Supply of Goods or services to related/ distinct person without consideration

When any transaction is undertaken between the related persons or distinct persons, the same is treated differently under GST. The present article helps to understand the term ‘related person’ and ‘distinct person’ as prevailing under GST law and it also helps to understand the concept of supply and its valuation in case of ‘related persons’ and ‘distinct persons’.

Before going into the nitty-gritty of treatment of the supply of goods or services between related persons / distinct persons, first of all let us understand the term ‘related person’ and ‘distinct person’.

Understanding the term ‘Related Person’ as per GST law –

The term ‘related person’ has been defined under Explanation to section 15 (5) of the CGST Act and the same is self-explanatory. As per the said explanation, the person shall be deemed to be ‘related person’ if –

• Such persons are directors or officers of one another’s business;
• Such persons are employer and employee;
• Such persons are legally recognized partners in the business;
• One of them directly / indirectly controls the other;
• Both of them are directly / indirectly controlled by the third person;
• Together they directly / indirectly control the third person;
• Any person directly / indirectly owns, control or holds 25% or more of the outstanding voting stock or shares or both of them;
• They are members of the same family.
• The person who are associated in the business with each other by way of sole agent / sole distributor / sole concessionaire, howsoever described.

It should be noted that the term person also includes the Legal person.

Meaning of family

As per section 2(49) 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;

Sole Agents deemed as Related Persons

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

Understanding the term ‘Distinct Person’ as per GST law –

The concept of ‘Distinct Person’ has been newly introduced under the GST law. Provisions of section 25 (4) and section 25 (5) of the CGST Act covers the concept of ‘Distinct Person’.

As per the concept of ‘Distinct Person’, if the person has obtained or is required to obtain more than one registration (whether in one State / Union Territory or more than one State / Union Territory) he shall be treated as ‘distinct person’ in respect of each such registration.

Further in case of establishment, if the person has obtained or is required to obtain registration in a State / Union Territory in respect of an establishment and the same person has an establishment in another State / Union Territory then such establishments shall be treated as establishments of distinct persons.

Categorizing the coverage of goods or services or both between the related person or distinct person as ‘supply’ under GST law –

After understanding the definition of the term ‘related person’ and ‘distinct person’, now, let us understand whether the supply between the same i.e. related persons or distinct persons is constituted as ‘supply’ in terms of the GST law.

The provisions relating to ‘supply’ with respect to related persons and / or distinct persons are specifically covered within schedule I of the CGST Act, 2017 i.e. Activities to be treated as supply even if made without consideration.

As per the said provisions, any supply of goods or services or both when made in the course or furtherance of business between the related persons or between the distinct persons the same would be treated as supply even when the supply is made without consideration.

Meaning thereby that any transaction between the related persons or between the distinct persons, irrespective of the consideration, would be treated as ‘supply’ and hence taxable under GST.

Understanding valuation of supply when undertaken between a related person or distinct person –

As seen above, when the transaction undertaken between the related persons / distinct person is considered as supply and like-wise taxable under GST, it is important to understand the valuation of supply rules attached to the same.

Basically, section 15 of the CGST Act, 2017 deals with the value of taxable supply. However, as per section 15 (4), if the value of goods or services or both cannot be determined as per section 15 (1), then, the same shall be determined as per valuation rules.

Rule 28 of the valuation rules deals with the value of supply of goods or services or both between the related persons or distinct persons. Going through the sequential order, the value of supply of goods or services or both would be –

• Open market value;
• In case the open market value is not available, then, the value of supply of like kind and quality;
• In case both the above valuation is not possible, the value of supply of goods or services or both based on cost (i.e. the value of supply = cost of supply + 10% mark-up);
• If none of the above valuations is possible, the residual method would be adopted for determination of the value of supply of goods or services or both. The value shall be determined using reasonable means consistent with the principles and general provisions.

Valuation in case of further supply –

Proviso to rule 28 states that when the goods being supplied are intended for further supply as such by the recipient, in such case, the value of supply shall be an amount equal to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. Supplier is at an option whether or not to adopt such a value.

Valuation in case the input tax credit benefit is available to the recipient –

Proviso to rule 28 also states that in case the recipient of the goods or services or both is eligible to avail full input tax credit, in that case the value declared in the invoice shall be deemed to be the open market value of the goods or services or both and the same would be adopted as value of supply.

(Republished with amendments by Team Taxguru taking into account comments of our readers)