We hereunder providing brief update on “Related party” transactions. The ‘related party’ is defined in GST (as per section 25 of CGST Act, 2017) as under:-
a) Such persons are officers or directors of one another’s businesses :- For example, Mr. A is a director in X Fashion Limited and an officer in M Textiles. Mr. B is an officer in X Fashion Limited and a director in M 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.
b) Such persons are legally recognized partners in business :-For example, Mr. A and Mr. M are partners in X Fashion Limited and thus any supply transaction of goods/ services between them will be treated as a supply between related persons.
c) Such persons are employer and employee:- For example, if Mr. A is an employee of X Fashion Limited then any transaction with regard to a supply of goods/ services between Mr. A and X Fashion Limited shall be regarded as a supply between related persons.
d) Any person directly or indirectly owns, 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
e) One of them directly or indirectly controls the other :- For example, direct control takes place when X Fashion Limited holds equity in LM 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 X Fashion Limited and LM Accessories Limited, wherein X Fashion Limited holds equity in LM Accessories Limited. Further, X Fashion Limited holds equity in D Ltd and T Limited. Therefore, in case of a supply taking place between LM Accessories Limited and D Ltd and T Limited, the transaction will be regarded as a related supply based on indirect control.
f) Both of them are directly or indirectly controlled by a third person :- For example, if X Fashion Limited holds equity in both Leather Accessories Limited as well as in D Ltd and T Limited, then any transaction taking place between Leather Accessories Limited and D Ltd and T Limited will be regarded as a related supply transaction.
g) Together they directly or indirectly control a third person :- For example, X Fashion Limited holds 70% equity in Leather Accessories Limited and 40% equity in D Ltd and T Limited. Leather Accessories Limited holds 60% equity in C United. Therefore, together, BJ Furniture Limited has control over D Ltd and T Limited and any transaction of supply between them will be regarded as a supply between related persons.
h) They are members of the same family;
i) Under GST, the term “related parties” also includes legal persons and persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, of the other. Further, related parties is also referred to as related persons or distinct persons under GST.
Who is a Distinct Person?
Under GST Act it is clearly mentioned that:
· Every seller/individual must be responsible tax payer registered under Schedule-V of the Act.
· A person who needs or have more than one registration, whether in one state or more than one state, shall be treated as distinct person with respect to every registration done under the Act.
· An establishment of a person which has or is required to register in a state and any of his other establishment in some other state shall be considered as distinct persons for the purposes of this Act.
The following scenarios are considered taxable for transactions between distinct persons:
Intrastate Supplies: Stock transfers taking place intrastate when an entity has more than one registration in a single state. For example, JM Furnishers is a furniture manufacturing unit located in Mumbai and owns a factory in Mumbai. JM 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, JM 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.
Export of service between distinct persons considered as supply.
Service is said to be exported when the following conditions are satisfied:
· Supplier of services is located in India
· Receiver of services is located outside India
· Place of supply is outside India
· Payment for such service is received in convertible foreign exchange
· Supplier and receiver of service are not merely establishments of a distinct person
Therefore, if a unit in India provides services to a branch outside India, it will not be an export of service as the 5th condition mentioned above does not get satisfied. Since this supply will not be an export, it will also not be a zero-rated supply. Hence the above transaction which was exempt before the GST will now be taxable.
Advance Ruling on “Related Party” transactions:
It was held in the case of In JSW group, the Appellate Authority for Advance Ruling refuses input tax credit for coal used for power generation.
A decision of an Appellate Authority for Advance Ruling can have the effect of plugging the leak in GST payments in related party transactions, with or without consideration.
The issue came up when JSW Steel and JSW Energy, both of the JSW Group, proposed to enter into a job work agreement under which the former would procure coal or any other input and supply to the latter. The power generated was to be supplied back to the steel company while the energy unit would get job work charges.
During the entire process, the title to the inputs would vest with the steel company along with the power generated. In addition to power, fly ash and other products generated at the power plant using the inputs would also vest with the steel company. JSW Energy approached the Authority for Advance Ruling (AAR) to know the applicability of GST on three things: supply of coal or any other inputs on a job work basis by the steel company to the energy company, supply of power by the latter to the former, and the job work charges payable to the power outfit.
The AAR’s order said that the proposed activity of the energy company is manufacture, and does not fall within the purview of “treatment or process”, as defined by “job work”. It also said that as both the companies are related parties, any supplies made between them, even without consideration, will be subject to GST.
The energy company then moved the Appellate Authority. The authority made it clear that “the transaction between the appellant (JSW Energy) and JSL (JSW Steel Limited) does not qualify for job work.”
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