TRANSFER PRICING UNDER GST --CA ROHIT SURANA

SCOPE OF TRANSFER PRICING IN GST TRANSFER PRICING UNDER GST RELATED PARTY TRANSACTION TRANSACTIONS BETWEEN DISTINCT PERSON GST Law specifies valuation rules in supply of goods/services between RELATED PERSON | DISTINCT PERSON

Who is a Related Person? Officer/ director of one business is the officer/ director of another business Businesses are legally recognised as partners An employer and an employee Any person holds at least 25% of shares in another company either directly or indirectly One of them controls the other directly or indirectly They are under common control or management The entities together control another entity They are members of the same family

Who is a Distinct Person? Examples of transactions between Distinct persons: Stock Transfers for further supply Expense incurred by HO on behalf of the company as a whole Centralised Procurement of materials Common Employees for accounting, auditing, marketing etc. which provides services to the company as a whole. State B State A A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as DISTINCT PERSONS for the purposes of this Act.

VALUATION RULES OPEN MARKET VALUE LIKE KIND OR QUALITY RESIDUAL METHOD Full value of money payable excluding taxes Supplier and recipient are not related person with price being the sole consideration OPEN MARKET VALUE Any other supply under similar circumstances I.r.t. characteristics, quality, quantity, functional components, materials and the reputation of goods or services Must closely or substantially resemble to the made supply LIKE KIND OR QUALITY R.30: 110 percent of cost of production/ manufacture/ acquisition/ provisioning of such service. R.31: If valuation cannot be determined under any of the rules, apply reasonable means consistent with the principles and general principles of valuation RESIDUAL METHOD

EXECEPTIONS TO THE VALUATION RULES Valuation = 90% of price charged for like kind and quality of goods or services INTENDED FOR FURTHER SUPPLY OF BUSINESS Deemed Open Market Value= Value declared in the Invoice RECIPIENT IS ELIGIBLE FOR FULL ITC

DEEMED SUPPLY OF SERVICES - Even if made without consideration v Supply of services between related persons when made in the course or furtherance of business v Import of Service by a taxable person from a related person or from other establishments outside India, in the course of furtherance of business

TYPES OF TRANSACTIONS: TRANSFER PRICING UNDER GST

DOMESTIC TRANSACTIONS Transactions between Related/Distinct Person Goods or Service Tax Implications 1. Centralised procurements undertaken by an entity for its group companies Deemed Service It must be taxable under Cross charge. 2. An Individual related party providing services to the company. E.g. Sponsorship Services Service The company must be liable to pay tax under RCM if received sponsorship services from an individual. 3. Cost-sharing Arrangements Varies from case to case basis 4. Stock Transfers Goods IGST must be charged for inter-state stock transfers an credit availed. 5. Reimbursement of Expenses If not covered under Pure agent services, taxes must be levied. 6. Supply to an Employee Goods/Service Exemption to gifts up to Rs. 50,000/- 7. Centralised Accounting, Auditing, Marketing etc. team. M/s Columbia Asia Hospitals Private Limited vs AAR Karnataka

INTERNATIONAL TRANSACTIONS Services Consideration Exchanged Branch office in India Head Office abroad Deemed Distinct Persons: Explanation to section 8 of IGST Act, 2017 talks about concept of deemed distinct person: ♦ Explanation 1 provides that where a person has, an establishment in India and any other establishment outside India; an establishment in a State or Union territory and any other establishment outside that State or Union territory; or an establishment in a State or Union territory and any other establishment registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons. ♦ Explanation 2 says that a person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory. Exemption from Tax has been brought for services provided by an establishment of a person with an establishment of that person outside India. Thus, it extends the benefit of no GST for transaction between head office with branches and project office operating in India on the condition place of supply is outside India.

CASE LAWS Services provided by liasioning office in India (M/s Habufa Meubelen B.V. vs AAR-Rajasthan) Facts: The Company with its Head Office in Netherlands reimburses the cost of salary and other expenses at its liaison office in India from HO. The liaison office does not have independent revenue or clients and is only established with the purpose of liasioning with the suppliers with regard to quality control of goods. Query: Whether the reimbursement of expense and salary paid by HO to liaison office is liable to GST? Order: The order held the relevance in the definition of Supply and services in the GST Act. In the aforesaid case, no separate consideration is charged by the liaison office for supply of such specified services. Further, there are no taxable supplies made from the liasioning office and is strictly established only to liasion with the suppliers of Head office. Mere liasioning office in India without any commercial activity does not mean having an establishment in India and hence cannot be treated as separate person. The applicant does not have any other source of income and it is solely dependent on the HO for all the expenses incurred by the applicant. Hence, the reimbursements claimed by them from HO is falling out of the purview of supply of service since it is pure reimbursement of services.

CASE LAWS Third Party Services shared by HO and branches: (British Airways vs CCE Service Tax) Facts: There was an agreement between BA U.K. and CRS/GDS companies (located outside India and not having any branch or business establishment in India) to provide services of maintaining on-line system for providing information about flight schedules, fares, seat availability, etc., of the flights operated by BA and the said information was provided to IATA agents in India. Issue: Department took a view that service recipient in this case was BA India and not BA U.K. and, hence, service tax under reverse charge mechanism was payable by BA India. Order: Hon. CESTAT rejected the view of the department on the grounds that- In the case of supply, it is the recipient who would be the person obliged to make the payment or pay for the service and would be entitled to provision of service to him or his intended beneficiary. Further, a third person can be considered as recipient only if the payer acted as a facilitator or agent for the said third person. M/s. British Airways, India has to be treated as a separate person and the contract between CRS/GDS companies is not with M/s. BA, India but M/s BA, UK. The appellant in the present case is only appointing IATA agents, dealing with them, collecting sale proceeds of the tickets sold by them and remitting the same to the head office. They are not, in fact, even using the said service directly and as such can, by no stretch of imagination held to be service recipient in India so as to pay any service tax.

THANK YOU! -CA Rohit Surana