Section specific advance ruling under GST Act – Sec 7 of CGST and SGST Act 2017

Article contains section 7 “Supply” related advance rulings under GST pronounced by Advance Ruling Authorities of Various States.

Advance ruling’ means a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of section 97 or sub-section (1) of section 100 of the CGST Act, 2017, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant.

An advance ruling helps the applicant in planning his activities, which are liable for payment of GST, well in advance. It also brings certainty in determining the tax liability, as the ruling given by the Authority for Advance Ruling is binding on the applicant as well as Government authorities.

As we all know that definition of supply is heart of GST Act,

So I hope this section specific advance ruling helps you to determine whether goods or services or both are covered under definition of “Supply” or not.

Case Name : Caltech Polymers Pvt. Ltd., Appeal Number : ORDER No.CT/531/18-C3, Date of Judgement/Order : 26.03.2018, Courts : AAR Kerala 

1) Questions sought by applicant: Whether reimbursement of food expenses from employees for the canteen service provided by the applicant is covered under defination of supply or not.

2) Submission of the applicant :

i) The applicant is a Private Limited Company engaged in the manufacture and sale of footwear. It is submitted that they are providing canteen services exclusively for their employees. They are incurring the canteen running expenses and are recovering the same from its employees without any profit margin.

ii) The applicant has further submitted that the service provided to the employee is not being carried out as a business activity the same is mandatory to provide as per the provisions of the Factories Act, 1948.

iii) The expenditure incurred by the Company on the vegetables and other items required for preparation of food is recovered from the employees, as a deduction from their monthly salary, in proportion to the foods consumed by them. iv) The company does not make any profit while recovering the cost of the food items, from the employees. Only the actual cost incurred for the food items is recovered from the employees.

3) Prayer by applicant : . The Applicant is of the opinion that this activity does not fall within the scope of ‘supply’, as the same is not in the course or furtherance of its business. The company is only facilitating the supply of food to the employees, which is a statutory requirement, and is recovering only the actual expenditure incurred in connection with the food supply, without making any profit.

4) Findings and discussion- As per concerned officer:

i) . It is true that in the pre-GST period, vide Sl No. 19 and 19 A of Notification No. 25/2012 ST dated 20.06.2012 as amended by Notification No. 14/2013-Service Tax dated 22.10.2013 the ‘services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 (63 of 1948), including a canteen having the facility of air-conditioning or central air-heating at any time during the year’ was exempted from service tax. But, there is no similar provision under the GST laws.

ii) The term “business” is defined in Section 2(17) of the GST Act, (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit: (b) any activity or transaction in connection with or incidents! or ancillary to sub-clause (a); … From the plane reading of the definition of “business”, it can be safely concluded that the supply of food by the applicant to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business.

iii) As per clause 6 of the Schedule II , the following composite supply is declared as supply of service.• “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.” Even though there is no profit as claimed by the applicant on the supply of food to its employees, there is “supply” as provided in Section 7(1 )(a) of the GST Act, 2017. The applicant would definitely come under the definition of “Supplier” as provided in sub-section (105) of Section 2 of the GST Act, 2017.

iv) The term ‘consideration’ is defined in Section 2(31) of the GST Act, 2017 which is extracted below: ‘consideration’ in relation to the supply of goods or services or both includes,-

a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any,o her person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or-both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Since the applicant recovers the cost of food from its employees, there is consideration as defined in Section 2(31) of the GST Act, 2017. 12

5) Ruling by authority for advance ruling : It is hereby clarified that recovery of food expenses from the employees for the .canteen services provided by company would come under the definition of ‘outward supply’ as defined in Section 2(83) of the Act, 2017, and therefore, taxable as a supply.

Case Name : M/s Ex- servicemen Resettlement Society, Appeal Number : 354//BAAR/2019-20, Date of Judgement/Order : 29/11/2019, Courts : AAR (West Bengal)

1) Questions sought by applicant: Applicant seeks a ruling on “whether it is liable to pay GST on the portion of the payment received on account of the bonus paid or payable to the persons it deploys as security personnel”

2) Submission of the applicant : i) The Applicant submits that it supplies security and scavenging services to the
Government hospitals, classifying the service under SAC 998525.

ii) The Finance (Audit) Department of the state government has clarifies that the monthly charges payable to private security agencies deployed in government establishment has two parts -i) Service charge ii) Security charge , the security charge is determined on the basis of L1 bid and fixed for the period of service contract. the service charge is the minimum wages for the security personnel, their entitlement ESI, EPF , and Bonus as applicable It is variable according to minimum wages stipulated by the state government.

iii) The applicant accordingly claims the minimum wages, employer”s portion of EPF, ESIC etc on its bill for monthly charges and charges GST on the gross amount, including security charges. As per Health and Family Welfare department of the state government directs that contractual security personnel be paid bonus @8.33% once in a year.

