Section 15 (5) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act, 2017) explains the term related persons. For the purpose of the Act, two persons are deemed to be 'related persons' if-
Such persons are officers or directors of one another's businesses; For the purpose of the Act, two persons are deemed to be related persons if such persons are the officers or directors of each other's businesses. Where X becomes an officer or director in Y's business, and Y becomes an officer or director in X's business, both X and Y shall be deemed to be related persons under the CGST Act. The absence of either person from his or her position in the other person's business will disrupt the relationship and the parties shall no longer be deemed to be related persons under the CGST Act. Bear in mind that 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 also be deemed to be related persons under the CGST Act, 2017.
Such persons are legally recognized partners in business; For the purpose of the Act, two persons are deemed to be related persons if they are legally recognized partners in business. In order to determine whether two persons are legally recognized partners in business, regards shall be paid to the real relation between the parties, as shown by all relevant facts taken together. Not all persons who agree to share the profits of a business carried on by both or any of them acting for both are legally recognized partners in a business. For example, if X and Y carry on different businesses but agree to share the profits coming out of each business together, X and Y are not legally recognized partners in business. Similarly if X and Y carry out illegal activities in business, or philanthropic work as business and share no incentive to earn any profit from it, X and Y shall not be deemed to be legally recognized partners in business. In order to truly establish whether a group of persons is, or is not a legally recognized business, or whether a person is, or is not in a legally recognized partnership emphasis must be laid on understanding the real relation between the parties as shown by all the relevant facts taken together. Furthermore, mere registration of the partnership deed alone does not justify that the partners in business are legally recognized partners. While it is true that all partnerships emerging from a registered partnership deed are legally recognized partnerships, all partnerships emerging from an unregistered partnership deed are also legally recognized partnerships since all unregistered partnership deeds are considered valid agreements between partners in India. Therefore, the registration status/ standing of a partnership deed alone holds no significance in determining whether two or more persons are in a legally recognized partnership or not.
Such persons are employer and employee; For the purpose of the Act, two persons are deemed to be related persons if they share an employer and employee relationship. In today's day and age it has become difficult to ascertain the true and correct relation between an employer and an employee. No one test of universal application can yield whether the contract between two persons is constructed as a contract of service or a contract for service. Relevance is only placed on the fact situation of every case. Factors such as control, in the sense of controlling not just the work that is given but the manner in which it is to be done, or whether the person employed is integrated into the employer's business or is merely an accessory, or whether the wage or any other remuneration is paid by the employer, or who owns the assets with which the work is to be done and/or who ultimately makes a profit or a loss so as to determine whether a business is being run for the employer or on one's own account, or whether the employer has economic control over the worker's subsistence, skill and continued employment, subject to fact situation of each case, are all important factors in determining the true and correct relation between an employer and his employees.
Any person directly or indirectly owns, controls or holds twenty five percent or more of the outstanding voting stock or shares of both of them; For the purpose of the Act, two persons are deemed to be related persons when any third person, directly or indirectly i.e. either in its own capacity or through an additional entity/entities, owns, controls or holds, twenty five percent or more of the outstanding voting stock or shares of both the persons respectively. The term 'persons' holds wide purview under this clause. It not only refers to an individual natural person but also includes an artificial juridical persons and legal persons such as a company or a corporation, or any other class of persons mentioned under Section 2 (84) of the CGST Act or beyond (subject to the interpretation of the Statute) that can own, control, hold or issue outstanding voting stock or shares either under its own name or under the name of any of its additional entity/entities. Moreover, for the purpose of this clause, the term 'outstanding voting stocks or shares' shall refer to the authorized stock or shares that a company has sold (issued) and that the shareholders currently hold. They represent the ownership stakes of different investors in a company permitting them various rights including the right to vote at shareholder meetings. Legal persons or juristic persons are also referred to as 'persons' under the CGST Act, 2017. Legal persons or juristic persons are persons who "connote recognition of an entity to be in law a person which otherwise it is not. In other words, it is not an individual natural person but an artificially created person which is to be recognized to be in law as such". This definition has been given by the Hon'ble Supreme Court in Shiromani Gurdwara Parbandhak Committee vs. Som Nath Dass and Others (2000).
One of them directly/indirectly controls the other; For the purpose of the Act, two persons are deemed to be related persons if one person, whether an individual, artificial juridical or legal person, either in its own capacity or through an additional entity/entities controls the other person who may also be an individual, artificial juridical or legal person. For the purpose of this clause and other clauses mentioned in the blog, understanding the correct meaning of the term 'control' is of crucial importance. While the interpretation of the word 'control' is wide, relevance must be placed on the definition found in the Companies Act, 2013. As per Section 2 (27) of the Companies Act, 2013 the word control has been defined as "shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreement or in any other manner." One can also find this definition to be almost completely aligned with the definition found under the SEBI ( Substantial Acquisition of shares and Takeovers) Regulations, 2011 A.k.a The Takeover Code.
Both of them are directly or indirectly controlled by a third person; For the purpose of the Act, two persons shall be deemed to be related persons if they are together, directly or indirectly i.e. either in one's own capacity or by an additional entity/entities controlled by a common third person. For the purpose of this clause the words 'persons' and 'control' shall have the same meaning and interpretation that has been assigned to them in the above mentioned clauses. Note that the word 'person' shall also include Legal Persons under the Act.
Together they directly or indirectly control a third person; For the purpose of the Act, two persons are deemed to be related persons if they together, either in their own capacity or through additional entity/entities control a common third person. For the purpose of this clause the terms 'person' and 'control' shall have the same meaning and interpretation that has been assigned to them in the above mentioned clauses. Note that for the purpose of the CGST Act, the term person shall also include Legal Persons.
They are members of the same family; For the purpose of the Act, two persons are deemed to be related persons if they are members of the same family. For the purpose of the CGST Act, 2017, the term family has been defined under Section 2 (49) as- "family" means- (i) the spouse and children of the person, and (ii) the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person; Note that family in relation to an individual, only means the individual, the husband or wife, as the case may be, and their children, whether major or minor irrespective of the fact that they are wholly and mainly dependent on him. However, the CGST Act, 2017 even recognizes parents, grand-parents, brothers and sisters as member of the same family provided they are wholly and mainly dependent on the person for their support and maintenance. Bear in mind that their recognition as members of the same family is subject to their dependence on the person, whether wholly or mainly, for the purpose of support and maintenance. Where parents, grand-parents, brothers and sisters are not wholly and mainly dependent on the person, they shall not be members of the same family. The word 'if' in clause (ii) of Section 2 (49) of the CGST Act, 2017 reiterates this inference.
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