NOVEMBER 21, 2018

By Vijay Kumar

Do you profitably supply to yourself?

MY friend in the GST Department is continuing with his fundamental questions. He texts me:

When person is defined under Section 2(84) as individual at (a) and an association of persons or body of individuals at (f), why is it defined at clause 7 of Schedule-II that supply of goods by association of persons to its members is supply of goods. What is the inference of Schedule 2, clause 7? Does it mean that supply of service by association of persons to its members is not supply service?

What is contemplated under clause 7 Schedule 2 should have been done in respect of supply of service as was done in case of service definition under Section 65B(44), Explanation 3 in erstwhile Finance Act if there is any iota of doubt on taxability of supply of service between AOP and its members. Clause 7, Sch2 in its present form hardly serves any purpose as it (sale of goods to members by AOP) has constitutional support under Art 366(29A)(e).

Let us see some definitions:

Section 2(84): "person" includes-

(a)  an individual;

(b)  a Hindu Undivided Family;

(c)  a company;

(d)  a firm;

(e)  a Limited Liability Partnership;

(f)  an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g)  xxxxx

(h)  xxxx

(i)  xxxx

Section 7: "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.

Section 2(17) (e): "business" includes-

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;

Para 7 of Schedule II of the CGST Act: Supply of Goods

The following shall be treated as supply of goods, namely:-

Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

Article 366 (29A)(e) of the Constitution of India: "tax on the sale or purchase of goods" includes-

a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

Now coming to the question raised by our friend in GST, the Board has answered the question in Circular No. 35/9/2018-GST, dated 5th March 2018, as:

GST is levied on intra-State and inter-State supply of goods and services. According to section 7 of CGST Act, 2017, the expression "supply" includes 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, and includes activities specified in Schedule II to the CGST Act, 2017.

The definition of "business" in section 2(17) of CGST Act states that "business" includes 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. The term person is defined in section 2(84) of the CGST Act, 2017 to include an association of persons or a body of individuals, whether incorporated or not, in India or outside India.

Further, Schedule II of CGST Act, 2017 enumerates activities which are to be treated as supply of goods or as supply of services. It states in para 7 that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods.

A conjoint reading of the above provisions of the law implies that supply of services by an unincorporated association or body of persons (AOP) to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services.

The above entry in Schedule II is analogous to and draws strength from the provision in Article 366(29A)(e) of the Constitution according to which a tax on the sale or purchase of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

But is the Board right?

1.  Can a person provide service to himself?

2.  Shouldn't there be a supplier of service and a recipient?

3.  Is the constitutional deeming provision for goods applicable to services?

4.  Can tax be levied on the basis of what the Board thinks the law implies?

In Income Tax Officer, Mumbai Vs Venkatesh Premises Cooperative Society Ltd - 2018-TIOL-82-SC-IT, the Supreme Court observed,

-  The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable.

-  The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and the participators in the surplus are contributors to the common fund.

-  The law envisages a complete identity between the contributors and the participants in this sense.

-  The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax;

Though these are observations in relation to Income Tax, they state the concept with clarity. If the Government wanted to tax services provided by an association to its members, there should have been such a provision in the Constitution or the Act, as it is there for goods. But amending the Constitution or the GST Act is far beyond the Board, at least as of now. So all that it can do at present, is issue a Circular and when we are anyway issuing a circular, why not tilt it in favour of Revenue; maybe we can make that retrospective amendment, if some Court strikes down the Circular. As far as GST is concerned, the rules are:

1.  The Board (Government) is always right.

2.  When it is wrong, refer to Rule No.1

3.  When it is proved wrong, refer to Rule No.1

4.  If a Court quashes the Board Circular, refer to Rule No.1

GST paid into the wrong account: In a recent case before the Kerala High Court, the petitioner, as a consignee and transporter, purchased goods from the consignor in Chennai. While those goods were in transit, they were detained. The consignor paid the tax and penalty. But the remittance was made under the head 'SGST' instead of 'IGST'. The petitioner, who is the consignee and transporter, insists that the consignor paid the tax and penalty under that head only based on the ASTO's directions. The authorities have refused to release the goods.

The Government Pleader, submitted in the High Court that the petitioner could as well pay the amount under 'IGST' and then claim a refund from the head 'SGST'. According to her, if the authorities have to go for an adjustment, it will take more than a couple of months. (If they don't have bread, why can't they eat cake?)

The High Court found no difficulty for the respondent officials to allow the petitioner's request and get the amount transferred from the head 'SGST' to 'IGST'. The High Court observed, "It may, as the Government Pleader has contended, take some time, but it is inequitable for the authorities to let the petitioner suffer on that count."

The High Court directed release the goods forthwith along with the vehicle and, then, ensure that the tax and penalty already stood remitted under the 'SGST' is transferred to the head 'IGST'. - 2018-TIOL-2902-HC-KERALA-GST

Do they remember, "One Tax, One Nation"?

Profiteering falls on McDonald's The National Anti-Profiteering Authority has ordered Hardcastle Restaurants operating quick service restaurants under the brand name "McDonald's" to pay an amount of Rs. 7.49 Crores with interest at 18% on the profiteering made by it. More is to come in the form pf penalty and further demands. What the government is going to get is more litigation, certainly not more revenue. And this demand has come based on a complaint by four unknown persons that the restaurant has not reduced the price when GST was reduced. Think twice before you ask for a reduction in taxes.

The NAA sagely observed, "The Respondent must remember that the benefit of reduction in the rate of tax as well as the benefit of ITC have been given by the Central as well as the State Government by sacrificing their own revenue in favour of the general public and the Respondent has no right to appropriate them." - 2018-TIOL-13-NAA-GST.

GST Calculator: Casio India claims that it has launched the world's first GST calculator. The Company states, GST Calculator Is "Calculator Making It Possible to Preset 5 Different GST Rates and to Calculate Total Tax Per Each GST Rate & For All GST Rates". Anything more would be free publicity to the Company.