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GST and Transfer Pricing Need for Harmonization (GST vis--vis Income Tax)

Goods and Services Tax - GST - By: - CASanjay Kumawat - Dated:- 7-11-2017 Last Replied Date:- 9-11-2017 - In the present age of globalization, it is a universal phenomenon that multinational Companies (MNCs) have branches/subsidiaries/divisions operating in more than one country. In such a situation, it is common event for MNCs to transfer goods produced by a branch in one tax jurisdiction to an associate branch operating in another tax jurisdiction. While doing so, the MNCs concerned has in min .....

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the same way as a transaction between independent enterprises. The Arm s Length Price (ALP) of a transaction between two associated enterprises is the price that would be paid if the transaction had taken place between two comparable independent and unrelated parties, where the consideration is only commercial. Under Income Tax Act, 1961, in order to provide a statutory framework empowering the tax authorities to determine reasonable, fair and equitable profits and tax in respect of cross border .....

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determination of reasonableness of expenditures between related domestic parties, the provisions of section 92 have been extended to include within its ambit the specified domestic transaction. Under GST regime, in Indian context, supply of goods and/or services between distinct person, as described in section 25(4) and (5) of the CGST Act, 2017, and related person, as defined in an explanation (a) attached with section 15 of the CGST Act, 2017, would be subject to levy of GST. Therefore, it is .....

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duly accounted for in GST returns. If the goods were exported and existing export documentation is not sufficient to support the adjusted price of goods, it is not clear how the GST authority would accept these documents for the purposes of allowance of benefit of zero-rated supply under section 16 of the IGST Act, 2017. This article focuses on the expectations of the taxpayers around the arm s length principle introduced, in GST framework, for the goods and services transactions between the di .....

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term associated enterprises has been defined in section 92A of the Income Tax Act, 1961. Under GST Act, 2017, section 2(12) provides meaning of the term associated enterprises . Accordingly, associated enterprises shall have the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. Accordingly, the term Associated Enterprise generally means any entity that participates directly or indirectly or through one or more intermediaries in the management or control or capital of an .....

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entity. Other specific relationships applicable to firms and family businesses are also prescribed. In the context of Specified Domestic Transactions, a related party (also referred to as Associated Enterprise ) includes, amongst others, a director of a Company, a relative of such director, an entity having substantial interest (i.e., holding more than 20% of the voting power) in the other entity, subsidiaries, fellow subsidiaries, etc. Related Persons Under GST, as per explanation (a) attached .....

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ntrolled by a third person; together they directly or indirectly control a third person; or they are members of the same family. Distinct Persons As per section 25(4) of the CGST Act, 2017, 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 GST Act. As per section 25(5) of the CGST Act, 2017, .....

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ethods. The Regulations have prescribed the following five methods for determination of ALP - Comparable Uncontrolled Price Method (CUP), Cost Plus Method (CPM), Resale Price Method (RPM), Profit Split Method (PSM), and Transactional Net Margin Method (TNMM). The Transfer Pricing Regulations also provide for use of any other method which takes into consideration a price charged in a similar transaction between unrelated parties in uncontrolled circumstances. In cases where there is more than one .....

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, provides provisions for determination of value of supply. Accordingly, the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Section 15 of the CGST Act, 2017 deals with a situation where supplier and the recipient of the supply are not related persons. .....

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section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- be the open market value of such supply; if the open market value is not available, be the value of supply of goods or services of like kind and quality; if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order. Provided that where the goods are intended for further supply as such by the recip .....

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ue of supply, are as follows: Open Market Value ( OMV ) Method Like kind and Quality Method (Or comparable method) Cost Plus Method (Rule 30 ) Residual Method (Rule 31 ) Resale price Method The various methods given in Rule 28 of the CGST Rules, 2017 have been discussed below: Open Market Value ( OMV ) Method The value of the supply of goods or services or both between distinct persons or where the supplier and recipient are related shall be the open market value of such supply. As per explanati .....

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oods or services are made when the supplier and recipient are not related and the price is the sole consideration for supply. This can be explained by way of an example. A manufacture of electronic items sells the AC to a customer for ₹ 1 lakh but he provides the AC to related person for ₹ 0.75 lakhs. The related person supplied goods to manufacturer for which amount charged by him is only ₹ 0.25 lakh and it was agreed that he will be provided the AC at the price of 0.75 lakh. .....

