Annexure 8: Check list for Key Points for supply and supply of goods or services or both - Model All India GST Audit Manual 2023 [CBIC] - GST

Annexure 8: Key Points for supply and supply of goods or services or both TABLE I: KEY POINTS FOR SUPPLY Sr. No. Key issues Reference Points from return/law Account 1. Whether the kind of outward supplies like Taxable supply, exempted supply, Zero- rated supply, NIL rated supply, Supplies to SEZ unit/ developers, Deemed Export etc. are appropriately classified under GST law? Sr. No. 4 5 of GSTR 9 Taxable Supply: Sr. No. 5N of GSTR 9 Exempted: Sr. No. 5D of GSTR 9 Nil: Sr. No. 5E of GSTR 9 Non-GST Supply: Sr. No. 5F of GSTR 9 Zero Rated: Sr. No. 5A, 4C of GSTR 9 Supply to SEZ: Sr. No. 5B, 4D of GSTR 9 Deemed exports: Sr. No. 4E of GSTR 9 Section 7 of SGST/ CGST Act Section 17(3) of SGST/CGST Act Section 147 of SGST/ CGST Act Schedule I , II and III of SGST/CGST Act Section 16 of IGST Act Invoice /Bill of Supply Tax rate Notification Exemption Notification HSN/SAC Contract Shipping Bill/Bill of Export Bill of Lading Letter of Undertaking Duty drawback availed Payment received (Bank/Cash) Composite/Mixed Supply 2. 2.Whether any activity or transaction which falls within the scope of supply has not been identified by the Registered Person? Non-GST Supply: Sr. No. 5F of GSTR 9 Schedule III of SGST/CGST Act Invoice/Bill of Supply Contract Consideration received Analysis of cash flow and mapping cash flow onto the returns Business purpose 3. Whether supply has been correctly classified as Inter- State supply/Intra- State as per Section 7(5) 8 of the IGST Act, 2017? Sr. No. 3.1 3.2 of GSTR 3B Section 10 , 12 , 13 of IGST Act Invoice/Bill of Supply Party-wise supply with address Contract Transportation document Whether B2B or B2C in case of supply of services 4. What is the treatment of promotional items given free to end consumers by FMCG companies? Sr. No. 5E 5 F of GSTR-9 Sr. No. 14N, 14P, 14Q of GSTR-9C Sales promotion expenses Ledger account of Distributors/Franchisees/Agents Stock Register 5. Whether the Zero - rated supply is verified as per the provisions of law? Sr. 5A 4C of GSTR-9 Section 16 of IGST Act Contract Shipping Bill/ Bill of Export Bill of Lading Payment received (Bank Statement) Letter of Credit / Telegraphic Transfer Letter of Undertaking Duty drawback availed 6. Whether supply of capital goods has been subjected to GST and as to whether the same has been included in the returns filed? Section 18(6) of CGST /SGST Act Fixed Asset Schedule Contract Ledger account of fixed assets/plant and machinery Ledger account of scrap TCS under Income Tax Act Bank Statement (Payment received) 7. Whether the transactions are correctly classified as supply of goods or supply of services as per Schedule-II of the CGST/SGST Act, 2017? Table 9 of GSTR 9C Sr. No. 17 18 of GSTR 9c Schedule II of CGST/SGST Act Invoice/Bill of Supply Contract Composite/Mixed Supply 8. 8 Are there any transactions wherein goods sent for job- work are not received back within the specified period? Form ITC -04 Section 143 of CGST /SGST Act Delivery Challan Gate outward register Gate Inward register Stock register Job work charges 9. Whether any business asset has been permanently disposed off for which input tax credit had been availed? Sr. No 6B of GSTR-9 Schedule I of CGST /SGST Act Fixed Asset Schedule Contract Ledger account of fixed assets/plant and machinery Ledger account of scrap Stock register Bank Statement (Payment received) Cash flow statement 10. Whether Related persons or Distinct persons in relation to the registered person have been identified and whether activities or transactions with them have been duly identified and accounted for as per law? Section 15(4) of CGST/SGST Act List of related/distinct persons Ledger account of Related persons Loans and advances Income tax Audit report Annual return under Companies Act 11. Whether any Agent has been appointed by the registered person and whether transaction with such agent has been duly accounted for as per law? Schedule I of CGST /SGST Act Commission expenses TDS/ Form 26AS Contract with franchisee /distributor Structure of business supply chain 12. Whether any foreign exchange has been remitted outside India for any import of services and whether tax on the same has been paid as per law? Sr. No. 6E and 6F of GSTR- 9 Contract Bank Statement (payment made) Letter of credit/ telegraphic transfer Director report 13. Whether the goods for business use have been put to personal use? Section 17 (1) of CGST /SGST Act Schedule II of CGST/SGST Act Stock register Drawings account Nature of expenses especially telephone, repair and maintenance, insurance etc. 14. Whether tax has been paid on RCM on inward supplies? Section 9(3) and 9(4) of CGST /SGST Act Self- invoices issued Payment vouchers Examine the nature of expenses especially freight (inward and outward), legal charges, import of services etc. Bank Statement (payment made) 15. Whether tax paid on advances received? Sr. No. 4F of GSTR-9 Section 12 and 13 of CGST/SGST Act Bank Statement (Payment received) Cash book for any cash received Loans and advances in the Balance Sheet Ledger account of debtors Current liabilities on account of unearned income/advance received 16. Whether any credit note issued for supplies made? Sr. No. 4I of GSTR-9 Section 34 of CGST /SGST Act Credit Note Vouchers Goods return register Ledger account of sale returns Weigh bill Gate Inward pass Transportation document ITC reversed by recipient Whether issued within timeline defined by section 34 Supply of Goods or Services or both. In the pre-GST era, incidence of taxation on goods and services varied under different tax laws. Excise duty was levied upon removal of manufactured products from the factory, Service Tax was levied on provision of service and VAT was levied on the value of sales or deemed sales of goods. These multiple incidences of taxation of