Related Party under GST | Taxation for CA Intermediate PDF Download

 Page 1


Under GST, related parties are: 
? Such persons are officers or directors of one another’s businesses; 
? Such persons are legally recognized partners in business; 
? Such persons are employer and employee; 
? Any person directly or indirectly owns or controls or holds twenty-five per cent or more of 
the outstanding voting stock or shares of both of them; 
? One of them directly or indirectly controls the other; 
? Both of them are directly or indirectly controlled by a third person; 
? Together they directly or indirectly control a third person; 
? They are members of the same family; 
Related Party Transaction  Value of Supply –
Transactions between related parties are of special importance under GST law. When parties 
are related, the prices are controlled and they would not sometimes be the prices that would 
have otherwise been charged, had the transaction taken place between unrelated parties. Related 
persons is defined u/s 2(84) of the GST Act. 
For this, the government has notified valuation rules. As per the valuation rules, irrespective of 
the value of transaction (whether with transaction or without consideration), charging GST for 
value of supply between related parties will be as follows:  
A) Value of Supply  Consideration is not wholly in Money –
Page 2


Under GST, related parties are: 
? Such persons are officers or directors of one another’s businesses; 
? Such persons are legally recognized partners in business; 
? Such persons are employer and employee; 
? Any person directly or indirectly owns or controls or holds twenty-five per cent or more of 
the outstanding voting stock or shares of both of them; 
? One of them directly or indirectly controls the other; 
? Both of them are directly or indirectly controlled by a third person; 
? Together they directly or indirectly control a third person; 
? They are members of the same family; 
Related Party Transaction  Value of Supply –
Transactions between related parties are of special importance under GST law. When parties 
are related, the prices are controlled and they would not sometimes be the prices that would 
have otherwise been charged, had the transaction taken place between unrelated parties. Related 
persons is defined u/s 2(84) of the GST Act. 
For this, the government has notified valuation rules. As per the valuation rules, irrespective of 
the value of transaction (whether with transaction or without consideration), charging GST for 
value of supply between related parties will be as follows:  
A) Value of Supply  Consideration is not wholly in Money –
In a lot of related party transaction, the consideration for the value of supply of goods and/or 
services might not be paid wholly in money. Hence, it’s important to ensure that in all related 
party transactions, the rules concerning value of supply where the consideration is not wholly 
in money, is followed. 
When the supply of goods or services  for a consideration not wholly  money, then value is in of 
the supply should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the sum total of consideration in money and any 
such further amount in money as is equivalent to the consideration not in money if such 
amount is known at the time of supply; 
• If the value of supply is not determinable as per the above two conditions, then the value of 
supply of goods or services should be based on like kind and quality; 
• If the value of supply is not determinable as per the above three conditions, then the sum 
total of consideration in money and such further amount in money that is equivalent to 
consideration not in money as determined by the cost method (cost of production) or 
residual method. 
Cost Method for Determining Value of Supply under GST 
Where the value of a supply of goods or services or both is not determinable by any of rules 
prescribed in the procedure for determining value of supply under GST, the value should be 
taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or 
cost of provision of such services. 
B) Value of Supply  Related Party Transaction or Distinct Persons –
The value of the supply of goods or services or both between distinct persons or related parties, 
other than where the supply is made through an agent, should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the value of supply of goods or services of like 
kind and quality; 
• If value is not determinable under the above two methods, then the value as determined by 
cost method or residual method; 
• Also, if goods are intended for further supply as such by the recipient, then the value of 
supply an amount equivalent 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. Finally, if the 
Page 3