Therefore applicant makes a separate bill for claiming the bonus amount. No GST is charged on such bonus bills.

4) Findings and discussion- As per concerned officer:

i) The applicant classifies its service under SAC 9985. it includes providing protective services through hired personnel to ensure the safety of people or property by guarding them against fire, theft, vandalism, or illegal entry, such as security guard services. It appears from agreement that the applicant provides a specific number of services personnel from among ex-servicemen for round the clock security job. The Applicant shall provide the recipient details of the personnel engaged, including names and home addresses and passport size photographs. The recipient should kept informed of any replacement etc. Deployment of security personnel shall be responsibility pf the applicant. Payment of consideration is subject to the recipient satisfaction about the service rendered.

ii) It is evident from the above discussion point that the security personnel engaged are at no point employees of the state government. The applicant can recruit, deploy, withdraw or replace any security personnel, provided the recipient is kept informed. It is not a manpower recruitment agency. The state government is not recruiting any personnel through applicant. The latter is the employer of the security personnel deployed and is responsible for paying all statutory dues including employer contribution to EPF, ESI etc.

iii) Employer’s contribution to EPF, ESI etc. and payment of Bonus at the Government approved rate are therefore component of applicant expenditure, who in terms of the agreement, is apparently ready to bear that liability. Such an agreement, however does not create a master and servant relationship between the recipient of service and the security personnel [Security Agencies Association vs Union of india (2013) 58 VST 295 (Kerala) ).Payment received from the recipient on account of the bonus paid or payable to the person deployed as security personnel is not, therefore guided by Para I of Schedule III.

5) Ruling by authority for advance ruling : The Applicant is liable to pay GST on the portion of the payment received on account of the bonus paid or payable to the persons it deploys as personnel.

Case Name : M/s COLUMBIA ASIA HOSPITALS PRIVATE LIMITED, Appeal Number : KAR ADRG 15 / 2018, Date of Judgement/Order : 27/07/2018,Courts : AAR ( Karnataka)

1) Questions sought by applicant:

“Whether 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 Central Goods and Services Tax Act, 2017 (CGST Act) shall be treated as supply as per Entry 2 of schedule I of the CGST Act or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act?”

2) Submission of the applicant :

i) The applicant states that he is a private limited company and is an international healthcare group operating a chain of modern hospitals across Asia. The Company is currently operating across six different states having eleven hospitals out of which six units are in the state of Karnataka.

ii) The applicant has its India Management Office (“IMO”) i.e Corporate Office in Karnataka and some of the activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by the employees from IMO which forms part of the registered person in Karnataka.

iii) The applicant provides that rental services amount to Rs.1,00,000 plus GST of Rs.18,000, which are towards management office. The Company in Bangalore would avail the input tax credit to the extent of Rs.18,000-00 and subsequently the Company, Bangalore would raise invoices on other units for an amount determined on the basis of turnover of respective unit to the total turnover of all the units in the said tax period and the applicable GST is discharged on the same.

iv) However, the applicant states, with respect to employee cost there are no invoices raised by the management office treating the same as activities carried out by employees in the course of or in relation to his employment which does not amount to supply of services.

v) The Applicant states that as per Section 7(1)(c) of the Central Goods and Services Tax Act, 2017, the term “Supply” includes “the activities specified in Schedule I, made or agreed to be made with or without a consideration”.

Further, as per Section 7(2) of the CGST Act, “activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services”. As per Entry 2 of Schedule I of the CGST Act, “Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”shall be treated as a supply even if it is made without consideration. He stated,however, as per Entry 1 of Schedule III of the CGST Act, “Services by an employee to the employer in the course of or in relation to his employment”shall not be treated as a supply of services.

vi) The applicant explained that the activities carried out by employees from its India Management Office (IMO) for accounting and other administrative functions with respect to other units amount to supply of services between distinct persons without consideration as per Entry 1 of Schedule I. However, the same shall not be treated as supply of services by virtue of specific relaxation provided in Entry 1 of Schedule III which states that “services by an employee to the employer in course of or in relation to his employment shall be neither treated as a supply of goods not a supply of services.”

