Scope and Type of Supplies under GST

1

(a)

(aa)

Explanation.–For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;”. – Inserted vide clause 99 of Finance Bill, 2021 dated 1-2-2021 updated as section 108 of Finance Act, 2021

It has been made effective from 1-1-2022 as notified vide Notification No. 39/2021 – CT dated 21-12-2021.

A new clause (aa) in sub-section (1) of Section 7 of the CGST Act is being inserted, retrospectively with effect from the 1st July, 2017, so as to ensure levy of tax on activities or transactions involving supply of goods or services by any person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

(b)

Note: Though the term ‘supply’ may prima facie appear to levy a tax on outward supply, however, it is pertinent to note that ‘supply’ is a ‘taxable event’ i.e. a tax shall be levied on the occurrence of an ‘event’ as defined under the term ‘supply’. Therefore, import of service which is an inward supply is also a taxable event as per Section 7(1)(b). Hence, the term supply has a much wider scope. Generally, it is seen that the GST is levied on the supply of goods and/or services for a consideration in the course or furtherance of business. However, in the instant case, it is significant to note that even though the import of service (please note – this section does not deals with import of goods) is done in the personal capacity (and not in the course or furtherance of business) shall be a taxable event for the purpose of GST and accordingly GST shall be levied. Let us not forget that GST is the destination-based consumption tax. In the instant transaction, the destination as well as consumption is taking place in India, therefore, in order to levy a tax on such transaction, clause (b) appears to find space in the section 7. For this purpose, even though such a person is not carrying on the business, still he has to take registration compulsorily under section 24 in GST and pay the tax under reverse charge basis on import of service along-with meeting all other set of compliances. However, services received from a provider of service located in a non-taxable territory (import of service) by an individual in relation to any purpose other than commerce, industry or any other business or profession is exempted vide Notification No. 9/2017-Integrated Tax (Rate), dated 28th June, 2017 and while in the case of online information and database access and retrieval (OIDAR) service, supplier has been showered with the responsibility to meet the statutory compliance.

(c)

(d)

However, this has been Omitted by the CGST (Amendment) Act, 2018, w.r.e.f. 1st July, 2017.

1A

This provision has been inserted by the CGST (Amendment) Act, 2018, w.r.e.f. 1st July, 2017.

2

(a)

(b)

3

(a)

(b)

Definition of ‘sale’ in Constitution

The definition of “sale” that is contained in the 1976 Act as it then stood. Sale is defined as follows:

“2(v) “sale”, with its grammatical variations and cognate expressions,

Article 366(29A)“tax on the sale or purchase of goods” includes –

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

Interesting fact: This was the particular fact situation which the Court was faced with in Gannon Dunkerley [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379] and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision was directly overcome.

Note: However, under the GST regime, the transfer of property in goods for the purpose of any immovable property in the execution of work contract has been classified as ‘supply of service’ as per Para 6(a) of Schedule II read with section 7(1A) & section 7(1).

(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

Note: Sub-clause (c) deals with hire-purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale.

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

Note: However, under the GST regime, transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration has been classified as ‘supply of service’ as per Para 5(f) of Schedule II read with Section 7(1A) & section 7(1).

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

Note: Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun as both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales.

Note: Further, under the GST regime, such transaction has been classified as ‘supply of goods’ as per Para 7 of Schedule II read with section 7(1A) & section 7(1).

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such TRANSFER, DELIVERY OR SUPPLY of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Note: Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. Associated Hotels of India Ltd. [(1972) 1 SCC 472: 29 STC 474]. That decision has by this clause been effectively legislatively invalidated.

What is interesting to note is that despite the fact that the constitutional amendment was made way-back in the year 1982, the 1976 Act was not amended so as to incorporate the definition of sale contained therein. What is of greater importance is to appreciate that when the 2009 Act has replaced the 1976 Act, again the definition of “sale” contained in the 2009 Act is same as definition as explained above in 1976 Act.

Despite the constitutional amendment having been passed, the definition of “sale” contained both in the 1976 Act and now in the 2009 Act would go to show that supply of services by way of food and drinks would not come within the purview of sale.

As per section 5 of “Transfer of property” means an act

• • by which a living person conveys property,
  • in present or in future,
  • to one or more other living persons,
  • or to himself,
  • or to himself and one or more other living persons; and
  • “to transfer property” is to perform such act.

In this section living person includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.

As per section 6 of Transfer of Property Act, 1882, any property can be transferred except few listed therein. However, from the perspective of section 7 of CGST Act, 2017, since we are dealing with GST, so we need to keep our discussion limited to transfer of goods and/or service only.

As per section 7 of Transfer of Property Act, 1882, every person competent to contract and entitled to transferable property, or authorised to dispose of transferable property not his own, is competent to transfer such property either wholly or in part, and either absolutely or conditionally, in the circumstances, to the extent and in the manner, allowed and prescribed by any law for the time being in force.

