♣ Permanent transfer or Disposal of Business assets, on which ITC has been availed.
(Business assets are those assets forming part of the assets and are used in the course of business)
In View of the above entry, where the businessman has availed input tax credit on some business assets and he subsequently transfer or disposes it off even without consideration, it shall be covered in the definition of supply. Thus, the following conditions should be satisfied in order to be covered under this clause: –
- There should be transfer of business assets.
• The transfer should be permanent in nature.
• The credit should have been availed on the assets so transferred.
e.g. (a) A dealer of an Air conditioner permanently transfer an Air conditioner on which ITC has been availed from his Stock in Trade for personal use at his residence.
(b) A Pharmaceutical company which has distributed certain products as free sample which are regular products having MRP on it and do not carry any declaration that a product are not for resale and on which ITC has been taken.
Now the question is Whether disposal of business assets on which ITC has not been taken as per Sec 17(5) of CGST Act, e.g. like Motor car on which ITC is not available subject to some exception. What will be the treatment on disposal of the same since it is not covered under Schedule I read with Section 7 of CGST?
In this case Clause 4 of Schedule II (Activities to be Treated as Supply of Goods OR Supply of services) which deals with “Transfer of Business assets” will apply which prescribes certain activities which will be treated as supply of goods or services.
♣ Supply of goods or services or both between related person or between distinct persons as prescribed under Section 25, when made in the course or furtherance of business.
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Definition of Related person
As per Explanation to section 15 (5) of the CGST Act, the person shall be deemed to be related person, if
- Such persons are Directors of Officers of one another’s business.
- Such persons are employer and employee.
- Such persons are legally recognised partners in business.
- One of them directly/ indirectly controls the other.
- Both of them are directly or indirectly controlled by a third person.
- Together they directly/indirectly control the third person.
- Any person directly / indirectly owns, control or holds 25% or more of the outstanding voting stock or shares or both of them;
- They are members of the same family.
- The person who are associated in the business with each other by way of sole agent / sole distributor / sole concessionaire, howsoever described.
It should be noted that the term person also includes the Legal person.
Definition of Distinct Person
The concept of ‘Distinct Person’ has been newly introduced under the GST law. Provisions of section 25 (4) and section 25 (5) of the CGST Act covers the concept of ‘Distinct Person’.
As per the concept of ‘Distinct Person’, if the person has obtained or is required to obtain more than one registration (whether in one State / Union Territory or more than one State / Union Territory) he shall be treated as ‘distinct person’ in respect of each such registration.
Further in case of establishment, if the person has obtained or is required to obtain registration in a State / Union Territory in respect of an establishment and the same person has an establishment in another State / Union Territory then such establishments shall be treated as establishments of distinct persons.
Hence, GST will be levied on Stock Transfer from one establishment to another establishment which are distinct person as per Sec 25.
♣ Intra State Stock Transfer
- Super Cars Ltd is a car manufacturing unit located in Karnataka. They also own a service unit in Karnataka. Super Cars Ltd have obtained separate registrations for both the manufacturing and service units.
The manufacturing unit and the service unit of Super Cars Ltd will be treated as distinct persons, and any supply between them will be taxable, even without consideration.
♣ Inter State Stock Transfer
- Super Cars Ltd is a car manufacturing unit located in Karnataka. They also own a service unit in Delhi.
The manufacturing unit and the service unit of Super Cars Ltd located in Delhi will be treated as distinct persons, and any supply between them will be taxable, even without consideration.
Rule 28 of the valuation rules deals with the value of supply of goods or services or both between the related persons or distinct persons which is summarised in the table below:
- Open Market Value– Open market value of supply of goods or services is the full value in money, excluding the GST and cess, payable by a person for a transaction.
- If Open Market Value is not available then there are two Proviso which are as follows:
First Proviso– Value of supply of goods and/or services of like kind and quality. However, the supplier has the option to take Value equivalent to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer, not being a related person”. This is applicable only when goods are intended for further supply by recipient.
Second Proviso- Where the recipient is eligible for full input tax credit, the value declared in the Invoice shall be deemed to be the open market value of the goods or services.
- Supply of Goods –
- By a Principal to his Agent, where the agent undertakes to supply such goods on behalf of the principal
- By an Agent to his Principal, where the agent undertakes to receive such goods on behalf of the principal.
The term “agent” has been defined as per sec 2(5) of the CGST Act as follows:
“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
Mandatory Registration for Agents (Section 24)
As per section 24 of CGST Act, the person who makes the taxable supply of goods or services or both on behalf of other taxable person whether as an agent is mandatory to take the registration under GST.
Explanation-
Here also, it is worth noticing that all the activities between the principal and the agent and vice versa do not fall within the scope of the said entry.
The key ingredient for determining relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry.
In cases where the invoice is issued by the agent to the customer in the name of the principal, such agent shall not fall within the ambit of Schedule I of the CGST Act.
Similarly, where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of the said goods by the agent to the principal would be covered by the said entry.
For E.g- (a) While making an Application for Pan Card , we visit Karvy Offices or other Franchise Holder (acting as an Agent) for the Principal (NSDL). Hence Karvy or other Franchise office will come under Schedule I.
