OCTOBER 25, 2017

By K K Sharma, Member, Central Board of Excise & Customs (Retd.)

SUPPLY of all goods, including motor vehicles, by a registered person is taxable under the GST law. A composition supplier {who can make, in terms of S.10(2)(c), only intra-State supplies} is liable to pay tax at rates specified in S.10(1) of cGST Act / sGST Act. A regular (non-composition) supplier, on the other hand, is required to pay the tax, at rates notified in this behalf, under S.9(1) of the CGST Act / sGST Act (intra-State supply) or under S.5(1) of the iGST Act (inter-State supply). There is no escape from this tax liability except when the Government grants exemption from such tax under S. 11 of cGST Act / sGST Act, or S. 6 of iGST Act.

2. It goes without saying that the taxable event under GST law is supply which has been defined in S.7 of the cGST Act / sGST Act. Relevant part of S. 7(1) reads as follows:

3. "7. (1) For the purposes of this Act, 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 of services as referred to in Schedule II ."(emphasis supplied).

4. The activity identified in S.7(1)(d) above, which is relevant to the issue at hand and which finds mention in para 4(a) of Schedule II, is reproduces below :

"4. Transfer of business assets

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for consideration, such transfer or disposal is a supply of goods by the person;"

5. Thus, so long as a transaction involving goods amounts to supply, as defined in S.7(1), and the supplier is a registered person, the transaction will be taxed unless it has been exempted under S.11 of cGST Act / sGST Act or under S.6 of iGST Act. It does not matter if the goods are motor vehicles or otherwise, old or new, used or unused, repaired or reconditioned. Their value may have depreciated, due to wear and tear, but taxable they will remain.

6. The Notifications No. 1/2017-CT(R) and 1/2017-IT(R) both dated 28.6.2017 as amended, which specify tax rates respectively on the intra-State and inter-State supplies of goods, make no distinction between goods depending on their age and use. Therefore, once goods of any description are identifiable with a specific entry in any of the tax rate schedules appended to the said notifications, the tax rate applicable to that entry has to be applied to the transaction value of those old and used goods for arriving at the amount of tax payable by a regular tax payer.

7. Like any other owner, a registered taxpayer also disposes of his old and used motor vehicles. He may or may not have availed ITC in respect of those vehicles, depending on whether or not he had used them for making such outward taxable supplies as included in S.17(5)(a)(i) & (ii) of cGST Act/sGST Act. But at the time of their disposal, an issue that he would be confronted with is whether he is liable to pay tax on such vehicles or not.

8. There is a view among some tax payers that only the following two kinds of persons, covered by S. 17(5)(a)(i)& (ii) of the cGST Act/sGST Act, are liable to pay tax on the outward supply of old and used motor vehicles viz. -

(i) those who are engaged in the business of supplying motor vehicles as such – new or old; or

(ii) those who are engaged in the business of making taxable supply of services involving use of such vehicles.

Their argument is that only these two kinds of persons are engaged in the supply of motor vehicles in the course or furtherance of business and that is precisely the reason such persons are not barred from availing ITC under S.17(5)(a)(i) & (ii) of cGST Act / sGST Act. Other persons, according to them, are not in the business of supplying vehicles and, therefore, sale of old and used vehicles by them does not qualify to be a supply in terms of S.7(1)(a).

They dismiss the provisions of S.7(1)(d) and para 4(a) of Schedule II, referred to in para 3 and 4 supra, contending that:

(a) these are intended only to clarify what transactions involving transfer of business assets will be treated as of goods, as opposed to those of services that are detailed in para 4(b) thereof; and

(b) whether a particular transaction amounts to supply or not has to be tested against the touchstone of S. 7(1)(a), i.e. whether it was made in the course or furtherance of business or not.

9. The proponents of this argument draw support from:

(i) para 1 of Schedule I to cGST Act/sGST Act, which relates to "Activities to be treated as supply even if made without consideration" . One of such activities mentioned in para 1 thereof is" Permanent transfer or disposal of business assets where input tax credit has been availed on such assets". They shore up their case with the argument that in case of serial sale transactions, involving same vehicle, each of the successive buyers would suffer cumulative tax burden without deriving corresponding ITC benefit, and that is patently unfair.