Under GST, related parties are: 
? Such persons are officers or directors of one another’s businesses; 
? Such persons are legally recognized partners in business; 
? Such persons are employer and employee; 
? Any person directly or indirectly owns or controls or holds twenty-five per cent or more of 
the outstanding voting stock or shares of both of them; 
? One of them directly or indirectly controls the other; 
? Both of them are directly or indirectly controlled by a third person; 
? Together they directly or indirectly control a third person; 
? They are members of the same family; 
Related Party Transaction  Value of Supply –
Transactions between related parties are of special importance under GST law. When parties 
are related, the prices are controlled and they would not sometimes be the prices that would 
have otherwise been charged, had the transaction taken place between unrelated parties. Related 
persons is defined u/s 2(84) of the GST Act. 
For this, the government has notified valuation rules. As per the valuation rules, irrespective of 
the value of transaction (whether with transaction or without consideration), charging GST for 
value of supply between related parties will be as follows:  
A) Value of Supply  Consideration is not wholly in Money –
In a lot of related party transaction, the consideration for the value of supply of goods and/or 
services might not be paid wholly in money. Hence, it’s important to ensure that in all related 
party transactions, the rules concerning value of supply where the consideration is not wholly 
in money, is followed. 
When the supply of goods or services  for a consideration not wholly  money, then value is in of 
the supply should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the sum total of consideration in money and any 
such further amount in money as is equivalent to the consideration not in money if such 
amount is known at the time of supply; 
• If the value of supply is not determinable as per the above two conditions, then the value of 
supply of goods or services should be based on like kind and quality; 
• If the value of supply is not determinable as per the above three conditions, then the sum 
total of consideration in money and such further amount in money that is equivalent to 
consideration not in money as determined by the cost method (cost of production) or 
residual method. 
Cost Method for Determining Value of Supply under GST 
Where the value of a supply of goods or services or both is not determinable by any of rules 
prescribed in the procedure for determining value of supply under GST, the value should be 
taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or 
cost of provision of such services. 
B) Value of Supply  Related Party Transaction or Distinct Persons –
The value of the supply of goods or services or both between distinct persons or related parties, 
other than where the supply is made through an agent, should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the value of supply of goods or services of like 
kind and quality; 
• If value is not determinable under the above two methods, then the value as determined by 
cost method or residual method; 
• Also, if goods are intended for further supply as such by the recipient, then the value of 
supply an amount equivalent 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. Finally, if the 
recipient is eligible for full input tax credit, then the value declared in the invoice should be 
deemed to be the open market value of goods or service. 
C) Supply of Goods via Agent 
A) 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. 
B) 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. 
Format for computation of transaction value and cost 
 
Particulars  Amount  Amount 
Selling price / -showroom / quoted price ex xxx 
Add: Inclusions to the transaction value not included 
in the sale price 
  
a) Materials purchased    
    a.1) within state (exclusive of CGST,SGCT,IGST) xxx  
    a.2) from other state (exclusive of IGST) xxx  
    a.3) from a registered dealer who opted for 
           composition scheme 
xxx  
    a.4) from SEZ unit (exclusive of IGST) xxx  
    a.5) from an un-registered person within the state 
           or outside the state 
xxx  
    a.6) from other country (imported and inclusive of 
           BCD but exclusive of IGST) 
xxx xxx 
b) Taxes, duties, fees, charges and cess except 
CGST,SGST and IGST 
xxx  
c) Amount paid by the recipient on behalf of supplier    
c.1) for raw materials supplied by buyer at free of 
cost or reduced cost in connection with supply 
xxx  
c.2) Technical consultation & development cost xxx  
c.3) Design charges paid by the buyer xxx  
Page 4


Under GST, related parties are: 
? Such persons are officers or directors of one another’s businesses; 
? Such persons are legally recognized partners in business; 
? Such persons are employer and employee; 
? Any person directly or indirectly owns or controls or holds twenty-five per cent or more of 
the outstanding voting stock or shares of both of them; 
? One of them directly or indirectly controls the other; 
? Both of them are directly or indirectly controlled by a third person; 
? Together they directly or indirectly control a third person; 
? They are members of the same family; 
Related Party Transaction  Value of Supply –
Transactions between related parties are of special importance under GST law. When parties 
are related, the prices are controlled and they would not sometimes be the prices that would 
have otherwise been charged, had the transaction taken place between unrelated parties. Related 
persons is defined u/s 2(84) of the GST Act. 
For this, the government has notified valuation rules. As per the valuation rules, irrespective of 
the value of transaction (whether with transaction or without consideration), charging GST for 
value of supply between related parties will be as follows:  
A) Value of Supply  Consideration is not wholly in Money –
In a lot of related party transaction, the consideration for the value of supply of goods and/or 
services might not be paid wholly in money. Hence, it’s important to ensure that in all related 
party transactions, the rules concerning value of supply where the consideration is not wholly 
in money, is followed. 
When the supply of goods or services  for a consideration not wholly  money, then value is in of 
the supply should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the sum total of consideration in money and any 
such further amount in money as is equivalent to the consideration not in money if such 
amount is known at the time of supply; 
• If the value of supply is not determinable as per the above two conditions, then the value of 
supply of goods or services should be based on like kind and quality; 
• If the value of supply is not determinable as per the above three conditions, then the sum 
total of consideration in money and such further amount in money that is equivalent to 
consideration not in money as determined by the cost method (cost of production) or 
residual method. 
Cost Method for Determining Value of Supply under GST 
Where the value of a supply of goods or services or both is not determinable by any of rules 
prescribed in the procedure for determining value of supply under GST, the value should be 
taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or 
cost of provision of such services. 
B) Value of Supply  Related Party Transaction or Distinct Persons –
The value of the supply of goods or services or both between distinct persons or related parties, 
other than where the supply is made through an agent, should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the value of supply of goods or services of like 
kind and quality; 
• If value is not determinable under the above two methods, then the value as determined by 
cost method or residual method; 
• Also, if goods are intended for further supply as such by the recipient, then the value of 
supply an amount equivalent 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. Finally, if the 
recipient is eligible for full input tax credit, then the value declared in the invoice should be 
deemed to be the open market value of goods or service. 
C) Supply of Goods via Agent 
A) 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. 
B) 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. 
Format for computation of transaction value and cost 
 
