The Expansive Scope of ‘Supply’ Under GST

The Expansive Scope of ‘Supply’ Under GST:

An analysis :

1. The Statutory Foundation: Taxable Event and Inclusive Definition--The Goods and Services Tax (GST) regime is fundamentally a levy on the event of Supply. This pivotal concept is defined inclusively and expansively to capture the entire spectrum of commercial activity.

Charging Section: The charging section, Section 7 of the CGST Act, 2017, establishes the taxable event. The primary condition : Section 7(1)(a) stipulates that 'supply' includes all forms of transfer (sale, barter, exchange, license, lease, etc.) for a consideration and in the course or furtherance of business. This aligns with the traditional commercial definition. The Foreign Component: Section 7(1)(b) specifically covers the import of services for consideration, making it a supply even if it is not in the course or furtherance of business. Section 16 of the IGST Act covers zero rated supplies.

2. The Legal Fiction: Supply Without Consideration (Schedule I).

This is the area that most often causes confusion and leads to arbitrary tax demands. The law deliberately departs from general contract principles (which require consideration) to prevent tax avoidance within corporate structures.

Key Provision: Section 7(1)(c) read with Schedule I of the CGST Act.

The Mandate: This clause legally deems certain activities as 'supply' even if made without consideration. This legal fiction is the cornerstone of anti-avoidance in GST, targeting transactions where commercial intent exists despite the lack of immediate monetary exchange. The activities listed under Schedule I that are treated as Deemed Supply are:

A. Permanent transfer/disposal of business assets (where Input Tax Credit (ITC) was availed). The purpose is to ensure the ITC previously claimed on the asset is effectively reversed when the asset leaves the business fold permanently.

B. Supply of goods or services (or both) between Related Persons or Distinct Persons when made in the course or furtherance of business. This is designed to prevent related entities (e.g., parent and subsidiary) or internal units (like branches in different states) from manipulating the price (or setting it to zero) for internal transfers of goods or services.

C. Supply of goods by a principal to his agent (where the agent undertakes to supply the goods on behalf of the principal) or vice-versa. This ensures commission sales and stock movements are covered under the scope of supply.

D. Import of services by a taxable person from a Related Person or from any of his other establishments outside India, even without consideration. This targets services like management or technical support received for free from a foreign Head Office or related entity, ensuring they are subject to GST. Mandatory Valuation via Rule 28 crucially, when a supply occurs between Related or Distinct Persons without consideration, the value cannot be accepted as zero. The tax shall be levied on a value determined by Rule 28 of the CGST Rules, 2017, typically the Open Market Value (OMV).

3. Operational Reality vs. Statutory Test: The Deputation Conundrum:

The complex, cross-border or inter-state operations involving the temporary deputation of personnel illustrate perfectly why geographical location alone does not determine the scope of supply.

Example A:

International Software Export (Zero-Rated Supply)--Consider a leading Indian Software Exporter (Supplier, LoS in India) who enters into a single, comprehensive contract with an Overseas Client (Recipient, Location outside India). The confusion often arises due to the on-site deputation of Indian engineers who are physically deployed overseas for support for extended periods. However, this physical presence is immaterial for determining the Place of Supply (PoS) under the general rules, as the service remains intrinsically linked to the overall software project. Critically, the Indian Exporter (Supplier) retains all employment control, HR management, compensation liability, and project risk. This retention of Risk and Responsibility confirms that the exporter is the principal supplier; the deputed individual is acting solely as an employee of the Indian entity, not as a separate manpower supplier. Furthermore, the entire consolidated payment, including the cost of on-site support, is received from the overseas client in convertible foreign exchange. This payment flow defines the true Recipient (the overseas client) and satisfies the most crucial condition for Export of Services .

Legal Outcome:

Despite the physical deployment of personnel outside India, the transaction satisfies all five conditions of Export of Services under Section 16 of the IGST Act, 2017. Therefore entire supply is treated as a Zero-Rated Supply, making the exporter eligible for refund of unutilized Input Tax Credit (ITC). The substance—the flow of risk, responsibility, and consideration—overrides the mere location of the employee at the time of service delivery.

Example B:

Inter-State Supply (Stock Transfer or Services)--The same principle applies domestically for a large manufacturing group involving internal transfers, internal stock transfer & inter-state supply:

When goods/services are moved from a supplier in Maharashtra State to its branch in Karnataka State  (both are under the same PAN, hence Distinct Persons ), the movement across state lines triggers the inter-state classification. However, the existence of supply is based entirely on the deemed supply fiction of Schedule I, which transforms a non-monetary transfer into an Inter-State Supply subject to IGST.

