ACTIVITIES TO BE TREATED AS ‘SUPPLY’ EVEN IF MADE WITHOUT CONSIDERATION UNDER ‘CGST ACT’

[Mr. M. GOVINDARAJAN]

Scope of ‘supply’

Section 7 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides the scope of ‘supply’.  Section 7(1) provides that for the purposes of this Act, the expression ‘supply’ includes-

• all  forms of supply of goods or services or such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

• import of services for a consideration whether or not in the course or furtherance of business;

• the activities specified in Schedule I, made or agreed to be made without a consideration; and

• the activities to be treated as supply of goods or supply of services referred to in Schedule II.

Consideration

Section 2(d) of the Contract Act, 1872 defines contract as when at the desire of the promissory, the promise or any other person has done or abstained from doing or does or abstains from doing or promise to do or abstain from doing something such act or abstinence or promise is a consideration for the promise.

Explanation to section 67 of the Finance Act, 1994 defines the term ‘consideration’ as including-

•  any amount that is payable for the taxable services provided or to be provided;
• any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;
• any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.

The definition of ‘consideration’ in CGST Act also contains inclusive clause as in the Finance Act, 1994.  Section 2(31) of the Act defines the term ‘consideration’ in relation to the supply of goods or services or both includes-

• any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
• the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

The proviso to this section provides that a deposit given in respect of supply of the goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Schedule I

Schedule I to the Act provides the activities that are to be treated as supply even such activities are made without consideration which are as follows-

• Permanent transfer or disposal of business assets where input tax credit has been availed on such assets;
• Supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business;
• Gifts not exceeding ₹ 50,000/- in value in a financial year by an employer to an employee shall not be treated assupply of goods or services or both;
• Supply of goods-

• by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal;
• by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal;

• Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

Permanent transfer or disposal business assets

The permanent transfer or disposal of business assets, if input tax credit has been availed on such assets, through, such transactions are made without consideration, it would amount to ‘supply’.

Transfer of business assets-

• where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
• where, by or under the direction or a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available or such goods is a supply;

Supply between related persons

Since the expression ‘related person’ finds in two places in the schedule I we have to refer the definition of ‘related person’.

Section 2(84) defines  the term ‘person’ as including-

• an individual;
• a Hindu Undivided Family;
• a company;
• a firm;
• a Limited Liability Partnership;
• an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
• any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in Section 2(54) of the Companies Act, 2013;
• any body corporate incorporated by or under the laws of a countryoutside India;
• a co-operative society registered under any law relating to co-operative societies;
• a local authority;
• Central Government or a State Government;
• Society as defined under the Societies Registration Act, 1860;
• Trust; and
• Every artificial juridical person, not falling within any of the above.

The proviso to section15 provides that for the purposes of this act-

-the persons  shall be deemed to be ‘related persons’ if-

• such persons are officers or directors of one another’s business;
• such persons are legally recognized partners in business;
• such persons are employer and employee;
• any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them;
• one of them directly or indirectly controls the other;
• both of them are directly or indirectly controlled by a third person;
• together they director indirectly control a third person; or they are members of the same family.

-the term ‘person’ also includes legal person;

-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 be deemed to be related.

The supply of goods or services or both taken between the related person as aforesaid shall be treated as ‘supply’ even the supply is made without consideration.

Supply between distinct persons

Section 25 of the Act deals with the procedure of registration by a taxable person.  If a taxable person has business more than one State, then he is required to obtain registration in both the States.  Section 25 (5) provides that where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

Any transactions between such distinct persons may be without consideration.  Such transaction is called as ‘supply’ even though it takes places without consideration.

Gift by employer to employee

Gifts not exceeding ₹ 50,000/- in value in a financial year by an employer to an employee shall not be treated as  supply of goods or services or both.  If the gift by the employer to employee is exceeding ₹ 50,000/- then it would amount to supply.  Gift is normally given by one person to another person without consideration.  Such gift would amount to ‘supply’ and liable to tax under GST regime.

Principal and agent

In a business the contract between the principal and agent is common.  The agent is working on behalf of the principal is entitled to commission as per agreement.  He may act on behalf of the principal and even business decisions can be taken by him.  Such transactions between principal and agent will not be under consideration.  Schedule I provides that supply of goods  by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal or by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

Import from a related person

Clause 4 of the Schedule I provides that import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business is considered as ‘supply’ even though it is not for consideration.  The term ‘related person’ is discussed above is also applicable to this clause.  The transactions between the branches or establishments of one company situated in two countries may be with consideration or without consideration.  Even if the supplies are made without consideration it would amount to ‘supply’ under schedule I.