Supply Goods or Services between Related Person

By Registrationwala

3rd May 2017


Related Person

Numerous organizations have different branches crosswise over states. Under the new GST law, they are required to enlist independently in each state they are operable in. Likewise, there can be various substances inside a combination which would likewise require numerous enlistments under GST. For example, TATA Steel and TATA Motors are both viewed as independent legitimate elements under TATA Sons, despite the fact that the previous supplies contributions to the last mentioned. Such business elements which may have isolate legitimate presence while sharing a typical control, fall under the meaning of 'related individual' under GST law.

Clause 2(82) of GST model law, 2016 defines related person. The supply is considered as between the related person only if the supply is made between:

(a) officers or directors of one another’s businesses

(b) legally recognized partners in business

(c) employer and employee

(d) the supplier or recipient directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them

(e) one of them directly or indirectly controls the other

(f) both of them are directly or indirectly controlled by the third person

(g) together they directly or indirectly control a third person; or

(h) they are members of the same family

The term “person” also includes legal persons.Person who are related in the matter of each other in that one is the sole agent or sole wholesaler or sole concessionaire, howsoever portrayed, of the other, might be regarded to be related.

"Agent" implies a man who carries on the matter of supply or receipt of goods and services in the interest of another, regardless of whether revealed or not and incorporates a factor, dealer, commission agent, arhatia, del credere specialist, middle person or a salesperson or some other trade operator, by whatever name called, and whether of an indistinguishable portrayal from hereinbefore specified or not – clause 2(5) of GST Model Law, 2016.

Supplies to Related Person

In case of supplies to related person, value shall be determined in the basis of:

a) Value of comparative goods or services

b)  Computed value

c)  Residual method of valuation rules, as applicable.

Under the GST VALUATION RULE, there are sets of rule which provide the manner of determining value of the transaction undertaken by the related parties. These rules are as under:

1. Comparative Method - Vide Rule 4, it has been expressed that where the value decided is not the best possible exchange value, the value should be resolved on the premise of exchange attempted by such provider with different clients of the goods/services of like kind and quality. Be that as it may, in deciding the value on the premise of examination, certain modifications are endorsed in Rule 4(2) which the officer might consider while deciding the exchange value. The modifications endorsed incorporates distinction in dates of supply, contrast in business level and amount level, distinction in structure/quality and design between goods and services and contrast in cargo and protection charges relying upon place of supply. Nonetheless, if the valuation is not definite under Rule 4 then the officer will continue to Rule 5 in deciding the value which is known as a computed value strategy.

2. Computed value method- Vide Rule 5 of the GST valuation rules, it is expressed that with a specific end goal to decide the transaction value different sorts of expenses are included for giving goods/services. The cost towards plan and brand of the goods are additionally included and the sum towards benefit and general cost are likewise added to cost to decide the exchange value. Regardless of the possibility that the value is not definite under Rule 5 over, the officer will additionally continue to Rule 6 which is residual method for ascertaining the value.

3. Residual method- Vide Rule 6 of the GST Value Rules, the value should be resolved utilizing sensible means reliable with the standards and general arrangements of these rules.

It is expressed in such manner that vide the previously mentioned principles of Model GST law, discretionary power have been given to the officers to hold that transactions between the related gatherings are not at the proper cost. In such a case, he can decide the estimation of the exchanges according to rules said above. These rules give discretionary power to the officers for deciding the exchange value. Advance there are sure terms utilized as a part of the arrangements as is value "essentially lower or higher", "reason to doubt", and so on which are obscure and subject to case.                    

In Case of Supply Between Such Related Persons Other Than Through Agents, Value Shall Be:

1. The Open Market Value (OMV) of such supply. OMV will be the entirety which is truly available in open market.

2. In the event that the open market esteem is not accessible, it will be the value of supply of goods or services of like, kind and amount. Here, the taxable individual can use as reference similar goods or services or both for deciding the value of supply.

3. On the off chance that the value is not decided in the over two cases it should be dictated by either by the Cost Method or Residual Method.

If the beneficiary of goods or services (or both) is qualified for full information tax credit, the value announced in the invoice should be regarded to be the open market estimation of goods or services.

The above arrangements have been incorporated to shield the transactions done amid the ordinary course of business between related people, in compliance with common decency.

Value of supply of goods made or received through agent

The value of supply of products between the principle and his agent should,-

(a) be the open market value of the goods being provided, or at the choice of the provider, be 90% of the cost charged for the supply of goods of like kind and quality by the beneficiary to his client not being a related individual, where the products are planned for further supply by the said beneficiary; illustration: Where principle supplies groundnut to his agent and the agent is providing groundnuts of like kind and quality in consequent supplies at a cost of Rs.5000 per quintal upon the arrival of supply. Another autonomous provider is providing groundnuts of like kind and quality to the said agent at the cost of Rs.4550 per quintal. The value of the supply made by the principle might be Rs.4550 per quintal or where he practices the choice the value should be 90% of the Rs.5000 i.e. is Rs.4500 per quintal.

(b) where the value of a supply is not definite under condition

(a), the same should be controlled by rule 4 or rule 5 in a specific order.

In the light of above discussion, it seems very unreasonable on the part of the government to check each transaction undertaken by the related parties. The government should have restricted the scope of such provisions to the transaction undertaken between the last seller and the consumer. These kinds of provision are necessary complicating the GST law and will lead to litigation.



Supply Goods or Services between Related Person