GST Implications of Inter-Firm Transactions with Common Partners

Summary: The article explains that GST treats partnership firms and partners as separate taxable persons, unlike partnership law, making inter-firm asset transfers through common partners potentially taxable. When a partner withdraws stock-in-trade from one firm and introduces it into another, GST deems it a two-stage supply under Schedule I, triggering tax even without consideration. The article highlights that related-party valuation rules under Rule 28, blocked input tax credit under Section 17(5)(d), and the Finance Act, 2025 amendments significantly affect such transactions, especially where goods are used for constructing immovable property. It also discusses judicial precedents, valuation principles, audit risks, and penalties for undervaluation or tax evasion. To mitigate disputes, the article recommends legitimate structures such as job work arrangements, pure agent models, business transfers as a going concern, and voluntary tax compliance. It concludes that informal partner drawings and inter-firm asset movements must be replaced with legally compliant transaction structures to preserve input tax credit and avoid litigation.

Introduction

The operational reality of Indian business frequently involves a web of closely allied entities, where promoters establish multiple partnership firms, limited liability partnerships (LLPs), and private companies to manage distinct business verticals, optimise resources, or pool capital. Within these networks, a common promoter or partner often serves as the central managerial authority, facilitating the movement of assets, funds, and services among different entities. While such movements are often viewed through the lens of classical partnership law as simple internal capital adjustments or drawings, the Goods and Services Tax (GST) regime approaches them with a distinct, rigorous statutory perspective.

A particularly illustrative scenario arises when a partner common to both Firm A and Firm B attempts to execute what appears to be a seamless, tax-free transfer of assets. Operating under the assumption that capital withdrawals are immune to indirect taxation, the partner withdraws stock-in-trade as “drawings” from Firm A and deploys those goods in Firm B for the fabrication of plant and machinery. When the legal reality is brought to the partner’s notice, the partner has no choice and is forced to realise that this informal tax avoidance plan is entirely ineffective. Under GST, this transaction triggers a chain of deemed supplies, disqualifies safe harbour valuations, and exposes the firms to severe blocked-credit traps and penalties.

The Jurisprudential Friction Between Partnership Law and GST Legal Fictions

To understand the indirect tax exposure of common-partner transactions, one must first analyse the fundamental conflict between the general law of partnership and the statutory fictions enacted under the GST regime. Under the Indian Partnership Act, 1932, a partnership firm is not recognised as a legal person separate from its constituent partners. The firm name is merely a collective compendium for the individuals who have agreed to share the profits and losses of a business carried on by all or any of them acting for all.

This principle of mutual agency and shared identity was established by the Supreme Court of India in Dulichand Laxminarayan v. Commissioner of Income Tax, which affirmed that a partnership is not a distinct legal entity under general law. Similarly, in Sait Tarajee Khimchand v. Yelamarti Satyam, the apex court reiterated that a firm is merely a collective name for its partners. In Jesingbhai Ujamshi v. Commissioner of Income Tax, the Bombay High Court further clarified that even when common partners carry on two distinct businesses under different names, they must be deemed to be the same firm under general law, rather than two separate legal entities. From this classical perspective, when a partner withdraws stock-in-trade as drawings, it is interpreted as the partner is not purchasing goods from an independent vendor; rather, they are withdrawing their own undivided share of joint property. This perspective underpins the common taxpayer misconception that capital withdrawals are immune to sales tax or GST.

However, the GST framework deliberately dismantles this classical unity of identity by creating an explicit legal fiction. Section 2(84) of the Central Goods and Services Tax (CGST) Act, 2017, defines a “person” to include a partnership firm, a limited liability partnership, and an individual as distinct, mutually exclusive legal categories. Once a deeming provision is introduced into a tax statute, it must be taken to its logical conclusion, thereby establishing the partnership firm as an independent taxable entity separate from its partners for indirect taxation.