Particulars  Amount  Amount 
Selling price / -showroom / quoted price ex xxx 
Add: Inclusions to the transaction value not included 
in the sale price 
  
a) Materials purchased    
    a.1) within state (exclusive of CGST,SGCT,IGST) xxx  
    a.2) from other state (exclusive of IGST) xxx  
    a.3) from a registered dealer who opted for 
           composition scheme 
xxx  
    a.4) from SEZ unit (exclusive of IGST) xxx  
    a.5) from an un-registered person within the state 
           or outside the state 
xxx  
    a.6) from other country (imported and inclusive of 
           BCD but exclusive of IGST) 
xxx xxx 
b) Taxes, duties, fees, charges and cess except 
CGST,SGST and IGST 
xxx  
c) Amount paid by the recipient on behalf of supplier    
c.1) for raw materials supplied by buyer at free of 
cost or reduced cost in connection with supply 
xxx  
c.2) Technical consultation & development cost xxx  
c.3) Design charges paid by the buyer xxx  
d) Packing materials and packing charges  xxx  
e) Pre delivery inspection charges xxx  
f) Selling expenses like advertisement, publicity xxx  
g) Insurance charges upto place of delivery xxx  
h) Bonus, commission etc for increasing sale xxx  
i) Freight / Transport charges up to recipient place xxx  
j) Additional design charges on request of buyer xxx  
k) Interest, late fee or penalty for delayed payment xxx  
l) Subsidies directly linked to the price other than 
subsidies provided by Central or State Govt. 
xxx  
m) Compulsory Warranty charges xxx  
n) Installation and erection charges if it is shown in 
Invoice at the time of or before delivery 
xxx  
o) Royalties and licence fees related to supply xxx  
p) Loading and unloading charges xxx  
q) Shipping charges xxx xxx 
Less: Exclusions to the transaction value included in 
the sale price 
  
a) Discount in normal trade practice xxx  
b) Cash / Trade discount after supply provided that it 
is established in agreement linked to supply 
xxx  
c) Supplies and corresponding credit is reversed by 
recipient 
xxx  
d) Cost of durables and returnable containers   xxx xxx 
Transaction value before adding profit margin  xxx 
Add: Profit margin  xxx 
Transaction Value / Taxable Value  xxx 
 
 
Example: What is the Transaction value for the purpose of levy of GST and also find out the 
GST payable from the following particulars: 
The selling price of the product exclusive of GST 10000, rate of GST is 5%, trade discount `
allowed as per normal trade practice before delivery of the product is `1200. Freight attributable 
for the supply of the product is 750 from factory to buyer place which is not included in the `
above selling price. 
 
