2025 (11) TMI 177 - AAR - GST

R&D funded by government grant qualifies as 'supply' under Section 7 CGST; IP ownership irrelevant, exemption denied

AAR held that the applicant's R&D carried out for a government ministry through a central research council against grant-in-aid constitutes a 'supply' ... Supply or not - Research and Development activity undertaken by the applicant for the Ministry of AYUSH (MoA), through the Central Council for Research in Ayurvedic Sciences (CCRAS), under a grant-in-aid arrangement - eligibility for exemption under Entry No. 3 or Entry No. 3A of N/N. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended. Whether the research and development activity undertaken by the applicant in collaboration with CCRAS constitutes a “supply” under GST law? - HELD THAT:- The applicant’s contention that there is no ownership or licensing of IP is not determinative of whether a supply exists. What matters is the performance of an activity (R&D) for another party for consideration. The output or deliverable (whether IP or a report or data) and the ownership thereof are not central to the determination of whether a supply has occurred - Further, the Government vide Notification No. 08/2024 -CT(Rate), dated 8 October 2024 inserted Sl.No.44A duly exempting research and development services supplied against consideration received in the form of grants by (a) a Government Entity; or (b) a research association, university, college or other notified institution under clauses (ii) or (iii) of sub-section (1) of Section 35 of the Income Tax Act, 196, provided that the institution is notified under those clauses at the time of supply. But, in the present case, the applicant has not provided any information whether it is notified under clauses (ii) or (iii) of sub-section (1) of section 35 of the Income Tax Act, 1961 - the Research and Development activity undertaken by the applicant for the Ministry of AYUSH (MoA), through the Central Council for Research in Ayurvedic Sciences (CCRAS), under a grant-in-aid arrangement, falls within the scope of ‘supply’ as defined under Section 7 of the CGST Act, 2017. If the R&D activity is considered a supply under GST, can the exemption under Entry No. 3 or 3A of Notification No. 12/2017 – Central Tax (Rate) be claimed? - HELD THAT:- In the present case, under project 1 the applicant is manufacturing 100 kg each of 5 different raw material extracts for further testing by other institutes, the value of these samples stated to be less than 10% of the total project value. But, this activity is not directly in relation to any function entrusted to a Panchayat under Article 243G or Municipality under Article 243W of the Constitution. As held in numerous judicial pronouncements (e.g., Dilip Kumar & Co. v. Commissioner of Customs, [2018 (7) TMI 1826 - SUPREME COURT (LB)], exemption notifications are subject to strict interpretation. If there is any ambiguity, the benefit of doubt must go to the Revenue. In the present case, the exemption conditions are not clearly or unambiguously satisfied. Further, the applicant’s argument that CCRAS would have been required to deduct GST if the services were taxable is factually and legally irrelevant to the question of taxability. The services rendered to CCRAS do not qualify for exemption under Entry 3 or Entry 3A of Notification No. 12/2017-Central Tax (Rate) as the services are not rendered in execution of functions under Articles 243G/243W. Hence, the supply is accordingly taxable under GST, and the applicant is liable to discharge GST at the applicable rate. ISSUES PRESENTED AND CONSIDERED 1. Whether research and development activities performed by an entity under a grant-in-aid arrangement with a Central Government nodal agency constitute a 'supply' within the meaning of Section 7 of the CGST Act. 2. If such R&D activities constitute a 'supply', whether those activities are exempt from GST under Entry No. 3 or Entry No. 3A of Notification No. 12/2017-Central Tax (Rate) (as amended), which grant nil rate to certain services provided to government authorities in relation to functions entrusted under Articles 243G/243W of the Constitution. ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: Whether the R&D activity is a 'supply' under Section 7 Legal framework: Section 7(1)(a) defines 'supply' to include all forms of supply of goods or services made for a consideration in the course or furtherance of business. Section 2(17) defines 'business' broadly (including activities whether or not for pecuniary benefit). Section 2(31) defines 'consideration' and excludes only subsidy given by Central/State Government. Section 2(102) defines 'services' as anything other than goods, money and securities. Notification amendments (Notification 08/2024-CT(Rate)) inserted Entry 44A exempting R&D services against grants by specified government entities/institutions (nil rate) subject to notification status. Precedent treatment: The authority applied the settled principle that statutory definitions are to be read in their inclusive and purposive sense; it cited the strict approach to exemptions and referred to judicial dicta holding exemption notifications to require clear satisfaction of conditions (reference to Dilip Kumar & Co. for strict interpretation of exemption notifications). Interpretation and reasoning: The authority analysed the factual matrix: centrally sanctioned grants routed through PFMS; the applicant required to carry out specified manufacturing (samples) and R&D deliverables (reports) and to submit final documentation for public dissemination. The authority found that (a) the entity performed organized R&D and manufacturing activities for consideration received from CCRAS; (b) Section 2(31)(a) covers payments made by any person in respect of supply and does not treat every grant as a non-consideration - only subsidies from Central/State Governments are excluded; (c) the receipt of grant linked to the specified R&D and deliverables satisfies the 'consideration' element; (d) the systematic provision of R&D/make-up of samples for the project falls within 'services' (and goods where manufactured) even if intellectual property/ownership is not transferred; (e) the broad definition of 'business' captures organized non-profit or non-pecuniary activities when undertaken as systematic organized activity for consideration. The authority rejected the applicant's reliance on nemo dat/quasi-subsidy reasoning to negate supply, holding that ownership or IP transfer is not decisive for service classification and that nomenclature of payment as 'grant' does not ipso facto convert it to a non-consideration unless it is a subsidy falling within the statutory exclusion. Ratio vs. Obiter: Ratio - R&D services and related manufacture executed under grant-in-aid arrangements constitute 'supply' under Section 7 when: (i) activity is performed for a payment by a government nodal agency in respect of specified deliverables; (ii) the payment is linked to the supplies rendered and therefore falls within the statutory definition of 'consideration' (unless demonstrably a subsidy excluded by Section 2(31)). Obiter - observations on nemo datquod non habet and dictionary definitions of 'license' as background reasoning; the factual note on PFMS flows is explanatory. Conclusion on Issue 1: The activity constitutes a 'supply' under Section 7 of the CGST Act. ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: Whether the supply (if any) is exempt under Entry No. 3 or 3A of Notification No.12/2017 Legal framework: Entry No. 3 exempts pure services provided to Central/State/UT/local authorities in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W. Entry No. 3A exempts composite supplies (goods+services) where goods =25% of value, provided to those government bodies in relation to functions under Articles 243G/243W. Judicial approach mandates strict construction of exemption notifications; benefit of doubt goes to Revenue. Precedent treatment: The authority applied the established rule that the expression 'in relation to any function entrusted to a Panchayat/Municipality' requires a proximate and direct nexus between the service supplied and the function being discharged by the local body; mere thematic overlap (e.g., 'health') is insufficient. The authority relied on jurisprudence requiring clear fulfillment of all exemption conditions and interpreted Notification amendments (omission/inclusions) contextually. Interpretation and reasoning: The authority examined whether the recipient and the functional nexus required by the notification exist. It found: (a) recipient is a Central Government body (CCRAS under MoA) - a government entity but not a Panchayat or Municipality; (b) the scheme and project are centrally conceived and executed by a central nodal agency without delegation to or supply directly for Panchayats/Urban Local Bodies; (c) the services do not have the requisite direct nexus to a function actually being discharged by a Panchayat or Municipality - publishing reports for public domain and conducting central research do not amount to execution of functions entrusted to local bodies under Articles 243G/243W; (d) the small goods component (