4) Findings and discussion- As per concerned officer:

i) Contention of applicant as given above is examined and explanation given by applicant related to entry 2 schedule II is accepted , Hence IMO is covered under one registration in the state of Karnataka and the units are covered under different registrations, and the units are controlled by the IMO, they both are related persons.

ii) Further, the explanation given under Clause (c) of sub-section (1) of Section 7 which is related to “the activities specified in Schedule I, made or agreed to be made without a consideration ”

Hence any activities made between related persons made or agreed to be made without a consideration shall be covered under supply of goods or services. The valuation of such services is to be done as per the provisions of section 15 of the Central Goods and Services Tax Act, 2017 and activities performed by the employees at the corporate office in the course of or in relation to employment, the employees employed in the Corporate Office are providing services to the Corporate Office and hence there is an employee-employer relationship only in the IMO. The other offices are distinct persons and therefore the employees in the IMO have no employer employee relationship with other offices.

Entry No.1. of the Schedule III which is related to the activities which are to be treated neither as a supply of goods nor supply of services reads as under:
1. “Services by an employee to the employer in the course of or in relation to his employment.”

The services provided to the employer, i.e. the corporate office by the persons employed by the corporate office are in the nature of the employee-employer relationship. Further, since the corporate office and the units are distinct persons under the Act, there is no such relationship between the employees of one distinct entity with another distinct entity, at least as per the Goods and Service Tax Acts, even if they are belonging to the same legal entity. Further, the activities made between the related persons are treated as supplies and the valuation includes all costs, the employee cost also needs to be taken into consideration at the time of valuation of goods or services
provided by one distinct entity to the other distinct entities.

5) Ruling by authority for advance ruling :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 Central Goods and Services Tax Act, 2017 (CGST Act) shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.

Case Name : M/s Rajarathnam‟s Jewels, Appeal Number : KAR ADRG 16/2018, Date of Judgement/Order : 27/07/2018, Courts : AAR ( Karnataka)

1) Questions sought by applicant:

a) Whether mere deposit of diamond with safe vaults acknowledged by Electronic Vault Receipts (EVR) would be treated as supply for the purpose of levy of GST?

b) Whether conversion of EVR (representing receipt for diamonds deposited) into e-Units (securities) would be treated as supply liable to GST?

c) Whether e-Units would be treated as securities and thereby transaction in e-Units would remain out of scope of the levy under GST?

d) Whether the derivative contracts in e-Unit and settlement thereof would be treated as transaction in securities and thereby would remain out of scope of the levy under GST?

e) Whether conversion of e-Units into diamonds would be treated as supply liable to GST?

2) Submission of the applicant :

Levy of GST on mere deposit of diamond with Safe Vaults in return for Electronic Vault Receipts (EVR):

i) The Safe Vaults holds the diamond in the capacity of a bailee and is under obligation to return the diamond upon furnishing the EVR by the depositor. Furthermore, the person has the right to obtain the same diamond stored at the vault at any point in time on production of the EVR.

Levy of GST on conversion of EVR into e-Units:

i) Under this arrangement, the person surrenders EVR (constructive ownership in diamonds) and receives e-Units (securities). Section 7 of the CGST Act inter alia suggests that GST would be leviable on supply of goods or services or both made or agreed to be made for a consideration.

ii) In view of the above, a position may be taken that conversion of EVR into e-Units would constitute supply of diamonds by such person to Exchange against the consideration in there form of e-Units and would be subject to GST at the applicable rate.

iii) The applicant submits that the transaction in securities does not amount to supply of goods or services or both and thereby out of GST net. In the instant case, he submits, that e-Unit constitutes securities on the following basis:

Levy of GST on conversion of e-Units into diamonds:

i) Under this arrangement, a holder of e-Units surrenders such e-Units in exchange for the delivery of actual diamonds. Upon exercising such option, the Exchange would generate a Delivery Order, based on which the vault will hand over the stones to the designated authorized representative.

ii) In view of the above, a position may be taken that even  re-conversion of e-Units into diamonds would involve the
“supply” of diamonds in exchange to such person against the consideration in the form of e-Units and would be subject to GST at the applicable rate.

iii)  The applicant submits that in view of the above, a ruling is sought whether the applicant has rightly concluded the following legal positions:

a) Mere deposit of diamond with safe vaults in return for EVR would not be treated as supply for the purpose of levy of GST

b) Conversion of EVR into e-Units would be treated as supply of diamond liable to GST at the end of person surrendering the EVR.

c). E-Units would be treated as securities and thereby transactions in e-Units would remain out of the scope of the levy under GST.

d) The Contracts of diamond derivative and settlement thereof would be treated as transaction in securities and thereby would remain out of the scope of the levy under GST.

e) Conversion of e-Units into diamonds would be treated as supply of diamonds liable to GST at the end of Exchange.

