Transfer pricing and GST valuation: two regimes, one transaction
An arm's length adjustment in income tax is evidence in a GST file. Groups rarely reconcile the two before the department does.
Transfer pricing determines an arm's length price for income tax purposes; GST determines a value under Section 15 and the valuation rules. The two are independent, and an arm's length price is not automatically the GST value. But a transfer pricing adjustment is documentary evidence that the price charged differed from an arm's length price, and departments use it to support a Rule 28 valuation demand. Where the recipient is eligible for full credit, the second proviso to Rule 28 largely answers the point.
Where the two regimes meet
A transfer pricing adjustment increasing the income of an Indian entity implies that the price charged to a related party was below arm's length. The GST question is whether the value of the supply should have been higher.
For a supply to a related party outside India, the supply is usually an export and zero rated, so the GST consequence of an adjustment is limited but the refund computation may be affected.
For a supply from a related party outside India, the import of service is taxable under reverse charge, and an adjustment increasing the payment increases the reverse charge base. Circular 210/4/2024-GST addresses the valuation where the recipient is eligible for full credit.
For domestic related party supplies, the second proviso to Rule 28 applies where the recipient has full credit, and the adjustment is then largely immaterial for GST.
The practical exposures
Import of services from a group company, where a year end true up increases the fee. The reverse charge liability on the increment must be discharged, with a self invoice, and interest runs from the original time of supply if it is treated as relating back.
Royalty and management fee adjustments, which are the most common heads.
Cost sharing arrangements, where the allocation is revised after the year end.
Supplies to a domestic related party which is not eligible for full credit, where the adjustment supports a valuation demand.
In each case the answer begins with whether the increment is consideration for the same supply, and when it became payable.
Reconciling the two before the department does
A schedule of all related party transactions, mapped to their GST treatment and their transfer pricing treatment, updated annually with the transfer pricing study.
For every proposed year end adjustment, a note on the GST consequence — whether a supplementary invoice or a self invoice is required, and the time of supply.
Where the recipient has full credit, record that fact, because it is the single most useful defence.
Where it does not, prepare the valuation basis under Rule 28 or 30 contemporaneously, so that the transfer pricing study is not the only document on the file.
Authorities relied on
Clarified the valuation of import of services from a related person outside India, including where the recipient is eligible for full input tax credit and no invoice is issued.
What to do on Monday
Maintain a related party transaction schedule mapping GST and transfer pricing treatment side by side.
Assess the GST consequence of every proposed year end adjustment before it is booked.
Record the recipient's credit eligibility for every domestic related party supply.
Prepare a contemporaneous Rule 28 valuation basis where the recipient does not have full credit.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Is the arm's length price the GST value?
No. The regimes are independent. But an adjustment is evidence the department will use.
Does a year end true up create a GST liability?
Where it is additional consideration for a taxable supply, yes, and the time of supply determines the interest exposure. Address it in the same year.
Are exports affected?
Zero rated supplies are unaffected in tax terms, but the refund computation may change with the value.
Does full credit eligibility solve the problem?
For domestic related party supplies, largely yes, through the second proviso to Rule 28. Record the eligibility.
Should the transfer pricing study be shared with the GST department?
Only with advice. It is a document that cuts both ways, and its production should be a considered decision.
In this cluster
- Valuation under Section 15: transaction value and its exceptions
- Rule 28 in practice: related party and distinct person supplies
- 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
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.