Related-party and distinct-person transactions are deemed supplies under Schedule I, often without consideration. Valuing these supplies correctly is critical because the transaction value is not reliable. Rule 28 of the CGST Rules prescribes a specific valuation hierarchy.
When Rule 28 Applies
Rule 28 applies to supplies between:
- Related persons as defined in the explanation to Section 15.
- Distinct persons as specified in Section 25 (separate registrations of the same legal entity).
These supplies are taxable under Schedule I even without consideration. The transaction value is not accepted because there may be no price or the price may not be at arm's length.
Valuation Hierarchy Under Rule 28
The value of supply between distinct or related persons shall be:
1. Open Market Value
The open market value of the supply is the full value in money, excluding GST, that a recipient would be required to pay to obtain the supply from an unrelated supplier in the ordinary course of business.
If open market value is available and determinable, it is the preferred value.
2. Value of Supply of Goods or Services of Like Kind and Quality
If open market value is not available, the value shall be the value of supply of goods or services of like kind and quality. This means similar goods or services in terms of characteristics, quality, quantity, functional components, materials, and reputation in the market.
3. 110% of Cost of Production/Acquisition/Provision
If both open market value and like kind and quality are not available, the value is 110% of the cost:
- For goods: 110% of cost of production or acquisition.
- For services: 110% of cost of provision of services.
This is the most commonly used method because open market value is often difficult to prove.
4. Reasonable Cost Plus Margin (Residual)
If the above methods fail, the value may be determined using reasonable means consistent with the principles and general provisions of GST law, such as cost plus reasonable profit.
Important Interpretations
- If the recipient is eligible for full input tax credit, the value declared in the invoice (even if lower) is deemed to be accepted as the value under Rule 28(2). This is a significant relaxation. If the recipient can claim full ITC, the department cannot challenge the valuation.
- For distinct persons, even if the recipient cannot claim full ITC, the taxpayer may opt for a value as per Rule 28.
Example
A Mumbai head office provides management services to its Delhi branch without charge. The cost of providing such services is Rs 10,00,000.
- Open market value not available.
- Like kind services not determinable.
- Value = 110% of Rs 10,00,000 = Rs 11,00,000.
- GST at 18% on Rs 11,00,000 = Rs 1,98,000.
The Mumbai office issues a tax invoice to Delhi branch for Rs 11,00,000 plus GST. Delhi branch claims ITC of Rs 1,98,000 if eligible.
Documentation
Maintain:
- Calculation of cost and 110% mark-up.
- Evidence of absence of open market value or like kind data.
- Contracts or agreements between related parties.
- Internal cost records.
- Invoices and ITC records.
Related-Party Import of Services
For import of services from a related person outside India, Rule 28 applies. If no consideration is paid, the value is determined as above. The Indian entity must pay reverse charge on the determined value.
How Anuj Desai & Associates Can Help
We help group companies and branches apply Rule 28 correctly, prepare valuation documentation, manage cross-border related-party services and defend valuations.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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