In the given case, your client has its principal place of business (factory) in Andhra Pradesh (AP) registered under AP GSTIN, where all purchases and outward supplies are made. Additionally, it maintains a Head Office (HO) and a Guest House in Hyderabad, Telangana (TS GSTIN). The HO incurs rent under Forward Charge Mechanism (FCM), and the Guest House incurs rent under Reverse Charge Mechanism (RCM). As the HO has no outward supply and no direct revenue generation, the input tax paid on HO rent and RCM liability on Guest House rent is leading to unutilized ITC accumulation under the TS registration. The issue, therefore, is how to utilize or transfer the ITC accumulated in the TS registration against the tax liability of the AP registration, given that the business operations are integrated and the HO primarily supports sales and promotion of the AP factory’s products.

Under the GST law, each GST registration obtained in different States is treated as a distinct person as per Section 25(4) and 25(5) of the CGST Act, 2017. Consequently, the HO in Telangana and the factory in Andhra Pradesh are considered distinct taxable persons, even though both belong to the same legal entity. This allows supply of services between distinct persons to be treated as taxable supplies under Schedule I, even if made without consideration. Therefore, the most legally sound and compliant way to transfer the benefit of ITC accumulated in the Telangana GSTIN to the Andhra Pradesh GSTIN is to treat the HO’s administrative and managerial support activities as “supply of services” to the factory and raise a tax invoice accordingly.

This arrangement is supported by the CBIC Circular No. 199/11/2023-GST dated 17th July 2023, which clarified that Head Offices (HOs) can distribute input services to branches/units registered in other States either through Input Service Distributor (ISD) mechanism or by issuing a tax invoice under Schedule I for cross-charge. In your client’s case, there are two options:

Option 1 – Cross Charge Mechanism:

The HO can raise a tax invoice on the AP factory towards business support and administrative services, including functions such as marketing, promotion, management, coordination, and liaison activities performed by the HO. The value of supply can be determined on a reasonable basis (e.g., proportion of turnover or expense allocation). The HO will charge IGST on this supply, which the AP factory can claim as input tax credit, thereby utilizing the ITC accumulated in Telangana registration. This method aligns with Section 7(1)(c) read with Schedule I, and the corresponding ITC transfer is justified as the HO’s expenses are directly attributable to overall business operations.

Option 2 – Input Service Distributor (ISD) Mechanism:

Alternatively, the HO can register as an Input Service Distributor (ISD) under Section 20 of the CGST Act, 2017 and Rule 39 of the CGST Rules, 2017. Through this registration, it can distribute ITC related to common input services such as rent, telephone, or consultancy fees to other units (like the AP factory) in proportion to their turnover. However, ISD registration is suitable only when the HO is not making taxable outward supplies. It is a purely distributional mechanism and avoids the need for cross-charging, but it requires a separate ISD registration in Telangana and compliance with ISD-specific return filings (GSTR-6).

Given that your HO’s primary expense is rent and it is otherwise not engaged in any operational activities, cross-charging a nominal value for administrative support services to the AP unit is often the simpler and more defensible approach, as it enables seamless flow of ITC through IGST while maintaining compliance with Schedule I provisions. The Guest House rent, being under RCM, can also be included as part of the HO’s general administrative cost, and proportionate ITC thereof can be passed to the AP unit through the same cross-charge mechanism.

Therefore, the recommended approach is to utilize the GST paid on HO and Guest House rent by:

Paying RCM on Guest House rent under TS GSTIN and availing corresponding ITC;

Consolidating the total ITC under HO (including HO rent and Guest House rent);

Issuing a cross-charge tax invoice from HO (TS GSTIN) to Factory (AP GSTIN) for administrative support services;

Charging IGST on such invoice (since inter-State supply); and

Allowing the AP GSTIN to avail IGST as ITC against its output tax liability.

This ensures complete compliance, transparency, and effective utilization of input tax credit while aligning with Section 25(4), Schedule I, and CBIC Circular 199/11/2023-GST