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transactions between related personsThis article deals with transactions between related persons and other activities to be treated as supply under GST even if made without consideration, which will be treated as supply and GST will be applicable on these transactions. These are listed in the Schedule I of the GST Act.

These transactions are mostly between parties which are related or between an agent and a principal. The parties pay GST and can later claim it as input tax credit.

Transactions between Related Persons

Supply of goods/services between related persons or between distinct persons as specified in section 25, made for business purposes.

Related persons include employee and employer. Employer’s gifts below Rs. 50,000 (in a financial year) to an employee will not be treated as a supply.

Distinct persons as per section 25 means that the various branches/business verticals of a person whether they are in the same state or not. But if the branches are registered separately then they will be treated as distinct persons.

The value of supply in cases between related persons or between distinct persons (with the same PAN) will be:

  1. Open market value
  2. Value of supply of ‘like kind and quality’
  3. Cost based value or Residual valuation

For example:

ABC Ltd. has 3 branches A, B & C in different states. A in West Bengal has run out of stock and B from Uttar Pradesh transfers its excess stock. This stock transfer to a unit outside the State will be treated as a supply.

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Supply of Goods via Agent

  1. By a principal to his agent and the agent will supply them on behalf of the principal.

For example, a company based in Mumbai employs an agent in Pune (Maharashtra) and sends goods to him. GST is applicable.

2. By an agent to his principal when the agent receives these goods on behalf of the principal.

For example, a company in the suburbs employs an agent in the city. The agent buys goods from the city and sends them to the principal to sell in the suburbs.

Any supplies between agent and principal will be liable to GST. Both agent and principal will be liable to pay GST jointly & severally. The person paying GST can later claim input tax credit.

The value of supply to an agent is also based on the above provisions in for related persons.

Taxable Person Importing Services From a Related Person

Import of services by a taxable person from a related person or from any of his other establishments outside India, for business purposes, will be treated as supply.

For example, ABC Inc. is incorporated in the US by A Ltd. along with B Ltd. in India. Services are imported by B Ltd from ABC Inc. without any consideration, the import will be deemed to be a supply. GST will be paid by B Ltd. on reverse charge basis.

Permanent Transfer of Business Assets where ITC has Been Availed on Such Assets

Permanent transfer or sale of business assets on which input tax credit has been availed will also be treated as supply even if there is no consideration received. GST is applicable on the sale of business assets only. It does not apply to the sale of personal land/building and other personal assets.

“Permanent transfer” means transfer without any intention of receiving the goods back.

Goods sent on job work or goods sent for testing/certification will not qualify as supply as there is no permanent transfer.

Donation of business assets or scrapping or disposal in any other manner (other than as a sale – i.e., for a consideration) would also qualify as ‘supply’, where input tax credit has been claimed.

Have more questions on GST? ClearTax has extensive articles on GST.

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