A new frontier for disputes under GST

Emboldened with “One Nation, One Tax”, establishing the goods and services tax (GST) regime marks a climatic transformation in India’s taxation landscape, earmarking the most significant indirect tax reform in history. Having a revitalised impact on the Indian economy and an accelerated fiscal consolidation, the introduction of GST has fostered a more unified and robust economic environment. 

Since its inception, GST has triggered a wave of litigation; yet the government has adeptly navigated these proactively through extensive democratic deliberations with the GST Council. Indeed, collaborative efforts have facilitated resolving some of the trickiest issues, often through administrative circulars and legislative amendments. While other litigious issues in GST have been addressed with relative efficacy, related-party transactions (RPTs) have been an area that continue to remain unsettled for years on end.

RPT under the GST law has a wide coverage since it is considered as deemed supply, even if no consideration is attached to it. Thereby, any transaction with a related party is within the scanner of the GST law. To aggravate the situation, the definition of related party is widely worded to cover relationships which are based on control, employment status, control by third person, and family relations. This again gives another wide coverage to the scope of RPT.

Interestingly, the erstwhile service tax law did not recognise RPT for the purpose of levying service tax. Thus, taxpayers never faced service tax levy on RPT. It is also widely known that the erstwhile service tax law formed the basis of the GST law, which has borrowed most of the concepts from it. 

The absence of provisions on RPTs under the erstwhile service tax law could be one of the key reasons for the far from ideal RPT provisions under the GST law. This situation exacerbates further, since service is intangible in nature and is difficult to envisage a transaction between related parties in the absence of any concrete documentation.

However, comparing with transfer pricing (TP) provisions under the income tax law, RPT is well-defined with a complete valuation framework. It is also supplemented with a range of domestic and international jurisprudence as well as rich soft law. This augurs well for taxpayers, as the availability of a settled principle leads to effective implementation and certainty. Thus, identifying service-related transactions within the domain of TP provisions is simple, given its framework.

The lack of clear RPT provisions under the GST law has wide ramifications, as it results in any transaction potentially being classified as an RPT with GST implications on it. Complexities in this context arise, especially on the valuation front, since some transactions may not go through the rigours of open market value.

Amidst the tax authorities deeming every transaction between related parties as “supply”, the apprehension within the industry has become quite palpable. The industry was notably taken aback by the imposition of GST on corporate guarantees offered without consideration. After an era of uncertainty, this has finally attained certainty after the Central Board of Indirect Taxes and Customs clarified that the valuation will be 1% of the guaranteed amount or the guaranteed fees.

However, unlike tangible corporate guarantees, valuing transactions involving intangible assets like trademarks, patents, and copyrights between related parties is an even more complex challenge. Tax authorities have scrutinised transactions concerning the use of logos or brand names owned by a holding company but used by subsidiaries without payment. 

A case in point is the recent news about Mahindra & Mahindra being served a GST notice for the use of the “Mahindra” brand name by various group companies despite there being no agreement or consideration for the practice. Such transactions are very common for business conglomerates. 

This development comes against the backdrop of the pre-show cause notice issued to information technology giant Infosys on transactions with its overseas offices. These demand notices have opened a Pandora’s box and have serious repercussions. Numerous multinationals may face scrutiny and potential GST demand in the coming days. The absence of any methodology in the current GST framework in determining open market value would result in disputes, which is not desirable.

Given the widened ambit of the GST framework and its encompassing definition of supply, many transactions have the potential to fall within its scope. Without definitive direction, taxpayers, especially MNCs, will continue to face uncertainty in ensuring compliance and accurately determining GST liabilities on RPT. 

Clear guidelines to determine the open market value of services, including rules for benchmarking the transactions between related parties, are regardless the need of the hour. Addressing these ambiguities will naturally foster a predictable tax environment for the country, leading to a holistic good and simple tax regime.

With assistance from Lopamudra Mahapatra, associate, BMR Legal.