the pre-GST era have been converted into the single incidence of taxation of SUPPLY in GST. GST Law has defined supply in an inclusive manner. Supply in GST comprises of all forms of supply of goods or services or both. It includes 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 [ section 7(1)(a) of CGST SGST Act]. Import of services for a consideration whether or not in the course or furtherance of business is also a supply. Some activities as specified in Schedule I of CGST/ SGST Act, even if made or agreed to be made without a consideration, are treated as supply. Further, activities or transactions specified in Sch III shall be treated neither as a supply of goods nor a supply of services in GST. Thus, supply has following important characteristics Supply shall be for a consideration except transactions specified in Sch.I which shall be treated as supply even if made without consideration. Supply is done in the course or furtherance of business except import of service for a consideration which is considered as supply whether or not in course or furtherance of business There are certain activities specified in Sch. III which are not to be treated as supply of goods or services. Conditions of Supply in GST: (a) for a consideration and (b) in the course or furtherance of business Exceptions: (a) Activities in Schedule I to be treated as supply even if made without consideration (b) Import of Service to be treated as supply even if it is not in the course or furtherance of business The above conditions are discussed below with some examples: A. Consideration is a condition of supply - A person runs two coaching centres. One is for needy students which is absolutely free, whereas the other is against fees. He is providing the same services from both the coaching centres. But, the services provided from the free coaching centre does not fulfil the first characteristic of supply (i.e. consideration) in GST. So, it is not a supply in GST. But, the services from the other coaching centre fulfills all the characteristics of supply. It must be remembered that consideration may not wholly be in monetary form; it may be in forms other than money too. For instance, supply of a new mobile phone worth Rs.50000 in exchange for a specified old mobile phone worth Rs.10000 and Rs.40000 in cash. When the consideration is not wholly in money, the value of the supply is to be ascertained as per rule 27 of the CGST Rules, 2017 . B. Supply should be in the course or furtherance of business - One of the characteristics of supply is that supply should be in the course or furtherance of business except a few. In the course or furtherance is not defined in GST law, but is broad enough to cover any supply made in connection with the business and therefore the phrase needs to be analyzed in detail. The Australian Concise Oxford Dictionary (1997) defines the phrase in the course of as during and the word furtherance to mean furthering or being furthered; the advancement of a scheme etc. The literal meaning of the said phrase in the course or furtherance of business is as part of doing regular business or anything done in relation to business . For example: i. Purchases Sales of goods by reseller. ii. Selling scrap generated in the process of manufacturing is also in the course of business. iii. Activities done as part of CSR by a Company are also in the course of business. Thus, the phrase widens the scope of supply to bring more activities in its ambit. C. Import of services for a consideration is supply in GST even if not in course or furtherance of business. Suppose, a person P of West Bengal is constructing his own house for his personal use. He availed the services of an architect in the USA and paid USD 10,000 for it. In this case, though it is not in the course of furtherance of business, still it would be treated as supply in GST and Mr. P would be liable for payment of GST under RCM; that he may be exempted from payment is another matter but the liability is there. It is also relevant to mention in this respect that, services are considered to be imported when three conditions are fulfilled- (i)Supplier of services is located outside India, (ii) Recipient of services is located in India and (iii) Place of supply of services is located in India [ sec 2(11) of the IGST Act,2017 ]. D. Exceptions in respect of Consideration being an essential condition for Supply in GST There are some exceptions where activities are treated as Supply under GST even if such are made without consideration. These are specified in Schedule- I under section 7 of the Act. Schedule I: Following activities to be treated as supply even if made without consideration: 1. Permanent transfer or disposal of business assets where ITC has been availed on such assets. 2. Supply of goods or services or both between related persons (such as officers or directors of one another s business, employer employee, members of the same family, legally recognized partners in business etc.) or between distinct persons as specified in sec 25, when made in the course or furtherance of business. But gifts not exceeding rupees fifty thousand in value in a financial year by an employer to an employee shall not be treated as supply. 3. Supplies of goods by principal to his agent where the agent undertakes to supply such goods on behalf of the principal. Supplies of goods by an agent to his principal where the agent undertakes to receive such goods on behalf of his principal. 4. Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business. 