I would have thought downwind begins at the point it meets crosswind. So if you are in the circuit you climb out, turn crosswind and then turn downwind. Anything further out is outside the circuit, and therefore can't be downwind?
If ATC told me to report downwind, I would assume I can join it anyway I want, but would probably go for an extended downwind position as I don't fancy the idea of flying straight towards someone who is on crosswind. There doesn't seem to be anything implied in their instruction other than report when you are established. This happens all the time where I fly, although downwinds are quite unusual - crosswind and left base are common.
ATC are trying to be helpful by giving you a more expeditious join than overhead - if you don't want to do it then ask for something else. I would have thought they would warn you about other traffic in the circuit though.