Rule 28 in practice: related party and distinct person supplies

Two provisos do most of the work. Whether they apply to you depends entirely on the recipient's credit position.

Who is related, and who is distinct

The explanation to Section 15 defines related persons, covering officers or directors of one another's business, legal partners, employer and employee, holders of twenty five percent or more of the voting stock, control, common control, family members, and sole agents or distributors.

Distinct persons arise under Section 25(4) and (5): separate registrations of the same person in different states, and an establishment in India and outside India, are distinct persons.

The consequence is that a supply between two branches of the same company in different states is a supply between distinct persons, taxable under Schedule I even without consideration, and valued under Rule 28.

Employer to employee supplies are related party supplies, subject to the exclusion of gifts up to fifty thousand rupees in a financial year and the treatment of perquisites under the contract of employment.

The second proviso, which resolves most cases

Where the recipient is eligible for full input tax credit, the invoice value is deemed to be the open market value. That removes the valuation dispute entirely for the majority of intra group supplies.

Circular 199/11/2023-GST confirmed the position for internally generated services supplied by a head office to branches, including that the cost of certain elements such as employee cost need not be included where the recipient is eligible for full credit.

Circular 210/4/2024-GST dealt with the related question of import of services from a related person outside India, including the treatment where the recipient is eligible for full credit and no invoice is issued.

Where the recipient is not eligible for full credit — because it makes exempt supplies, or because the credit is blocked under Section 17(5) — the proviso does not apply and the open market value must be established. That is where the real exposure sits.

Corporate guarantees

Rule 28(2) provides a specific value for the supply of a corporate guarantee by a person to a banking company or financial institution on behalf of a related person, at one percent of the amount guaranteed per annum or the actual consideration, whichever is higher.

The second proviso to Rule 28(1) has been applied to this supply as well where the recipient is eligible for full credit, and the interaction has been the subject of clarification. Verify the current position before advising.

The practical issue is documentation: the amount guaranteed, the period, whether the guarantee was issued before or after the rule came into force, and whether the guarantee was renewed.

Authorities relied on

What to do on Monday

1. Map every intra group flow and record whether the recipient is eligible for full credit; that single field decides the valuation risk.

2. For recipients without full credit, build the open market value or cost file contemporaneously.

3. Document corporate guarantees with the amount, period and renewal history.

4. Review employee benefits against the fifty thousand rupee gift threshold annually.

Questions we are asked on this

Do we have to value a branch transfer at cost plus?

No, where the receiving branch is eligible for full credit; the invoice value is then deemed to be the open market value.

What if the receiving branch makes exempt supplies?

Then the proviso does not apply and the open market value must be established. Build the cost and comparables file.

Is a corporate guarantee to a group company taxable?

A guarantee provided to a bank or financial institution on behalf of a related person is covered by Rule 28(2) with its specific value. Check the position for guarantees issued before the rule.

Are employee gifts taxable?

Gifts not exceeding fifty thousand rupees in a financial year to an employee are outside supply under Schedule I. Beyond that they are related party supplies.

Is a management fee between group companies a related party supply?

Yes, and it is valued under Rule 28. Where the recipient has full credit, the invoice value stands.

In this cluster

• Valuation under Section 15: transaction value and its exceptions
• Corporate guarantees between group companies: the one percent rule
• Northern Operating Systems: secondment, and the notice that follows every expatriate
• Cross charge of common costs between branches
• Mandatory Input Service Distributor: the compliance rebuild
• Post sale discounts: the agreement requirement and the credit note trail
• Free of cost supplies, warranty replacements and moulds
• Reimbursements and the pure agent exclusion under Rule 33
• Liquidated damages, penalties and notice pay recovery
• Vouchers and gift cards: the amended treatment

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.