Valuation of supplies made to related persons in gst

VALUATION OF SUPPLIES MADE TO RELATED PERSONS IN GST

VALUATION OF SUPPLIES MADE TO RELATED PERSONS FOR THE PURPOSES OF GST:

Valuation rules has been provided under CGST Rules dt 01.07.2017 for valuation of supplies.

The 28 , 30 and 31  of the said rules  provide for valuation of supplies  if the buyer is related or the distinct person and no agent is involved

Related person has been defined in the Section 15 of CGST Act which is as under: (a) persons shall be deemed to be “related persons” if –

(i)            such persons are officers or directors of one another’s businesses;

Our Comment: This means that owner of a business is either an officer or director of the another business entity with which he/she is transacting.

(ii)          such persons are legally recognised partners in business;

our Comment :This means if two persons( say X & Y) are partners in another partnership business then X&Y becomes related persons. The transactions between the two ie X & Y shall be under purview of valuation rules , being related

(iii)         such persons are employer and employee;

Our Comment :Employer and Employees are considered to be related persons, making all perquisites taxable under GST. However exemption for gifts up to an annual value up to Rs. 50,000/- is given.

(iv)         any person directly or indirectly owns, controls or holds twenty-five per cent   or more of the outstanding voting stock or shares of both of them;

Our Comment:That means if a person holds more than 25% or more of  voting stock of  two companies then these two companies become related.

(v)           one of them directly or indirectly controls the other;

Our Comment :That means holding – subsidiary relation ships , subsidiary of a subsidiary, common subsidiaries become related.

Further apart from controlling stakes , if two companies are such that one can exercise control on other  for example principle raw material supplier of a company or  principle buyer of products of accompany ,becomes related.

(vi)         both of them are directly or indirectly controlled by a third person;

Our Comment:This clause establishes relationship from point of control over the business unlike shareholding control under clause (iv) .For example common Managing Director or if majority of directors are common in two business then these two business becomes related.

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

Our Commnet:That means though Business A & Business B are independent but together they are majority shareholders of third business  c or otherwise in a position to control the affairs of the business C , then  A & B becomes related

(viii)      they are members of the same family;

                 2(49) of CGST Act 2017 :family” means,––

(i) the spouse and children of the person, and
(ii) the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person;

(b) the term “person” also includes legal persons;

(c) Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

       Distinct person has been defined in the Act as

Section 25(4) provides that, a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

As Per Section 8 of  IGST ACT

Explanation 1 – For the purposes of this Act, where a person has,–

(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.

That means branches/offices/establishments/ Verticals of a single entity(having same PAN number) in same/ different states having separate registration for purpose of GST laws shall be considered distinct entities

How to do Valuation of transaction which are effected between the persons outlined above:

As per rule 28 , the transaction value shall be

(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

It can be inferred that this rule become applicable only for manufactured goods. Therefore Rule 30 shall become applicable for traded goods which states as under:

30. Value of supply of goods or services or both based on cost.-Where the value of a supply of goods or services or both is not determinable as per rule 28 , the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

 Our Comment :  The tax payer may follow CAS 4 issued by the The Institute of cost Accountants of India for determination of  transfer price for transactions between related persons

 31.Residual method for determination of value of supply of goods or services or both:

 Where the value can not be determined as per rule 28 or rule 30 then same shall be determined on a reasonable basis consistent with the principles and the general provision of Section 15

Our comment : The principle laid down under Section 15 of The CGST Act & under chapter IV of CGST Rules are as under:

1 ALL Cost incurred by the supplier for supply of Goods or services 
2. Any taxes , levies etc other than those charged under GST Laws
3.Any FOC supply made by the recipient which if not supplied then supplier would have procured  by itself
4. Any die/tool/mould provided for supply of goods then amortised cost of the same
5.Reasonable margin as per trade consitions 

Conclusion :

It is advisable that for related party transactions , valuation principle laid down in the rule 30 shall be followed by adding ,minimum 10% to cost of acquisition

Further related party transactions are also subjected to scrutiny under Income Tax Of India under transfer pricing provisions covering international transactions. As per Section 92 C of the Act,

The arm's length price in relation to an international transaction   shall be determined by any of the following methods, being the most appropriate method as applicable to the such transactions   namely :—

(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.

It is advisable that all international transactions should also be scrutinised from the point of view of  above law as well