Introduction
Transactions between related domestic entities — head office and branches, holding and subsidiary companies, or entities with common control — are subject to special valuation rules under GST. The transaction value is not accepted, and a hierarchical valuation framework applies. The question arises: How should related party transactions be valued for GST purposes?
This guide explains the legal framework under Rule 28 of the CGST Rules and the practical implications.
Legal Framework: Section 15 and Rule 28 of the CGST Rules
Transaction Value Disqualified
Where the supplier and recipient are related persons, the transaction value under Section 15(1) is disqualified. The valuation must follow Rule 28 of the CGST Rules, 2017.
Distinct Persons
The law separately treats distinct persons — different GST registrations of the same legal entity (e.g., a head office in Maharashtra and a branch in Tamil Nadu) — on par with related-party supplies. Schedule I mandates that supplies between related persons or distinct persons are taxable even if made without consideration.
The Rule 28 Valuation Framework: A Sequential Test
Step 1: Open Market Value (OMV)
The primary benchmark. OMV is the full amount a buyer would pay to purchase an identical or similar supply from an unrelated supplier in similar circumstances. This is the cleanest yardstick but also the most contested.
Step 2: Like Kind and Quality
If OMV cannot be determined, the value of goods or services of like kind and quality supplied at or about the same time to an unrelated buyer is used as the benchmark.
Step 3: Cost-Plus or Residual Method
- Rule 30: 110% of the cost of production or provision of service.
- Rule 31: Reasonable means / best judgement is the residual fallback.
Practical Note
In litigation, the OMV step is the most contested battleground. Taxpayers must maintain contemporaneous documentation showing how OMV was determined or demonstrate why it was not available before jumping to Rule 30 or 31. A bald assertion of "cost plus" without exhausting prior steps has been consistently rejected in audit proceedings.
Common Transactions
- Stock Transfers: Between head office and branch.
- Shared Services: IT support, treasury, or administrative services.
- Corporate Guarantees: Provided between related entities.
- Secondment of Employees: Deputation of staff between related entities.
Documentation Required
- Valuation Report: Documentation of the OMV determination.
- Comparable Analysis: Documentation of like kind and quality comparisons.
- Cost Sheets: For cost-plus valuation.
- Inter-Company Agreements: Documentation of the transaction terms.
Best Practices
- Maintain Contemporaneous Documentation: Document the valuation methodology at the time of the transaction.
- Exhaust Prior Steps: Demonstrate why OMV and like kind and quality are not available before using cost-plus.
- Review Agreements: Ensure inter-company agreements reflect arm's length terms.
- Seek Professional Assistance: For complex related-party transactions, seek guidance.
Conclusion
Transactions between related domestic entities must be valued under Rule 28, following a strict hierarchical method. The OMV is the primary benchmark. Contemporaneous documentation is essential to defend the valuation in audit proceedings.
Dealing with related-party transactions? Anuj Desai & Associates provides expert guidance on Rule 28 valuation. Contact us today.
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