- Super Cars Ltd appoints Sharma Agency as an agent. Sharma Agency receives spare parts supplied by Super Cars Ltd, and as and when an order is received by Super Cars Ltd from his dealers, an instruction will be sent to Sharma Agency to supply the parts. Also, Sharma Agency is entrusted to receive raw material from the manufacturers on behalf of Super Cars Ltd.
- M/s XYZ, a banking company, appoints Mr. B (auctioneer) to auction certain goods. The auctioneer arranges for the auction and identifies the potential bidders. The highest bid is accepted and the goods are sold to the highest bidder by M/s XYZ. The invoice for the supply of the goods is issued by M/s XYZ to the successful bidder.
In this scenario, the auctioneer is merely providing the auctioneering services with no role played in the supply of the goods. Even in this scenario, Mr.B is not an agent of M/s XYZ for the supply of goods in terms of Schedule I.
Valuation of Supply of Goods or Services: (Section 15 and Rules 29,30,31,33 of CGST Act)
As per Rule 29, if the goods or services have been supplied between the principal and agent, then the value of supply of goods or services shall be the open market value of the goods being supplied, or at the option of the supplier, be 90% of the price charged for the supply of goods of like kind and quality by the recipient (Agent) to his customer not being a related person, where the goods are intended for further supply by the said recipient (Agent).
As per Rule 30, if the value of supply of goods or services is not ascertainable through above Rule (Rule 29) then the value shall be 110% of cost of production or manufacture or cost of acquisition or cost of provisions of service.
As per Rule 31, if the value of supply of goods or services is not ascertainable through above Rules (Rule 29 and 30), then the value of supply of goods or services shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter.
E.g- Super Cars Ltd supplies spare parts to his agent Sharma Agencies. On the day of supply, the agent Sharma Agencies is supplying spare parts of like kind and quality in subsequent supplies at a price of Rs.5,000 per no. Another independent supplier is supplying spare parts of like kind and quality to the said Sharma Agencies at the price of Rs.4,550 per No.
The value of the spare parts supplied by Super Cars Ltd will be the open market value i.e. Rs 4,550 or he can opt for 90% of the price charged by Sharma Agencies in his subsequent supplies i.e. 90% of Rs 5,000 which is Rs 4,500 per No.
If for any reason the above method cannot be applied for determining the value of supply, it will be determined by applying the cost of the product + 10 %, or by using the residual method.
♣ Import of Services by a taxable person from a related person or from any of his other establishments outside India , in the course of furtherance of business
As a general principle, import of services without consideration will not be considered as supply under GST in terms of Section 7. However, import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business, even without consideration will be treated as supply in terms of Sl. No.4 of Schedule I.
Section 2(11) of IGST Act 2017 defines Import of Services as follows:
Import of services means the supply of any service where-
(i) The supplier of service is located outside
(ii) The recipient of service is located in India; and
- The place of supply of service is in India;
Analysis: Import of services from unrelated person would be taxable only if consideration is involved. However, services imported in the course or furtherance of business from a related person would be taxable even if no consideration is involved.
In other words, services imported from related person for personal purpose would be taxable only if consideration is involved
For Example-
John & Co an architecture consultancy firm of USA provided his services to Ram & Associates, a Chartered Accountants firm of India for designing it’s office at Mumbai for a consideration of Rs. 10,00,000/- and also to design the home of Mr Ram, the Managing Partner of Ram & Associates for a consideration of Rs 2,00,000 respectively. Also Ram & Associates took the services of its’ associate firm Ram Capital in London which specializes in Capital Management to manage its surplus funds without any consideration.
Solution:
As per Sec 2(102) of CGST Act , services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form currency or denomination to another form, currency or denomination for which a separate consideration is charged.
So, here designing consultancy by John & Co and capital management services by Ram Capital fall under the definition of services as these are activities other than goods, money and securities. Service can either be active i.e to do something or passive i.e not to do something.
As per Sec 7(1) (b) of CGST Act: Supply includes Import of Services for a consideration whether or not in the course or furtherance of business.
In this case John& Co provides design consultancy to both Ram Associates and also to its Managing Partner Mr Ram. Service to Ram & Associates was for furtherance of business as the design was made for the office but service to Mr Ram for designing his home was not for the furtherance of business but rather individual personal use. But still both these conditions satisfy the conditions of Sec 7(1)(b) and hence are supply of service.
As per Sec 7(4) of CGST Act , Supply of services imported into the territory of India shall be treated to be supply of services in course of inter-state trade or commerce.
The services of John & Co and Ram Capital shall be treated as Inter and as a result IGST would be levied.
Supply as per Schedule I
Ram Capital of London is an associate firm of Ram & Associates and thus is an establishment outside India. Ram & Associates is a taxable person importing capital management service without consideration. Hence it is a supply.
The Import of service from HO or branch outside India in the course or furtherance of business will be subject to GST even if no payment was made to HO or Branch outside India.
As per Sec 7(4) of CGST Act , Supply of services imported into the territory of India shall be treated to be supply of services in course of inter-state trade or commerce.
The services of John & Co and Ram Capital shall be treated as Inter and as a result IGST would be levied.
Thanks & Regards
CA Geetanjali Pandey Rawal
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