Understanding the nuances of valuing transactions between related parties is crucial for ensuring compliance with GST regulations. This guide provides a detailed analysis of the various valuation methods under the GST Act, accompanied by practical examples and clear illustrations.
Defining Related Parties
Under Section 15 of the GST Act, related parties are defined as individuals or entities with specific relationships that could influence the terms of their transactions. These relationships include:
| Category | Description |
|---|---|
| Officers or Directors | Officers or directors in each other’s businesses. |
| Business Partners | Legally recognized partners in a business. |
| Employer and Employee | Employer and their employee. |
| Significant Shareholders | Individuals or entities that own, control, or hold 25% or more of the voting stock or shares, directly or indirectly. |
| Mutual Control | Individuals or entities that control each other, or are controlled by a third person. |
| Family Members | Members of the same family (such as spouse, siblings, parents, children, etc.). |
| Sole Agents, Distributors, or Concessionaires | Entities acting as sole agents, distributors, or concessionaires for each other. |
Transaction Value and Its Limitations
Section 15(1) states that the transaction value is the price actually paid or payable if the supply is between unrelated parties and is the only consideration. When dealing with related parties, the direct method usually doesn’t apply due to potential influence on the transaction price.
Valuation Methods for Related Party Transactions
1. Open Market Value (Rule 28(a))
This method uses the full value in money, excluding taxes, that the recipient would pay in an open market transaction.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B (Subsidiary) | Company A sells goods to its subsidiary Company B. |
| Comparable Transaction | Similar goods are sold to an unrelated party for ₹100,000. |
| Valuation | The open market value for the transaction with Company B should also be ₹100,000. |
2. Value of Like Kind and Quality (Rule 28(b))
If the open market value cannot be determined, the value is based on similar goods or services.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B | Company A supplies customized machinery to Company B. |
| Comparable Transaction | Similar machinery is sold to an unrelated party for ₹150,000. |
| Valuation | The value for the related party transaction is ₹150,000. |
3. 90% of Price to Unrelated Customer (Rule 28(c) Proviso 1)
For goods intended for further supply, the value can be 90% of the price charged to an unrelated customer.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B | Company B resells machinery received from Company A to an unrelated customer for ₹200,000. |
| Valuation | The value of the supply from Company A to Company B can be 90% of ₹200,000, which is ₹180,000. |
4. Invoice Value as Deemed Open Market Value (Rule 28 Proviso 2)
If the recipient is eligible for full input tax credit, the invoice value is considered the open market value.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B | Company A sells raw materials to Company B. |
| Input Tax Credit Eligibility | Company B is eligible for full input tax credit. |
| Valuation | The invoice value declared by Company A is accepted as the transaction value. |
5. Cost-Based Valuation (Rule 30)
If other methods don’t work, the value is 110% of the cost of production or acquisition.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B | The cost of production for goods supplied by Company A to Company B is ₹70,000. |
| Valuation | The transaction value will be 110% of ₹70,000, which is ₹77,000. |
6. Reasonable Means Method (Rule 31)
As a last resort, use a reasonable method consistent with GST principles.
Example:
| Scenario | Explanation |
|---|---|
| Company A to Company B | If no other methods are feasible, Company A and Company B use a reasonable method to ascertain the value. |
| Valuation | Ensure the value aligns with GST principles and general provisions of Section 15. |
Practical Examples and Applications
| Transaction Type | Example | Valuation Method | Value |
|---|---|---|---|
| Service Transactions | Parent company provides consulting to subsidiary | Open Market Value | ₹50,000 |
| Goods Transfer | Company transfers goods worth ₹100,000 to related party | Open Market Value | ₹95,000 |
Understanding these valuation methods ensures proper GST compliance, avoiding penalties and issues with tax authorities.
