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GST on Supply even without any consideration

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GST is payable even if supply is made without any consideration mentioned in Schedule-1

Para 1 :Permanent Transfer/Disposal of Business Assets on which ITC is availed.

 

 This clause covers transfer of business assets from HC to SC for nil consideration

Note: Permanent transfer/disposal of following business assets will not be deemed as supply:

(i) Business assets on which ITC is blocked/not available under GST

(ii) Business assets though eligible for ITC, but ITC has not been availed by such RP.

Ex: Dhruv gives old laptops being used in his business to his friend free of cost. This will qualify as supply provided input tax credit has been availed by Dhruv on such laptops.

Ex: A dealer of AC permanently transfers the motor vehicle free of cost. ITC on said motor vehicle is blocked. This transaction will not constitute a supply as ITC has been blocked on Cars.

Q. State whether the following transactions qualify as supply?

(a) XYZ & Co. a manufacturer of goods donated old computers to Charitable Schools on account of renovation of office. Tire company has taken ITC on the computers so donated.

(b) Mr. Rahim purchased a car for Business use & after 2 years, he transferred he car for personal use at home. Will the transaction be treated as supply? ITC has not been availed by Mr. Rahim.

(c) M/s T Ltd., is in the business of Hotel. He purchased AC for business purpose & after 2 years, he transfers AC to director without consideration. ITC has been availed on AC machines.

Ans:

(a) Yes. As per Section 7(1)(c) r/w Schedule I of CGST Act, 2017, Permanent transfer or disposal of business assets where ITC has been availed shall be treated as supply even if made without consideration. Hence, donation of old computers to charitable schools shall qualify as supply since ITC has been availed by XYZ & Co.

(b) Since ITC has not been availed on such car at the time of its acquisition & it is not treated as supply.

(c) Yes, it shall be a deemed supply (as per Para 1 of Sec 7(1)(c) r/w Schedule I).

Para 2 : Supply betwen Related or Distinct Persons (if made in course or furtherance of business

 Supply of Goods or Services b/w ‘Related persons’ or b/w ‘distinct persons’ as specified in section 25, will qualify as supply if it is made in the course/furtherance of business.

 Related Person [Explanation to sec 15]
Persons are deemed to be related persons in the following cases:

 Such persons are officers/directors of one another’s business.

 Such persons are legally recognised partners.  Such persons are Employer & Employee [Discussed Later in Detail]

 3rd person controls/holds (directly/indirectly) ≥ 25% voting shares of both of them

 One person controls (directly/indirectly) the other person.

 3rd person controls (directly/indirectly) both of them.

 Such person together control (directly/indirectly) a 3rd person.

 Such persons are members of the same family.

 One of them is the sole agent/sole distributor/sole concessionaire of other.

Ex: Ms. Priya holds 30% shares of ABC Ltd. & 35% shares of XYZ Ltd. ABC Ltd. & XYZ Ltd. are related.

Ex: Q Ltd. has a deciding role in corporate policy, operations management & quality control of R Ltd. It can be said that Q Ltd. controls R Ltd. Thus, Q Ltd. & R Ltd. are related.

 Distinct Person [Section 25]

 A person who has obtained/is required to obtain more than one registration, whether in one State/UT or more than one State/UT shall be treated as distinct persons, i.r.o each such registration.

Ex: Mohan (CA), has a registered head office in Delhi. He has also obtained registration in West Bengal i.r.o his newly opened branch office. Mohan shall be treated as distinct persons i.r.o registrations in West Bengal & Delhi. Supply b/w Delhi office & West Bengal office, in course or furtherance of business even without consideration will qualify as supply.

 Further, where a person who has obtained or is required to obtain registration in a State/UT i.r.o an establishment, has an establishment in another State/UT, then such establishments shall be treated as establishments of distinct persons

Ex: X Enterprises, a registered supplier, owns AC restaurant in Maharashtra. It has opened a liquor shop in Uttarakhand for trading of alcoholic liquor for human consumption. Since supply of alcoholic liquor for human consumption in Uttarakhand is a non-taxable supply, Rishabh Enterprises is not required to obtain registration w.r.t the same in Uttarakhand. In this case, AC restaurant in Maharashtra & liquor shop in Raipur [though unregistered] shall be treated as establishments of distinct persons. Supply by Maharashtra office to Uttarakhand office, in course or furtherance of business even without consideration will qualify as supply.