Page 5


Under GST, related parties are: 
? Such persons are officers or directors of one another’s businesses; 
? Such persons are legally recognized partners in business; 
? Such persons are employer and employee; 
? Any person directly or indirectly owns or controls or holds twenty-five per cent or more of 
the outstanding voting stock or shares of both of them; 
? One of them directly or indirectly controls the other; 
? Both of them are directly or indirectly controlled by a third person; 
? Together they directly or indirectly control a third person; 
? They are members of the same family; 
Related Party Transaction  Value of Supply –
Transactions between related parties are of special importance under GST law. When parties 
are related, the prices are controlled and they would not sometimes be the prices that would 
have otherwise been charged, had the transaction taken place between unrelated parties. Related 
persons is defined u/s 2(84) of the GST Act. 
For this, the government has notified valuation rules. As per the valuation rules, irrespective of 
the value of transaction (whether with transaction or without consideration), charging GST for 
value of supply between related parties will be as follows:  
A) Value of Supply  Consideration is not wholly in Money –
In a lot of related party transaction, the consideration for the value of supply of goods and/or 
services might not be paid wholly in money. Hence, it’s important to ensure that in all related 
party transactions, the rules concerning value of supply where the consideration is not wholly 
in money, is followed. 
When the supply of goods or services  for a consideration not wholly  money, then value is in of 
the supply should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the sum total of consideration in money and any 
such further amount in money as is equivalent to the consideration not in money if such 
amount is known at the time of supply; 
• If the value of supply is not determinable as per the above two conditions, then the value of 
supply of goods or services should be based on like kind and quality; 
• If the value of supply is not determinable as per the above three conditions, then the sum 
total of consideration in money and such further amount in money that is equivalent to 
consideration not in money as determined by the cost method (cost of production) or 
residual method. 
Cost Method for Determining Value of Supply under GST 
Where the value of a supply of goods or services or both is not determinable by any of rules 
prescribed in the procedure for determining value of supply under GST, the value should be 
taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or 
cost of provision of such services. 
B) Value of Supply  Related Party Transaction or Distinct Persons –
The value of the supply of goods or services or both between distinct persons or related parties, 
other than where the supply is made through an agent, should be calculated as: 
• The open market value of such supply; 
• If open market value is not available, be the value of supply of goods or services of like 
kind and quality; 
• If value is not determinable under the above two methods, then the value as determined by 
cost method or residual method; 
• Also, if goods are intended for further supply as such by the recipient, then the value of 
supply an amount equivalent 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. Finally, if the 
recipient is eligible for full input tax credit, then the value declared in the invoice should be 
deemed to be the open market value of goods or service. 
C) Supply of Goods via Agent 
A) 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. 
B) 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. 
Format for computation of transaction value and cost 
 
Particulars  Amount  Amount 
Selling price / -showroom / quoted price ex xxx 
Add: Inclusions to the transaction value not included 
in the sale price 
  
a) Materials purchased    
    a.1) within state (exclusive of CGST,SGCT,IGST) xxx  
    a.2) from other state (exclusive of IGST) xxx  
    a.3) from a registered dealer who opted for 
           composition scheme 
xxx  
    a.4) from SEZ unit (exclusive of IGST) xxx  
    a.5) from an un-registered person within the state 
           or outside the state 
xxx  
    a.6) from other country (imported and inclusive of 
           BCD but exclusive of IGST) 
xxx xxx 
b) Taxes, duties, fees, charges and cess except 
CGST,SGST and IGST 
xxx  
c) Amount paid by the recipient on behalf of supplier    
c.1) for raw materials supplied by buyer at free of 
cost or reduced cost in connection with supply 
xxx  
c.2) Technical consultation & development cost xxx  
c.3) Design charges paid by the buyer xxx  
d) Packing materials and packing charges  xxx  
e) Pre delivery inspection charges xxx  
f) Selling expenses like advertisement, publicity xxx  
g) Insurance charges upto place of delivery xxx  
h) Bonus, commission etc for increasing sale xxx  
i) Freight / Transport charges up to recipient place xxx  
j) Additional design charges on request of buyer xxx  
k) Interest, late fee or penalty for delayed payment xxx  
l) Subsidies directly linked to the price other than 
subsidies provided by Central or State Govt. 
xxx  
m) Compulsory Warranty charges xxx  
n) Installation and erection charges if it is shown in 
Invoice at the time of or before delivery 
xxx  
o) Royalties and licence fees related to supply xxx  
p) Loading and unloading charges xxx  
q) Shipping charges xxx xxx 
Less: Exclusions to the transaction value included in 
the sale price 
  
a) Discount in normal trade practice xxx  
b) Cash / Trade discount after supply provided that it 
is established in agreement linked to supply 
xxx  
c) Supplies and corresponding credit is reversed by 
recipient 
xxx  
d) Cost of durables and returnable containers   xxx xxx 
Transaction value before adding profit margin  xxx 
Add: Profit margin  xxx 
Transaction Value / Taxable Value  xxx 
 
 
Example: What is the Transaction value for the purpose of levy of GST and also find out the 
GST payable from the following particulars: 
The selling price of the product exclusive of GST 10000, rate of GST is 5%, trade discount `
allowed as per normal trade practice before delivery of the product is `1200. Freight attributable 
for the supply of the product is 750 from factory to buyer place which is not included in the `
above selling price. 
 
Computation of transaction value and GST payable 
 
Particulars  Amount  Amount in  `
Selling price   10000 
Add: Inclusions to the transaction value not included 
in the sale price 
  
a) Freight   750 
Sub total  10750 
Less: Trade Discount   1200 
Transaction Value  9550 
 
Output Tax Liability: = Transaction Value x rate of GST 
 CGST (9550 x 2.5/100)    238.75 `
 SGST (9,550 x 2.5/100)    238.75 `
 Total GST Payable     477.50 `