2) value so that the question never arises; the subsidiary takes the full credit.

Step 5: If the guarantee is renewed, a fresh supply arises on renewal.

Secondment. The engineer works in Mumbai under Vardhan's control but stays on Kessler's payroll. Kessler recharges his cost.

Judicial view: Secondment as manpower supply

Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd. (Supreme Court, 2022): In a service tax case, the Court held that an overseas group company seconding its employees to an Indian entity, which reimbursed their salary, was supplying manpower. The Court looked at the substance of the arrangement, not the label of employer. The principle carries to GST as an import of services taxed under reverse charge.

Illustration 220: Reverse charge on the secondment recharge

Step 1: Kessler invoices quarterly: Rs. 18,00,000.

Step 2: Vardhan pays IGST under reverse charge each quarter: Rs. 3,24,000, in cash, and takes the credit in the same return. For the year, Rs. 12,96,000.

Step 3: Circular 210/4/2024: where the Indian recipient is eligible for full credit, the invoice value is the value, and where the foreign related party issues no invoice the value may be deemed nil. Since Kessler invoices, tax is paid on the invoice.

Step 4: The real cost is cash flow: the reverse charge must be paid in cash and the credit is used later.

Directors. Circular 140/10/2020 clarified that remuneration of a whole-time director treated as salary is outside GST. Fees and commission to independent directors are taxed under reverse charge in the company's hands. The place of supply is the company's location, Maharashtra.

Three directors in Maharashtra: 22,00,000 x 9% CGST	Rs. 1,98,000
Same: 22,00,000 x 9% SGST	Rs. 1,98,000
One director in Delhi: 8,00,000 x 18% IGST	Rs. 1,44,000
Reverse charge on directors for the year	Rs. 5,40,000

53.4 Compliance and documentation

ISD registration and GSTR-6 by the 13th; ISD invoices to each unit.
Cross charge invoices from the Maharashtra GSTIN, e-invoiced if the turnover test is met.
Guarantee: tax invoice to the subsidiary on 1 July 2026; board note on valuation.
Self-invoices for secondment and directors' fees; reverse charge in Table 3.1(d) and credit in Table 4A(2) (imports) and 4A(3).

Key point

Lessons

Third-party common services go through ISD; internal services are cross charged. Keep the two apart.

Full credit at the receiving end makes most group valuation questions revenue neutral, but not cash neutral.

Check the substance of every secondment; payroll location alone does not decide it.

Chapter summary

• ISD distribution is mandatory for third-party common services from 1 April 2025.

• A three-year guarantee of Rs. 20 crore is valued at Rs. 60,00,000, with IGST Rs. 10,80,000.

• Secondment recharges bear reverse charge of Rs. 12,96,000 a year, creditable.

• Independent directors' fees bear reverse charge of Rs. 5,40,000.