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Supply of Goods and Services between Related Persons, or between Distinct Persons

In our earlier post we explained the impact of GST on supplies made without consideration and importation of services. In this article, we have attempted to explain the differences between related and distinct persons under GST regime with respect to supplies without consideration.

Understanding Related Person

Just like the Customs Valuation Rules under the pre-GST regime, a related person under GST is somewhat similar. The supply is considered as between related persons only if the supply of goods or services is made in the below mentioned way between:-

  1. The supplier and recipient are officers or directors of one another’s businesses. For example, Mrs. Khan is a director in Max Fashion Limited and an officer in Minda Textiles. Mr. Mohan is an officer in Max Fashion Limited and a director in Minda Textiles, thus in case of a supply of goods/ services between these two parties, the transaction will be considered to be that of a supply between related persons.
  2. The supplier and recipient are legally recognised partners in business. For example, Mrs. Khan and Mr. Mohan are partners in Max Fashion Limited and thus any supply transaction of goods/ services between them will be treated as a supply between related persons.
  3. The supplier and recipientare employer and employee. For example, if Mrs. Khan is an employee of Max Fashion Limited then any transaction with regard to a supply of goods/ services between Mrs. Khan and Max Fashion Limited shall be regarded as a supply between related persons.
  4. The supplier, or the recipient directly or indirectly controls or holds twenty-five per cent, or more of the outstanding voting stock or shares of both of them. For example, if the supplier owns 30% of equity in the recipient’s business.
  5. The supplier, or the recipient directly or indirectly controls the other. For example, direct control takes place when Max Fashion Limited holds equity in Leather Accessories Limited. Therefore, the supply that takes place between the two companies are related as there is direct control of the business. In case of indirect control, let us take the example of Max Fashion Limited and Leather Accessories Limited, wherein Max Fashion Limited holds equity in Leather Accessories Limited. Further, Max Fashion Limited holds equity in Zippers and Tags Limited. Therefore, in case of a supply taking place between Leather Accessories Limited and Zippers and Tags Limited, the transaction will be regarded as a related supply based on indirect control.
  6. The supplier and the recipient are directly or indirectly controlled by a third person. For example, if Max Fashion Limited holds equity in both Leather Accessories Limited as well as in Zippers and Tags Limited, then any transaction taking place between Leather Accessories Limited and Zippers and Tags Limited will be regarded as a related supply transaction.
  7. The supplier and the recipient together directly or indirectly control a third person. For example, Max Fashion Limited holds 70% equity in Leather Accessories Limited and 40% equity in Zippers and Tags Limited. Leather Accessories Limited holds 60% equity in Crockery United. Therefore, together, JB Furniture Limited has control over Zippers and Tags Limited and any transaction of supply between them will be regarded as a supply between related persons.
  8. The supplier and the recipient are members of the same family, then any transaction taking place between them shall be regarded as a supply between related persons.

Understanding Distinct Person

A distinct person under GST India law is described as any taxable person who has obtained or is required to obtain more than one registration within the same state or in different states. A distinct person may also be one whose establishment has either obtained or is required to obtain a registration and the person also has an establishment in another state. Every registration and establishment belonging to such a taxable person shall be treated as a distinct person and every supply transaction made between such distinct persons shall be regarded as taxable. The following scenarios are considered taxable for transactions between distinct persons:

  • Intrastate Supplies: Stock transfer taking place intrastate when an entity has more than one registration in a single state. For example, Jindal Furnishers is a furniture manufacturing unit located in Delhi and owns a factory in Delhi. Jindal Furnishers has obtained separate registrations for the manufacturing unit and the factory and thus these two units or establishments will be treated as distinct persons. Any transaction made between them will be regarded as a taxable transaction even when no consideration amount is present.
  • Interstate Supplies: Stock transfer taking place interstate between two entities that are located in two different states is taxable. For example, Jindal Furnishers has a manufacturing unit located in Delhi and a factory in Karnataka. Therefore, these two units will be treated as distinct persons and any supply transaction made between the two units will be taxable even without consideration i.e, no consideration amount is present.

 

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