Related-Party Purchases: Subsidy Restrictions to Check
Buying machinery from a related business for a subsidised project? Restrictions schemes might apply, how to prove a fair price and a ₹28 lakh example.
In this article (10 sections)
- Why schemes are cautious about related-party purchases
- Restrictions an assistance scheme might apply
- Legal rules that apply anyway
- Worked example: a ₹28 lakh machine from a brother's firm
- How to protect your claim
- Documents checklist
- Questions to ask the scheme office and the bank
- Common mistakes
- If a claim is cut or rejected
- Key takeaways
Buying machinery or civil work from a related business, such as a family member's firm, a sister concern or a company where you are a director, is not automatically barred by subsidy schemes, but it is one of the first things a scheme office checks. Depending on the scheme, you might face exclusion of that asset, a cap at market value, a demand for an independent valuation, or a rule that the asset must be new and not shifted from an existing unit. The safest approach is to disclose the relationship, prove the price with independent quotes, and get the scheme office's view in writing before ordering. Rules vary; examples below are illustrative and as of November 2026.
Why schemes are cautious about related-party purchases
A capital subsidy is a percentage of what you invest. If the seller is connected to the buyer, the price can be set higher than the market to enlarge the subsidy, and the money can flow back to the same family. Schemes and banks guard against this because:
- The investment must be genuine and at a fair price.
- The asset must usually be new, not moved between group units.
- The unit claiming the subsidy must be a genuinely new or expanding unit, not a re-labelled existing one.
Restrictions an assistance scheme might apply
| Possible restriction | What it looks like in practice |
|---|---|
| Disclosure | A declaration in the claim listing any supplier connected to the promoters |
| Cap at market value | Eligible cost limited to the price supported by independent quotes or valuation |
| Independent valuation | Chartered engineer's certificate of value and that the asset is new |
| New-asset rule | Machinery moved from an existing unit or bought used from a group concern excluded |
| New-unit rule | Units formed by splitting, relocating or re-registering an existing unit excluded |
| Exclusion | Some schemes may simply not count assets bought from promoter-connected firms |
Not every scheme uses all of these. Search your scheme guidelines or Government Resolution for words like "related", "associate concern", "sister concern", "group", "promoter", "new unit" and "second-hand", and read the exclusions list. For how ownership and equity tests work in state schemes, see does business structure affect state scheme eligibility.
Legal rules that apply anyway
Even if the scheme is silent, other laws apply:
- Companies: Section 188 of the Companies Act, 2013 requires board approval for certain contracts with related parties, such as sale or purchase of goods, and shareholder approval above prescribed thresholds, unless the transaction is in the ordinary course of business and at arm's length. Record the approval in board minutes.
- Income tax: tax officers can question an inflated price paid to a relative or connected concern and adjust the cost on which you claim depreciation. Confirm the current section references under the Income-tax Act, 2025 with your CA.
- GST: supplies between related persons are valued under special GST valuation rules (open market value). Your supplier's CA should check this.
Worked example: a ₹28 lakh machine from a brother's firm
A new unit buys a machine from a firm owned by the promoter's brother at ₹28 lakh. Two independent manufacturers quote ₹24 lakh and ₹25 lakh for the same model. Assume an illustrative scheme with a 15% capital subsidy that caps related-party purchases at market value. All figures are illustrative.
| Claimed by unit | Likely view of scheme office | |
|---|---|---|
| Price paid | ₹28,00,000 | |
| Market value (average of independent quotes) | ₹24,50,000 | |
| Eligible investment | ₹28,00,000 | ₹24,50,000 |
| Subsidy at 15% | ₹4,20,000 | ₹3,67,500 |
| Difference | ₹52,500 less |
That is the mild outcome. If the scheme excludes related-party purchases entirely, the subsidy on this machine is nil, and if the machine turns out to be used, it may be excluded as second-hand. Meanwhile the unit also borrowed against the higher price; check the extra EMI on ₹3.5 lakh of additional loan in the EMI calculator.
Buying at ₹24.5 lakh from the brother's firm, with the two independent quotes on file, would have avoided most of this.