1. Permanent transfer or disposal of business assets without consideration: There is no doubt that disposal of business assets against consideration is a supply. However, if ITC on any business asset has been availed, then disposal of such business assets even if made without consideration should also be treated as supply. Examples a. Permanent transfer: Example No. 1 - Suppose XYZ Ltd., is in the business of hospitality. He purchases an air conditioner and a car for his hotel business and avails ITC on the air-conditioner but no ITC is availed in respect of the car. After 2 years, he permanently transfers the AC to one director and the car to another director, both without any consideration. Though no consideration is taken in case of transfer of the air conditioner still, it would be treated as a supply as per Schedule I and supplier shall have to pay an amount determined according to section 18(6) of the CGST/SGST Act. In the case of permanent transfer of the car, it will not be treated as supply since no ITC has been availed on the same. Example No. 2 - Woodwork, being a sole proprietorship firm is in the business of selling furniture. However, if the owner takes a set of furniture from its inventory to furnish his bedroom, the transfer of the furniture by the owner is a supply as per Schedule I and would be subject to GST. Whether temporary transfer of business assets would be considered as supply in GST? Temporary transfer of business assets with consideration is a supply in GST. However, temporary transfer of business assets without consideration has not been covered under Sch. I. So, it will not be treated as supply. But, for that limited period for which such assets are not used for the purpose of business, ITC shall have to be reversed as per provisions of section 17(1) read with rule 42 and 43 . Disposal of business assets: There are various reasons for disposal of business assets without any consideration. Most common reasons for such disposal are following: Assets are not in usable condition, Assets donated etc. e.g. A company disposes of its old fans to a nearby rural health Centre as a donation during renovation of its office. The company had availed ITC on such fans. So, even if no consideration is involved in this disposal, it will still be treated as supply in GST. Supplies between related persons: a. Transactions between related persons is considered a supply in GST even if made without any consideration. Related persons are defined u/s 2(84) of the CGST /SGST Act. Persons shall be deemed to be related if they fall under any of the following categories: Officer/ director of one business is the officer/ director of another business, Businesses are legally recognized as partners, An employer and an employee, Any person holds at least 25% of shares in another company either directly or indirectly, One of them controls the other directly or indirectly, They are under common control or management, The entities together control another entity, They are members of the same family. However, in accordance with the provision in entry no. 2 of Schedule I, gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply. Example: Company X gives a mobile phone worth Rs. 25000/- to each member of its sales team as a gift in 2017-18. The same Company X gives a high-end laptop worth Rs. 60,000/- to the head of the sales team for his performance. Here, the gift of mobile phone to a salesperson as stated above, would not be treated as supply since the value of such gift to an employee does not exceed Rs.50,000/- in that FY. However, say, the company over and above the above, also gifts a family tour package to that employee which is worth Rs.30,000/- in the same FY. In this case, since the value of the gift exceeds Rs.50,000/-, the entire amount of Rs.55, 000/-(=Rs.25, 000/- + Rs.30, 000/-) would be treated as a supply by the employer. In the second case also, gift of laptop worth Rs.60, 000/- to the sales head would be treated as a supply since the value of gift exceeds Rs.50,000/-. Sometimes companies gift to non-related persons without any consideration. The same may be illustrated as follows a. Gifts provided by pharmaceutical companies to the Doctors Gifts given by the pharmaceutical companies to the doctors shall not be treated as supply since in this case, both are not related persons or distinct persons as specified in section 25 and the activity (of giving gift) is made without consideration. However, the pharmaceutical company in this case, is not entitled to claim ITC on corresponding purchase of such gift items in accordance with section 17(5) of the CGST /SGST Act. b. Diwali gift / New Year gift to business Clients The activity of giving Diwali Gifts or New Year gifts to business clients would also not qualify as supply since the activity is not between related parties and is without consideration. However, ITC on corresponding purchase of the same needs to be reversed, if already availed, in accordance with S.17(5) of the SGST/CGST Act. Supply between distinct persons: Stock transfer from one branch to another branch or from the manufacturing unit to different sales units within or outside the State is a very common practice in business. In the pre-GST regime, this type of inter-state transaction was exempted subject to fulfilment of certain conditions. However, this stock transfer is a supply between distinct persons in GST. Following persons are distinct persons a. All registered persons (whether in the same State or different States) under a single PAN are distinct persons ( section 25(4) of the CGST/SGST Act). b. Where registration has been obtained by a person in respect of an establishment in a State (or a union territory), another establishment of the same person in another State (or union territory) they are treated as establishments of distinct persons (section 25(5) of the CGST /SGST Act). Example: A registered manufacturer in Delhi, transfers finished goods worth Rs.5,00,000/- to its depot located in Kolkata, WB. This would be treated as a supply in GST. Supply of principal and agent: In pre-GST regime, consignment transfer to consignment agents in VAT and CST Acts was exempted subject to fulfilment of certain conditions. However, supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of his principal is treated as