Transactions Without Consideration Treated as Deemed Supplies Under GST

Summary: GST generally applies to supplies of goods or services made for consideration in the course or furtherance of business, but the CGST Act specifically brings certain transactions without consideration within the scope of supply. Section 7(1)(c), read with Schedule I, covers specified activities including permanent transfer or disposal of business assets where input tax credit has been availed, supplies between related or distinct persons in the course or furtherance of business, specified principal-agent transactions, and import of services from related persons or overseas establishments for business purposes. The existence of a deemed supply must be distinguished from its valuation: a transaction must first qualify as a supply before valuation provisions such as Rule 28 become relevant. This distinction assumes particular significance for intra-group arrangements and corporate guarantees. CBIC Circular Nos. 204/16/2023-GST and 225/19/2024-GST address the taxability and valuation of personal and corporate guarantees, while Rule 28(2) provides a specific valuation mechanism in specified corporate guarantee cases. The Gujarat High Court’s decision in Torrent Power Ltd. v. Union of India further examines the GST treatment of corporate guarantees. Businesses should therefore assess the nature of the transaction, relationship between the parties, business purpose, applicable Schedule I entry and valuation provisions rather than assuming that the absence of a sale or monetary consideration necessarily takes a transaction outside GST.

Introduction

GST is generally understood as a tax on the supply of goods or services for consideration in the course or furtherance of business. However, the CGST Act creates specific exceptions where certain transactions are treated as supplies even when no consideration is involved.

Section 7(1)(c), read with Schedule I of the CGST Act, 2017, brings specified activities within the scope of supply despite the absence of consideration. These transactions are commonly referred to as deemed supplies. The concept is particularly relevant to businesses that transfer assets, provide services between related or distinct persons, operate through agents, or receive services from overseas group entities.

Understanding the Legal Framework

Section 7 defines the scope of “supply” under GST. While Section 7(1)(a) generally deals with activities undertaken for consideration in the course or furtherance of business, Section 7(1)(c) specifically covers activities listed in Schedule I, even when made without consideration.

This distinction is important because every transaction without consideration is not automatically taxable under GST. It must fall within one of the categories specifically recognised by the law.

The CGST framework also requires Schedule I to be read alongside Schedule II and Schedule III. Schedule II helps determine whether certain activities are treated as supplies of goods or services, while Schedule III identifies activities that are treated as neither supplies of goods nor supplies of services.

Thus, GST liability must be determined by examining the statutory classification of the transaction rather than merely looking at whether money has changed hands.

Four Categories of Deemed Supply

1. Permanent Transfer or Disposal of Business Assets

The first category under Schedule I covers the permanent transfer or disposal of business assets where input tax credit has been availed on those assets.

For example, if a business permanently gives away machinery on which it had previously claimed ITC, the transfer may attract GST even though the recipient does not pay for the machinery.

The provision prevents a taxpayer from retaining the benefit of ITC while permanently removing the corresponding asset from the business without an appropriate tax consequence.

However, the provision is not a blanket rule covering every free transfer of property. The statutory condition concerning prior availment of ITC is significant.

2. Supplies Between Related or Distinct Persons

The second category covers supplies of goods or services between related persons or distinct persons, when made in the course or furtherance of business.

The concept of a distinct person is particularly important under GST. Where the same legal entity obtains separate GST registrations in different States, those registrations are treated as distinct persons.

For example, if a company’s Karnataka registration provides administrative or accounting services to its Maharashtra GST registration, the fact that both registrations belong to the same company does not automatically take the transaction outside GST.

The transaction may be treated as a supply even when there is no separate payment between the two registrations.

However, the requirement that the transaction be made in the course or furtherance of business remains important.

Schedule I also contains a specific exception for gifts by an employer to an employee: gifts up to ₹50,000 in value in a financial year are not treated as supplies merely because the employer and employee are related persons.

3. Principal-Agent Transactions

The third category concerns specified supplies of goods between a principal and an agent.

It covers situations where a principal supplies goods to an agent who undertakes to supply those goods on the principal’s behalf, as well as specified circumstances where an agent receives goods on behalf of a principal.

This provision is important in commercial arrangements involving agents and consignment structures because the movement of goods may occur without an immediate sale to the ultimate customer.

4. Import of Services from Related Persons or Overseas Establishments

The fourth category covers the import of services by a person from a related person or from any of the person’s other establishments outside India, when made in the course or furtherance of business.

This is particularly relevant to multinational businesses.

For instance, an overseas group company may provide management, technical, administrative or other support to its Indian establishment without charging a conventional commercial price.

The absence of a separate payment does not necessarily prevent the transaction from being treated as a supply where the statutory conditions are satisfied.

This demonstrates an important principle of Schedule I: the existence of consideration is not always decisive in determining GST liability.

Valuation of Deemed Supplies

Once a transaction is established as a supply, the next issue is its valuation.

Rule 28 of the CGST Rules provides the valuation mechanism for supplies between related persons and distinct persons. The rules generally refer to the open market value, with prescribed alternatives where the open market value cannot be determined.

Importantly, the question of whether a transaction constitutes a supply must be separated from the question of how that supply should be valued.

The existence of a valuation rule does not independently create a taxable supply. The transaction must first fall within Section 7 and, where relevant, Schedule I.

This distinction is particularly important in intra-group transactions, where there may be no conventional sale price.

