VALUATION ASSIGNMENTS IN CASE OF RELATED PARTY TRANSACTIONS

As a matter of principle, tax will be leviable under GST law at each stage of transaction at the prescribed rate. Tax will be leviable on the value of the transaction entered into between the parties. Section 15 of Model GST Law provides that for the purpose of levy of tax value of the transaction shall be accepted if the supplier and the recipient are not related and the price is the sole consideration. Accordingly, it is a condition for adopting the transaction value for the purpose of levy of tax that the parties should not be related to each other and the price should be the sole consideration, meaning thereby, the price should be determined as if they are the independent parties. The aforesaid condition obviously has been imposed to avoid under valuation of transactions between the parties who are related to each other.

The term “related person” has been defined under Model GST Law vide section 2(82) as under:
  (a) They are officers or directors of one another's businesses;
  (b) They are legally recognized partners in business;
  (c) They are employer and employee;
  (d) Any person directly or indirectly owns, controls or holds five per cent or more of the  outstanding voting        stock or shares of both of them;
  (e) One of them directly or indirectly controls the other;
  (f) Both of them are directly or indirectly controlled by a third person;
  (g) Together they directly or indirectly control a third person; or
  (h) They are members of the same family;

As per the above provision, the definition of related persons is very wide and extends to even the employer & employees, family members, etc.

In the aforesaid background and the provisions of Model GST Law, it is important to examine the provisions which will govern determination of transaction value in case the transactions are between the related parties. In this regard, Rule 3(4) of GST Valuation Rules provides that transaction value shall be accepted where the supplier and recipient are related parties, provided that the relationship has not influenced the price of the goods and service. Accordingly, in the circumstances where the relationship of the parties has not influenced the value, transaction value shall be accepted by the Officer. However, as per Rule 7, if the officer has any reason to doubt the truth and accuracy of the transaction, he may ask the supplier to furnish the details / information to justify the value. In case the officer is still in doubt, the transaction will be deemed to be transaction not as per the valuation principle and the assessing officer will determine the transaction value. Before rejecting any transaction value between the related parties, the officer shall, however, supply in writing the grounds for having doubt in regard to truth and accuracy of the value and also give proper and reasonable opportunity to the supplier to present his case. If after hearing the supplier, the officer is not satisfied, the officer shall determine the value after recording the reasons for the same. Under the GST valuation rules, there are set of rules which provide the manner of determining value of the transaction 

undertaken by the related parties. These rules are as under: 

1. Comparative Method - Vide Rule 4, it has been stated that where the value determined is not 

the proper transaction value, the value shall be determined on the basis of transaction 

undertaken by such supplier with other customers of the goods / services of like kind and quality. 

However, in determining the value on the basis of comparison, certain adjustments are 

prescribed in Rule 4(2) which the officer shall consider while determining the transaction value. 

The adjustments prescribed includes difference in dates of supply, difference in commercial level 

and quantity level, difference in composition / quality and design between goods and services 

and difference in freight and insurance charges depending on place of supply. However, if the 

valuation is not determinable under Rule 4 then the officer will proceed to Rule 5 in determining 

the value which is called a computed value method. 

2. Computed value method – Vide Rule 5 of the GST valuation rules, it is stated that in order to 

determine the transaction value various types of costs are added for providing goods / services. 

The cost towards design & brand of the goods are also added and the amount towards profit and 

general expense are also added to cost in order to determine the transaction value. Even if the 

value is not determinable under Rule 5 above, the officer will further proceed to Rule 6 which is 

residual method for calculating the value. 

3. Residual Method - Vide Rule 6 of the GST Value Rules, the value shall be determined using 

reasonable means consistent with the principles and general provisions of these rules.