Transactions between Related Parties treated as Supply under GST

Last Update Date : October 05, 2018

transactions between related parties treated as supplies in GST

The taxable incident under GST is the supply of goods and/or services. The term ‘supply’ defines all forms of supply of goods or services, either already supplied or to be supplied in future, for a consideration, in the course of or for continuance of business.

Nevertheless, specific types of supplies mentioned in the GST law are considered as supply even without a consideration like transactions between related parties.

Categories of Supply

  • Supplies made for a consideration in the course of or for continuance of business
  • Supplies without consideration
  • Supplies made for a consideration whether or not in the course of or for continuance of business

Supply with consideration is mostly for operational activities like sales, transfers, etc. To understand the concept of supply without consideration, let us start with understanding definitions of related persons and distinct persons and supply transactions between them.

Supply without Consideration under GST

The followings are treated as supplies under GST even without consideration:

Supply of goods or services or both between related parties (related persons) or between distinct persons as specified under section 25

According to CGST Act, ‘related persons’ covers:

  • Officers and directors of business,
  • Legally recognised business partners,
  • Employer-employee,
  • Ownership interest of supplier-recipient controlling or holding>25% of the outstanding voting stock or shares
  • Family members
  • Supplier or recipient – one of them directly or indirectly controlling each other
  • Supplier and recipient – Both of them are directly or indirectly controlled by a third person
  • Supplier and recipient – together they directly or indirectly control third person

The deeming provisions also include legal persons, exclusive agent, distributor or concessionaire (holder of a concession or grant, especially for the use of land or commercial premises or for trading rights) in the definition of related persons.

Quick Note: Employer’s gifts of value not exceeding INR 50,000 (in a financial year) to an employee will not be treated as a supply.

According to the CGST Act, a distinct person can be defined as:

  • A taxable person who has obtained or is required to obtain more than one registration in the same state or in different states.
  • Or an establishment of a person who has obtained or is required to obtain a registration, and also has the establishment in another state.

Quick Note: Supplies made between related parties and distinct persons will be taxable even without consideration.

Permanent transfer or disposal of business assets on which ITC is availed

The transactions related to permanent transfer or disposal of business assets (capital goods) on which ITC was availed shall be treated as supply even without consideration. Here, the business is liable to pay GST. Donation of business assets would also qualify as ‘supply’, where ITC has been claimed.

However, GST does not apply to the sale of personal land/building and other personal assets, it is applicable only to business assets.

Example

Oxford Agri-products Ltd bought 15 laptops worth INR 450,000 and paid 18% GST of INR 81000. Oxford Agri-products Ltd availed Input Tax Credit of INR 81,000. These computers were used for maintaining the finance and accounts of the business.

At the end of useful life of period, Oxford Agri-products Ltd disposed them by giving away to the office staff at FREE of cost.Though the computers were disposed without any consideration, Oxford Agri-products Ltd is liable to pay GST on the value as derived according to the valuation rules promulgated in CGST Rules 2017.

Quick Note:“Permanent transfer” means the transfer of goods without the intention of receiving goods back. Hence, goods sent on consignment, job work or for testing/certification will not qualify as supply as there is no permanent transfer.

Supply of goods between principal and agent

Under the following scenarios, the supply of goods between the principal and his agent scenarios is considered as taxable supply even without consideration.

Supply to the Principal by his Agent: when agent receives or undertakes to receive goods on the behalf of principal
Supply to the Agent by his Principal: when agent supplies or undertakes to supply goods on behalf of principal

Example

Fast-drive Two-wheelers Ltd appoints Regal Agency as their agent to store the tyres and tubes supplied by Fast-drive Two-wheelers Ltd. On receiving an order by Fast-drive Two-wheelers Ltd from his dealers, an instruction will be sent to Regal Agency to supply the consignment. Further, Regal Agency is entrusted to receive the supply of raw materials (metal, plastic, rubber) from manufacturers on behalf of Fast-drive Two-wheelers Ltd.

As mentioned in the example, it can be analysed that:

  • Fast-drive Two-wheelers Ltd is the principal and Regal Agency is their agent.
  • The receipt of (metal, plastic, rubber) from manufacturers on behalf of Fast-drive Two-wheelers Ltd and the subsequent supply by Regal Agency to Fast-drive Two-wheelers Ltd is a taxable supply even without consideration
  • Supply of tyres and tubes by Fast-drive Two-wheelers Ltd to Regal Agency is a taxable supply even without consideration

The tax liability on the above transactions will be

  • either shared mutually by Fast-drive Two-wheelers Ltd and Regal Agency,
  • or borne individually by either of Fast-drive Two-wheelers Ltd and Regal Agency

Quick Note: Any supplies between agent and principal will be liable to GST. The person paying GST can later claim input tax credit.

Importation of services by a taxable person from a related person outside India or from any of his other establishments outside India (in the course of or for the continuance of business)

The abovementioned clause implies that any kind of imported service from related persons situated outside India without consideration will be treated as taxable supply even without consideration. Such transactions are chargeable under GST only when they have been carried out in the course of or for continuance of business.

Example

Fast-drive Two-wheelers Ltd imported service of interior designing for the new showroom from its Head-office located in Japan. Here, the received interior designing service shall be treated as taxable service and is liable for GST on reverse charge. This is taxable since it has been imported for the continuance of business from related parties.

In case, the same service has been imported from unrelated parties without consideration for the continuance of business, it would not be chargeable under GST. Similarly, if the same service has been imported from related parties without consideration for the personal use, it would not be chargeable under GST.

Example

Interior designing service imported by Fast-drive Two-wheelers Ltd from the head office, located in Japan for personal residence without any consideration will not be chargeable under GST.

Valuation of supply without consideration between related persons or between distinct persons

The supply without consideration under GST in both cases (1) transactions between related persons and/or (2) transactions between distinct persons (with the same PAN) needs to be valued under GST.

Example

Fast-drive Two-wheelers Ltd. has three branches X, Y and Z in three different states.

Branch X located in Gujarat is running out of stock of tyres and tubes and hence Branch Z located in Rajasthan transfers its excess stock.

This transfer of stock will be treated as supply from outside state even without consideration.

Here, the supply of excess stock needs to be valued. The same will be valued at:

  • Open market value
  • In the absence of open market value availability,
    • the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money
    • value of goods or services of ‘like kind and quality’
  • In the absence of above two options, value will be determined as per Cost method or Residual method
    • Value can be taken as 110% of cost of production / provision of service OR
    • Value should be reasonable means consistent with the general principles and provisions OR
    • If the goods are further sold by the buyer in the transaction, i.e. if the buyer in the transaction is dealer himself and not the consumer, then there is an additional option to take 90% of the value of such further sale.

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