supply by principal to the agent even if such is made without consideration. Similarly, supply of goods by an agent to his principal where the agent undertakes to receive goods on behalf of the principal is treated as supply by the agent to his principal even if such is made without consideration. The key here is whether the invoice for the supply has been issued by/to the agent in his own name rather than in the name of the principal; if so, the transaction between the principal and the agent is a supply, otherwise not. ( Circular no. 57/31/2018-GST dated 4th September, 2018 refers) The same is illustrated below A manufacturer of hosiery products in Kolkata engages an agent in Siliguri to sell his products as an agent. When the manufacturer transfers his stock to the agent it would be treated as supply by the principal to the agent and subsequently when the agent sells the same to the customer such would be treated as supply by the agent. This manufacturer further engages an agent in Nadia to receive cotton yarn from vendors of Nadia. When the agent transfers cotton yarn to the manufacturer the same would be treated as supply by the agent to the principal. Import of services from a related person or from overseas establishment Import of services is a supply, if it is made for a consideration. However, Import of Service without consideration would also be treated as supply if such is made in the course or furtherance of business and is made from any related person or from any establishment outside India to him in India and the same is made. Example A multinational company engaged in engineering services provides engineering drawing from its unit at France to a unit in Kolkata, free of cost. This import of service would be treated as supply even if it is without any consideration. However, in this case it is very difficult to identify such services., if there is no self-compliance made by the RTP. If we examine the books of accounts carefully, we may find some areas where an audit trail of such supply may be identified. In such cases a list containing details of establishments outside India can be obtained and the correspondences between the entity in India and its foreign counterpart can be examined, at least on a sample basis. For example, a company asks engineers from his foreign establishment to supply engineering services to a client in West Bengal. The foreign establishment charges nothing for the services but travel expenses and all other expenses of such engineers are borne by the registered company in West Bengal. So, audit trail of such services can be found in the relevant head of expenses. Therefore, it is very important to know the business pattern of the auditee to identify probable areas where reflection of such type of transactions may be identified. E. Activities neither to be treated as supply of Goods nor as supply of service Before going into the detailed discussion on activities or transactions which shall neither be treated as supply of goods nor supply of service as provided in Schedule III, it is important to know the context of Schedule-III. In GST law, services are defined in the widest form ; anything other than goods is defined as services. So, the services provided by an employee to his employer also becomes a supply of services. Functions performed by MLAs and MPs also get into the ambit of services as far as the definition of services is concerned. But it was never the intention of the GST law to bring services by the employees or MLAs or MPs and similar other activities into the scope of supply. Accordingly, the following activities or transactions which are enlisted in Sch. III, shall neither be treated as a supply of goods nor a supply of services: i) Services by an employee to the employer in the course of or in relation to his employment. ii) Services by any court or Tribunal. iii) Functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities; iv) The duties performed by any person who holds a post in pursuance of the provisions of the Constitution in that capacity; v) The duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central/ State Govt. or a local authority and who is not deemed as an employee before the commencement of this clause. vi) Services of funeral, burial, crematorium or mortuary including transportation of the deceased. vii) Sale of land, sale of building (other than specified in Para. 5(b) of schedule II of the Acts]. viii) Actionable claim, other than lottery, betting and gambling. ix) Supply of goods from one non-taxable territory to another without entering into India. x) (a) Supply of warehoused goods to any person before clearance for home consumption. (b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port i) Services by an employee to the employer in the course of or in relation to his employment In case of supply of services by an employee, fulfilment of the following three broad conditions is required for the levy of GST - i. presence of service, ii. existence of consideration and iii. the supply is in the course of or in relation to the employment of the employee; that is to say, the services rendered by the employee are as per the contract of employment or within the scope of the employment. But, as per entry no.1 in Schedule III, services rendered by an employee to his employer in the course of or in relation to his employment, shall neither be treated as supply of goods nor as supply of services. It is important to note that the exclusion is applicable only in circumstances where the services are rendered in the course of or in relation to his employment and not otherwise. Any service rendered by an employee to his employer beyond the normal course of employment can be subject to GST unless otherwise exempted. Therefore, employee-employer agreement should have comprehensive details about the roles and responsibilities of the employee and remuneration against those services. These