2018 (10) TMI 1145 - AAR - GST

Levy of GST - charges received on account of washed away / cancelled contracts for supply of goods - Forward Contracts - agreeing to the obligation to refrain from an act, agreeing to the obligation to tolerate an act or a situation, or agreeing to the obligation to do an act - scope of supply and securities - whether GST is applicable on the differential payment received by a party to the aforesaid contract from the other party to the contract is (in) event of settlement , washout or closure of contract by it? Held that - While it is clear that this activity is not a sale transfer, barter, exchange, licence, rental or lease, it is also apparent that the situation of closure of contract which was related to supply of goods, would also not be covered under the term disposal. The term disposal carries a connotation that the goods physically leave the possession of the supplier, which is not the situation in the present case - Therefore, the scenario of closure of contract by the applicant or its other contracting party would not amount to supply of goods and therefore, no goods and service tax would be applicable as far as supply of goods is concerned. Whether the activity of closure of contract by the applicant or the other contracting party would fall under the scope of the term service or under the scope of the term supply under GST law? - Held that - It is clear that once an activity does not fall under scope of the term service , it becomes immaterial whether it falls under scope of the term supply for deciding questions of applicability of tax on services under Section 9. From Section 18A of SCRA, it emerges that the term securities which covers commodity derivatives refers to only those contracts which are traded or settled in recognised stock exchange, unless the contracts are notified by the Central Government. By this measure, the claim of the applicant that the closure of purchase/sale of cotton contract by way of settlement between him and the other contracting party in terms of the contract, would be covered under the term securities in the definition of services in Section 2(102) of the CGST Act, 2017 and hence would not entail tax on services, does not seem to be valid. While it is forthcoming that legal provisions discussed above do not exclude the closure of purchase/sale of cotton contract by way of settlement between applicant and the other contracting party in terms of the contract from scope of services, and the applicant would therefore be liable to the provisions of Section 9 of the CGST Act, 2017 - it is evident that intention of the Government, evident from the answer to the FAQ, is not to tax settlements under forward contracts where settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date. Therefore, we feel that if the executive instruction interprets legal provisions in a manner which provides relief to a taxpayer and publishes these on its website, such relief should flow to the taxpayer. The purchase contracts entered between the applicant and the other contracting party where settlement is made without supply of goods, the activity would be covered under the term securities and therefore would not entail tax - However, in sales contracts entered between the applicant and the other contracting party, where settlement is made without supply of goods on the above terms in as far as the applicant considers a discretionary price other than the market price of cotton on the day of settlement, these would not be covered under the term securities and would therefore become subject to section 9 and section 7 of the CGST Act, 2017. In the present case, there is clearly an agreement between the contracting parties to refrain from bringing in arbitration, which is also built in the contract, if the contract is settled by payment of agreed amount of monies. Therefore, this activity can clearly be considered as supply of service by agreeing to the obligation to refrain from an act , and would therefore by subject to applicable tax - The present activity is also a toleration of the act of not providing the other party to the contract, the agreed quantity of goods at agreed prices at the agreed date, on payment of agreed amount of monies to settle the contract. Therefore, this would be liable for consideration as supply of service by way of agreeing to the obligation to tolerate an act or a situation. The activity of closure of the sale contract of cotton by either of the contracting parties by way of settlement considering a price different from the market price of cotton on the day of settlement would be a supply of service under each of the three limbs i.e. agreeing to the obligation to refrain from an act, agreeing to the obligation to tolerate an act or a situation, or agreeing to the obligation to do an act, mentioned in para 5(e) of Schedule Il to Section 7 of the CGST Act, 2017. Ruling - In forward contracts in cotton sales, being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other party to the contract by way of payment of the differential of forward rate and prevailing market rate on the settlement date, the same would be falling within the purview of securities as defined in Section 2(101) of the CGST Act, 2017and would therefore not be chargeable to GST. In forward contracts in cotton sales being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other party to the contract by way of payment of the differential of forward rate and rate fixed by the applicant using his discretion, such rate being different than the market price of cotton on the date of settlement, the same would not be falling within the purview of securities as defined in Section 2(101) of the CGST Act, 2017 and would therefore be chargeable to GST. In the forward contracts in cotton purchase being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other party to the contract by way of payment of the differential of forward rate and prevailing market rate on the settlement date, the same would be falling within the purview of securities as defined in Section 2(101) of the CGST Act, 2017and would therefore not be chargeable to GST.

Summary

Issues Involved:
1. Applicability of GST on differential payment received in the event of "Settlement," "Washout," or "Closure" of forward contracts for the sale/purchase of cotton.

Detailed Analysis:

Issue 1: Applicability of GST on Settlement, Washout, or Closure of Forward Contracts

Background and Applicant's Position:
The applicant, engaged in the business of trading cotton, oil, and grains, sought an advance ruling to determine the applicability of GST on differential payments received during the settlement, washout, or closure of forward contracts. The applicant argued that such activities should be classified under "Securities," which are excluded from the definition of "Services" under Section 2(102) of the CGST Act, 2017.

Legal Provisions and Definitions:
- Section 7(1) of the CGST Act: Defines "supply" to include all forms of supply of goods or services made for consideration in the course or furtherance of business.
- Section 2(102) of the CGST Act: Defines "services" as anything other than goods, money, and securities but includes activities relating to the use of money.
- Section 2(101) of the CGST Act: Defines "securities" as per the Securities Contracts (Regulation) Act, 1956, which includes derivatives and commodity derivatives.

Applicant’s Arguments:
1. The applicant contended that the differential payments made during the settlement of forward contracts should not be considered services as these fall under "securities."
2. They referenced FAQs issued by the Government, which clarified that future contracts, typically settled by net settlement without actual delivery, qualify as securities and are not chargeable to GST.

Authority's Analysis and Findings:
1. Scope of Supply: The authority examined whether the closure of contracts falls under the term "supply." It concluded that the closure of contracts does not amount to the supply of goods since no physical transfer occurs.
2. Definition of Services: The authority scrutinized whether the activity falls under "services." It noted that the applicant's activity of settling contracts could be seen as "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act," as per Schedule II, para 5(e) of the CGST Act.
3. Securities and Derivatives: The authority clarified that for an activity to be classified under "securities," it must be traded on a recognized stock exchange or settled through a recognized clearing house. The applicant did not provide evidence that their contracts met these criteria.

Executive Instructions and FAQs:
The authority acknowledged the FAQs on Financial Services, which indicated that settlements under forward contracts, where the settlement is by net settlement of the differential, fall under "securities" and are not chargeable to GST.

Final Ruling:
1. Forward Contracts in Cotton Sales (Market Rate Settlement): If settled by paying the differential between the forward rate and the prevailing market rate on the settlement date, these fall under "securities" and are not chargeable to GST.
2. Forward Contracts in Cotton Sales (Discretionary Rate Settlement): If settled by paying the differential between the forward rate and a rate fixed by the applicant (different from the market rate), these do not fall under "securities" and are chargeable to GST.
3. Forward Contracts in Cotton Purchase: If settled by paying the differential between the forward rate and the prevailing market rate on the settlement date, these fall under "securities" and are not chargeable to GST.

Conclusion:
The ruling distinguishes between settlements based on market rates and those based on discretionary rates set by the applicant. Only the former falls under "securities" and is exempt from GST, while the latter is subject to GST. The ruling is based on the specific contract conditions provided by the applicant and may not apply to contracts with different terms.