(ii) Hon'ble Delhi High Court's decision in the case of Panacea Biotech Ltd. Vs Commissioner of Trade and Taxes , pronounced on 14.12.2012 in WP(C) No. 4717/2011. The said decision had quashed the assessment order passed by the Sales Tax Officer wherein consideration received by the petitioner – a manufacturer and seller of pharmaceutical products – for sale of an old and used car had been included in the turnover of the petitioner for the relevant assessment year 2004-2005.

10. This view on non-taxability of old and used motor vehicles raises the following questions:

(a) would even the transactions, enumerated in the said Schedule II, have to be tested against the essentials of S.7(1)(a) to be regarded as taxable supplies?

(b) is it only the supplies involving motor vehicles, mentioned in S.17(5)(a)(i) & (ii), which can be treated as made in the course or furtherance of business? Are all other supplies to be regarded as not made in the course of business and are, therefore, not taxable?

(c) if in respect of any assets ITC has not been availed at the time of their inward supply, would their subsequent disposal be treated and taxed as a supply?

(d) is the ratio of Hon'ble Delhi High Court's decision in Panacea Biotech case applicable to the supplies of old and used cars in the GST regime?

11. Let us analyse and find answers to these questions:

(a) S.7(1) of cGST Act/sGST Act defines the taxable event in GST law, i.e. supply. Clause (a) of sub-section (1) of Section 7 covers, under its broad and inclusive sweep, various kinds of transactions and lays down a general rule that those transactions are to be regarded as supplies only if they have the four specified essentials. These essentials are that each one of those transactions must be:

(1) made or agreed to be made:

(2) made for a consideration;

(3) made by a person {as defined in S.2(84)}; and

(4) made in the course or furtherance of business.

S.7(1)(b) and S.7(1)(c) carve out a few exceptions to the general rule contained in S.7(1)(a) inasmuch as even if one of those essentials is absent, the transactions shall still be considered as supplies. Then comes S.7(1)(d) which, referring to Schedule II to the Act, not only declares the activities, enumerated in the said Schedule II, as supplies but also goes on to clarify, for removal of any doubts, as to which of those activities will be treated as supplies of goods or of services.

Clearly, the transactions listed in Schedule II are supplies in their own right, in terms of S. 7(1)(d). There is no authority in law to test them again against the four essentials of S.7(1)(a) to determine whether or not they constitute a supply.

Having thus determined the scope of S.7(1)(d), it can't be denied that a motor vehicle, owned by a taxpayer and purchased out of his business money, is his business asset. When one of such business assets is transferred, or disposed of in a manner as no longer to form part of those assets, it amounts, in terms of para 4(a) of Schedule II read with S.7(1)(d), to supply of goods. The sale of old and used motor vehicle would without doubt, therefore, be subject to levy of GST under S.9.

(b) Secondly, the phrase "in the course of business" has not been defined in the cGST/sGST/iGST Act. However, according to Black's Law Dictionary, "course of business" means "the normal routine in managing a trade or business". The Collins dictionary.com defines the phrase "in the course of" as "in the progress or process of; during". The freedictionary.com defines it to mean "during".

Many years ago, this phrase had come up for the consideration of Hon'ble Supreme Court in the case of State of Travancore, Cochin vs Shanmugha Vilas Cashew Nut Factory (1954 SCR 53). The dispute in that case involved interpretation of Art. 286(1)(b) of the Constitution which exempted from taxation under State laws, the goods purchased and sold in the course of import into or export out of India. It was observed that "in the course of the import of the goods into and the export of the goods out of the territory of India' would obviously cover the period of time during which the goods are on their import or export journey".

Thus in essence, the phrase in the course of business can only mean the period during which the business is carried on. Accordingly, when an old and used motor vehicle belonging to a business entity is sold by its owner during the period he carries on that business, it can safely be said to have been sold in the course of business. It is more so when the money spent on its purchase and made on its subsequent sale enters his business accounts. In any case, once a transaction falls within the ambit of Schedule II and is declared as supply, it is deemed to have been made in the course of business. Obviously, therefore, a sale by any registered taxpayer of old and use motor vehicles owned by him amounts to supply and squarely falls within the scope of S.7 of cGST Act / sGST Act.

