"Supply" Under GST – Some Interpretational Issues

The objective of this article is to examine and analyse some of the important interpretational issues noticed while unravelling the definition of “Supply” in the Central Goods and Service Tax Act, 2017 (CGST Act).

Under any taxation legislation, the levy of tax depends on undertaking of an event. Levy of Excise Duty is on ‘manufacture or production of goods’, while for levy of Service Tax, there has to be a ‘provision of service’ and levy of Sales Tax/VAT triggers on ‘sale of goods’. According to Article 366(12A) of the Constitution of India, ‘Goods and Service Tax’ means “a tax on supply of goods or services, or both, except ………” The definition of “supply” contained in the new GST legal framework, is central to the ambit of its applicability. Therefore, for GST to be levied on a transaction, it must satisfy the ingredients of definition of ‘supply’.

Section 7 of the CGST Act defines ‘Supply’ as under

“….the expression “supply” includes-

(a) 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;

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

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

(d) the activities to be treated as supply of goods or supply or services as referred to in Schedule II.”

Whether use of the word ‘includes’ has enlarged the scope of “supply” to include all transactions even if these are not covered in Clauses (a) to (d) or the word “includes” is to be construed as equivalent to “means and includes”.

Where the definition of a term employs the word “includes”, the natural connotation is of an extensive, rather than restrictive, definition and construction. This interpretation has been held by judiciary in many cases. But, this interpretation may be contentious in the context of GST, as it would render filters of applicability ineffective, granting an arbitrary taxing power. Further, this could result in transactions that were not intended to be a “supply”, being held to constitute “supply” for the purposes of this law.

Hence, the implications of the word “includes” in the definition of “supply” requires consideration. While the use of the word “includes” in a definition usually denotes that the definition is prima facie extensive, it is capable of another construction.

Lord Watson in the Privy Council in the case of Dilworth vs. Commissioner of Stamps¹ stated that this alternate construction may become imperative if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions used. It may be equivalent to ‘mean and include’ and in that case, it may afford an exhaustive explanation of the meaning which for the purposes of the Act must invariably be attached to those words or expressions.

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1   (1899) AC 99, pp. 105, 106

The following Supreme Court judgments take cognisance of this dicta and illustrate possible situations which allow for the word “includes” to be construed as equivalent to “mean and include”, providing for a restrictive and exhaustive definition of the term.

1) South Gujarat Roofing Tile Manufacturers Association vs. State of Gujarat, AIR 1977 SC 90

Entry 22 added by the Gujarat Government to Part I of the Schedule to the Minimum Wages Act, 1948 is followed by an explanation which reads: ‘For the purpose of this entry potteries industry includes the manufacture of the following articles of pottery namely – (a) Crockery, (b) Sanitary appliances, (c) Refractories, (d) Jars, (e) Electrical Accessories…’

The Supreme Court held that constructing the explanation, the items included in it were plainly comprised in the expression which showed that the word ‘includes’ was not used to extend the normal meaning of the expression. The word ‘includes’ was used in the explanation in the sense of ‘means’ and so the definition provided by the explanation was exhaustive. Hence, Mangalore pattern roofing tiles manufactories lay outside the ambit of Entry 22 as they were not included in the Explanation.

2) RBI vs. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424

The Supreme Court held that interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statutemaker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context.

3) NDP Namboodripad vs. Union of India, (2007) 4 SCC 502

Rule 62 of Part III of the Kerala Services Rules uses the word “includes” in the definition of “emolument”.

The Supreme Court held that the word “includes” in Rule 62 should be read as “comprises” or “consists of”. Accordingly, clearness allowance and special allowance cannot be added to the pay for the purposes of pension as they were not contained in the definition.

Based on above discussion, it is amply clear that use of word ‘includes’, cannot be read to enlarge the scope of ‘supply’ to any absurd situation. Therefore, in my opinion, a supply without consideration (not specifically covered by Schedule I will not be considered as a supply liable to GST, despite use of the word ‘includes’ in the definition.