are also important areas to examine. For example a. There is a condition in the employment clause of a pharma company that an Area Sales Manager is required to fulfil his target during a year otherwise, it would affect his increment and next promotion. An Area Sales Manager who is highly efficient exceeded the target prior to the end of the financial year. The company, being pleased, gifted him a personal car. This is nothing but a gift by the employer to the employee but the same would be treated as supply in accordance with entry 2 of Schedule I. ii) Actionable claim, other than lottery, betting and gambling: Except lottery, betting and gambling, all other actionable claims are neither to be treated as supply of goods nor as supply of services. Section 3 of the Transfer of Property Act, 1882 defines Actionable Claim. It is a claim of 1. any debt which is not secured by: a. Mortgage of immovable property, or b. Hypothecation, or pledge of movable property, 2. any beneficial interest in movable property, which is not in possession of the claimant. The possession can be actual or constructive. Examples of Actionable Claims Lottery ticket, Betting gambling, Right to credit in a provident fund, Dividends on shares, debentures, negotiable instruments such as bills of exchange etc., Rights shares or option to purchase shares, Bank guarantee, Examples of Non-Actionable Claim Copyright, Right to claim damage in the event of breach of contract, Right to use, Coupons and Vouchers. There are several examples of actionable claims. But, only lottery, betting and gambling are liable to GST. iii) Sale of land, sale of building (other than specified in Para. 5(b) of schedule II of the CGST/ SGST Act): Sale of land is outside the ambit of GST. But there may be many activities and transactions related to land which can be taxable in GST. Some of these activities are mentioned in Sch. II. Schedule II: Activities or transactions to be treated as supply of goods or supply of services 1. TRANSFER (a) Any transfer of title in goods is a supply of goods - Transfer of title of goods means transfer of possession and control on such goods i.e transfer of ownership. However, sometimes, title may be transferred before getting physical possession of goods. For example, X being a reseller of sewing machines receives an order to supply 15 pieces of sewing machine to a business person Y in Bihar. But, Y instructs X to deliver the same to Z in Jharkhand. In this case, Y transfers the title of the goods to Z without getting physical possession of the goods. Hence, in this case there are two distinct supplies of goods, first one by X to Y and the second one by Y to Z. There may be situations where transfer of title of taxable goods may not be treated as supply in GST. In the case of High Sea Sales , transfer of title of goods occurs on high seas. Subsequently, documents of Customs clearance i.e. Bill of Entry etc is filed by the person who buys the goods from the original importer during the said sale. This high sea sale is not a supply in GST as per entry no. 8(b) of Sch. III. (b) Any transfer of right in goods or of undivided share in goods without the transfer of title thereof is a supply of services Transfer of right to use of goods was always a point of dispute between two different taxation authorities. Transfer of effective control and possession over any goods along with the transfer of right to use was considered as deemed sale under the VAT Acts. However, if there was no transfer of effective control and possession over any goods, mere transfer of right to use was considered as supply of service. So, upon consideration of all the conditions it was always difficult to decide whether a particular transaction was liable to levy of VAT or service tax. This particular entry in Sch. II has done away with any such confusion and henceforth any transfer of right in goods or of undivided share in goods without the transfer of title thereof would be considered as supply of services. Excavators, Cranes, Dumper trucks, Generator, Transit Mixer and many such machineries are usually supplied on rent basis without transferring the title. All such transactions are treated as supply of service in GST. But, as per the rate notification, rates of applicable GST of such services is equivalent to the rates of the particular goods. (c) 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- Example of the aforesaid entry can be Hire Purchase. There may be a two- party transaction between the owner and the hirer or there may be a tripartite agreement between seller, the buyer and the financer. Obviously the second type of agreement is more popular nowadays. However, this kind of tripartite arrangement cannot be considered as hire purchase. In this case, full payment is made by the financing company for the purchase of the buyer and the purchaser becomes the owner of the goods. The finance company has only the right to seize the goods for non-payment of loan. In case of failure to pay the loan, the finance company sells the goods after taking possession of the goods. In such a case, it is a supply in GST and there is specific valuation rule 32(5) of the CGST / SGST Rules, 2017 which reads as follows: Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored: Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession . This is further clarified by Question No.63 in FAQ issued by the CBIC on Banking, Insurance and stock brokers sector dated 27.12.2018. 