Background

With the advent of Goods and Services Tax (‘GST’) laws, the term ‘supply’ has become an essential element for the levy of GST. Thus, determining whether an activity falls under the meaning and scope of ‘supply’ is important to determine the applicability of GST. Moreover, the interpretation of the scope of ‘supply’ has been a contentious issue.

This Article intends to analyze the scope of supply under GST laws and highlight the problems arising due to its wide interpretation especially for treatment of liquidated damages, gift etc. Further, it throws light on the recent legislative and judicial developments in GST laws which are a guiding factor for deciding various ambiguities in this respect.

The concept of ‘Supply’ under GST

Section 9 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) is the key provision for levy and collection of GST. Section 9(1) of the CGST Act enumerates that GST shall be levied on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor. Therefore, as per Section 9(1) of CGST Act, it is clear that for the levy of GST, there must be ‘supply’ of either goods or of services or both.

Section 7 of the CGST Act provides an inclusive definition of ‘supply’ by laying down specific inclusions under its scope. According to Section 7 of the CGST Act, ‘supply’ includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. It further includes import of services for a consideration, whether or not in the course or furtherance of business and activities specified in Schedule I, even if made without consideration.

Due to the usage of the word ‘includes’ in clause 7(1) of CGST Act in the scope of ‘supply’, one can draw an interpretation that the ambit of ‘supply’ is wide enough to cover indefinite activities. This is further augmented by the definition of ‘goods’ and ‘services’ under the GST laws as explained hereinbelow.

The definition of ‘goods’ provided under Section 2(52) of CGST Act covers all kinds of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Further, the term ‘services’ under Section 2(102) of CGST Act has been defined as 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.

It may be noticed that the phrase ‘anything other than goods’ in the definition of ‘services’, covers everything within its ambit which is not covered under the definition of ‘goods’. Therefore, by reading both the definitions of ‘goods’ and ‘services’, one can interpret that supply of everything other than goods, money and securities would get covered under the ambit of supply of services. Such an unfettered and unlimited scope of ‘supply’ provided under Section 7(1) of CGST Act read with the broad definition of ‘services’ causes various ambiguities in the interpretation of the scope of ‘supply’ for the purpose of GST as illustrated below.

Ambiguities surrounding the scope and interpretation of ‘supply’

Due to the ‘inclusive’ definition of scope of ‘supply’, coupled with wide meaning of the term ‘services’, there is ambiguity with respect to the applicability of GST on payments such as;

• Liquidated damages/ compensation
• Grants
• Salary drawn from partnership firm/ LLP by a partner
• Alimony
• Winnings from gameshow etc.

Thus, the question arises whether such payments mentioned above are subject to levy of GST.

Recent Legal & Judicial Developments

Post introduction of GST, there are two key developments whereby the legislature and the judiciary have tried to restrict the ambit of the inclusive definition ‘supply’, as elaborated below:

• Insertion of sub-section 7(1A) vide CGST(Amendment) Act, 2018

The legislature vide the CGST (Amendment) Act, 2018 has sought to delete clause (d) of Section 7(1) by replacing it with sub-section (1A) with retrospective effect from the introduction of GST (i.e., 01.07.2017). In view of the said amendment, the old as well as the newly inserted provision reads as under:

Section 7 (pre-amendment)

Section 7 (post-amendment)

(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

(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; (1A) Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II

Therefore, with the insertion of sub-section (1A), the intent of the legislature can be clearly understood. For constituting supply, the activities specified under Schedule II have to first fulfill the conditions laid down in Section 7(1) of the CGST Act. An interpretation can be drawn, that for qualifying any activity as supply, consideration is an essential element. Even if the activity is specified under Schedule II of the CGST Act, the same will not qualify as supply merely by virtue of being specified under Schedule II until it satisfies the test of Section 7(1) of the CGST Act. Thus, it can be stated that vide the amendment, the legislature has tried to restrict the inclusive and unfettered scope of ‘supply’ and in order to constitute supply, any activity except for activities specified in Schedule I, have to fulfill the conditions laid down in Section 7(1) of the CGST Act.

In other words, the legislature does not intend that the scope of supply must be unrestricted. This is apparent from the newly inserted sub-section (1A) by which once an activity qualifies as ‘supply’ under sub-section 7(1), then only the activities specified under Schedule II fall under its purview.

• Judicial Development

Recently, the Hon’ble Bombay High Court in the case of Bai Mamumbai Trust and Others vs. Suchitra wd/of Sadhu Koraga got an opportunity to interpret the scope of ‘supply’ while dealing with the issue as to whether a Court Receiver can be said to have supplied services against receipt of fees and royalty for allowing the defendant to occupy the premises, in dispute and whether the Court Receiver is liable to pay GST.

While deciding the issue, the Hon’ble Court laid down the following principles contemplating the intent of the legislature with respect to the scope of ‘supply’:

• Where no reciprocal relationship exists, a ‘supply’ cannot be said to have taken place;
• ‘Supply doctrine’ does not contemplate or encompass a unilateral act;
• For a supply to fall under sub-sections (a), (b) or (c) of Section 7(1) of the CGST Act, there must be a contemplated consideration. Only activities specified in Schedule I to the CGST Act are considered as supply, even if made without consideration. This is evident from the insertion of sub-section (1A) in Section 7 of the CGST Act vide the Amendment Act of 2018.

Accordingly, the Hon’ble Court held that no GST is payable on payment of royalty towards damages or compensation because such payment lacks the necessary quality of reciprocity to make it a ‘supply’. Deciding the above, the Hon’ble Court provided an illustration with respect to trespass or illegal occupation, wherein the Hon’ble Court stated that the computation of damages will involve the determination of rental income payable in surrounding areas to determine mesne profits and it is the quality of the payment and not the method used to determine its measure that determines its character namely, whether it is ‘consideration’ or damages.

Conclusion

The intent of the legislature was never to keep the ambit of the definition of ‘supply’ wide enough to cover every activity within its scope even if the same is carried out without consideration. This can be contemplated from the CGST (Amendment) Act, 2018 (made with retrospective effect) which indicates that the term ‘supply’ should be interpreted strictly i.e. to cover only the activities which fall within the purview of sub-section (1) of Section 7 of the CGST Act. Moreover, the Hon’ble Bombay Court has provided a direction with respect to the interpretation of the scope of ‘supply’ which will act as an aid in resolving any ambiguities in future.