The Goods and Services Tax (GST) is structured to make sure tax compliance in all business transactions, including those within family-run businesses. When a closely held Public Limited Company (Ltd Co) and a Limited Liability Partnership (LLP) are operated by the same family, challenges arise in proving the legitimacy of transactions between these entities, especially when there is no physical movement of goods.
Understanding the Business Model
1. Structure of Entities Involved
- A Public Ltd Co (closely held) procures tea leaves from Assam and delivers them to a warehouse in Kolkata.
- The LLP (also controlled by the same family) purchases the tea leaves from the Ltd Co and exports them.
- The warehouse serves as a common storage facility before export.
- Directors of the Ltd Co are also partners in the LLP, making decision-making centralized.
2. Key Transaction Flow
- The Ltd Co purchases tea from Assam and transports it to the warehouse in Kolkata.
- A sale occurs between Ltd Co and LLP while the goods remain in the warehouse.
- The LLP arranges the shipping bill in its name and exports the tea.
The main GST concern arises because there is no physical movement of goods after the sale from Ltd Co to LLP.
GST Compliance Challenges in the Given Scenario
1. Lack of Physical Movement Post-Sale
- Under GST law, a transaction must be accompanied by the movement of goods, which is a key indicator of “supply” under the GST Act.
- Since the sale from Ltd Co to LLP does not involve additional transportation, the GST authorities may question the authenticity of the transaction.
2. Common Decision-Making Center
- Since the same family controls both the Ltd Co and LLP, GST authorities may suspect tax evasion or undervaluation.
- The risk of related-party transactions being scrutinized under transfer pricing regulations increases.
3. Warehouse as a Common Storage Facility
- If a single warehouse is used by both entities, it can raise doubts about whether ownership of the goods actually changed hands.
- GST authorities may argue that LLP is merely acting as an export facilitator rather than a genuine buyer.
4. Taxability of the Supply to LLP
- The sale from Ltd Co to LLP is a domestic supply, and GST is applicable.
- Since LLP is exporting, it may claim a refund of input tax credit (ITC), but the GST authorities may challenge the legitimacy of ITC claims.
How to Satisfy the GST Department?
1. Document the Sale Clearly
To establish a legitimate sale from Ltd Co to LLP, the following documents must be maintained:
✅ Invoice & E-way Bill: Even if goods do not move physically, generate an invoice and e-way bill to document the transfer.
✅ Stock Register & Accounting Records: Maintain clear records showing the reduction in stock for Ltd Co and the addition of stock for LLP.
✅ Independent GST Registration for Warehouse: If possible, register the warehouse separately and show a distinct ledger for Ltd Co and LLP.
2. Justify ‘Bill-to-Ship-to’ Transactions
- Under GST Rule 46(f) and Section 10(1)(b) of IGST Act, an entity can sell goods without physical movement if the transaction is structured as a “Bill-to-Ship-to” model.
- The Ltd Co can issue an invoice to LLP, and LLP can show exports in its name.
3. Transfer of Risk & Rewards of Ownership
- GST authorities assess whether the risk and rewards of ownership have genuinely transferred from Ltd Co to LLP.
- A properly drafted sales agreement defining the ownership transfer terms will help establish legitimacy.
4. Payment Flow & Banking Transactions
- Ensure that payment for the sale from Ltd Co to LLP is done through proper banking channels.
- Any price variation should be supported by valuation mechanisms and independent purchase agreements.
5. Valuation Compliance (Related-Party Transactions)
- Since Ltd Co and LLP have common owners, GST authorities may invoke Rule 28 of the CGST Rules to check valuation.
- Use a cost-plus method or open market value method to determine the correct sale price.
6. Compliance with Export Rules
- Since LLP is exporting, it should comply with Letter of Undertaking (LUT) or pay IGST and claim a refund.
- The Ltd Co should issue a Tax Invoice reflecting the applicable GST, which LLP can claim as an input credit.
Legal Precedents & GST Rulings
- In various Advance Rulings (ARs) and GST case laws, authorities have ruled that sale within a warehouse is valid as long as proper documentation is maintained.
- Example: AAAR Karnataka in the case of Rajashri Foods Pvt Ltd (2022) ruled that ownership change without movement is acceptable if financial control is transferred.
Practical Steps for GST Compliance
| Action | Why It’s Important | How to Implement |
| Generate E-way Bills | Establishes evidence of supply | Issue an invoice and e-way bill even if no movement occurs |
| Maintain Warehouse Registers | Proves stock ownership transfer | Separate stock ledgers for Ltd Co and LLP |
| Use Banking Transactions | Shows a genuine financial transaction | Avoid cash transactions, use bank transfers |
| Draft a Proper Sales Agreement | Defines ownership transfer terms | Specify payment terms, ownership, and risk transfer |
| File GST Returns Timely | Avoids compliance issues | Monthly GST filings with correct tax amounts |
Final Remarks
In a business structure where a family-run Ltd Co sells goods to its LLP without additional physical movement, GST compliance is crucial to avoid scrutiny. By maintaining strong documentation, ensuring proper invoicing, and justifying the sale with contractual agreements, the business can satisfy GST authorities and claim legitimate tax benefits.
By following these best practices, businesses can ensure smooth operations while remaining compliant with Indian GST laws and Learn More. …