2. LAND AND BUILDING (a) Any lease, tenancy, easement, licence to occupy land is a supply of services, (b) Any lease or letting out of the building including a commercial, industrial, or residential complex for business, or commerce, either wholly or partly is a supply of services - Land and buildings being immovable properties are kept outside the ambit of Goods as defined under the CGST /SGST Act, 2017. But services like lease, tenancy, tenancy transfer, easement, licence to occupy land, lease or letting out of any building or part thereof are treated as supply of service in GST. Even, the tenancy premium is liable for levy of GST. There are certain kinds of such supplies which are notified as nil rated supply. e.g. Leasing of industrial plots or plots for development of infrastructure for financial business. Grant of tenancy rights in a residential dwelling for use as residential dwelling against tenancy premium or periodic rent or both is also exempt supply [vide sl. no 12 of Notification No. 12/CT (R)2017]. An interesting ruling by AAR of GST, Karnataka is relevant to mention here [vide, ruling 2020 (4) TMI 692 ]: Applicant has let out a Residential complex to a company who is engaged in the business of providing residential accommodation to students by entering into sublease agreement with students for providing residential accommodations with amenities, security, entertainment facilities for a period varying from 3 months to 11 months. The ruling held that they are like hotel rooms and no circumstances can be termed as a residential dwelling. The services provided are not for use as a residence by the lessee. Hence it is not the nature of the property which determines taxability but the purpose of letting out the property which determines taxability. 3. TREATMENT OR PROCESS Any treatment or process which is applied to another person s goods is a supply of services Any treatment or process applied to another person s goods is a service. Further, any treatment or process undertaken by a person on goods belonging to another registered person is defined as job work in GST. Now, if consumables are supplied by the job worker in the process of applying treatment or process then also it would be treated as supply of services. However, if goods are also supplied by the job worker for manufacturing of a product as per the specification of the Principal then the same may be considered as manufacturing of that particular goods. Accordingly, the job worker is liable to charge GST at applicable rates for supply of that particular goods. In this respect clarification in Circular No: 52/26/2018-GST dated 09.08.2018 is relevant: Fabrication of buses may involve the following two situations - (a) Bus body builder builds a bus, working on the chassis owned by him and supplies the built-up bus to the customer, (b) Bus body builder builds body on chassis provided by the principal for bodybuilding. In situation (a), the supply of a bus is being made, and accordingly the supply would attract GST@ 28%. In situation (b), fabrication of body on chassis provided by the principal (not on account of bus bodybuilder), the supply would be treated as services, and 18% GST as applicable will be charged accordingly. 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 direction of a person carrying on the business so as no longer to form part of those assets, such transfer or disposal is a supply of goods by the person. In this entry business assets means both Fixed and Current assets. Transfer or disposal of the same would be taxable under GST irrespective of whether the transaction is done with consideration or without consideration. (b) Where, by or under the direction of a person carrying on business, goods held or used for the purpose 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, the usage or making available of such goods is a supply of services. Where goods held or used for the purpose of business - (i) are put to private or personal use; or (ii) made available to another person for use for any purpose other than a purpose of the business, In both such cases it would be a supply of services only if such a transaction is made for consideration. e.g1. A proprietor who is in the business of selling cars brings a car temporarily for 2 months to his residence for personal use. Here, it should be deemed as a supply of services by the said registered person to the proprietor if he pays to the business for the personal usage of the car; otherwise, credit proportional to such usage is to be reversed in terms of section 17(5)(g) . e.g2. When a registered person transfers the right to use his assets to his sister concerns (who are distinct persons) for a limited period of time, it would also be a supply of services even if there is no consideration involved by virtue of falling within the scope of entry 2 of Schedule I. (c) Where any person ceases to be a taxable person, any goods forming part of the assets of the business carried on by him, shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person unless- (i) The business is transferred as a going concern to another person, or (ii) The business is carried on by a personal representative who is deemed to be a taxable person. Example- A manufacturer of hosiery goods has decided to close his business. At the time of filing application for cancellation of registration, he has raw materials and finished goods as stock worth Rs.10 Lakh. He also has Plant Machinery worth Rs.15 Lakh. He has disclosed such assets but failed to pay any tax. His application is accepted and registration is cancelled. This manufacturer is liable to pay tax on his stock including Plant Machinery as the same is deemed to be supplied by him immediately before he ceases to be a taxable person. However, in the present case if the person would have transferred the business as a going concern to another person, in such case, it would have been treated as exempt supply of services in accordance with sl.no 2 of Notification No. 12-CT(R)/2017 dated 28.06.2017 . Similarly, in case of death of the person, if the business is carried on by his legal heir as a taxable person under GST then all liability of the deceased proprietor would be transferred to the legal heir. 5. SUPPLY OF SERVICES As per Sch. II the following activities are treated as supply of services: (a) renting of immovable property. (b) Construction of