As per Para 1 of Schedule II of the CGST Act, 2017:

• • Transfer of title can only be done by a person holding title. Person having no title cannot transfer it to another person.
  • It is pertinent to note that the transfer of the ‘right to use’ any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration is a ‘supply of service’ under SAC Code 9973.
  • Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods is also a ‘supply of service’ under SAC Code 9973.

Hon’ble Supreme Court in the case of State of Madras v. Gannon Dunkerley & Company (Madras) Ltd. [1958] 9 STC 353/2015 (330) E.L.T. 11 (S.C.): The concept of sale, as it now obtains in our jurisprudence has its roots in the Roman law. Under that law, sale, emptio venditio, is an agreement by which one person agrees to transfer to another the exclusive possession of (vacuagn possessionem tradere) of something (merx) for consideration. In the earlier stages of its development, the law was unsettled whether the consideration for sale should be money or anything valuable. By a rescript of the Emperors Diocletian and Maximian of the year 294 A.D., it was finally decided that it should be money, and this law is embodied in the Institutes of Justinian, vide Title XXIII. Emptio venditio is, it may be noted, what is known in Roman law as a consensual contract. That is to say, the contract is complete when the parties agree to it, even without delivery as in contracts or the observance of any formalities as in contracts verbis and litteris. The common law of England relating to sales developed very much on the lines of the Roman law in insisting on agreement between parties and price as essential elements of a contract of sale of goods. Coming to the Indian law on the subject, section 77 of the Indian Contract Act, 1872, defined “sale” as “the exchange of property for a price involving the transfer of ownership of the thing sold from the seller to the buyer”. It was suggested that under this section it was sufficient to constitute a sale that there was a transfer of ownership in the thing for a price and that a bargain between the parties was not an essential element. Hence, if merely title to goods passes but not as result of any contract between parties, express or implied, there is no sale. Also, if consideration for transfer was not money but other valuable consideration, it may then be exchange or barter but not sale. Further, if under contract of sale, title to goods has not passed, then there is agreement to sell and not completed sale.

However, under the GST regime, in case of sale also, the definition of ‘consideration’ is not restricted only to money but includes other valuable considerations also. Therefore, it can be noted that how the scope of the term ‘supply’ has been significantly enlarged under the GST. From the perspective of barter or exchange, the above judgment clearly explains that if consideration for transfer was not money but other valuable consideration, it may then be exchange or barter but not sale. Hence, a view can be taken that wherever the transaction does not involves ‘money’ but there is an element of ‘transfer’, it can be said as barter or exchange, but it again depends on facts of the case and may differ from case to case basis.

In terms of section 7 of CGST Act, 2017 supply includes barter also if it is in the course of furtherance of business. Further, in terms of section 2(31) of the CGST Act, 2017 consideration in relation to supply includes money or otherwise. Hence, the supply for the consideration other than money also squarely falls under the definition of “Supply”. Therefore, construction of a building by developer for land owner in exchange of undivided interest in land falls under the definition of “Supply” and attracts tax under GST. – Durga Projects & Infrastructure Private Limited, In re [2019] 108 taxmann.com 106/29 GSTL 132 (AAR – Karnataka)

The Applicant have executed projects under Joint Development Agreement (JDA) where land owner contributes land and developer develops the property with the condition to share the developed properties whereby land owner transfers undivided interest in land to the Developer’s share of flats and developer agrees to construct buildings on the land belonging to the land owner. In the instant case the supply is in the form of ‘barter’ and the consideration is in the form of development rights and is in the course or furtherance of business. Hence, the activity squarely falls under “Supply” under CGST Act, 2017. – Durga Projects & Infrastructure Private Limited, In re [2019] 108 taxmann.com 106/29 GSTL 132 (AAR – Karnataka).

Valuation in case of exchange as the consideration is not in money – As per rule 27

Illustration: Where a new phone is supplied for INR 20000 along with the exchange of an old phone and if the price of the new phone without exchange is INR 24000, the open market value of the new phone is INR 24000.

Surrendering e-units to ICEX to obtain EVR is EXCHANGE and not TRANSFER: For the purpose of Trading at commodity exchange, in the instant case, Diamond trading, as per the terms of procedure prescribed by Indian Commodity Exchange (ICEX) for derivative trading, diamonds in physical form are first deposited in designated safe vaults and a receipt (EVR) is obtained. The EVR is then surrendered to ICEX and e-Units obtained for trading thereof online. On settlement after expiry, same procedure is adopted in reverse. Next part is online derivative trading in e-Units.

Lastly, for obtaining physical delivery, e-Units are surrendered to ICEX to obtain EVR. What is obtained by surrender of e-Units at the time of EXCHANGE of e-Units to diamonds is SIMILAR diamonds and not the SAME diamonds. Hence, there is a supply of diamonds and then diamonds back from safe vault. Section 7(1) of the CGST Act, 2017 covers the supply of goods in the form of EXCHANGE under the scope of supply and the consideration received by the applicant is in the form of e-Units. The term consideration as per section 2(31) of the CGST Act is wide enough to consider any payment made or to be made and it is immaterial whether such payment is made in the form of money or otherwise. Hence, this EXCHANGE of diamonds to e-Units constitute a supply under section 7(1) of the CGST Act and the applicant is liable to tax on the value of such transaction. Please note this an EXCHANGE form of supply and not TRANSFER OF TITLE  OF GOODS as the diamonds received against the exchange of e-units will be SIMILAR DIAMONDS and not SAME DIAMONDS. – Rajarathnam’s Jewels, In re [2018] 96 taxmann.com 244/69 GST 434 (AAR – Karnataka)

“Where one person grants to another, or to a definite number of other persons,

• • a right to do, or
  • continue to do, in or upon the immovable property of the grantor,
  • something which would, in the absence of such right, be unlawful, and
  • such right does not amount to an easement or an interest in the property, – the right is called, a licence.”

