Whether Schedule II to the CGST Act, 2017 can act de hors Section 7 of the Act, before the amendment in 2018?

[Srinivasan Krishnamachari]

The following ruling of AAR Karnataka in the case of M/S. AQUARELLE INDIA PRIVATE LIMITED 9 (2019 (10) TMI 753) answers the above question of the Article in the affirmative.

Schedule II only differentiates a supply either as a supply of goods or a supply of services in case of an activity which has constituted a supply in accordance with the provisions of sub-section (1) of Section 7.

Hence entries of Schedule II can be invoked under sub-section (1A) of Section 7, only if an activity is qualified as a supply under sub-section (1) of the Section 7.

It is pertinent to note that this line of application is only applicable to the transactions which have happened after the amendment and is not applicable to the transactions which have concluded before the effective date of amendment to the CGST Act.

Earlier to the amendment, since the scope of supply also included those under Schedule II, the transaction of the applicant since concluded before the effective date of amendment, would constitute a supply under the CGST Act and hence is liable to tax at the appropriate rates applicable to the goods in question.

A brief analysis of the above issue is attempted below;

The applicant is a registered dealer. He wished to vacate the business premises in the near future and intended to hand over the possession of the premises to the owner along with fixtures to the building.

The applicant submitted that these fixtures cannot be dismantled on vacating the premises and these fastened assets would be handed over to the building owner in “as is where is' condition without any consideration charged for the assets handed over.

They provided the list of assets which would be left over during handing over of the possession in an annexure to the application.

The applicant states that these assets were capitalized in the books of accounts before the introduction of Goods and Services Tax Act i.e., 1st July 2017 and no credit of CENVAT or VAT was availed in the earlier regimes.

As per the applicant the said assets were put to use in the pre-GST regime without availing of CENVAT/VAT credit, the disposal of such assets in the GST regime should not amount to supply and hence not liable to GST.

The applicant further submitted that treating such transactions as “Supply” considering the essence of the provisions stated in Schedule II of CGST Act 2017 might lead to double taxation, which goes against the very spirit of the GST Law.

In the opinion of the AAR, it is admittedly a fact that the applicant had taken the building on rent or lease during the earlier regime for business purposes and has invested in the furnishing of the building to suit his requirements.

They capitalized the assets as “Office Equipment, furniture and fittings” in their books of accounts.

The applicant stated that they have not claimed any input tax credit under the earlier laws on the assets involved.

The applicant is disposing off these assets so that they no longer would be a part of their assets and the same is for nil consideration.

As per Section 7(1) of the Central Goods and Services Tax Act

“7. Scope of supply.-

(1) For the purposes of this Act, the expression “supply” includes -

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

(b) import of services for a consideration whether or not in the course or furtherance of business; and

(c) the activities specified in Schedule I, made or agreed to be made without a consideration.”

The above sub-section as per the AAR, clearly states that the activities specified in Schedule I, agreed to be made without a consideration are also covered under “Supply”

Schedule I to the Central Goods and Services Act, 2017 states as under:

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.”

The same is said to have been examined by the AAR and observed that in the instant case there is a permanent transfer of business assets and admittedly they are capitalized before the advent of the GST Act and no input tax credit is claimed under the earlier law.

Further, there is no claim of input tax credit, under the present GST Law. Hence, the transaction is not covered under the entry no.1 of the Schedule I to the Central Goods and Services Tax Act and hence not covered under the clause (c) of sub-section (1) of Section 7.

The entry 4(a) of Schedule II to the Central Goods and Services Act, 2017 which is related to the “activities or transactions to be treated as supply of goods or supply of services” is said to have been examined, which reads as under

“4. Transfer of business assets

(a) 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;”

In the opinion of the AAR, it is an admitted fact that the assets sought to be transferred are capitalized under the head “Office equipment, furniture and fittings” and forms the part of the assets of the Applicant’s business entity and these assets are sought to be transferred or disposed of by the applicant and they undoubtedly no longer form part of those assets, then such transfer or disposal would be a supply of goods by the applicant and it is immaterial whether the said transfer/disposal is for a consideration or not.

Hence they would be treated as supply of goods as per entry no. 4(a) of Schedule II to the CGST Act.

However, the newly inserted sub-section (1A) to Section 7 to the Central Goods and Services Tax Act 2017 w.e.f. 01.02.2019, states as under:

“(1A) where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”

However as per the AAR, admittedly that means Schedule II only differentiates a supply either as a supply of goods or a supply of services in case of an activity which has constituted as a supply in accordance with the provisions of sub-section (1) of Section 7.

Hence entries of Schedule II can be invoked under sub-section (1A) of Section 7, only if an activity is qualified primarily as a supply under sub-section (1) of the Section 7.

Having stayed on course, suddenly the AAR jumps to a baseless conclusion hastily that it is pertinent to note that this line of application is only applicable to the transactions which have happened after the amendment and is not applicable to the transactions which have concluded before the effective date of amendment to the CGST Act, in 2019.

According to him therefore, earlier to the amendment, the scope of supply also included those transactions under Schedule II, and therefore had the transaction of the applicant been concluded prior to the date of amendment, it would not constitute a supply under the CGST Act.

As per his conclusion, only if the transaction had taken place after the effective date of amendment to the CGST Act, i.e. 01.02.2019, it would merit for relief.

But since it is after the effective date of Amendment of the Act, it must be held liable to tax at the appropriate rates applicable to such goods in question.

However, the AAR had held that the transaction of transfer of ownership of business assets in the course or furtherance of business for a consideration (being the monetary value in relation to the transfer of such assets) in the stated circumstances of the above case, would constitute a supply in accordance with the provisions of clause (a) of Section 7(1) of the CGST Act and the same would also be the supply of goods in accordance with the entry no. 4(a) of the Schedule II to the CGST Act.

It would be rather pertinent as per the Author, to verify whether or not primarily the transaction was covered under the scope of supply under Clause (a) of sub-section (1) of Section 7 of the CGST Act, to decide the issue than harping on an amendment aiming at rectifying the deficiency in Schedule which tends to cut across the parent provision.

Section 7(1A) though has been notified with effect from 01.02.2019, it is important to note that the section had been inserted to take effect retrospectively from 01.07.2017.

This is in view of the mandate to incorporate legislative changes relating to the Parent provisions such as Section 7 of the Act and as also due to the narrow window of only a year provided for carrying out such changes or adding any explanations to amplify the scope of the provisions to the extent it is found deficient or wanting.

Therefore the observation of the AAR "that Section 7(1A) can be invoked only if the transactions have happened after the insertion of Section 7(1A) appears patently both absurd and devoid of appreciation of the mechanism and the implication of the subject change.

How can the transactions of the applicant since concluded before the effective date of amendment would constitute a supply under the Act and hence be liable to tax at the appropriate rates applicable to the goods in question?”

In my view, though notification was wef 01.02.2019, Section 7(1A) was inserted with a retrospective effect from 1/7/2017 and therefore, it has the effect of having been always there since the inception of GST i.e from the start of July,2017 and transaction should not be treated as supply and subject to tax.

The AAR has failed to appreciate the following points of Law;

1. Schedule II can, at no point of time could afford to act de hors the Parent provision of Section 7 of the CGST Act, 2017.

2. The purpose of the Amendment Act 2018 which got the assent of the President in early August, 2018 which had inter alia carried several amendments effective from different dates, was to give particular effect to the above change w.e.f 1/7/2017.