Corporate Guarantees: A Contemporary Development

Corporate guarantees provide a useful contemporary example of the difficulties surrounding transactions without conventional consideration.

CBIC issued Circular No. 204/16/2023-GST to clarify the GST treatment of personal and corporate guarantees. Rule 28(2) also introduced a specific valuation mechanism for corporate guarantee services supplied between related persons in specified circumstances.

The issue involves two separate questions: first, whether the furnishing of a corporate guarantee constitutes a supply; and second, how such a supply should be valued.

In Torrent Power Ltd. v. Union of India, decided by the Gujarat High Court on 14 August 2026, the Court considered challenges concerning GST treatment and valuation of corporate guarantees. The Court held that furnishing a corporate guarantee by a holding company to its subsidiary could constitute a supply of services under the GST framework, while also examining the validity and operation of the valuation mechanism under Rule 28(2).

The decision demonstrates that a deeming provision does not eliminate the need to examine the statutory requirements governing the transaction and the limits of the valuation rule.

Since the decision is a High Court judgment, its treatment should be understood within the existing judicial hierarchy and not presented as the final determination of the issue.

Critical Analysis: Does “No Sale” Mean “No GST”?

The concept of deemed supply demonstrates why the GST framework cannot be understood solely through the traditional concept of a sale.

Modern businesses regularly operate through branches, group companies, agents and overseas establishments. If GST applied only where a conventional sale and monetary consideration existed, certain business transactions could escape the tax framework even though goods or services were being provided for business purposes.

At the same time, Schedule I should not be interpreted as making every transaction without consideration taxable.

Each category contains its own statutory requirements. For example, permanent transfer of business assets under Schedule I depends upon prior availment of ITC. Supplies between related or distinct persons must be made in the course or furtherance of business. Principal-agent transactions are covered only in the specified circumstances.

Therefore, the correct approach is not to ask simply: “Was there a sale?”

The more appropriate questions are:

• Was there an activity involving goods or services?
• Was it connected with business?
• Does Section 7 bring the activity within the concept of supply?
• Does Schedule I specifically cover the transaction despite the absence of consideration?
• If it is a supply, what valuation and compliance provisions apply?

This approach prevents both over-taxation and under-compliance.

Practical Compliance for Businesses

Businesses dealing with transactions without consideration should maintain proper documentation and examine:

1. The nature and purpose of the transaction.

2. The GST registration status of the parties.

3. Whether the parties qualify as related or distinct persons.

4. Whether ITC was previously claimed on transferred business assets.

5. Whether the transaction falls specifically within Schedule I.

6. The appropriate valuation mechanism under the CGST Rules.

7. The applicable invoicing and reporting requirements.

Proper documentation becomes particularly important for intra-group transactions because the absence of a conventional sale invoice or payment can make the commercial substance of the arrangement more difficult to establish.

Conclusion

Deemed supplies represent an important departure from the ordinary understanding that GST applies only where there is a sale for consideration.

Section 7(1)(c), read with Schedule I, brings specified transactions without consideration within the scope of supply, including certain transfers of business assets, supplies between related or distinct persons, specified principal-agent transactions and imports of services from related persons or overseas establishments.

However, the absence of consideration does not automatically make every transaction taxable. The precise statutory conditions must be satisfied before GST liability arises, and valuation is a separate question from the existence of supply.

The treatment of corporate guarantees further demonstrates the continuing importance of this distinction. It shows how modern commercial arrangements can create difficult questions concerning both taxability and valuation.

Ultimately, businesses should not determine GST liability merely by asking whether a transaction involved a “sale” or whether money changed hands. The correct approach is to examine the nature of the transaction, the relationship between the parties, its business purpose and the specific statutory provisions governing deemed supplies.

In this sense, deemed supplies ensure that GST remains aligned with the economic substance of specified business transactions while maintaining clear statutory boundaries around transactions that are actually brought within the tax net.

References

Statutes and Rules

• Central Goods and Services Tax Act, 2017, Section 7 — Scope of supply; Schedule I — Activities treated as supply even without consideration; Schedule II — Activities treated as supply of goods or services; Schedule III — Activities treated neither as supply of goods nor services.
• Central Goods and Services Tax Act, 2017, Section 25 — Procedure for registration and treatment of distinct persons.
• Central Goods and Services Tax Rules, 2017, Rule 28 — Value of supply of goods or services or both between distinct or related persons.

Circulars

• Central Board of Indirect Taxes and Customs, Circular No. 92/11/2019-GST, dated 7 March 2019, Clarification on various doubts related to treatment of sales promotion schemes under GST.
• Central Board of Indirect Taxes and Customs, Circular No. 204/16/2023-GST, dated 27 October 2023, Clarification on issues pertaining to taxability of personal guarantee and corporate guarantee in GST.
• Central Board of Indirect Taxes and Customs, Circular No. 225/19/2024-GST, dated 11 July 2024, Clarification on various issues pertaining to taxability and valuation of supply of services of providing corporate guarantee between related persons.

Judicial Decisions

• Columbia Asia Hospitals Private Limited, Advance Ruling No. KAR ADRG 15/2018, Karnataka Authority for Advance Ruling, decided on 27 July 2018.
• Torrent Power Ltd. v. Union of India, Special Civil Application No. 12175 of 2024 and connected matters, Gujarat High Court, decided on 14 August 2026.