This divergence is further illustrated by the jurisprudence surrounding partner remuneration. In Commissioner of Income Tax v. R.M. Chidambaram Pillai, the Supreme Court of India held that salary paid to a partner is merely a special portion of the partnership profits under a different name. This rationale was historically imported into the service tax regime by the Gujarat High Court in Cadila Healthcare Limited and by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore in Gautam Bhattacharya, both of which held that services rendered by a partner to their firm were not taxable because a person cannot render services to themselves. Under the GST regime, however, the statutory separation of the firm from its partners means that any transfer of goods or services between them must be subjected to the statutory “supply” test under Section 7 of the CGST Act.

Deconstructing the Two-Stage Supply Chain under Schedule I

The partner’s attempt to avoid GST by withdrawing stock-in-trade as “drawings” from Firm A and deploying them in Firm B fails because it ignores the statutory definition of “supply” under Section 7 of the CGST Act, read in conjunction with Schedule I. The partner operates under the assumption that a transfer without any kind of monetary consideration, such as a withdrawal of stock-in-trade debited as a drawing, cannot attract GST because it lacks “consideration” under Section 7(1)(a). This is a fundamental misunderstanding of the legislative design.

Section 7(1)(c) of the CGST Act specifically includes activities specified in Schedule I, made or agreed to be made without consideration, within the ambit of “supply”. Two specific entries in Schedule I are triggered by a partner’s withdrawal of stock and its subsequent deployment in another firm.

Stage 1: The Permanent Transfer of Business Assets from Firm A to the Partner

Paragraph 1 of Schedule I treats the “permanent transfer or disposal of business assets where input tax credit has been availed on such assets” as a deemed supply, regardless of the presence or absence of consideration. When Firm A purchases stock-in-trade, it avails of Input Tax Credit (ITC) under the general enabling provisions of Section 16 of the CGST Act. The moment those goods are permanently withdrawn as drawings by the partner, this constitutes a permanent transfer or disposal of a business asset. Consequently, Firm A is legally required to treat this withdrawal as an outward supply of goods and discharge the applicable GST liability.

Even if Firm A had not availed of ITC on the raw materials or stock-in-trade, the transaction remains captured under Paragraph 2 of Schedule I, which covers the “supply of goods or services or both between related persons or between distinct persons… when made in the course or furtherance of business”. Under the Explanation to Section 15 of the CGST Act, legally recognised partners in business are deemed to be “related persons”. Because the withdrawing individual is a partner in Firm A, the partner and Firm A are statutory related persons. Thus, the withdrawal of stock constitutes a deemed supply of goods from Firm A to the partner.

Stage 2: The In-Kind Capital Contribution from the Partner to Firm B

When the partner introduces those withdrawn goods into Firm B to fabricate plant and machinery, this movement represents a second, distinct transaction. In-kind capital contributions are governed by the principle that the partner, acting in their individual capacity as a promoter, is transferring business assets to a separate legal person (Firm B) in furtherance of business.

Under GST, this introduction of goods as capital constitutes a supply of goods by the partner to Firm B. Because the partner and Firm B are related persons under the Explanation to Section 15, this transaction is also a deemed supply without consideration under Paragraph 2 of Schedule I. Hence, the partner’s informal tax-avoidance scheme does not bypass the tax; rather, it results in a two-stage transaction, with GST liability triggered at both points of transfer.

Comparative Table of Common-Partner Inter-Firm Transactions

The Notional Rent Trap: Deemed Supplies of Free-of-Cost Partner Immovable Properties

A common inter-firm transaction within common-promoter networks involves a partner who owns a commercial showroom, office, or warehouse and allows their partnership firm to utilise that property free of rent. Taxpayers routinely assume that in the absence of a written rental agreement or actual rent payments, no GST liability can arise. This is a misconception that can result in unexpected tax demands during audits.

The Authority for Advance Ruling (AAR) in Tamil Nadu directly addressed this issue in the famous case of Shanmuga Durai. In that case, the applicant was the Managing Partner of a partnership firm and owned individual commercial properties that were used by the firm without any rent payments. The applicant argued that under the Income Tax Act, 1961, when a partner uses their individual property for the business of the firm, no deemed or notional rent is taxed. Therefore, the applicant contended that no notional rent should be taxable under GST.