In the course or furtherance of business

The words ‘in the course or furtherance of business’ would be important to determine whether particular activity can be taxed or not. The word ‘business’ has been defined in an inclusive manner in section 2(17) giving a wide meaning. Activities without profit motive or even infrequent or irregular transactions are also considered as business. However, despite such a wide connotation, in my opinion, a personal activity or activities for pleasure or sport would still not fall under ‘business’. In the case of State of Mysore vs. K. N. Chandrasekhar AIR 1965 SC 533 and State of Andhra Pradesh vs. H. Abdul Bakhi AIR 1965 SC 531, it was held that the expression ‘business’ though extensively used as a word of indefinite import, in taxing statute, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person and is normally with an object of making profit and not for pleasure or sport. FAQ on GST issued by CBEC (2^nd Edition) has clarified that selling of personal car by an individual is not a business activity. Therefore, an intention of a person carrying out a particular transaction can be one of the determining factors in deciding whether it is a business transaction or not.

Consideration in kind and Barter/Exchange Transactions –

-   Barter/ exchange transactions were not liable to VAT, as these were considered as transaction without a valuable consideration. However, GST law specifically includes these transactions in the definition of supply. Provision of architect/construction services for which consideration is paid by way of transfer of  flat by a builder or exchange of old phones/cars for new ones, etc. are illustration of non-monetary consideration and liable to GST as covered by definition of “supply”.

-   In case of redevelopment projects where a developer may agree to construct a new building for existing flat owners, the service of construction provided by builder would be considered as provided in lieu of additional FSI received by him. This activity would come in the category of barter transaction and liable to GST. It is interesting to note that in barter transactions, both person are making supply to each other and GST is leviable on both persons, if the transactions satisfy other requirements of the definition. In such transactions, valuation of each of the supplies will be governed by the Valuation Rule. Rule 1, provides for considering the open market value of the goods supplied by the supplier in such cases. Therefore, despite the consideration for both the supplies being same in commercial sense, the valuation for taxability under GST may differ.

Whether issuing bills payable to a creditor results in Exchange liable to GST? The exchange is of one form of payment to another, therefore, the transaction is in money and neither party receives goods or services. Therefore, despite being an exchange in common parlance, it will not be liable to GST.

Unilateral Disposal

In order to cover the disposal as a supply, it has to be made to another person with a consideration, therefore, unilateral disposal of waste, even though made in the course of business, e.g. flaring of gas, disposing refuse, etc. without consideration is not a ‘supply’, consequently, not liable to GST.

 Supplies without a consideration (Schedule I) Clause (c)

As per main definition u/s. 7(1)(a), an activity without consideration is not “supply”. However, Clause (c) provides that in certain cases, even though there is no consideration, the same would be treated as ‘supply’. Such cases are listed in Schedule I. Hence, normal cases of free service by a professional or free supply of goods, like free samples or gifts to customers would not be liable to GST, unless these are covered by the specified transactions listed in Schedule I.

Permanent transfer of business assets

Permanent transfer or disposal of business assets where input tax credit has been availed has been deemed to be supply even if it is made without consideration as per entry 1 of the Schedule I. The word ‘permanent transfer’ implies that goods should be transferred without any intention or requirement of having to receive the goods back by a person. Typically, donation of business assets or disposal in any other manner would qualify as ‘supply’ under this clause, where input tax credit has been claimed on the same.

Whether destruction by natural causes or intentional destruction would also be covered within the meaning of disposal? Destruction by natural causes, in my view, may not be covered under the scope of disposal, as disposal is an intentional and deliberate act as against the destruction by natural causes. On the other hand, intentional destruction, say scrapping of a machine, may be covered in the scope of disposal.

A linked issue to disposal of business asset is that of double taxation. When any capital goods or plant or machinery is supplied, proportionate input tax or GST on transaction value, whichever is higher, is required to be paid in terms of section 18 (6) of CGST Act. On the same transaction, GST would also be required to be paid, as it is deemed to be supply under this entry of Schedule I. Further, no input tax credit can be availed in case where goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples as per section 17(5)(h) of CGST Act. Therefore, unless an exemption is provided for one of these transactions, it would lead to double taxation.

