Section 7 Of Gst Scope Of Supply Under Gst Regime

Section 7 of GST – Scope of supply

Related Provisions of the Statute

Introduction

While the definition of the word ‘supply’ is inclusive, the legislature has carefully chosen not to use the word/s such as “means”, or “means and includes”, “shall mean”, or “shall include”, etc. A careful consideration of the above explanation would indicate that the draftsman is uncertain about any transaction of supply that could escape the ambit of levy. It is for this reason that despite being exhaustive, the legislature has used the word “includes”. A plain reading of the definition of the word ‘supply’ contained in Section 7(1) would invite anybody’s attention to the 8 words – sale, transfer, barter, exchange, license, rental, lease or disposal. Look at these 8 words – they are arranged in a descending order. Words 2 to 8 was a subject matter of challenge under the erstwhile State-level VAT Laws. This ambiguity has been done away with in the GST Laws. These 8 words together form a ‘continuum’. The last 7 words complete the absoluteness of the word ‘sale’ and / or supply. The Model GST Law released in June 2016 had included the meaning of the term ‘Supply’ within the clauses of the definition Section. However, in GST law, the term ‘supply’ is defined by way of a separate and distinct Section, Section 7. One understands that the meaning attributed to the term “Supply” is of very wide amplitude, but yet, an inclusive one. It must be noted that this term is ordinarily attributable to an ‘outward supply’, unless the context so requires that the term refers to an inward supply – say in case of importation of services or in respect of transactions without consideration etc. Many things come within ‘supply’ but not everything is ‘supply’. Supply too has boundaries and many transactions are excluded from its grasp. This points to a clear understanding that expression ‘supply’, although inclusively defined, does have a recipe or a set of ingredients that each transactions must be tested against to see if it is or is not ‘supply’. The word ‘supply’ could be understood as actual or implied. Implied supplies are governed by the relevant Schedules. The three pillars of a supply would be:(a) subject – viz. goods, services or goods treated as services. One cannot find an instance in the GST statute where a supply of services is treated as a supply of goods.(b) place of supply – to identify whether the transaction is an inter-State supply or an intra- State supply(c) time of supply – where legislature specifies ‘when’ the incidence is attracted.