The AAR rejected this argument and ruled that under GST, the individual partner and the partnership firm are separate persons. Because they are related persons under Section 15, the activity of providing commercial property for use, even without consideration, constitutes a taxable supply of renting services under Section 7, read with Paragraph 2 of Schedule I. The AAR observed that the rent-free accommodation indirectly accrues as a profit for the firm, which is ultimately enjoyed by the partner, thereby establishing that the transaction is in the course or furtherance of business. Consequently, the partner is legally required to pay GST on the notional rent, determined based on the Open Market Value of renting similar properties in the same locality, as mandated by the valuation rules of Rule 28.

Valuation Mechanics and the Disqualification of Safe Harbours

Once an inter-firm transaction is identified as a supply between related or distinct persons, Section 15(1) of the CGST Act, which relies on the “transaction value” or the price actually paid, is disqualified because the price is not the sole consideration and the parties are related. The taxpayer must determine the taxable value of the supply by applying Rule 28 of the CGST Rules, 2017.

Rule 28(1) mandates a strict hierarchical valuation methodology:

1. Open Market Value (OMV): The full value in money that is fairly payable by an unrelated recipient at the time of supply.

2. Value of Like Kind and Quality: If OMV is not available, the value must be based on identical or structurally similar goods.

3. Cost-Plus Method (Rule 30): If value cannot be determined under the previous clauses, it must be calculated as 110% of the cost of production, manufacture, or acquisition of the goods.

4. Best Judgment Method (Rule 31): Reasonable valuation using principles consistent with Section 15 and the valuation rules.

The Disqualification of the Second Proviso to Rule 28(1)

Many taxpayers attempt to defend related-party transfers by invoking the Second Proviso to Rule 28(1). This proviso contains a powerful safe harbour:

“Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.”

The Appellate Authority for Advance Ruling (AAAR) in Tamil Nadu, in the famous case of Specsmakers Opticians, affirmed that the second proviso operates independently of the first proviso (the 90% valuation option for as-such sales). The AAAR confirmed that if the recipient is eligible for full ITC, the taxpayer is permitted to declare any amount as nominal value (even “Nil”) on the tax invoice, and the tax department is legally bound to accept that nominal value as the OMV. This safe harbour was further reinforced by CBIC Circular No. 199/11/2023-GST and Circular No. 210/4/2024-GST, which clarified that in distinct or related party transactions where the recipient can avail of full ITC, the invoice value can be deemed to be “Nil”, and no tax is payable.

However, the partner’s plan to avoid GST on the transfer of stock from Firm A to Firm B by relying on this safe harbour fails due to a critical restriction: the recipient must be eligible for “full input tax credit”. The GST Audit Manual and tax audit guidelines emphasise that “eligible for full ITC” means the recipient must have no legal barriers, partial exemptions, or statutory blocks preventing them from claiming every rupee of GST charged on the invoice. If the recipient is subject to  ITC restriction under Section 17(2) (exempt supplies) or Section 17(5) (blocked credits), they are not eligible for full ITC.

In this scenario, Firm B is using the withdrawn stock-in-trade to fabricate “plant and machinery”. If this plant and machinery is capitalised as an immovable property or contains civil structures, it is subject to the blocked credit provisions of Section 17(5)(d) of the CGST Act. Because Section 17(5)(d) blocks ITC on goods and services used for the construction of immovable property, Firm B has a statutory bar on claiming ITC on these inputs.

Consequently, Firm B is not eligible for full ITC on the inward supply of these goods. The moment this eligibility is compromised, the safe harbour of the second proviso to Rule 28(1) is completely lost. The transaction must be valued under the standard hierarchy:

Taxable Value = Open Market Value (Clause a) or 110% of Cost (Rule 30)

If Firm A issued a Nil-value invoice or failed to pay tax on the drawings, the tax department will reject the valuation, determine the tax based on the open market value, and demand the payment of the differential tax, plus interest and penalties.