(c) Thirdly, the tax is levied under S.9 of cGST Act/sGST Act or S. 5 of iGST Act. Its payment can't be avoided unless the same is expressly exempt. Tax liability on goods arises from their supply. It has nothing to do with their ITC eligibility or availment. In fact, admissibility of ITC on inward supplies depends upon taxability of outward supplies, not vice versa. The solitary object of provisions contained in Chapter V of the cGST Act/sGST Act, relating to Input Tax Credit, is to allow the credit of tax paid on a transaction in a supply chain so as to set it off against the tax payable on the next transaction in the same supply chain, and thereby prevent cascading of taxes. The reach of these provisions can't be extended to override the basic provision of GST law enshrined in S.9 – levy of GST. Even otherwise, there are several kinds of supplies of other goods, like those detailed in S. 17(5)(e) to (i), which are taxable under S.9 but in respect of which no ITC is admissible under S.16 or 18.

Further, any reliance on the entry No. 1 of Schedule I, referred to in para 10(i) supra, to avoid payment of tax on old and used vehicles, is fallacious at best. Whereas goods disposed of without consideration seem to go out of the scope of S.7(1)(a), this entry in Schedule I brings them back within the "supply" fold, in a situation where ITC has been availed on such goods. In fact, this provision is akin to S. 17(5)(h) and S.17(2), that deny ITC on goods which inter alia are disposed of by way of gift or free samples and are thus exempt supplies. What it means is that since ITC is allowed only for payment of tax on output supply and since the disposal here, being without consideration, is not a taxable output supply, the ITC attributable thereto must be reversed.

The reasoning of unfair treatment of motor vehicles in that while tax is payable but ITC is denied does not mean much either. As observed by Justice GP Singh in Principles of Statutory Interpretation (Ninth edition, Reprint 2005, p-693), it is well settled that in the field of taxation, hardship or equity has no role to play in determining eligibility to tax and it is for the legislature to determine the same.

(d) Finally, the decision of Hon'ble Delhi High Court in Panacea Biotech Ltd. This decision is distinguishable on law and is thus not applicable to the GST regime. In that case, the issue for determination was whether or not, under the relevant provisions of Delhi Sales Tax Act, 1975 (since repealed), the consideration received by a person, engaged in manufacture and sale of pharmaceutical products, for the sale of its old and used car could be included in his total business turnover. The Hon'ble Court had ruled in favour of the petitioner holding that:

(i) the transaction, mainly aimed at getting rid of old vehicles, could not be considered an activity of "business", as defined in S.2(c) of Delhi Sales Tax Act, 1975; and

(ii) the vehicle had already been taxed once under the " first point taxation " regime and could not, therefore, be taxed again.

In this context, it will be useful to compare the terms " business", "turnover" and "sale ", as were defined in the Delhi Sales Tax Act, 1975, as also under the cGST Act / sGST Act. According to S.2(c), 2(o) and 2(l) of the Delhi Sales Tax Act, 1975, these terms were defined thus:

S.2(c) "business" includes --

                (i)  any trade, commerce or manufacture as any adventure or concern in the nature of trade, commerce of manufacture whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure or concern; and

(ii)   any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern ;"

S.2(o) " turnover"

means the aggregate of the amount of sale price receivable, or if a dealer so elects, actually received by a dealer in respect of any sale of property in goods, made during any prescribed period in any year after deducting the amount of sale price, if any, refunded by the dealer to a purchaser in respect of any goods purchased and returned by the purchaser within the prescribed period;

PROVIDED that an election as aforesaid once made shall not be altered except with the permission of the Commissioner and on such terms and conditions, as he may think fit to impose;"

S.2(l) "Sale"

means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration and includes-

(i) A transfer of goods on hire purchase or other system of payment by instalments, but does not include a mortgage or hypothecation of or a charge or pledge on goods;