How to protect your claim
- Disclose the relationship to the bank and in the subsidy application. Hidden relationships discovered later can turn a price issue into a recovery case.
- Collect independent quotations for the same specification, and check the timing rules in buying machinery before subsidy approval.
- Pay at market price, through the bank, against a proper GST invoice in the applicant unit's name.
- Get a chartered engineer's certificate that the machine is new and the price is reasonable, where the scheme accepts one.
- Record approvals: board resolution for a company, partners' resolution for a firm.
- Keep the asset physically new: never move machines between group units during the lock-in.
Documents checklist
- Declaration of related suppliers, in the scheme's format if any
- Two or three independent quotations, and your comparison note
- Related supplier's GST invoice, delivery challan and installation report with serial number
- Bank payment proof (no cash, no set-off against amounts the supplier owes you)
- Chartered engineer's certificate of value and newness, if asked
- Board or partners' resolution approving the purchase
- Manufacturer's invoice to the related supplier, if it was a dealer resale, to show the machine is new
Questions to ask the scheme office and the bank
- Do you count machinery bought from a firm connected to the promoters? At invoice price or market value?
- What proof of fair price do you accept: quotes, CE certificate, both?
- Is machinery transferred or bought from an existing group unit treated as new?
- Will the bank finance a related-party purchase, and will it pay the supplier directly?
- If my relative's firm is only a dealer, do you need the manufacturer's invoice?
Common mistakes
- Settling the price by adjusting it against other dues between family firms instead of a clean bank payment.
- Using the related firm as a middleman to add a margin on a machine bought from a manufacturer.
- Moving an old machine from the family's existing unit into the new unit and claiming it.
- Not disclosing the relationship, which then surfaces through common addresses, phone numbers or directors.
- Mixing the purchase with personal transfers; keep everything in the business account (separate personal and business finances).
If a claim is cut or rejected
- Ask for the reason and clause in writing.
- Submit independent quotes and valuation to show market value; ask for the eligible cost to be capped rather than rejected, if the scheme allows.
- Escalate to the DIC General Manager, then the state industries or MSME commissionerate; for central schemes use CPGRAMS at pgportal.gov.in.
- For bank-related delays, complain to the bank's grievance officer, then the RBI Integrated Ombudsman at cms.rbi.org.in after 30 days.
Key takeaways
- Related-party purchases are not always barred, but they draw scrutiny and may be capped, excluded or need valuation.
- In the example, a ₹28 lakh related-party price against ₹24.5 lakh market value cut an illustrative 15% subsidy by ₹52,500, and could have cost all of it.
- Disclose relationships, pay market price through the bank and keep independent quotes.
- Companies must also follow Section 188 of the Companies Act for related-party contracts.
- Machinery moved from an existing group unit is usually not new investment.
Frequently asked questions
Can I buy machinery from a relative's or sister concern's business for a subsidised project?
Often yes, but it attracts closer scrutiny. Some schemes may exclude such purchases, cap the eligible cost at market value, or ask for disclosure and an independent valuation. Read the scheme guidelines and ask the scheme office in writing before you order.
Who counts as a related party for a subsidy?
There is no single definition. Schemes, the Companies Act and income-tax law each define it differently. Typically it includes family members, firms or companies where you or your relatives are partners, directors or major shareholders, and group concerns sharing ownership or control.
Can I shift machinery from my existing unit to a new unit and claim subsidy?
Usually not as new investment. Machinery moved from an existing unit is generally treated as old or second-hand, and many schemes also bar units created by splitting or relocating an existing unit. Check the scheme's definitions of new unit and eligible investment.
How do I prove that a related-party price is fair?
Keep two or three independent quotations for the same machine, a chartered engineer's valuation if asked, the related supplier's normal price list or recent sales to others, and board or partner approval where the law requires it.
Does a company need approval to buy from a related party?
Under Section 188 of the Companies Act, 2013, certain contracts with related parties need board approval, and above specified thresholds shareholder approval, unless they are in the ordinary course of business and at arm's length. Check with your company secretary or CA.
This article is for general education and is not personalised financial, tax or legal advice. Rates and rules are as of 1 Nov 2026; confirm current terms with your lender, AMC or a qualified adviser.