Section 17(5)(d) and the Post-Finance Act 2025 Landscape

To understand the full tax implications of using these goods in Firm B, one must analyse the statutory boundary between blocked “immovable property” and eligible “plant and machinery” under Section 17(5)(c) and (d) of the CGST Act.

• Section 17(5)(c) blocks ITC on works contract services supplied for the construction of an immovable property, other than plant and machinery.
• Section 17(5)(d) blocks ITC on goods or services received by a taxable person for the construction of an immovable property, other than plant and machinery, on their own account, even when used in the course or furtherance of business.

The statutory definition of “plant and machinery” is provided in the Explanation to Section 17:

“Plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes land, building or any other civil structures, telecommunication towers, and pipelines laid outside the factory premises.

The Judicial Intervention: The Safari Retreats Legacy

The tension between blocked immovable property and eligible plant and machinery was a major source of litigation, culminating in the Supreme Court’s decision in Chief Commissioner of Central Goods and Services Tax v. M/s Safari Retreats Private Limited. In this case, the taxpayer had constructed a shopping mall for the purpose of letting it out to tenants, incurring substantial GST on inputs like cement, steel, escalators, and electrical systems. The tax department denied ITC on these inputs under Section 17(5)(d).

The Supreme Court upheld the constitutional validity of Section 17(5)(d) but introduced a distinction:

1. The court ruled that the term “plant or machinery” used in Section 17(5)(d) had a broader connotation than the term “plant and machinery” defined in the Explanation.

2. It established a functionality test: if a building or structure is uniquely designed and engineered to serve as an essential tool for carrying out the business of supplying services (such as renting), and cannot be easily separated from that service, it qualifies as a “plant”.

3. If a building satisfies the functionality test, it is excluded from the ITC restriction of Section 17(5)(d).

The Finance Act 2025

In the Union Budget 2025-26, acting on the recommendations of the 55th GST Council Meeting, the legislature enacted a retrospective amendment to nullify the relief provided by the judgment.

The Finance Act 2025 amended Section 17(5)(d) with retrospective effect from July 1, 2017:

1. It substituted the words “plant or machinery” with “plant and machinery” in Section 17(5)(d), aligning it with the narrow definition used in Section 17(5)(c).

2. It inserted a retrospective deeming explanation clarifying that, notwithstanding any judgment, decree, or order of any court, any reference to “plant or machinery” must be construed as a reference to “plant and machinery” as defined in the statute.

Following the Finance Act 2025, if Firm B constructs a warehouse, factory shed, or office workspace using the stock-in-trade withdrawn from Firm A, it faces an absolute ITC block on any civil structure or building components, even if those structures are used to generate taxable rental income.

The Strategic Interpretation of “On His Own Account”

Despite the retrospective amendment of 2025, one critical statutory phrase in Section 17(5)(d) remains untouched: “on his own account”. Under principles of statutory interpretation, every word in a statute must be given meaning, and the legislature does not write redundant provisions. The restriction in Section 17(5)(d) only applies if the construction of the immovable property is undertaken by the taxpayer “on his own account”.

As clarified by the Supreme Court in Safari Retreats (specifically at Paragraph 32 of the judgment), construction is undertaken “on own account” when it is for personal use or serves as a mere setting for carrying out the business (such as an administrative office). Conversely, when a taxpayer constructs an immovable property for the purpose of making taxable outward supplies, such as leasing or renting the property under commercial agreements, the construction is not on their own account. In such cases, the taxpayer is constructing the asset to generate GST-taxable revenue for the exchequer. To deny ITC in this scenario would break the credit chain and violate the core principle of tax neutrality.

The following comparison details the statutory differences in asset classification under Section 17(5)(c) and (d) following the enactment of the Finance Act 2025.

Audit Vulnerabilities, System-Generated Flags, and Evasion Penalties

For businesses operating under such common-partner networks, attempting to bypass GST through informal capital transfers or drawings creates significant exposure during tax audits. The All India GST Audit Division classifies related-party transactions and structural drawings as high-risk audit targets.