(ii) Supply of goods by a society (including a Co-Operative Society), club, firm or any association to its members for cash or deferred payment, or for commission, remuneration or other valuable consideration, whether or not in course of business; and

(iii) Transfer of goods by an auctioneer referred to in sub-clause (iv) of clause (e);

Under the cGST Act /sGST Act, on the other hand, these terms have been defined in S. 2(17) and 2(112) as follows: -

S.2(17) "business" includes––

(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 incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

S.2(112) "turnover in State" or "turnover in Union territory"

means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess:"

S.7 "Supply" (discussed in para 3 above)

12. It would be seen that the definitions under the GST law are far wider in amplitude than under the Delhi Sales Tax Act. Notably, unlike, "sale" under the Delhi Sales Tax Act, "supply" in GST law (paras 3 & 4 supra) includes transfer of business assets (like old and used cars) as well. Similarly, "turnover" under GST law includes not only taxable but exempt (including non-taxable) supplies as well. Thus, while the sale of business assets like old and used vehicles was not includible in the business turnover under the Delhi Sales tax Act, the same is explicitly included in the GST law. Further, whereas in the "first point taxation" regime, prevalent under the Delhi Sales Tax Act, certain goods were taxed only once (at the source) and could not be subjected to the same tax again, under the GST law, same tax is levied on every transaction, involving the very same goods, all along the supply chain, until they are finally put in the hands of ultimate consumer.

13 Thus, the ratio of Panacea case decision, made as per the provisions of Delhi Sales Tax Act, 1975, does not apply to the sale of old and used vehicles by a registered tax payer in the GST regime. Incidentally, the Delhi Value Added Tax Act, 2004, which replaced the Delhi Sales Tax Act, 1975, had redefined the term "business", under S.2(d), in far more expansive terms and had added an explanation thereto which went as follows:

"Explanation.- For the purpose of this clause –

(i) any transaction of sale or purchase of capital assets pertaining to such service, trade, commerce, manufacture, adventure or concern shall be deemed to be business ;

(ii) purchase of any goods, the price of which is debited to the business and sale of any goods, the proceeds of which are credited to the business shall be deemed to be business; " (emphasis supplied)

14. The successor legislation not only treated sale of capital assets like motor vehicles as a business transaction, it also unambiguously declared that where the proceeds of any goods were credited to the business account of a taxpayer, the transaction would be deemed to be a business transaction. What was stated here by way of an explanation in the Delhi VAT Act, has been expressly incorporated in the GST law by way of the provisions under S.7(1)(d) read with para 4(a) of Schedule II to the cGST Act / sGST Act.

15. To sum up, the view that sale of old and used motor vehicles by a registered supplier is outside the scope of supply and is, therefore, not taxable is inconsistent with the provisions of GST law. GST on such supplies is indeed payable on the value (depreciated), as determined in terms of S.15 of cGST Act/ sGST Act, and it is payable in the following manner:

(i) if the person happens to be a regular registered supplier, he would pay tax, irrespective of whether or not he was eligible for or had taken ITC. The tax would be payable at the rate prescribed against relevant entry in Notification No. 1/2017-CT(R) or, as the case may be, Notification No. 1/2017-IT(R) both dated 28.6.2017, as amended. In addition, he would be liable to pay cess, at the applicable rate specified in Notification No. 1/2017-Compensation Cess (R) as amended, issued under S.8(2) of the Goods and Services (Compensation to States) Act, 2017.

(ii) if, on the other hand, the person concerned is a composition supplier, he would pay tax only at rates applicable to him under S.10(1). He would not be liable to pay the compensation cess, as all supplies by such taxpayers are outside the scope of GST (Compensation to States) Act, 2017, as made clear in proviso to S.8(1) thereof.

(iii) No tax or cess is payable under the GST dispensation by any person who is not registered or is not liable to be registered under S. 22 or 24 of the cGST Act or sGST Act.

(The author is based at Chandigarh and is associated with GSTaxperts as Chief Patron. The views expressed are strictly personal.)