The issue is whether the LICENCE to extract mineral ore and also the right to use such minerals extracted is a leasing/rental service. It is clear that LICENcING by the Government is the LEASE of the right to extract and use mineral ores and that is not covered by any specific entries in the Serial No. 17 of the Notification and hence falls under the residual entry. Upto the amendment of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 by the Notification No. 27/2018-Central Tax (Rate), dated 31-12-2018, the tax rate for the above service is fixed at the rate of tax which was applicable on supply of like goods involving transfer of title in goods. But after the amendment by the Notification No. 27/2018-Central Tax (Rate), dated 31-12-2018, leasing or renting of goods and leasing or rental of services have been placed under separate item numbers under Serial Number 17 of the Notification. Accordingly, the leasing or renting of goods was made taxable at the rate of tax which was applicable on supply of like goods involving transfer of title in goods and all other leasing or rental services have been made taxable at 9% CGST. Since the transaction of the applicant is not leasing of goods but license to extract and use mineral ore, WHICH INVOLVES LEASING OF LAND, the transaction is covered under the residual Entry (viii) of Serial Number 17 of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 as amended by the Notification No. 27/2018-Central Tax (Rate), dated 31-12-2018 and is taxable at 9% CGST. Hence, Leasing of the Government land to the applicant to carry out the activity of the mining is a supply of service to the applicant. – Naren Rocks and Mines Pvt. Ltd., In re [2019] 110 taxmann.com 280/[2020] 79 GST 312 (AAR – Karnataka), JSW Steel Ltd., In re [2019] 110 taxmann.com 286/[2020] 79 GST 270/[2019] 30 GSTL 115 (AAR – Karnataka)

“A lease of immovable property

1. is a transfer of a right to enjoy such property, made for a certain time,

• • • express or implied, or
    • inperpetuity,

2. in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value,

3. to be rendered periodically or on specified occasions,

4. to the transferor by the transferee,

5. who accepts the transfer on such terms.”

The subject matter of a lease is a specific immovable property such as land, houses, factories, shops, minerals, buildings etc. Usually a lease of a house and a shop includes not only the superstructure but also the site, unless the same is specifically excluded from the definition of the land in the lease deed. However, terrace and air space above a tenanted multi-storeyed building are not included in lease.

The differences between the term lease and licence has been shown below for clear understanding:

Applicant pleading that since lease of industrial land is for a period of 99 years, it is as good as sale and hence not liable to GST. Definition of lease in Transfer of Property Act, 1882 clearly stating that a lease could be for perpetuity. Therefore, mere long period of lease does not make it a ‘sale’ transaction. Similar view taken by Bombay High Court in Builders Association of Navi Mumbai v. Union of India [2018] 92 taxmann.com 134/67 GST 334/12 GSTL 232 (Bom.). Further, in this case applicant has no right for re-sale of said land and therefore cannot be called an owner of land. Paying stamp duty for getting lease deed registered will also not change status from lease to sale. Leasing of, inter alia, industrial land is specifically covered under Schedule II of CGST Act, 2017 as ‘supply of service’. – Greentech Mega Food Park Pvt. Ltd., In re [2019] 107 taxmann.com 263/75 GST 149/27 GSTL 143 (AAR – Rajasthan)

Applicant is engaged in the business of supplying e-campus solutions wherein hardware is given along-with the training, maintenance, manpower services, etc. for which the consideration is received over the period of 5 years in instalments. The sample contract is examined and found that the transfer of title in goods is happening only at the end of the contract period and it is a clear case of lease, hence a service. The supply in these cases is leasing of infrastructure which is covered under SAC 9973 29 the description of which is “Leasing or rental services concerning other goods”. – Vaps Knowledge Services Pvt. Ltd., In re [2019] 110 taxmann.com 431/[2020] 78 GST 655/32 GSTL 115 (AAR – Karnataka) However, in the personal opinion of the author, the transaction appears to be the composite supply of service. The reason cited in the above ruling that as the transfer of title takes place at the end of contract period, it cannot be said to be supply of goods does not seems to hold good in the light of Para 1(b) of Schedule II of CGST Act, 2017 which clearly stipulates that any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods. Further, in the instant case, as there are two or more than two taxable supplies which is naturally bundled, hence, it appears that the principal supply is the supply of service of creating an infrastructure of e-campus rather than leasing service.

If there is consideration and subject to other conditions, disposal will be treated as supply.