Audit Detection Methodologies

During a departmental audit, GST auditors do not merely rely on the taxpayer’s filed GSTR-1 and GSTR-3B returns. They employ a “substance over form” approach, analysing the corporate structure and internal financial transactions through several checkpoints:

1. Cross-Examination of Capital Accounts and Drawings: Auditors review the general ledger of the Partner’s Capital and Drawings Accounts in the audited financial statements of Firm A. Any debit to a drawings account that is not represented by a cash withdrawal is naturally flagged for verification of physical stock movement.

2. Fixed Asset Registers of Allied Entities: The fixed asset register of Firm B is analysed to identify any additions to plant, machinery, or capital work-in-progress (CWIP). The auditor will demand the purchase invoices for the materials used in that CWIP. If Firm B cannot produce purchase invoices matching the physical materials used, the auditor will trace the source to Firm A.

3. E-Way Bill and Transit Log Matching: Auditors pull the vehicle registration records and e-way bill histories of both firms. The physical movement of raw steel, cement, or equipment from Firm A’s warehouse to Firm B’s construction site, without a matching commercial tax invoice, proves a taxable supply of goods under Section 7.

The Repercussions of Non-Compliance and Evasion

If the tax department establishes that a partner deliberately moved stock-in-trade to avoid tax, the transaction will be treated as a wilful evasion of tax under Section 74 of the CGST Act. This carries severe financial and legal consequences:

1. Differential Tax and Retrospective Interest

The tax department will reject any Nil valuation and determine the taxable value under Rule 30 (110% of cost) or the open market value. The taxpayer will be assessed for the differential tax, plus mandatory interest under Section 50(1) at the rate of 18% per annum, calculated from the exact date the tax was originally due.

2. Severe Monetary Penalties

Under Section 74(1), where evasion is irrefutably established by reason of fraud, wilful misstatement, or suppression of facts, the taxpayer is liable to a penalty equal to 100% of the tax evaded or ₹10,000, whichever is higher. Furthermore, under Section 122(1A), penalties can be levied directly on any partner or promoter who was the beneficiary of the evasion transaction.

3. Reversal of ITC under Section 18(6)

If Firm B had managed to claim ITC on the plant and machinery, and those assets are later found to have been constructed using tax-evaded inputs, the department will demand a reversal of the ITC. Under Section 18(6), read with Rule 44(6), if any capital goods or plant and machinery are supplied or disposed of, the taxpayer must pay an amount equal to the ITC availed, reduced by 5% per quarter or part thereof from the date of the invoice, or the tax on the transaction value, whichever is higher:

Reduced ITC Payable = Initial ITC × (1 – 0.05 × Q)

Q: The number of quarters (or part thereof) of use from the date of the original purchase invoice.

Innovative Tax-Planning Structuring and Dispute Resolution Protocols

To execute inter-firm transfers within common-partner networks without triggering tax liabilities and penalties, tax practitioners must design structures that align with the statutory provisions of the GST law. Rather than attempting to bypass the system, businesses can utilise several legitimate planning strategies to optimise their tax exposure.

Option 1: The Job Work Model (Section 19 read with Section 143)

If Firm A has surplus raw materials and Firm B requires those materials to fabricate some plant and machinery, the transaction can be structured as a formal “job work” arrangement under Section 143 of the CGST Act.

Under this model, Firm A (as the principal) sends the raw materials to Firm B (as the job worker) under a formal job work challan, without payment of GST. Firm B uses its labour and technical expertise to fabricate the plant and machinery using Firm A’s materials. Once the machinery is fabricated, Firm B returns the completed plant and machinery to Firm A under a challan. Firm B issues a tax invoice to Firm A only for its job work charges (services), which is subject to standard GST (usually 18%). Firm A can claim full ITC on these service charges. This structure prevents any taxable transfer of underlying goods, avoids the valuation traps of Rule 28, and ensures that the raw materials remain on Firm A’s books as business assets, preserving Firm A’s original ITC.

