Valuation of Supplies between Related Parties – What Businesses Should Watch Out For

The Goods and Services Tax (GST) regime has brought a uniform tax structure across India, but it has also brought renewed scrutiny on transactions between related or distinct persons. Valuation of such supplies can be a compliance minefield if not handled carefully. In this article, we’ll decode what businesses should watch out for, how valuation rules work, and where the risk areas lie.

Who Are "Related" or "Distinct" Persons under GST?

Under Section 15 of the CGST Act, supplies between related persons and distinct persons (branches with different GSTINs under same PAN) are treated as deemed supplies, even without consideration.

Related Persons include:

• Officers or directors of one another’s businesses

• Legal partners

• Employer and employee

• Holding-subsidiary relationships

• Entities under common control or management

Distinct Persons:

• Units of the same company in different states/UTs (e.g., Head Office in Delhi and Branch in Maharashtra)

Applicable Provisions

When Section 15(1) is not applicable (i.e., when price is not the sole consideration or parties are related), the value is determined as per Rule 28 of the CGST Rules, 2017.

Further, as per S.No. 4 of Schedule I of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the ‘CGST Act’), import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business, is to be treated as supply even if made without consideration.

Rule 28: Value of supply of goods or services between distinct or related persons

The value shall be:

• Open Market Value (OMV) - If available, this is the first preference.

Example: If a company sells the same goods to unrelated distributors for ?100, then that is the OMV.

• Value of supply of like kind and quality

If OMV is not available, use value of similar goods under similar conditions.

• Cost-based method (Rule 30)

110% of cost of production or provision of services

• Residual method (Rule 31)

Reasonable means consistent with principles and provisions of GST law.

Key Risks to Watch Out For

1. Undervaluation for Tax Arbitrage

• Businesses may understate values between related entities to shift profits or reduce GST liability.

• This is a red flag for tax authorities.

2. Incorrect ITC Claims

• Overstatement or understatement of value can lead to incorrect ITC by the recipient branch.

3. Missing Documentation

• In absence of proper valuation basis, the transaction may be deemed non-compliant.

• Authorities may invoke Rule 30/31 arbitrarily if OMV not justified.

4. Cross-Charging vs ISD

• Confusion between cross-charging and input service distribution (ISD) can lead to incorrect valuation.

• Cross-charging is subject to valuation rules; ISD is not.

5. Employee Secondment/Shared Services

• Deploying employees from head office to branches? This may require cross-charging and proper valuation.

6. Valuation for Branch Transfers (Same PAN, Different State)

• Treated as supply under GST even within the same legal entity across states.

• Valuation rules for related parties apply.

• You may adopt invoice value if the receiving branch is eligible for full ITC.

7. International Related Parties

• In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism.

• In such cases, the registered person in India is required to issue self-invoice under section 31(3)(f) of CGST Act and pay tax on reverse charge basis.

Steps which can follow to avoid penal action by department

• Ensure Transactions Are at Arm’s Length

• Even if prices are lower (e.g., transfer pricing), ensure they can be justified as per Rule 28.

• Maintain documentation supporting valuation (agreements, price benchmarking, etc.)

• Review all inter-company agreements

• Revisit valuation annually or when business changes

Relevant Judgments

The petitioner, challenged GST demands on services by foreign affiliates involving seconded employees. Relying on CBIC Circular No. 210/4/2024-GST, which allows "Nil" valuation if no invoices are issued, the court ruled that these seconded services should bear no tax liability. The court quashed the show cause notices, aligning with the circular's terms for related-party transactions. [2024] 77 TAXLOK.COM 086 (Delhi)

The transactions undertaken by NDDB and Unions in accordance with the agreements made by NDDB with State Government of Assam and Jharkhand are not to be considered as supply between ‘related persons’ in accordance with Schedule I of Central Goods and Service Tax Act. [2018] 02 TAXLOK.COM 442 (AAR-Gujarat)

The Karnataka High Court quashed IGST demands of Rs. 57.94 crore raised on alleged manpower supply from foreign group companies via expatriate secondment. The Court held that the seconded employees, being on the petitioner’s payroll and under its control, formed an employer-employee relationship. Relying on CBIC Circular 210/4/2024-GST and Metal One ruling, the Court held that in absence of invoices and with full ITC, value must be deemed ‘Nil’ under Rule 28.

The transactions undertaken by NDDB and Unions in accordance with the agreements made by NDDB with State Government of Assam and Jharkhand are not to be considered as supply between ‘related persons’ in accordance with Schedule I of Central Goods and Service Tax Act. [2018] 02 TAXLOK.COM 442 (AAR-Gujarat)

Conclusion- GST valuation in related party transactions is a sensitive area, but manageable with the right processes.