a complex, building, civil structure or a part thereof, including a complex or a building intended for sale to a buyer, wholly or partly, except where entire consideration has been received after the issuance of completion certificate, where required by the competent authority or after its first occupation, whichever is earlier. (c) Temporary transfer of right to use or enjoyment of intellectual property right is service. (d) Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software. (e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. (f) 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. (a) Renting of immovable property is service - The word Immovable Property has not been defined in the CGST /WBST Act, 2017, however the same has been defined u/s 2(19) of the General Clauses Act, 1977 - Immovable Property shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth. Suppose, a heavy generator is installed on the ground of any registered person. Whether the same would be treated as immovable property? In the judgement of Mallur Siddeswara Spinning Mill case (166) ELT 154 (SC) the Hon ble Supreme Court of India held that if a machine (say a Genset) is fastened on a frame and is capable of being shifted from that place, it is capable of being sold. It is goods and not immovable property. In such cases the twin test of permanence and marketability have been laid down by the Apex Court. It is advised to go through the relevant judgements in this regard. Several activities are associated with renting of immovable properties such as: Renting of residential complex / building / flats/ etc. Renting of a commercial complex/unit/flat. Renting of a place / property/ complex for a religious function. Renting of a place / property/ complex for social function. Renting of a place / playground for sports and games. Renting of property to an educational institution. (b) Construction of a complex, building, civil structure or a part thereof, including a complex or a building intended for sale to a buyer, wholly or partly - Where any consideration in respect of construction of complex, building, civil structure or part of it is received partly or wholly, before issuance of completion certificate, then the entire consideration shall be treated as consideration for the services provided and, the same is taxable under the Act. But, if no consideration is received before getting completion certificate or after its first occupancy, whichever is earlier, then sale of that complex or building or any civil structure will neither be treated as supply of services nor as supply of goods. The tax rate on supply related to real estate projects has undergone a change w.e.f. 01.04.2019. The input- output scenario up to 31.3.2019 was as follows: In the real estate sector, a Developer - Promoter or a Landowner Promoter is primarily engaged in supply of service. A Developer-Promoter is a promoter who constructs or converts a building into apartments or develops a plot for sale. A Landowner-Promoter is a promoter who transfers the land or development rights or FSI to a developer-promoter for construction of apartments and receives constructed apartments against such transferred rights and sells such apartments to his buyers independently. Apart from the aforesaid services there are various other services also associated. A separate book has been published by the Directorate of Commercial Taxes, West Bengal on the real estate sector. An Audit officer entrusted with the job of auditing a taxpayer in the real estate sector is advised to follow the book and go through the notifications related to real estate. Present input- output scenario in the real estate sector which is effective from 01.04.2019 is as follows: (c) Temporary transfer or permitting the use or enjoyment of any intellectual property right - The term Intellectual Property Right (IPR) has not been defined in the GST Act. However, IPR includes Copyright, Trademark, Patents and other similar rights to an intangible property. In GST law goods comprise of both tangible and intangible goods. IPR is nothing but goods. Temporary transfer or permitting the use or enjoyment of IPR is treated as supply of service in GST. However, if IPR is permanently transferred it would be considered as a supply of Goods. (d) Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software - Software a goods or service? Software in physical form is considered as goods in GST. However, the act of development of software is service. (e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is service in GST- One of the services which have always been the point of discussion in pre- GST regime as well as in the GST regime is the supply of service for agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act . The key here is whether any of the following activities of: (a) refraining from doing an act, or (b) tolerating an act or a situation, or (c) doing an act, has been carried out (I) in accordance with an agreement or contract (express or implied) which provides for the same, and (II) whether any consideration (whether in money or otherwise) is paid in return for engaging in any of the aforesaid activities. If both the aforesaid conditions at (I) and (II) above are satisfied then such activity constitutes a supply within the meaning of the Act. (f) Transfer of Right to use goods for cash, deferred payment or valuable consideration is considered supply of services under Schedule II. It has already been discussed in Sl. No.1(b) above. Let us discuss some rulings by AAR in this respect: Example 1: AAR Kerala in the case of M/s. Abbott Healthcare Pvt. Ltd. Abbott undertakes an agreement for placement of specified medical instruments to customers like hospitals, labs etc., for their use without any consideration but with the condition that these hospitals, labs etc. agree to purchase at least a specified number of products like reagents, calibrators, disposals