Option 2: The Pure Agent Cost Allocation Framework

If the common partner manages administrative or procurement functions for both firms from a central office, attempting to allocate these costs through arbitrary drawings or lump-sum transfers will trigger GST audits. Instead, the firms should execute a totally formal Pure Agent Agreement that satisfies the conditions of Rule 33 of the CGST Rules, 2017.

Under Rule 33, any expenditure incurred by a supplier on behalf of a recipient as a “pure agent” is excluded from the taxable value of supply. To implement this, Firm A must enter into a written agreement to act as a pure agent for Firm B in procuring specific materials or services from third-party vendors. The third-party vendors must issue invoices in the name of Firm B, while payment is facilitated through Firm A. Firm A recovers the exact amount paid to the vendors from Firm B, without any markup or service fee. This cost recovery does not attract GST, avoiding the 10% notional profit markup required under Rule 30 of the CGST Rules.

Option 3: Mergers and Business Transfers as a Going Concern

If the operational integration between Firm A and Firm B is permanent, the partners should consider a formal business merger or a transfer of a business unit as a “going concern” under Section 18(3) of the CGST Act.

Under Notification No. 12/2017-Central Tax (Rate) (Entry No. 2), the “services by way of transfer of a going concern, as a whole or an independent part thereof” are exempt from GST. By structuring the transaction as a going-concern transfer, all assets and liabilities of the business unit (including stock-in-trade and capitalised machinery) are transferred from Firm A to Firm B without any GST liability. Under Section 18(3), read with Rule 41, Firm A is permitted to transfer its unutilized Input Tax Credit balance to Firm B by filing Form GST ITC-02. This allows the businesses to consolidate their operations and transfer assets without cash flow blockages or tax leakage.

Litigation Mitigation and Dispute Resolution Protocols

For businesses that have already executed informal inter-firm transfers or drawings and are facing audit inquiries, tax practitioners must deploy a structured defence and dispute resolution protocol to minimise litigation risks.

Protocol 1: The “No Double Taxation” Defence

If the tax department raises a demand on the transfer of stock-in-trade from Firm A, and Firm B has already paid GST on its final outward supplies of the fabricated machinery, the taxpayer should invoke the equitable principle against double taxation. As established under income tax jurisprudence in International v. PCIT, the same commercial income cannot be taxed twice in the hands of the same group of promoters.

Under GST, because it is a destination-based consumption tax designed to eliminate cascading effects, the tax practitioner must demonstrate that any tax paid at the initial drawing stage would have been fully available as ITC to Firm B. By proving that the transaction is revenue-neutral to the exchequer, the taxpayer can build a strong case for the waiver of penalties under Section 73 or 74.

Protocol 2: Voluntary Disclosure and Interest Mitigation

If a review of the books reveals undischarged liabilities on partner drawings, the taxpayer should not wait for a departmental audit to discover the omission. Under Section 73(5) or Section 74(5) of the CGST Act, if a taxpayer self-detects a tax shortfall, pays the differential tax, and informs the tax authorities before the issuance of a formal show-cause notice (SCN), the department cannot issue an SCN or levy penalties. This voluntary compliance route protects the partners from personal penalties under Section 122(1A) and significantly reduces litigation costs.

Protocol 3: Preserving Evidence of “Own Account” Status

In cases where Firm B is constructing commercial properties (such as warehouses or offices) for leasing, and is contesting an ITC block under Section 17(5)(d), the tax practitioner must compile robust, contemporaneous evidence to defend the “not on own account” status:

• Executed Commercial Lease Agreements: Provide formal agreements that are stamp-duty-paid, executed with tenants before or during the construction phase to prove the commercial intent of the asset.
• GST Invoices on Outward Rental Income: Maintain conclusive records demonstrating that the constructed property is actively generating outward GST liability (at the standard rate of 18%).
• Separation of Civil and Mechanical Costs: Ensure that the books of account clearly bifurcate the costs of the core civil structure (which are capitalised and blocked) from the costs of the modular apparatus, equipment, and structural supports, which qualify as eligible “plant and machinery” under the statutory exception.

