Under the CGST Act's Schedule I, specific transactions, including those between connected individuals, are classified as 'supply' for Goods and Services Tax (GST) purposes, even if no payment is exchanged. This article examines these types of transactions, detailing how they are considered supplies despite the absence of monetary consideration. These activities, primarily involving related parties or agents and principals, are subject to GST, and taxpayers can subsequently claim input tax credit. Dealings between connected entities hold significant importance in legal frameworks due to the complexities involved in pricing and valuation. When parties are related, transaction prices can be influenced, potentially deviating from what would be established between independent entities. This section explores the GST treatment of transactions between related persons, including when such supplies are taxable and how they are valued under GST regulations.

Defining Related Persons Under GST

According to Section 2(84) of the GST Act, individuals are considered 'related' if they meet any of the following criteria:

• An officer or director of one enterprise also serves as an officer or director for another.
• Their businesses are legally recognized as partners.
• An employer and an employee relationship exists.
• One party directly or indirectly holds at least 25% of the shares in the other company.
• One entity exercises direct or indirect control over the other.
• They are subject to common control or management.
• The entities collectively control a third entity.
• The promoters or management personnel are from the same family.

The term 'persons' encompasses legal entities such as individuals, Hindu Undivided Families (HUF), companies, firms, LLPs, cooperative societies, bodies of individuals, local authorities, governmental bodies, and artificial juridical persons. This definition also extends to entities established outside India. Additionally, those associated in business, or acting as sole agents, distributors, or concessionaires, are also deemed related.

Taxability of Supplies Between Related Persons

When related parties conduct transactions at arm's length, with appropriate consideration, these are typically considered 'supplies' under GST. However, supplies between related persons that involve insufficient or no consideration fall under Schedule I of the GST Act. These transactions qualify as 'supply' only if they occur during or in furtherance of business activities. Furthermore, if a taxable entity imports services from a related person or an overseas establishment for business purposes without consideration, it is still categorized as a supply. An exception applies to gifts from an employer to an employee: if the gift's value is below Rs. 50,000, it is not deemed a supply.

Valuing Transactions Between Related Persons

The value of supplies exchanged between related persons, excluding those facilitated by an agent, is determined through specific methods:

• Open Market Value: This is the price an unrelated entity would pay for the supply. For instance, if Company A sells goods to related Company B for Rs. 1,000 but to unrelated Company C for Rs. 1,500, the latter price of Rs. 1,500 will be used for valuation.
• Value of Like Kind and Quality: If the open market value cannot be established, the value of similar goods or services of comparable kind and quality is used. For example, if Company A exclusively sells to Company B, and Company D sells equivalent goods for Rs. 1,200, then Rs. 1,200 would be the valuation.
• Cost or Residual Method: Should the above methods prove inadequate, the valuation can be based on the total production cost or determined using a residual method.

Supply of Goods Through Agents

Supply of goods through an agent is subject to GST in two scenarios:

• Principal to Agent: When a principal dispatches goods to an agent for subsequent supply on the principal's behalf. For instance, if a Mumbai-based company sends goods to its agent in Pune, GST applies.
• Agent to Principal: When an agent procures goods on behalf of a principal and forwards them. For example, a city agent acquiring goods for a suburban principal.

In both cases, supplies between an agent and principal are subject to GST, with both parties jointly and severally liable. The party paying GST can later claim input tax credit. The valuation rules for supplies involving an agent align with the provisions for related persons.

Importing Services from Related Persons

If a taxable individual imports services from a related entity or an associated overseas establishment for business operations, these imports are considered a supply. For example, if Indian Company B Ltd. imports services without payment from ABC Inc., an entity it co-founded in the US with A Ltd., this import is treated as a supply. B Ltd. will be responsible for paying GST under the reverse charge mechanism.

Permanent Transfer of Business Assets After ITC Claim

The permanent transfer or sale of business assets for which input tax credit (ITC) has been claimed is considered a supply, even if no consideration is received. This applies solely to business assets, not personal property such as land, buildings, or other personal effects. A 'permanent transfer' signifies a transfer with no intent for the goods to be returned. Activities like sending goods for job work, testing, or certification do not constitute a supply because they lack permanent transfer. However, if business assets on which ITC was claimed are donated, scrapped, or disposed of in any way other than a sale for consideration, these actions also qualify as a supply.