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n Standards (IVS 1 - Market Value Basis of Valuation, Seventh Edition): The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. From a taxpayer s perspective, open market value (OMV) is the value at which supply of goods and services being made to an unrelated person as per the market tre .....

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ke kind and Quality Method (Or comparable method) The value of the supply of goods or services or both between distinct persons or where the supplier and recipient are related shall be the, where if the open market value is not available, value of supply of goods or services of like kind and quality. As per explanation (b) attached after Rule 35 of the CGST Rules, 2017, supply of goods or services or both of like kind and quality means any other supply of goods or services or both made under sim .....

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onents, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles. This method is similar to the Comparable Method provides under Income Tax Act, 1961. Under GST, selection of comparables will be a tedious task for the taxpayers and any wrong determination of value of supply will invite the litigation in near future. For the purpose of selection of comparables, comparability analysis is to be performed by a comparison of .....

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nt is not possible to perform. Selection of loss-making or abnormal profit-making taxpayers as comparables; Comparison of high-end services with low-end services; There are some differences like business relations, future expectations, use of Trademark and other marketing intangibles, specific circumstance, etc. which cannot be accurately adjusted. Comparison of trading functions with agency functions; Comparison of turnover, employee costs, transactions in foreign currency, etc.; Comparability .....

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omparison of the product shall be made between the product in respect of characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both. The GST authorities or Department must demonstrate comparability of these factors in order to determine the value of supply of goods or services of like kind and quality otherwise it will add various interpretational issues, classification issues, etc in newly launched GST, hence, lead to litigation. Th .....

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kard (India) Software Operation (P) Limited v. DCIT 2016 (3) TMI 1242 - ITAT BANGALORE , it was held that company having revenue from software licensing could not be compared to a company providing software development services. Support Services : In C3I Support Services (P) Limited v. DCIT 2016 (4) TMI 1279 - ITAT HYDERABAD , it was held that assessee, a BPO, could not be compared with a company that was into KPO services. Manufacturing Industry : In Essilor Manufacturing India (P) Limited v. D .....

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and/or services, in case of services, the application of this Rule will be very difficult task for the authorities because quality of services or services for the satisfaction can t be measured. Cost Plus Method If the value is not determinable under earlier valuation methods, value of supply shall be the value as determined by the application of Rule 30 or Rule 31, in that order. Accordingly, Rule 30- Value of supply of goods or services or both based on cost of the CGST Rules, 2017, provides t .....

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t specify the clear guidelines or procedure or standards to determine the cost of the goods or provision of services. However, similar provisions of value based on cost of production or manufacture is contained in Rule 8 of Central Excise Valuation (Determination of value of excisable goods) Rules, 2000 issued under the Central Excise Act, 1994. As per CBEC Circular No. 692/08/2003 dated 13.02.2003 read with Cost Accounting Standard-4 (Known as CAS-4) may be referred for the purpose of determina .....

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provident fund and ESIS Bonus/ ex-gratia payment to employees Provision for retirement benefits such as gratuity and superannuation Medical benefits Subsidised food Leave with pay and holiday payment Leave encashment Other allowances such as children s education allowance, conveyance allowance which are payable to employees in the normal course of business etc. It is important to note that in the case of supply of services, the supplier may opt for Rule 31, ignoring rule 30. Hence, If the value .....

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etermination of value of supply of goods or services or both of the CGST Rules, 2017, provides that where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter. It may be noted that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30. Accordingly, in this case, value .....

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at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. The essential characters of this provision are as follows: There must be as such supply (i.e., supply in the same form in which received.). In other words, this method can be applied for trading industry only. This method is available at the option of supplier only. The value of supply shall be .....

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GST on 10 % value of the supply of goods. Other As per second proviso to Rule 28 of the CGST Rules, 2017, where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. Accordingly, the declared invoice value will be accepted but only where the recipient (or buyer) is eligible to claim credit of GST charged. In cases where credit is not available, GST will be applicable on open market value, whic .....

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equired, supplier will have to substantiate the manner of determining the value of supply. Tolerance limit for value of supply under GST Under Income Tax Act, 1961, the tolerance range available for wholesale traders is 1%, while that for other taxpayers is 3% of the value of International Transaction/ Specified Domestic Transaction. On other hand, no tolerance range available under GST hence it will invite the accuracy related issues, correctness issues, hence, resultant in disputes between the .....

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