Analysis

(a) Generic meaning of ‘supply’: Supply includes all forms of supply (goods and / or services) and includes agreeing to supply when the supply is for a consideration and in the course or furtherance of business (as defined under Section 7 of the Act). It specifically provides for the inclusion of the following 8 classes of transactions: (i) Sale(ii) Transfer(iii) Barter(iv) ExchangeCh 3: Levy and Collection of Tax Sec. 7-11 / Rule 3-786 BGM on GST(v) License(vi) Rental(vii) Lease(viii) Disposal The word ‘supply’ is all-encompassing, subject to exceptions carved out in the relevant provisions. There are various ingredients that differentiate each of these eight forms of supply. On a careful consideration of the purposeful usage of these eight adjectives to enlist them as ‘forms’ of supply, it becomes clear that the legislature makes its intention known by the choice of words that are deliberate and unambiguous. However, the definition starts off with the phrase – “For the purpose of this Act”, which means that wherever the term supply has been used anywhere in the Act, the meaning should always be derived from this section 7 and cannot be substituted by any other understanding of the term supply. Barter means a “thing or commodity” given in ‘in return of’ another. In other words, no value is fixed- viz., barter of wrist watch with a wall clock. Disposal means distribution, transferring to new hands, extinguishment of control over, forfeit or pass over control to another. Transfer means to pass over, convey, relinquishment of a right, abandonment of a claim, alienate, each or any of the above acts, lawfully.A tentative attempt at identifying the characteristics of each of these forms of supply is provided below: On an understanding of the above chart, one may infer that ‘supply’ is not a boundless word of uncertain meaning. The inclusive part of the opening words in this clause may be understood to include everything that supply is generally understood to be PLUS the ones that are enlisted. It must be admitted that the general understanding of the word ‘supply’ is but an amalgam of these 8 forms of supply. Any attempt at expanding this list of 8 forms of supply, in case of goods, must be attempted with great caution. Attempting to find other forms of supply has in the normal course not yielded the desired results. However, transactions that do not amount to supply have been discovered viz., – transactions in the nature of an assignment where one person steps into the shoes of another, appears to slip away from the scope of supply, as well as transactions where goods are destroyed without a transfer of any kind taking place. Perhaps, the case of destruction of goods is not included within the meaning of ‘supply’ considering that the input tax credits in respect of destroyed goods is a blocked credit. However, the contradiction may continue until a clarification is issued to state whether the blocked credits is in respect of goods that have been destroyed before the availment of credits, or is applicable even in case where goods are destroyed after the credits have been availed in respect of such goods. Now looking at ‘services’, we find that the adjectives used to describe the 8 forms of supply in this clause are akin to transactions involving goods and not services. Services other than licensing, rental and leasing services have not been specifically included in the meaning of the term ‘supply’. However, transactions involving services are also required to be passed through the same criteria for determination of supply. In doing so, a slight adjustment in the way of looking at transactions involving services is necessary so as to substitute the object of supply from goods to services while administering the tests for determining the forms of supply involving services. In other words, the same 8 forms of supply must be applied in relation to services but with adjustment that is understood by the expression mutatis mutandis. The law has provided an inclusive meaning to the word ‘supply’ which implies that the specific transactions which are listed in the said Section are only illustrative.It is essential that such supplies should be by the supplier who is engaged in business. (‘Business’ as defined in Section 2(17) of the Act). However, in case of import of services for a consideration, even if such services are imported otherwise than in the course or furtherance of business, it would be a supply.The word ‘supply’ should be understood as follows:— It should involve delivery of goods and / or services to another person; The word ‘delivery’ must          be  understood from allied laws such as The Sale of Goods Act, 1930 or the Contract Laws;                  Delivery could be actual, physical, constructive, deemed etc.— Supply will be treated as ‘wholly one supply’ – if the goods and / or services supplied are listed in      Schedule II or could be classified as a composite supply or mixed supply;— It should involve quid-pro-quo – viz., the supply transaction requires something in return, which          the person supplying will obtain, which may be in money / monetary terms / in any other form            (except in cases of activities specified in Schedule I which are deemed to be supplies, even when      made without consideration). What is received in return need not be always in ‘money’; it can              partly/wholly be in money’s worth too (non-monetary in nature);— Transfer of property in goods from the supplier to recipient is not necessary viz., lease or hiring of      goods;It is essential that all the above forms of transactions including the extended and generic                    meaning  given to the word ‘supply’ should be made for a ‘consideration’. The only exception for          this rule of construction will be cases specified in Schedule I. Absence of consideration (as                  defined in Section 2(31)) will take away the character of the word ‘supply’ under this clause, and accordingly, the transaction will not attract tax. It is important to note supplies listed in Schedule would nevertheless attract the wrath of tax, even when made without consideration. One has to therefore, be very careful, while analysing the tax implications in respect of supplies listed in Schedule I.