 Stock transfers or Branch transfers (with different GST registration) = Supply

 Transactions b/w different locations (with separate GST registrations) of same legal entity

Ex: Stock transfers or branch transfers) will qualify as ‘supply’ under GST as these are transactions b/w distinct persons.

Ex: Raghubir Fabrics transfers 1000 shirts from his factory located in Lucknow to his retail showroom in Delhi so that the same can be sold from there. The factory & retail showroom of Raghubir Fabrics are registered in the States where they are located. Although no consideration is charged, supply of goods from factory to retail showroom constitutes supply.

 Transfer b/w 2 units of a legal entity under single registration (apparently within same State) will not be considered as supply.

Ex: Raghubir Fabrics transfers 1000 shirts from his factory located in Lucknow to his retail showroom in Kanpur so that the same can be sold from there. It has taken one registration in State of Uttar Pradesh declaring Lucknow factory as its principal place of business & Kanpur showroom as its additional place of business. Since no consideration is charged, supply of goods from factory to retail showroom in same State under single registration does not constitute supply. But if Raghubir Fabrics obtains separate registrations for Lucknow factory & Kanpur showroom, stock transfer b/w the Lucknow factory & Kanpur showroom will constitute supply.

 Supply of goods or services b/w an Employer & Employee

 Employer & employee are related persons as given in the definition of related person.

 However, Services provided by employee to employer in the course of employment are not treated as supply of services [Specifically given in Schedule III of CGST Act]

 Gifts by an employer to an employee ≤ Rs. 50,000 in value in FY shall not be treated as supply of G/&S. Thus Gifts > Rs. 50,000  GST .

Perquisites given by employer to employee: If perquisites (services) are given in the course of Employment or provided in terms of the contract b/w the employer & employee & is part & parcel of the cost-to company, it will not be subjected to GST.

Para 3 : Supply of Goods by Principal to his Agent or Vice Versa

 

Supply of goods by a principal to his agent, without consideration (where the agent undertakes to supply such goods on behalf of the principal) is considered as supply.

Similarly, supply of goods by an agent to his principal, without consideration (where agent undertakes to receive such goods on behalf of principal) is considered as supply

Note: Only supply of goods is covered in Para 3. Thus, Supply of services from Principal to his Agent & vice versa would be treated as supply if there is a consideration

Determining factorWhether a particular P-A relation falls within scope of Para 3 depends on “whether invoice for further supply of goods on behalf of principal is being issued by the agent or not”. [whether or not the agent has the authority to pass or receive the title of the goods on behalf of the principal].

Invoice for further supply is issued by Provision of goods from principal to agent
Agent to customer in his own name would fall within scope of Para 3 & thus would be treated as supply.
Agent to customer in name of principal would not fall within scope of Para 3 & thus would not be treated as supply.

Ex: A appoints B to procure certain goods from market. B identifies various suppliers who can provide goods as desired by A & asks the supplier (Golu) to send the goods & issue invoice directly to A. Here, B is only acting as the procurement agent, & has in no way involved himself in supply or receipt of goods. Hence B is not an agent of A in terms of Para 3.

Ex: A C&F agent or commission agent takes possession of the goods from the principal & issues the invoice in his own name. In such cases, the C&F commission agent is an agent of the principal for the supply of goods in terms of Para 3. of Schedule I. The disclosure or non- disclosure of the name of the principal is immaterial in such situations.

Ex: M/s Tintin, a banking company, appoints Mandaar (auctioneer) to auction certain goods. The auctioneer arranges for the auction & identifies the potential bidders. The highest bid is accepted & the goods are sold to the highest bidder by M/s Tintin. The invoice for the supply of the goods is issued by M/s Tintin 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, Mandaar is not an agent of M/s Tintin for the supply of goods in terms of Para 3. of Schedule I.

Ex: Gautam, an artist, appoints Gambhir (auctioneer) to auction his painting. Gambhir arranges for the auction & identifies potential bidders. The highest bid is accepted & painting is sold to the highest bidder. Invoice for the supply of the painting is issued by Gambhir on the behalf of Gautam but in his own name & painting is delivered to the successful bidder. In this scenario, Gambhir is not merely providing auctioneering services, but is also supplying the painting on behalf of Gautam to the bidder, & has the authority to transfer the title of the painting on behalf of Gautam. This scenario is covered under Para 3. of Schedule I.

Q. Mr A sells agricultural produce by using services of Mr B who is a commission agent as per ‘Agricultural Produce Marketing Committee Act’ of the State. Mr B identifies the buyers & sells the agricultural produce on behalf of Mr. A for which he charges commission from Mr. A. Whether Mr. B is an agent under Para 3. of Schedule I?

