TaxTMI 
TaxTMI 
2018 (8) TMI 932
X X X X Extracts X X X X
X X X X Extracts X X X X
....l business of gold and is registered under the Goods and Services Act, 2017. He is desirous of entering into a derivative contract in diamonds through Indian Commodity Exchange Limited ('ICEX' or the 'Exchange') which is a recognized Commodity Derivatives Exchange regulated by SEBI to provide a nation wide online trading platform in commodity derivatives. ICEX has obtained a registration with Securities and Exchange Board of India (SEBI) vide Registration No.33. The applicant has sought advance ruling in respect of the following question: a) Whether mere deposit of diamond with safe vaults acknowledged by Electronic Vault Receipts (EVR) would be treated as supply for the purpose of levy of GST? b) Whether conversion of EVR (representing receipt for diamonds deposited) into e-Units (securities) would be treated as supply liable to GST? c) Whether e-Units would be treated as securities and thereby transaction in e-Units would remain out of scope of the levy under GST? d) Whether the derivative contracts in e-Unit and settlement thereof would be treated as transaction in securities and thereby would remain out of scope of the levy under GST? ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mond derivative contracts are subject to market risk which depends upon the price volatility as influenced by the quantum of trade and the price discovery through market forces; v. In case of excessive market volatility or circumstances where risk element is higher, an additional and/or special margin may also be recovered by ICEX from its member, as deposit; vi. A derivative contract commences on 6th of every month and expires on 5th of third month; vii. Before the expiry of the contract period, such person may square off its position (by taking an opposite position to the previous position, i.e. a sale position against a buy position and vice versa); viii. In case of any open position at the expiry of the derivative contract, such person shall honour the obligation under the contract by giving or taking the delivery of e-Units; ix. All deliveries in derivatives contract on expiry will be in electronic form only. For example, assuming that on expiry of the contract, member A has a sale positon of 24 cents and members B and C have buy position of 16 and 8 cents respectively, then the member A can deliver 24 e-Units held by him against hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....VR) for the same will be given to such person; v. Such person would have to surrender electronic vault receipt to obtain e-Units; vi. e-Units equivalent to the stone's caratage/ weight in cents will be credited in diamond owner's e-Account. For example if the stone is of 104 cents, such person will get a credit of 104 e-Units. vii. Once the diamonds are converted into e-Units, these diamonds become part of the pool of diamonds maintained by the Exchange and the holder of e-Units would lose its right to obtain the same diamond stone which was deposited; viii. Further, until EVR is converted into e-Units, the holder of EVR would have the right to surrender EVR and get the same diamond back. In other words, EVR is just an acknowledgement towards the safe deposit of diamonds in safe vaults and the rental charges as applicable are payable for such safe deposit of diamond. f. The entire mechanism of the diamond derivative contracts is such that in case a person has an open buy position at the expiry of a derivative contract and thereby gets the delivery of e-Units in his account, such person can hold and retain e-Units in its e-account without....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 5 of the Integrated Goods and Services Tax Act, 2017 inter alia provides that IGST would be leviable on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under Section 15 of the CGST Act and at such rates, as may be notified by the Government. 5. Thus, as per the applicant, it is clear that taxable event under GST is 'supply of goods or services or both'. The term 'supply' has been defined under section 7 of the CGST Act as under: Scope of Supply (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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instruments issued to the investors under any mutual fund scheme; Explanation.- For removal of doubts, it is hereby declared that "securities" shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938); (ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and Rights or interests in securities;" The term "derivative" is defined....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."business" has been defined under Section 2(17) of the CGST Act. He opines that the term "business" is widely worded and therefore, the activities proposed to be undertaken on ICEX by the applicant would constitute business. 10. The applicant submits that in light of the above legal provisions, the implications under the GST on the specified transactions are as under: a. Levy of GST on mere deposit of diamond with Safe Vaults in return for Electronic Vault Receipts (EVR) i. In this leg of the transaction, the person hands over the diamonds to the Safe Vault designated by the Exchange and is issued an EVR which is in nature of the acknowledgement of the deposit of the diamond by the Safe Vaults. ii. The Safe Vaults holds the diamond in the capacity of a bailee and is under obligation to return the diamond upon furnishing the EVR by the depositor. Furthermore, the person has the right to obtain the same diamond stored at the vault at any point in time on production of the EVR. iii. The person can then opt to surrender the EVR to the Exchange in return of e-Units to be allotted by the Exchange. Once, the EVR is surrendered in lieu of diamonds, the right t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransferor would be regarded as transaction in securities at its end and thereby out of scope of GST. vii. The applicant submits that the transaction in securities does not amount to supply of goods or services or both and therby out of GST net. In the instant case, he submits, that e-Unit constitutes securities on the following basis: 1. Section 2(101) of CGST Act adopts the definition of the term "securities" from SCRA; 2. The definition of the term "securities" as defined under Section 2(h) of the SCRA include "derivatives" within its ambit; 3. The term "derivative" is defined under section 2(ac) of the SCRA to include commodity derivatives; 4. The term "commodity derivative" has been defined under Section 2(bc) of the SCRA to mean a contract for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, and which is not a ready delivery contract; 5. The Central Government has issued Notification dated 27.09.2016 bearing F.No. 17/2/2016-CD to notify the goods specified in the Schedule for the purposes of clause (bc) of Section 2 of the SCRA. Entry 57 of the said Notification dated 27.09.2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... conditions are fully satisfied at the time of conversion of e-Units into diamonds: 1. The transaction involves supply of diamonds at the end of Exchange 2. Such supply is made against e-Units which constitute consideration under section 2(31) of the CGST Act 3. Supply of diamonds is made in the course or furtherance of business. iv. In view of the above, a position may be taken that even reconversion of e-Units into diamonds would involve the "supply" of diamonds in exchange to such person against the consideration in the form of e-Units and would be subject to GST at the applicable rate. 11. The applicant submits that in view of the above, a ruling is sought whether the applicant has rightly concluded the following legal positions: a. Mere deposit of diamond with safe vaults in return for EVR would not be treated as supply for the purpose of levy of GST b. Conversion of EVR into e-Units would be treated as supply of diamond liable to GST at the end of person surrendering the EVR c. E-Units would be treated as securities and thereby transactions in e-Units would remain out of the scope of the levy under GST ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermitted by launch Diamond futures. It has also received approval from SEBI permitting the exchange to recommence live trading operations and it has all the necessary infrastructure to handle deposits, grading and sealing, vaulting and deliveries of diamonds as part of its preparation to launch the diamond contracts. According to the applicant, ICEX is a trading company dealing in commodity futures and is deemed recognized stock exchange under SCRA, 1956 in terms of Section 131(B) of Finance Act, 2015, pursuant to the Central Government Notification dated August 28, 2015 providing a nation-wide online trading platform in commodity derivatives. The ICEX is converting the EVR into e-Units, which are in the nature of securities, as admitted by the applicant. iv. Section 2(101) of the Central Goods and Services Tax Act, 2017 defines "securities" and they shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, (SCRA) the term securities include "derivatives" and as per Section 2(ac) of the SCRA, the term derivatives includes commodity deri....