Gifts to employee of more than Rs. 50,000 in a financial year

Employee and employer have been deemed to be related persons as per section 15 of CGST Act. Entry 2 of Schedule I provides that supply of goods between related persons without consideration is also deemed to be supply. However, the proviso to the said entry provides for an exemption to gift up to Rs. 50,000 in a year. The term ‘gift’ has not been defined in the Act. Therefore, whether payments like bonus, free accommodation, free food/beverages, free transportation, diwali gifts, Sodexo coupons, ex-gratia payments would be considered as gift? In my view, all payments which are part of the employment contract cannot be treated as a gift. Pre-decided bonus, free accommodation are illustrations of this category. Further, there are some perquisites which are given to employees as part of normal business practice like free food and beverages during office hours or use of gym in office, as these may also not be considered as Gift. On the other hand, payment in cash or kind like Diwali gifts or gift vouchers on achievement by a child of employee or any ex-gratia payment may come in the category of Gift.

Clause (d) – Schedule II

Schedule II to the CGST Act lists down activities to be treated as supply of goods or services and all these activities have been deemed to be supply as per clause (d) of Section 7(1).

While other clauses of section 7(1) specifically provide for the existence or otherwise of the conditions of consideration and furtherance of business, this clause does not mention requirement of any such condition. Therefore, does it mean that these activities will be considered as supply, even if they are made without consideration or are not in the course or furtherance of business? For example, transfer of car to a daughter without any consideration may fall in entry 1 (a) of said Schedule II. Further, some of the entries, like 4(a) and (b) provides for coverage under the scope of ‘supply‘ whether or not with a consideration. Entry 5 (f) also prescribe a condition of consideration. Does it mean that for other entries in the Schedule, there is no requirement of consideration?

Transfer of Development Right (TDR) – whether covered in GST?

Entry 2(a) of said Schedule provides that any lease, tenancy, easement, license to occupy land is a supply of service. Further, entry 5 of Schedule III treats the activity of sale of land as not a supply. Development Right are one of many rights attached to earth.

As per definition of Immovable Property, u/s. 3(26) of the General Clauses Act, 1897, any benefit arising out of land is also considered as an immovable property. As per Entry 18, List III, of Seventh Schedule to the Constitution, land also includes rights in or over land. It has also been held by Bombay High Court in Chedda Housing Development Corporation (2007 (3)MHLJ 402 that TDR is an immovable property. In the case of goods, the activity of any transfer of right in goods without transfer of title has been treated as a supply of service. However, in case of land and building, only specific modes like lease, tenancy, easement, and license to occupy land and only lease and letting out building has been deemed to be a supply of service.

This shows the intention of the legislature to not include all types of transfer of rights relating to land under the purview of GST. In the present Service Tax law, a view could have been taken that transaction of sale of TDR was in the nature of transfer of title in the immovable property, hence, was excluded from the definition of Service u/s. 65 B (44). However, in GST law, exclusion is only towards sale of land. Hence, taking a view that sale of TDR is equivalent to sale of land is fraught with risk.

Construction of Complex

Like in present Service Tax Law, construction service has been made liable to GST. Entry 5 in Schedule II provides for this activity. In the said entry, in addition to the issue of completion certificate, one more condition of first occupation has been added. First Occupation requirement would be applicable only when requirement of issue of completion certificate is not there, say in case of villages. Explanation (2) to the said entry provides that the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure. It means that any activity, say of alteration of existing flat, would also be covered under the scope of construction activity.

However, it is unclear as to how the test of receipt of consideration before issuance of completion certificate or after its first occupation can be fulfilled in such situations. In fact, there can be cases where alteration or additions can be made in one part of building, even with residents staying inside the building. Further, in such cases, generally there is no requirement to issue completion certificate. Therefore, it appears that the Explanation has been added without realising the implication thereof.

Conclusion