Interplay of Different Laws Governing Related Party Transactions (RPTs)

When one transaction speaks five legal languages, but tells one story of fairness.

The Idea of a Related Party

The Idea of a Related Party: In corporate law, a 'related party' is not merely someone connected by ownership or management it’s someone whose relationship can influence a decision.That influence, when unchecked, can distort price, profit, or perception.Thus, every regulatory regime be it Company law, tax, Customs, Accounting, or Goods and Services Tax looks at related party transactions through its own lens.

Yet, despite the different terms they use 'arm’s length', 'fair value', 'open market value' they all ask the same question: Was this transaction what it appears to be, or what it was meant to achieve?

RPTs therefore form the cross - section where corporate governance, taxation, and transparency converge.

Companies Act, 2013 (CA, 2013):

The Governance Spine: The CA, 2013 views RPTs as a test of integrity in boardrooms. Section 2(76) defines a related party as directors, key managerial personnel (KMP), their relatives, and entities they control or influence.

Section 188 demands that any transaction sale, purchase, leasing, or service between such parties must be:

• In the ordinary course of business, and
• At arm’s length (i.e., as if the parties were unrelated).

If either test fails, shareholder approval becomes mandatory through a special resolution. The intent is not prohibition, but fair process ensuring that managerial discretion does not become managerial advantage. Thus, company law focuses on perception and process, not price in isolation.

Income Tax Act, 1961 (IT Act)

The Economic Spine: If company law protects fair decisions, the IT Tax Act protects fair profits — making sure income is taxed where it is truly earned, not shifted through close relationships or influence.

Sections 2(41) and 92A define who counts as 'related' — from family members and key company officers to associated enterprises where one company controls or significantly influences another. Sections 92 to 92F apply the Arm’s Length Principle, meaning prices between related parties should match what independent parties would charge each other in the open market.

Section 40A (2) checks whether payments made to related parties are higher than what’s reasonable or market-based and disallows the excess. Section 56(2)(x) casts an even wider net — taxing anyone who receives property or benefit for less than its fair value, especially where relationships could be used to transfer value indirectly.

The principle is simple: profits should arise where real value is created. If company law’s concern is who approved the transaction, tax law’s concern is who benefited from it.

Customs Law – The Border Perspective

In cross-border dealings, the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 steps in.

Rule 2(2) defines related importers and exporters, and Rule 3(3) allows customs officers to reject the declared value if the relationship appears to influence price. Here, valuation isn’t about income or profit it’s about duty integrity. A transaction acceptable under transfer pricing may still be questioned by customs if the price seems artificially low for duty purposes. Thus, where tax law fears profit shifting, customs fears duty evasion. Two regulators, same transaction different anxieties.

Accounting Standards – The Mirror of Disclosure

Under AS 18 and Ind AS 24, accounting doesn’t judge; it reveals. Companies must disclose related relationships, the nature and volume of transactions, and outstanding balances. These standards don’t test 'fairness' they ensure visibility. Auditors, investors, and tax officers often trace irregularities first through these disclosures, where omissions reveal more than disclosures. Accounting standards are thus the mirror in which all other laws see their reflection.

GST Framework – The Value of Value

Section 15 of CGST Act, 2017 read with Rule 28 of the CGST Rules defines and regulate transactions between related or distinct persons for goods or services. Here, the key term is Open Market Value (OMV) (i.e., essentially the price at which unrelated parties would transact). But GST’s objective differs. Its goal is tax neutrality, not profit control.

If the recipient can claim full input tax credit, the law graciously accepts the declared invoice value.

Where credit is restricted, the valuation ladder: open market, like-kind, cost-plus steps in. Thus, GST law values neutrality over suspicion, testing whether tax credits, not profits, remain intact.

The Convergence and Interplay – When Five Laws Speak One Truth

Across India’s regulatory ecosystem, five distinct expressions Arm’s Length, Ordinary Course, Fair Value, Open Market Value, and Price Influence define how 'fairness' in Related Party Transactions is measured. Yet beneath these linguistic differences lies a unified logic: authenticity of value the assurance that relationships do not distort reality.

The table below synthesizes how these principles operate across the five regimes:

Disclaimer

The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader's reliance on information obtained through this report. The contents are provided for your reference only.

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