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TMI Blog2018 (10) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, comments from the concerned officer i.e. Assistant Commissioner of State Taxes, Bathinda has been sought. The concerned officer vide his letter No. 5076 dated 03-08-2018 stated that charges received on account of washed away / cancelled contracts for supply of goods are covered under GST as services as per definition of services u/s 2(102) of the Act ibid. The activities relating to use of money are clearly covered under services in view of the above mentioned definition of services. As per the definition of consideration under the Act as per section 2(31)(b) of the CGST, the charges received on account of forbearance for supply of goods are part of consideration. A personal hearing was held on 13.08.2018 before the Advance Ruling Authorities, Punjab. On 13-08-2018, Sh. Abhishek Mishra & Sh. Anand Aggarwal, Chartered Accountants appeared on behalf of the applicant with regard to advance ruling application and reiterated their submissions made in Annexure-1 & Annexure-2 of their advance ruling application dated 07-06-2018. They stated that the activity of M/s. Louis Dreyfus Company India Private Limited, Ground Floor, House No. 378, Model Town, Phase-I, Bhatinda, 151001 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are an ensemble of "Supply" cum "Settlement" Contracts. Such Contracts culminate into and entail performance either by way of actual delivery of goods or settlement by payout of differential sum. 3. The Company enters into Sale and Purchase Contracts of aforesaid nature with its customers and vendors respectively, the salient terms of which are produced hereunder for ease of reference: Sale Contract: A Contract no. SO/GJ/2016-17/202 B. TT no. LDC-GJ-1617-12U C. Sale Date 13/10/2017 D. Contract Generation Date 13/10/2017 E. Quantity 500 (Five Hundred Only) Fully pressed Bales F. Specification 1. Growth 2. Station 3. Staple Length 4. Micronaire 5. Remarks 6. Trash Indian raw cotton crop 2016/17 (GJ-V797, Gujarat) in Fully pressed Bales Ant station of Gujarat Zone at supplier's option 22 mm 4.7 NCL-5.5 NCL Pre-Approved Lots 13% Max 9% max G. Type of sale Spot Spot H. Sample Tendering Period 13/10/2017 to 03/11/2017 at Supplier's option I. Last date of Payment 03/11/2017 J. Price 28400 (rupees Twenty Eight Thousand Four Hundred Only) Indian Rupees/ Candy K. Taxes The Price is exclusive of all applicable taxes like the Goods & S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TT no. RS 17-18/0297 C. Contract no. PO/PB/2017-18/0043 E. Quantity 110 (One Hundred Ten Only) Fully pressed Cotton Bales, Bales weight of 165 Kg. each. +/- 3.0% variation in weight allowed F. Specification 1 Growth 2. Station 3. Variety 4. Grade 5. Staple 6. Micronaire 7. Strength 8. Trash 9. Moisture Indian raw cotton crop 2017-18 Crop Year Punjab (PB) All Punjab J-34-RJ-RG Midding 28+ mm Minimum 4.0+ NCL 28 GPT Minimum 4 % (1:1 discount above 4%) 9% (Moisture will be checked on spot (at gin) with moisture meter before approval) G. Price INR 4038 (Rupees Four Thousand Thirty Eight Only) / Maund H. Taxes The Price is exclusive of all applicable taxes like the Goods & Services Tax, duties, cesses, local taxes and any other indirect taxes. Any burden due to any additional tax, duties and cesses etc. imposed due to any reason whatsoever at the time of invoicing shall be borne by the Supplier. I. Incoterms FCA (Free Carrier) Gin/Warehouse(Punjab) AS PER INCOTERMS 2010 J. Delivery Period 09/12/2017 to 19/12/2017 K. Weight Basis Bale by bale weighing OR Empty/ Loaded Truck weighing will be carried out at the gin at the Supplier's cost in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st supply of predetermined quantity of cotton. 6. On the other hand, in case of "closure" or "washout" of aforesaid Contracts, the party to the Contract which opts for such "closure" or "washout" is required to pay to the other party a sum equivalent to difference between the Settlement rate and the rate of cotton at which the supply of the same is agreed upon. 7. The Settlement rate is enshrined in the Contract to be as follows: Sale Contract - It is discretionary upon the Company to settle / close the Contract at the rate fixed by it. In this regard, the rate at which the Company settles is usually the market rate of cotton prevalent on the Commodities Exchange such as MCX on the day on which such settlement is made. Purchase Contract - Market rate of cotton prevalent on Commodities Exchange such as MCX on the day on which such settlement is made. The fixation of rate as per the Contract is binding on the other Party to the Contract without any room for aberration or further deliberation / negotiation. The rate at which the Parties had agreed to settle the Contract in the event of non-delivery of cotton is sacrosanct and any deviation to the same is to be construed as violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II of the CGST Act provides for specific transactions on which GST applies. In other words, Schedule Il is an exhaustive compendium of transactions on which GST applicability is re-emphasized by inclusion in the said Schedule. GST would have applied on such transactions invariably even in absence of Schedule Il if such transactions qualified as supply of goods and/ or services. Hence, Schedule II of the GST Act is merely clarificatory in nature and in no manner tends to expand the ambit of transactions on which GST applies under the GST laws. 6. In the above backdrop, Serial No 5(e) of Schedule Il should be construed to mean that GST liability arises in the eventualities enlisted below as the same would be deemed to be supply of "services" under the GST law: - agreeing to the obligation to refrain from an act; - agreeing to the obligation to tolerate an act or situation - agreeing to the obligation to do an act 7. It is noteworthy that the aforesaid Entry in Schedule II is a combination of two activities on part of the deemed supplier of services, which are as follows: - An overt act to agree to the obligation - An activity which follows the agreement to the obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, reference may be made to Para 6.7.1 of the Education Guide issued by Central Board of Excise and Customs in respect of earlier Service Tax regime governed by Chapter V of Finance Act, 1994 wherein a similar entry existed in the list of Services termed as "Declared Services": "6.7.1 Would non-compete agreements be considered a provision of service? Yes. By virtue of a non-compete agreement one party agrees, for consideration, not to compete with the other in any specified products, services, geographical location or in any other manner. Such action on the part of one person is also an activity for consideration and will be covered by the declared services." 