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Related in GST, unrelated in Customs !

MARCH 28, 2017

By Disha Jain & Nikhil Mediratta, Lakshmikumaran & Sridharan

THE triggering events such as sale, service, manufacture etc. will no longer remain relevant for imposition of Indirect Taxes when the Goods and Service Tax ("GST") regime is rolled out, effective July 01, 2017. The concept of supply shall now be a sine qua non to determine whether GST can be levied on an activity. The meaning and scope of supply has been defined inclusively under Section 3 of the Model GST Law ("MGSTL").

The definition of supply, inter alia, includes a supply specified in Schedule I, made or agreed to be made without consideration. Schedule I is titled 'Matter to be treated as supply even if made without consideration'. Schedule I, inter alia, includes supply of goods or services between related persons, or between distinct persons as specified in Section 10, when made in the course or furtherance of business. Accordingly, a supply effected between related persons without consideration but, in the course or furtherance of business, will be covered by the GST net.

The term 'related persons' has been defined under clause (84) to Section 2 of the MGSTL. It provides that persons shall be deemed to be related persons if only-

a. they are officers or directors of one another's businesses;

b. they are legally recognized partners in business;

c. they are employer and employee;

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;

e. one of them directly or indirectly controls the other;

f. both of them are directly or indirectly controlled by a third person;

g. together they directly or indirectly control a third person; or

h. they are members of the same family;

The above definition has been borrowed from the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Rule 2(2) to the said Rules provides a similar mechanism to determine whether persons are related to each other.

However, Explanation II to Section 2(84) and to Rule 2(2) is differently worded. The same is tabulated below for the purpose of comparison:

Explanation II to Section 2(84) of MGSTL

Explanation II to Rule 2(2) to Custom Valuation Rules

Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related

Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule.

It can be seen from the above tabulation that for persons to be related for the purpose of Custom Valuation Rules, the deeming fiction created by Explanation II operates only when one of the criteria mentioned under Rule 2(2) is satisfied. In other words, the deeming fiction that persons (who are associated in the business of one another, in that one is the sole agent/ distributor/ concessionaire of the other) are related will operate only if the criteria mentioned under Rule 2(2) are satisfied.

However, for the purpose of Section 2(84) of the MGSTL, no such criteria are required to be satisfied. Does the omission of the phrase 'if they fall within the criteria of this sub-rule' which is present in Customs when compared with GST signify that different parameters will be followed to determine related parties for the purpose of Customs and for GST? Further, for one transaction of import, will two different parameters be made applicable for determining valuation for customs duty and IGST? This will definitely upsurge the valuation related disputes.

Another point of concern is that no definition as such has been provided for 'sole distributor' under the MGSTL leaving valuation of such transactions to multiple interpretations. Though, various decisions such as Jay Engineering Works Limited v. UOI[1981 (8) E.L.T. 284 (Del.)] and AK Roy v. Voltas[ - 2002-TIOL-381-SC-CX-LB] have discussed when a distributor will be a sole distributor, however, to what extent can the same be made applicable to settle GST related issues, is still an open question. Thus, in order to ensure minimal litigation, a definition of 'sole distributor'is required under the MGSTL.

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 


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