etc. The ruling says that it is a composite supply where the principal supply is the transfer of right to use of any goods for any purpose which is supply of service and is liable to GST under SI No. 17 (iii) Heading 9973 of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017 . Example 2: Case Number 46 of 2019, Order Number 40 of WBAAR/2019-20 - M/s Ishan Resins Paints Limited , the applicant engaged in the business of leasing out trucks or tankers without operator to GTA raised query as to whether it would be covered under serial no. 22 (b) of Notification No. 12/2017 CT(Rate) dated 28/06/2017 (corresponding State Notification No. 1136 FT dated 28/06/2017 ) as exempt services by way of giving on hire of transportation of goods to GTA. The AARWB HELD THAT: - The Applicant intends to lease out vehicles like trucks, tankers etc. that are designed to transport goods. The control and possession of the vehicle will be transferred to the lessee, who will engage the operators and bear the cost of repair, insurance etc. It is, therefore, not classifiable under SAC 9966, which is restricted to rental services of transport vehicles with operators. The service is classifiable under SAC 997311 as leasing or rental services concerning transport equipment without an operator. It amounts to transfer of the right to use the goods and taxable under Sl No. 17(iii) of the Rate Notification. 6. COMPOSITE SUPPLY The following composite supplies shall be treated as a supply of services, namely: (i) works contract as defined in clause (119) of section 2 ; and (ii) 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 (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration. (i) Works contract: Works Contract has been defined in Section 2(119) of the CGST Act, 2017 as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. Thus, it is seen from the definition that the term works contract has been restricted to a contract for building construction, fabrication etc. of any immovable property only . This is a clear diversion from the concept of works contract as per the VAT Act. This diversion is expected to solve many disputes in the realm of taxation of works contracts. In a works contract both goods and services are naturally bundled and supplied in conjunction with each other in the ordinary course of business. So, basically it is a composite supply. But, there is no need to find the principal supply since this entry 6(a) in Schedule II specifies works contract as a supply of service. Apart from works contracts in GST, there are several other composite supplies such as fabrication or painting jobs done in automotive body shops, service contracts relating to different machines and equipment etc. However, these would not be covered within the definition of works contract in GST. In such contracts it is important to identify the principal supply for levy of appropriate rate of tax. (ii) 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 (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration is a supply of service There were several judgements before the 46th amendment of the Constitution of India in this respect. Hon ble Apex Court in the matter of State of Punjab vs M/S. Associated Hotels Of India (on 4 January, 1972) analyzed the nature of contract where a customer stays in the hotel and meals are served as part of and incidental to that service. Hon ble Andhra High Court in the matter of Durga Bhavan And Ors. vs The Deputy Commercial Tax Officer on 19th September, 1980 categorized the sale of food in restaurant into two parts - The supply of food, etc., by restaurants may be made to customers who sit in the restaurants and consume the food. In such a case they enjoy the amenities provided by the owners of the restaurants. The second class of cases comprise of supply of food-stuffs, snacks, drinks, etc., across the counter where there is practically no service rendered or amenities provided except in the manner of supplying the goods like packing, etc. Finally, it was needed to make 46th Constitutional Amendment in the year 1981. Key Elements of Article 366(29A)(f) Tax on the sale or purchase of goods includes: (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 of supply is made. Thus, in the pre-GST regime both Service Tax and VAT was levied on this supply. This entry 6(b) of the Schedule II is expected to reduce any confusion in respect of determination of this particular nature of supply since entry 6(b) of the Schedule II specifies the supply as the supply of service. However, there may still prevail some confusion regarding the nature of certain supplies. Illustration - a. Whether tobacco consumed in hookah bars would get covered in the entry 6(b) of Schedule II as any other article for human consumption ? To analyse this, we need to take resort to a well-recognised and established principle of a law which is Ejusdem Generis . Ejusdem Generis is an aspect of the principle of Noscitur a sociis . The Latin word sociis means society , Society of the same nature. It is an established principle of law that when general words follow specific words, such cannot be read in isolation. Their colour and their contents are to be derived from the context of specific words. In this case any other article for human consumption can t be read in isolation. It must be read as being food or any other article for human consumption . The phrase any other article takes its colour from the word food . Now the question arises whether hookah is a food? Since it is not a food it will not be covered under this entry of Schedule II. In hookah bars, hookah paste is supplied with the right to use a smoking apparatus. So, it is a composite supply, where hookah paste is the principal supply. [There is a very famous judgement in respect of the principle of Ejusdem Generis . Interested readers may go through the judgement in the case of McBoyle v. United States 283 U.S. 25 (1931)].