2022 (2) TMI 1105 - AAR - GST

Partner providing rent-free property to partnership firm constitutes taxable supply under Section 7(1)(a) and Schedule I

The AAR Tamil Nadu held that a partner providing rent-free property to a partnership firm constitutes a taxable supply under GST. The partner, who owned ... Liability of GST - property of the partner used by the Partnership Firm to carry out the business by the firm at free of rent - relevant section or rule or provision in GST law under which the partner of the firm is required to pay GST on notional rent - execution of rental deed between partner and Partnership firm, when there is no furtherance of business for that partner - applicable valuation rule, when consideration is not fixed and not received by the Partner - HELD THAT:- Any trade whether or not for pecuniary benefit and irrespective of the volume, frequency, continuity or regularity, is considered as Business. The Pecuniary benefit is nothing but the economic benefit accrued to the Service Provider in exchange for the said service provided, directly or indirectly and is corelatable with the service provided. In order to qualify, any service as in course of business, should be provided with the intention of deriving economic benefits. If it accrues directly or indirectly, then the same is treated as provision of service against consideration - the properties are found to have been rented to the partnership firm for carrying on its activities such as Showrooms, Godowns/Warehouses and Hostels for their staff and also it is observed that the EB charges and water tax/ charges are being borne by the partnership firm as evidenced by the ledger extracts of the partnership firm pertaining to such payments. For the years after introduction of GST, the applicant has stated to have collected rent from the firm in respect of the properties listed above which has been reflected as Income from Property in the Income Tax Returns of the applicant. The rent free accommodation if so provided by the applicant indirectly accrues as profit for the firm which is enjoyed by the applicant as partner. So the economic benefit accrues to him and hence this supply is in the course of and furtherance of business only. Thus it is evident that the applicant in the course of furtherance of business has rented out the properties for commercial use to the partnership firm which is a separate person - in the case at hand the applicant is the owner of the properties. He also holds 2/3rd of the shares in the partnership firm in which the Managing Partner and controls the firm. Therefore, the applicant and the firm who are separate persons are “Related Persons” for the purposes of this Act. Therefore, as per the above schedule, the supply of service between such related persons i.e., the applicant and the partnership firm, when made in the course or furtherance of business, the same is a taxable supply even when rendered without consideration. The rent free accommodation proposed to be provided by the applicant to the partnership firm in which he is major shareholding partner and Managing Partner is. a supply without consideration in the course of and furtherance of business and is found taxable under Section7(1)(a) read with Schedule I of the CGST Act,2017. Applicable valuation provisions when consideration is said to have not been fixed and received - HELD THAT:- Where the supply is between related persons, the value of such supply shall be the open market value of such supply. Where the open market value is not available, the value of supply of goods or services of like kind and quality will be the taxable value. In the instant case, the property being rented and the supplier and recipient being related Rule 28 of CGST/TNGST Rules 2017 applies and the value should be arrived at accordingly for the purposes of GST. The activity of renting out the Immovable Properties owned by the applicant as an individual person to the partnership firm, another individual person in which he is a major shareholding partner and Managing Partner even without consideration is a taxable supply under Section 7(1)(a) read with Schedule I of the CGST Act, 2017. The value of taxable supply shall be as stipulated under Rule 28 of the CGST Rules, 2017. Issues Involved:1. GST liability on property used by the partnership firm at free of rent.2. Relevant section or rule under GST law for GST on notional rent.3. Mandatory execution of rental deed between partner and partnership firm.4. Applicable valuation rule when consideration is not fixed and not received.Issue-wise Detailed Analysis:1. GST Liability on Property Used by Partnership Firm at Free of Rent:The applicant, a managing partner in a partnership firm, owns properties used by the firm without charging rent. The Advance Ruling Authority examined whether this arrangement attracts GST liability. According to Section 7(1)(a) of the CGST Act, 2017, 'supply' includes all forms of supply of goods or services made for a consideration by a person in the course or furtherance of business. The property used by the firm is considered a 'supply' even if no rent is charged, as per Schedule I of the CGST Act, which treats transactions between related persons as supply even without consideration. The applicant and the partnership firm are 'related persons' under Section 2(84) and Section 15 of the CGST Act.2. Relevant Section or Rule Under GST Law for GST on Notional Rent:The ruling clarified that the supply of property by the partner to the partnership firm, even without consideration, is taxable under Section 7(1)(a) read with Schedule I of the CGST Act, 2017. The valuation of such supply should follow Rule 28 of the CGST Rules, 2017, which stipulates that the value of supply between related persons should be the open market value or, if not available, the value of supply of like kind and quality.3. Mandatory Execution of Rental Deed Between Partner and Partnership Firm:The question regarding the mandatory execution of a rental deed was deemed procedural and not answered. However, it was clarified that the activity of renting property to the partnership firm is in furtherance of business, and thus, subject to GST.4. Applicable Valuation Rule When Consideration is Not Fixed and Not Received:The valuation of the supply of property to the partnership firm, when no rent is charged, should be determined as per Rule 28 of the CGST Rules, 2017. This rule requires the adoption of the open market value or, if not available, the value of supply of like kind and quality. The financial statements showed that the applicant had charged rent post-GST implementation, indicating that the supply was not entirely without consideration.Ruling:1. GST is liable to be paid on properties rented out by the applicant to the partnership firm even if it is free of rent, as the activity is in furtherance of business and amounts to supply under Section 7(1)(a) read with Schedule I of the CGST/TNGST Act, 2017.2. The value for GST purposes shall be determined as per Rule 28 of the CGST/TNGST Rules, 2017.