Answer: As per APMC Act, commission agent is a person who buys or sells the agricultural produce on behalf of his principal, or facilitates buying & selling of agricultural produce on behalf of his principal & receives, by way of remuneration, a commission or percentage upon the amount involved in such transaction. If the invoice is issued by Mr. B to the buyer, the former is an agent covered under Para 3. of Schedule I. However, in cases where the invoice is issued directly by Mr. A to the buyer, the commission agent (Mr. B) doesn’t fall under the category of agent covered under Para 3.

CLARIFICATION: Scope of ‘Principal & Agent relationship’ in context of del-credere agent

 Meaning of Del-credere Agene (DCA): DCA is an agent who guarantees payment to principal supplier. In order to guarantee timely payment to supplier, DCA can resort to various methods including extending short-term transaction-based loans to buyer or paying supplier himself & recovering amount from buyer with some interest at a later date. This loan is to be repaid by buyer along with interest to DCA @ mutually agreed rate b/w DCA & buyer.

 Whether ‘DCA’ falls under the ambit of ‘Agent’ under Para 3 of Schedule I?

Invoice for supply of goods is issued by Position of DCA
Supplier to customer (either himself or through DCA) DCA does not fall under ambit of agent & thus would not be treated as supply.
DCA to customer in his own name DCA would fall under ambit of agent thus would be treated as supply.

 Whether Temporary short-term transaction-based loan extended by DCA to buyer, for which interest is charged by DCA, is to be included in value of goods supplied by supplier (principal)?

Particulars Case 1: DCA is not an agent Case 1: DCA is not an agent
Invoice is issued by Supplier to buyer DCA to buyer (in his own name)
Transactions involved 1. Supply of goods from supplier (principal) to buyer;

2. Supply of agency services from DCA to supplier or both;

3. Supply of extension of loan services by DCA to buyer.

1. Supply of goods by supplier (principal) to DCA.

2. Supply of goods by DCA to buyer 3. Supply of agency services by DCA to supplier or buyer or both 4. Loan services by DCA to buyer

Clarification  Short-term Loan provided by DCA to buyer is a supply of service by DCA to buyer on principal to principal basis & is an independent supply.

 Therefore, interest charged by DCA would not form part of the value of supply of goods supplied (to the buyer) by the supplier.

 Activity of extension of credit by DCA to buyer would not be considered as a separate supply as it is in context of supply of goods made by DCA to buyer.

 Value of Interest for such credit would be included in value of supply of goods by DCA to buyer.

Para 4 : Importation of Services

 Import of services by (a taxable) ANY Person without consideration

 from a related person or from his establishments located outside India,

 in course or furtherance of business shall be treated as “supply”.

Ex: J Associates received legal consultancy services from its head office located in Malaysia. Head office has rendered such services free of cost to its branch office. Since J Associates & head office are related persons, services received by J Associates will qualify as supply even though head office has not charged anything from it.

Ex: Chaman, a proprietor registered in Delhi, has sought architect services from his son in US w.r.t his newly constructed house in Delhi. Although services have been received by Chaman without consideration from his son (related person), yet it will not qualify as supply since it has not been received in course/furtherance of business.

Section Nature of Service Consideration Business Test
Sec 7(1)(b) Import of Services Required Not required
Para 4 of Schedule I of Sec 7(1)(c) Import of Services by any person from related Person or from any of his other Establishments o/s India (distinct Person) Not Required. Required.

Clarification on ‘Free samples & gifts’ → [Supply nahi hai]

 Free Samples which are supplied free of cost (without any consideration) → shall not be treated as supply under GST (except in case of activities mentioned in Schedule I of the CGST Act).

 Input Tax Credit: ITC shall not be available to supplier on inputs, input services & capital goods to extent they are used in relation to gifts or free samples distributed without any consideration. If activity of distribution of gifts or free samples falls within scope of ‘supply’, on account of provisions contained in Schedule I of said Act, supplier would be eligible to avail ITC.

Clarification on ‘Buy one & get one free offer’ → [Composite or Mixed Supply; taxed u/s 8]

 It may appear that in case of offers like ‘Buy One, Get One Free’, one item is being supplied free of cost.

 But it is a case of two or more individual supplies where a single price is being charged for entire supply.

 It can at best be treated as supplying two goods for price of one.

Taxability of such supply will be dependent upon as to whether supply is a composite supply or a mixed supply & rate of tax shall be determined u/s 8 of CGST Act.

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