11. The above explanation of "agreeing to an obligation to refrain from an act or to tolerate an act or situation or to do an act" by way of an example is apt as in such case one of the Parties agrees, out of his free will and discretion, to enter into non-compete agreement and also takes an "action" by not competing with the other Party to the Contract. Both the said ingredients of "agreeing to an obligation" and 'to refrain from and act or to tolerate an act or situation or to do an act" are being fulfilled and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to bes ecurities; and (iib) rights or interest in securities. " From the above, it appears that 'securities' include derivative, amongst other things. 17. As per in clause (ac) of the Section 2 of the SCRA, 'derivative' includes: "a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (a) a contract which derives its value from the prices, or index of prices, of underlying securities;] (b) commodity derivatives; and (c) such other instruments as may be declared by the Central Government to be derivatives;]" 18. The term "comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the definition of "Securities". "Securities" are specifically excluded from the definition of "goods" and "services" 23. This is supported by Frequently Asked Questions ("FAQ") no. 36 & 37 issued by GST authorities. The relevant extract if said FAQ is reproduced hereunder for easy of reference: S.no. Question Answer 36 Would 'future contracts' be chargeable to GST? Future contracts are in the nature of financial derivatives, the price of which is dependent on the value of underlying stocks or index of stocks or certain approved currencies and the settlement happens normally by way of net settlement with no actual delivery. Since future contracts are in the nature of derivatives these qualify as 'securities' as defined in Section 2(101) of the CGST Act, 2017. As securities are neither 'goods' nor 'services' as defined in the CGST Act, 2017, future contracts are not chargeable to GST. But where the future contracts have a delivery option and the settlement of contract takes place by way of actual delivery of underlying commodity/currency, then such forward contracts would be treated as normal supply of goods and liable to GST. Further, if some service charges or service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, we would first like to go through the legal structure under the CGST Act, 2017 (which should be hereinafter read to also mean Punjab GST Act, 2017, the provisions in both Acts being similar) imposing the tax. The charging Section i.e. Section 9 reads as follows: "1) . . . . ......there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person" Further, the scope of supply has been laid down in Section 7 of the CGST Act, 2017. Relevant portion of which reads as under:- "7 (1) For the purposes of this Act, the expression "supply" includes all forms of supply of goods or services or both 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; ........ ........ (d) the activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a separate consideration is charged". The applicant claims that his activity of closure of contract by way of settlement is covered under the term 'securities' which have been specifically excluded from the definition of 'Services' under CGST Act, 2017, a situation which would entail no taxation. This claim of the applicant requires examination under legal provisions." 4.1 The Section 2 (101) of CGST Act, 2017 defines 'Securities' as "Securities shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);". The definition of 'Securities' as given in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (SCRA) is as follows: "(h) securities include- (i).................. (ia) derivative; .................." From the above definition of 'securities', it is clear that securities include derivative. 4.2 Further, Section 2 (ac) of SCRA defines 'derivative' as: "derivative"- includes (A) ..................................................; (B) ..................................................; (C) commodity derivatives; and (D) ...................................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral Government may, by notification in the Official Gazette, specify" 4.4 The applicant has not laid any information which points to the transactions regarding sale/ purchase of cotton and closure of such contracts being traded on recognised stock exchange or being settled on the clearing house of the recognised stock exchange or the contracting parties and the terms being notified by the Central Government. Therefore, on harmonious reading of above provisions of SCRA, especially in view of the said Section 18A, 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. 5.Therefore, while it is forthcoming that legal provisions discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions in a manner which provides relief to a taxpayer and publishes these on its website, such relief should flow to the taxpayer. 6. However, once such an executive decision passes on relief to a taxpayer, it is natural that the relief must be to the extent mentioned in such executive decision. In the answer to FAQ No. 37 it had been inter-alia specified that "Where the settlement takes place by way of net settlement of differential of the forward rate over the 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, 2017. As securities are neither 'goods' nor 'services' as defined in the CGST Act, 2017, future contracts are not chargeable to GST." But in para 7 of Annexure - I to the Advance Ruling Application filed by the applicant wherein he had described the nature of activities in respect of which advance ruling had been sought, settlement rate has been described in the contract as follows: "Sale Contract - It is discretionary upon the Company to settle/ close the Contract at the rate fixed by it. In this regard, the rate at which the company settles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding 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. It is also clear that the applicant and the other contracting party are agreeing to the obligation of doing an act viz. settling the contract by payment of agreed amount of monies if goods are not delivered in terms of the contract, and therefore this activity of theirs, by this measure too, is to be treated as supply of services and liable to taxation under provisions of CGST Act, 2017. Therefore, it is seen that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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