A GST notice alleging under-valuation or non-payment on services between related persons invokes Section 15 read with Rule 28 of the CGST Rules, and where the supply is without consideration, Schedule I, Entry 2 of the CGST Act. The department’s typical case is that the related party received a service—management support, brand usage, guarantees, secondment—for nil or inadequate consideration, and that the value should be benchmarked upward. The taxpayer’s defence has been materially strengthened by three recent judicial developments: the Gujarat High Court’s read-down of Rule 28(2) in Torrent Power, the德里 High Court’s zero-value principle in KEI Industries, and the Mahindra & Mahindra adjudication on brand usage where the subsidiary’s ITC availability determined the parent’s liability.
The Torrent Power Read-Down of Rule 28(2)
Rule 28(2), inserted with effect from 26 October 2023, prescribed that the value of a corporate guarantee between related persons shall be deemed to be 1% of the guaranteed amount per annum or the actual consideration, whichever is higher. In Torrent Power Ltd v. Union of India, the Gujarat High Court upheld the taxability of corporate guarantees as supplies between related persons even without consideration, but read down the mandatory “whichever is higher” clause. The Court held that where actual, ascertainable consideration exists—including consideration below 1%—GST applies to that actual consideration; the 1% deemed value applies only where the guarantee is gratuitous or its value cannot be determined. The Court further held that Rule 28(2) cannot operate retrospectively for periods before 26 October 2023, and set aside Section 74 notices concerning past periods.
The practical consequence for a notice covering periods before 26 October 2023 is that the retrospective invocation of Rule 28(2) is vulnerable. For periods after that date, the taxpayer can argue that the actual consideration, where documented, displaces the 1% deemed value.
The KEI Industries Zero-Value Principle
In KEI Industries Ltd v. Union of India, the德里 High Court quashed an IGST demand on expenses that the petitioner had not cross-charged to its group entities. Following Circular No. 199/11/2023-GST and the court’s earlier secondment ruling, the High Court clarified that un-invoiced services can be valued at zero where full input tax credit is available. The rationale is revenue neutrality: if the recipient is eligible for full credit, an inflated valuation produces no net revenue to the government and merely creates a compliance burden. The same principle underpins the Mahindra & Mahindra adjudication, where the authority held that if the subsidiary pays GST and claims ITC, the parent is not liable beyond the declared value; where the group company is not eligible for full ITC, the valuation benchmark becomes relevant.
The ITC-Availability Defence
The common thread across Torrent Power, KEI Industries and Mahindra is that the related-party valuation dispute is not resolved on the symmetry of the transaction alone. The taxpayer should lead with the ITC position of the recipient: if the recipient is a registered person eligible for full credit, the revenue-neutrality argument supports the declared value or zero value, as the case may be. Where the recipient is partly exempt or in a no-ITC sector (real estate under the 5%/1% scheme, exempt supplies), the department’s benchmarking argument gains force, and the reply should pivot to the actual consideration, the commercial rationale and the absence of any statutory minimum for the specific service.
The Notice-Specific Response
A Rule 28 notice should be answered with the related-party agreement, the service description, the consideration actually charged, the recipient’s ITC eligibility, the GSTR-2B and credit ledger of the recipient, and the valuation analysis under Rule 28(1) or 28(2) as applicable. Where the notice invokes Section 74 for the pre-October 2023 period, the Torrent Power prospective holding should be pleaded directly. Where the notice treats a nil-consideration service as taxable without examining the ITC position, KEI Industries and Mahindra should be cited.
What the Taxpayer Should Control
The related-party outcome depends on three variables: whether the notice period falls before or after 26 October 2023; whether the recipient’s ITC eligibility supports the declared or zero value; and whether the reply leads with the actual consideration and the commercial rationale rather than a blanket denial. The taxpayer that controls these variables narrows the dispute from a valuation re-determination to a revenue-neutral correction.
Call to Action: We advise corporate groups on Rule 28 related-party notices, Torrent Power-based prospective arguments and ITC-linked valuation defences. For a related-party-specific engagement, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.