Internal Service Deputation: If the supplier/factory/HO in Maharashtra State manufacturing machinery deploys specialists to its office at Bengaluru in Karnataka to provide support services to its clients under the original contracts, the physical location only determines the need for IGST. The existence of supply is again mandated by Schedule I (Supply between Distinct Persons) based on the HO’s provision of services and retention of control, making the HO the supplier of the technical service, even if only cost is recovered. Critically, the principal supplier in Maharashtra retains all employment control, HR management, compensation liability, and project risk. This retention of Risk and Responsibility confirms that such supplier continues to be the principal supplier; the deputed trained personnel are acting solely as employees of principal supplier in Maharashtra, not as a separate/independent manpower/goods supplier in Karnataka. Furthermore, the entire consolidated payment, including the cost of support services provided by employees based in Bengaluru office, is received by the principal supplier in Maharashtra under the IGST invoice. This payment flow defines the actual recipients in Karnataka and satisfies the most crucial condition for Inter-State Services in terms of  Section 7 of the IGST Act supported by original privity of contract for supply of machinery and further support service.

Legal Outcome:

In such domestic cases too, the physical movement/location triggers the Inter-State classification, but the statutory definition of supply (either for the deemed supply or for the taxable event) is the primary driver for levying tax. The substance—the flow of risk, responsibility, and consideration—overrides the mere location of the employee at the time of service delivery.

4.Adjudication Directive: Substance as the Governing Factor.  These examples lead to a clear directive for adjudicating authorities:

The determination of 'Supply' must follow a hierarchy:

A. Does a Supply Exist? Check and Schedule I (Intent, Risk, Recipient).

B. What is the Recipient Location? Determine the party liable for payment or assuming the primary risk.

C. What is the Place of Supply? Use the IGST Act rules to fix the location of consumption.

D. What Tax Applies? Only then classify the tax (CGST/SGST, IGST, or Zero-Rated).

The mere location of assets, personnel, or documents is a secondary data point; the flow of consideration, assumption of liability, and contractual risk define the scope of the taxable 'Supply.' The foundational requirement is the intent of the privity of contract, risk & responsibility and the consideration from the ultimate recipients as defined under Section 2(93) of the CGST Act.

5. Substance Over Form: Intent, Risk, and Consideration:  

A significant analytical error for adjudicating authorities is to determine the scope of supply based solely on geographical location (e.g., one party being overseas or in other States of India). Location is necessary for determining the type of GST (IGST/CGST/SGST), but it alone does not determine the existence of a supply. The true test of supply lies in the substance of the transaction, which requires examining:

A. Intent of Suppliers and Recipients: Was there a clear intent to transfer goods or provide a service for commercial purposes?

B. Mutual Risk and Responsibility: Who bears the commercial risk?

C. The transfer of risk is a strong indicator of a genuine supply.

D. To whom the consideration is made:

This is critical. For instance, in a triangular transaction, merely receiving physical goods does not make a party the recipient of the supply; the recipient is the person who is obliged to pay the consideration in terms of Section 2(93) of the CGST Act, 2017

6. Adjudication Directive:

The legal scope of 'Supply' is designed to be comprehensive. To ensure lawful determination and curb unwanted litigation, adjudicating authorities are obliged to apply a substance-based analytical framework that moves beyond superficial checks (like location or lack of consideration). A precise application of Schedule I, Rule 28 (Valuation), and the Risk/Substance doctrine will serve the legislative intent, clear the clouds of ambiguity, and lead to fair, sustainable, and legally sound tax determinations, minimizing the need for unnecessary interest and penalty actions.

7. Conclusion:

A correct appreciation of “supply” under Section 2(21) of the IGST Act read with Section 7(1) of the CGST Act demands unwavering attention to its two essential pillars: the existence of an obligation to provide goods or services, and the presence of consideration flowing in return. These ingredients must be clearly established on record before any tax liability can be fastened. Mere geographical movement—whether within India or outside its territory—cannot, by itself, create a taxable event unless these statutory conditions are satisfied. In this framework, adjudication must remain fair, balanced, and rooted in law. Any biased or mechanical approach cannot be allowed to become a spanner in the wheel of the lawful rights of honest taxpayers, who are entitled to certainty, neutrality, and justice in the application of GST.

Disclaimer:

This is only for academic purpose and not to be used in courts/litigation. The author is not responsible for any consequences.