Saturday, May 25, 2024

GST Valuation for Related Party Transactions: An Analytical and Illustrative Note

Understanding the nuances of valuing transactions between related parties is crucial for ensuring compliance with GST regulations. This guide provides a detailed analysis of the various valuation methods under the GST Act, accompanied by practical examples and clear illustrations.

Defining Related Parties

Under Section 15 of the GST Act, related parties are defined as individuals or entities with specific relationships that could influence the terms of their transactions. These relationships include:

Officers or DirectorsOfficers or directors in each other’s businesses.
Business PartnersLegally recognized partners in a business.
Employer and EmployeeEmployer and their employee.
Significant ShareholdersIndividuals or entities that own, control, or hold 25% or more of the voting stock or shares, directly or indirectly.
Mutual ControlIndividuals or entities that control each other, or are controlled by a third person.
Family MembersMembers of the same family (such as spouse, siblings, parents, children, etc.).
Sole Agents, Distributors, or ConcessionairesEntities acting as sole agents, distributors, or concessionaires for each other.

Transaction Value and Its Limitations

Section 15(1) states that the transaction value is the price actually paid or payable if the supply is between unrelated parties and is the only consideration. When dealing with related parties, the direct method usually doesn’t apply due to potential influence on the transaction price.

Valuation Methods for Related Party Transactions

1. Open Market Value (Rule 28(a))

This method uses the full value in money, excluding taxes, that the recipient would pay in an open market transaction.


Company A to Company B (Subsidiary)Company A sells goods to its subsidiary Company B.
Comparable TransactionSimilar goods are sold to an unrelated party for ₹100,000.
ValuationThe open market value for the transaction with Company B should also be ₹100,000.

2. Value of Like Kind and Quality (Rule 28(b))

If the open market value cannot be determined, the value is based on similar goods or services.


Company A to Company BCompany A supplies customized machinery to Company B.
Comparable TransactionSimilar machinery is sold to an unrelated party for ₹150,000.
ValuationThe value for the related party transaction is ₹150,000.

3. 90% of Price to Unrelated Customer (Rule 28(c) Proviso 1)

For goods intended for further supply, the value can be 90% of the price charged to an unrelated customer.


Company A to Company BCompany B resells machinery received from Company A to an unrelated customer for ₹200,000.
ValuationThe value of the supply from Company A to Company B can be 90% of ₹200,000, which is ₹180,000.

4. Invoice Value as Deemed Open Market Value (Rule 28 Proviso 2)

If the recipient is eligible for full input tax credit, the invoice value is considered the open market value.


Company A to Company BCompany A sells raw materials to Company B.
Input Tax Credit EligibilityCompany B is eligible for full input tax credit.
ValuationThe invoice value declared by Company A is accepted as the transaction value.

5. Cost-Based Valuation (Rule 30)

If other methods don’t work, the value is 110% of the cost of production or acquisition.


Company A to Company BThe cost of production for goods supplied by Company A to Company B is ₹70,000.
ValuationThe transaction value will be 110% of ₹70,000, which is ₹77,000.

6. Reasonable Means Method (Rule 31)

As a last resort, use a reasonable method consistent with GST principles.


Company A to Company BIf no other methods are feasible, Company A and Company B use a reasonable method to ascertain the value.
ValuationEnsure the value aligns with GST principles and general provisions of Section 15.

Practical Examples and Applications

Transaction TypeExampleValuation MethodValue
Service TransactionsParent company provides consulting to subsidiaryOpen Market Value₹50,000
Goods TransferCompany transfers goods worth ₹100,000 to related partyOpen Market Value₹95,000

Understanding these valuation methods ensures proper GST compliance, avoiding penalties and issues with tax authorities.