4) Findings and discussion- As per concerned officer:

i) The applicant proposes to convert diamond to e-Units by depositing them to the safe vault, obtaining an EVR and surrendering the EVR to obtain e-Units. In this transaction, the diamonds are handed over to the Safe Vault and obtains the receipt of such deposit. As per the submissions made by the applicant, it is seen that at this stage, the applicant can surrender the EVR and obtain the same diamond back which were deposited in the Safe Vault. Hence there is only a transfer of possession of diamonds and the Safe Vault holds the diamonds as a bailee of the depositor, i.e the applicant and is under the obligation to return the same back to the depositor on submitting the EVR. Further, there is no consideration involved in this transaction and hence this transaction does not amount to supply of goods, i.e.

ii) The applicant, who is in possession of the EVR, would now propose to convert the EVRs, which represent the diamonds in the possession of the bailee, to e-Units. The EVRs being documents to the title of goods represent the diamonds in possession of the bailee and any transfer of EVRs amounts to transfer of the title to the goods, i.e. diamonds. Hence there is a supply of diamonds. The consideration need not be in the form of cash, but in the form of securities. The submission of the applicant that he effectively loses the title to the same goods being diamonds once he surrenders the EVRs pertaining to those diamonds deposited points to the fact there is transfer of title of diamonds to the person who is receiving it and converting the same to e-Units. Hence this transaction amounts to supply of diamonds as per Section 7 of the Central Goods and Services Act and is liable to tax as per Notification No. 1/2017 –Central Tax (Rate) dated 06.2017.

iii) The transactions of e-Units are in the form of derivatives as they are done on an online – M/s ICEX is approved by SEBI to act as a commodity exchange and it has been permitted by launch Diamond futures. It has also received approval from SEBI permitting the exchange to recommence live trading operations and it has all the necessary infrastructure to handle deposits, grading and sealing, vaulting and deliveries of diamonds as part of its preparation to launch the diamond contracts. According to the applicant, ICEX is a trading company dealing in commodity futures and is deemed recognized stock exchange under SCRA, 1956 in terms of Section 131(B) of Finance Act, 2015, pursuant to the Central Government Notification dated August 28, 2015 providing a nation-wide online trading platform in commodity derivatives. The ICEX is converting the EVR into e-Units, which are in the nature of securities, as admitted by the applicant

iv) Section 2(101) of the Central Goods and Services Tax Act, 2017 defines “securities” and they shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, (SCRA) the term securities include “derivatives” and as per Section 2(ac) of the SCRA, the term derivatives includes commodity derivatives.

v) The applicant proposes to surrender the documents of title to the diamonds (goods) in the form of EVR to obtain e-Units and this involves the loss of right of claim of the same diamonds which he has kept in vault and hence there is a transfer of title to the diamonds. What is obtained by surrender of e-Units at the time of exchange of e-Units to diamonds is similar diamonds and not the same diamonds. Hence, there is a supply of diamonds. Section 7(1) of the Central Goods and Services Tax Act, 2017 covers the supply of goods in the form of exchange under the scope of supply and the consideration received by the applicant is in the form of e-Units. The term consideration as per section 2(31) of the CGST Act is wide enough to consider any payment made or to be made and it is immaterial whether such payment is made in the form of money or otherwise. Hence this exchange of diamonds to e-Units constitute a supply under section 7(1) of the CGST Act and the applicant is liable to tax on the value of such transaction.

vi) Similarly, when the e-Units are surrendered to obtain the diamonds, there is a supply of diamonds by the Exchange to the applicant for a consideration in the form of e-Units surrendered and this constitute a supply under the provisions of section 7(1) of the CGST Act.

5) Ruling by authority for advance ruling :

The mere deposit of diamond with safe vaults acknowledged by Electronic Vault Receipts (EVR) does not constitute of supply of diamonds for the purpose of levy of GST

2. The conversion of Electronic Vault Receipts representing the diamonds held in the Vaults to e-Units would constitute a supply of diamonds liable to tax under the Goods and Service Tax Act.

3. The e-Units are securities under the clause (101) of section 2 of the Central Goods and Services Tax Act 4. The derivative contracts in e-Units and settlement thereof would be treated as transactions in securities in case it involves only e-Units without any involvement of physical diamonds and thereby would remain out of the scope of levy under GST. 5. The conversion of e-Units into diamonds would constitute a supply of diamonds liable to tax under the Goods and Services Tax Act.

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