Case Law Analysis and Judicial Precedents

To establish an authoritative defence during assessments and appeals, tax practitioners must align their arguments with key judicial and quasi-judicial precedents at different levels of tax litigation, from advance ruling authorities to the Supreme Court of India.

i. Rent-Free Showroom and Office Space Use by Partnership Firms

The leading precedent on rent-free use remains the Tamil Nadu AAR ruling in the famous case of Shanmuga Durai. This ruling established that an individual partner and a partnership firm are related persons under GST. Consequently, providing commercial space without rent constitutes a deemed supply of services under Paragraph 2 of Schedule I, and notional rent is exigible to GST.

This stands in contrast to the historical income tax position where no such notional rent is recognised, illustrating that direct tax principles cannot be blindly imported into the GST regime.

ii. Valuation Disputes within Interconnected Undertakings

Under the Central Excise Act, 1944, which provided the structural foundation for GST valuation rules, the transposition of independent transaction values to related-party transactions was heavily litigated. In Commissioner of Central Excise v. Khyati Ispat Pvt. Ltd., the department sought to confirm a demand of ₹42,64,132 because the taxpayer and the buyer were interconnected undertakings due to common directors. The tribunal rejected the department’s appeal, holding that the mere presence of common directors or partners, without establishing joint control or mutuality of interest, does not permit the rejection of the transaction value.

Similarly, in BBM Heavy Machinery Pvt. Ltd. v. Commissioner of GST & Central Excise, the CESTAT Thane analysed a joint venture agreement where raw materials were supplied free of cost by related entities. The tribunal ruled that the transaction value must be accepted unless the department proves that the relationship influenced the price, a principle that continues to guide best-judgment assessments under Rule 31 of the CGST Rules.

iii. The Disallowance of Immovable Property ITC

The Supreme Court of India in Chief Commissioner of Central Goods and Services Tax v. M/s Safari Retreats Private Limited upheld the constitutional validity of Section 17(5)(d), confirming that the legislature has broad discretion in choosing which credits to block. However, the court remanded the matter back to the High Court of Orissa to apply the functionality test on a case-by-case basis.

The subsequent legislative substitution of “plant or machinery” with “plant and machinery” via the Finance Act 2025 effectively nullified the functionality test for general buildings. This retrospective change underscores the importance of the “not on own account” defence, which remains the primary avenue for claiming ITC on properties constructed for commercial leasing.

Conclusion

Inter-firm transactions within common-partner networks require strict adherence to the statutory obligations of the GST regime. The commercial view that partner drawings and capital movements are non-taxable internal transfers has no standing under GST. When a partner withdraws stock-in-trade to deploy it in another venture, they initiate a chain of deemed supplies that must be valued under the hierarchical provisions of Rule 28.

The retrospective amendments introduced by the Finance Act 2025 have restricted the “plant and machinery” exception under Section 17(5)(d), making it essential for businesses to structure their asset transfers and construction projects with precision. To avoid tax leakage, penalties, and audit exposure, tax practitioners should implement the following recommendations:

1. Abolish Informal Drawings of Stock: Replace any informal transfers of raw materials or stock-in-trade with formal commercial agreements, such as the Job Work model under Section 143 or pure agency cost allocations.

2. Execute Risk-Based Valuation Reviews: Map all transactions between allied entities and common partners. If the recipient entity is subject to any ITC blockages under Section 17(5), reject Nil-valuations and adopt the cost-plus or open market value methods to prevent undervaluation disputes.

3. Contest Construction ITC Blockages Dynamically: For commercial structures built for leasing, preserve the “not on own account” defence by documenting that the construction is a direct tool for generating taxable outward supplies of renting services.

4. Deploy Voluntary Rectification Protocols: Where historical omissions are identified, utilise the self-correction mechanisms under Section 73(5) to pay the differential tax and interest, thereby securing a statutory waiver of penalties before audit proceedings commence.

By replacing informal arrangements with legally sound, structured transaction models, common-partner networks can safeguard their cash flows, preserve their input tax credits, and navigate the complexities of the GST regime with legality and confidence.