(b) Supply should be in the course or furtherance of business: For a transaction to qualify as ‘supply’, it is essential that the same is ‘in the course’ or ‘furtherance of business’. This implies that it is only such of those supplies of goods and / or services by a business entity would be liable to tax, so long as it is ‘in the course’ or ‘furtherance of business’. Supplies that are not in the course of business or in furtherance of business will not qualify as ‘supply’ for the purpose of levy of tax, except in case of import of service for consideration, where the service is treated as a supply even if it is not made in the course or furtherance of business.The expression ‘in the course of’ must be construed differently from ‘in the course or’. The GST Laws use the expression ‘in the course or’ and careful analysis is therefore, essential. The expression ‘in the course’ appearing in Section 7(1)(a) does not appear in Section 7(1)(b) or Section 7(1)(c) or Section 7(1)(d). However, one cannot lose sight of the fact that the expression ‘in the course’ is used selectively in respect of transactions listed in Schedule I, II or III. The import of this would mean that the meaning attributable to the expression ‘in the course’ would apply only in respect of such of those transaction, so listed, in the relevant Schedules.Let us now try to understand the meaning of the phrase ‘in the course’. The expression ‘in the course’ implies not only a period of time during which the movement or transaction is in progress, but postulates a connected relationship. Therefore, the class of transactions needs to be analysed and cannot be randomly applied to the provisions of Section 7 or Section 8. So construed, the word ‘or’ appearing in the phrase or expression ‘in the course or furtherance of business’ assumes importance. When read in a proper perspective, the preposition ‘or’ actually bisects the entire phrase into two limbs. Therefore, the 8 forms of supply would tantamount to transaction of supply when such supplies are in the course of business, or in the furtherance of business. Therefore, the legislature has supplied huge amount of elasticity in understanding the meaning of the term ‘supply’.The term ‘business’ has been defined under the GST Laws to include:(i) a wide range of activities (being “trade, commerce, manufacture, profession, vocation, adventure,        wager or any similar activity”),(ii) “whether or not it is for a pecuniary benefit”,(iii) regardless of the “volume, frequency, continuity or regularity” of the activity.(iv) and those “in connection with or incidental or ancillary to” such activities.A recent order of the Authority for Advance Ruling – Kerala has ruled, in a matter involving recovery of food expenses from employees for the canteen facility provided by a Company, that such recovery falls within the definition of ‘outward supply’ and are therefore taxable outward supplies under the GST law. In paragraph 9 of the order, the AAR-Kerala has concluded that the supply of food by the applicant (Company) to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business and thereby the test of ‘in the course or furtherance of business’ is met by the applicant. – Order No. CT/531/18-C3 dated 26.03.2018.Also a question came up before Authority for Advance Ruling – Karnataka in the matter of Columbia Asia, whether allocation of expenses to other registered units by Corporate Office tantamount to supply of services between related or distinct persons as per Entry 2 to Schedule I to CGST Act and accordingly liable to tax. The Authority ruled that the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGST Act shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.Drawing similarities from the erstwhile State-level VAT laws, it follows that the said transaction should be with a commercial motive, whether or not there is a profit motive in it or its frequency / regularity. E.g.: sale of goods in an exhibition, participation in a trade fair, warranty supplies, sale of used assets / scrap sales, etc. would be activities in the course of business.(c) Import of service will be taxable in the hands of the recipient (importer): The word ‘supply’ includes import of a service, made for a consideration (‘consideration’ as defined in Section 2(31)) and whether or not in the course or furtherance of business. This implies that import of services even for personal consumption would qualify as ‘supply’ and therefore, would be liable to tax. This would not be subject to the threshold limit for registration, as tax would be payable in case of import of services on reverse charge basis, requiring the importer of service to compulsorily obtain registration in terms of Section 24(ii) of the Act. However, the GST law has ensured that persons who are not engaged in any business activities will not be required to obtain registration and pay tax under reverse charge mechanism, and it turn, requires the supplier of serviceslocated outside India, to obtain registration for the OIDAR (online information and database access and retrieval) services onlyNote: Import of services is included within the meaning of ‘supply’ under the CGST / SGST Acts. However, it would be liable to IGST since it would not be an intra-State supply. In fact, Section 2(21) of IGST Act has adopted the meaning of ‘supply’ from CGST/SGST Act.(d) Transactions without consideration: The law lists down, exhaustively, cases where a transaction shall be treated as a ‘supply ‘even though there is no consideration. Such transactions are listed in Schedule I. Once an activity is deemed to be a ‘supply’ under the paragraph listed in Schedule I, the value of taxable supply shall be determined in terms of provisions of Section 15(4) of the Act read with Chapter IV (Determination of Value of Supply) of CGST Rules.In this regard, it may be noted that on careful consideration of the essential ingredients of a valid contract, it cannot be disputed that a contract without consideration is not a contract at all. The reference made to ‘transactions without consideration’ In Schedule I does not imply that a void contract is being made valid, by GST laws. It can be argued that transactions listed in Schedule I, are not contracts at all owing to lack of consideration in terms of the Contract Laws. Even though they are not contracts, by legal fiction, flowing from section 7(1)(c) read with Schedule I, they will be nevertheless regarded as a ‘supply’ and made taxable. As can be seen from the above, in all other clauses of section 7(1), supply exists within a valid contract, but in select circumstances supply is imputed by legal fiction in the absence of a contract. It is therefore important not to extrapolate this legal fiction beyond the specific cases to which the law imputes this fiction.The activities specified in Schedule I are analysed in the ensuing paragraphs:1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.a. Of the 8 forms of supply, the only forms that qualify as a supply, under this category are ‘transfer’ and ‘disposal’. Other 6 forms of supply listed in section 7(1)(a) would not stand categorised in this paragraph, given that there is (a) an element of a consideration that is intrinsic to the form, such as the case of a sale or barter or exchange, or (b) there is no business asset that is permanently transferred such as in the case of a licence or rental or lease, or any other service for that matter.b. Ordinarily, there can be no permanent transfer in case of goods sent for job work. The aspect of sending goods on job work is not a supply, has been clarified vide Circular No.38/12/2018 dated 26.03.2018. However, where a registered person has purchased any moulds, tools, etc. and has sent the same to the job worker, there is a good chance that the goods are never