TaxTMI 
TaxTMI 
2018 (10) TMI 1145
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....Closure" of Contract by it." In this regard, comments from the concerned officer i.e. Assistant Commissioner of State Taxes, Bathinda has been sought. The concerned officer vide his letter No. 5076 dated 03-08-2018 stated that charges received on account of washed away / cancelled contracts for supply of goods are covered under GST as services as per definition of services u/s 2(102) of the Act ibid. The activities relating to use of money are clearly covered under services in view of the above mentioned definition of services. As per the definition of consideration under the Act as per section 2(31)(b) of the CGST, the charges received on account of forbearance for supply of goods are part of consideration. A personal hearing was held on 13.08.2018 before the Advance Ruling Authorities, Punjab. On 13-08-2018, Sh. Abhishek Mishra & Sh. Anand Aggarwal, Chartered Accountants appeared on behalf of the applicant with regard to advance ruling application and reiterated their submissions made in Annexure-1 & Annexure-2 of their advance ruling application dated 07-06-2018. They stated that the activity of M/s. Louis Dreyfus Company India Private Limited, Ground Floor, House No. 378, Model....
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....the Company enters into customized Contracts which are an ensemble of "Supply" cum "Settlement" Contracts. Such Contracts culminate into and entail performance either by way of actual delivery of goods or settlement by payout of differential sum. 3. The Company enters into Sale and Purchase Contracts of aforesaid nature with its customers and vendors respectively, the salient terms of which are produced hereunder for ease of reference: Sale Contract: A Contract no. SO/GJ/2016-17/202 B. TT no. LDC-GJ-1617-12U C. Sale Date 13/10/2017 D. Contract Generation Date 13/10/2017 E. Quantity 500 (Five Hundred Only) Fully pressed Bales F. Specification 1. Growth 2. Station 3. Staple Length 4. Micronaire 5. Remarks 6. Trash Indian raw cotton crop 2016/17 (GJ-V797, Gujarat) in Fully pressed Bales Ant station of Gujarat Zone at supplier's option 22 mm 4.7 NCL-5.5 NCL Pre-Approved Lots 13% Max 9% max G. Type of sale Spot Spot H. Sample Tendering Period 13/10/2017 to 03/11/2017 at Supplier's option I. Last date of Payment 03/11/2017 J. Price 28400 (rupees Twe....
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....ts sole discretion to settle / close the Contract, and debit any loss and charges to Recipient's account." Purchase Contract A. PO generation date 09/12/2017 B. Trade Date 08/12/2017 B. TT no. RS 17-18/0297 C. Contract no. PO/PB/2017-18/0043 E. Quantity 110 (One Hundred Ten Only) Fully pressed Cotton Bales, Bales weight of 165 Kg. each. +/- 3.0% variation in weight allowed F. Specification 1 Growth 2. Station 3. Variety 4. Grade 5. Staple 6. Micronaire 7. Strength 8. Trash 9. Moisture Indian raw cotton crop 2017-18 Crop Year Punjab (PB) All Punjab J-34-RJ-RG Midding 28+ mm Minimum 4.0+ NCL 28 GPT Minimum 4 % (1:1 discount above 4%) 9% (Moisture will be checked on spot (at gin) with moisture meter before approval) G. Price INR 4038 (Rupees Four Thousand Thirty Eight Only) / Maund H. Taxes The Price is exclusive of all applicable taxes like the Goods & Services Tax, duties, cesses, local taxes and any other indirect taxes. Any burden due to any additional tax, duties and cesses etc. imposed due to any reason whatsoever at the time of invoicing shall be borne b....
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....er of cotton or payment not being made by recipient of goods. The "closure" or "washout" of aforesaid Contracts is necessarily a fall out or unequivocal resultant of Contractual terms. 5. In case of supply of cotton effected in terms of Contract, the Recipient of cotton is required to pay sum pre-specified in the Contract against supply of predetermined quantity of cotton. 6. On the other hand, in case of "closure" or "washout" of aforesaid Contracts, the party to the Contract which opts for such "closure" or "washout" is required to pay to the other party a sum equivalent to difference between the Settlement rate and the rate of cotton at which the supply of the same is agreed upon. 7. The Settlement rate is enshrined in the Contract to be as follows: Sale Contract - It is discretionary upon the Company to settle / close the Contract at the rate fixed by it. In this regard, the rate at which the Company settles is usually the market rate of cotton prevalent on the Commodities Exchange such as MCX on the day on which such settlement is made. Purchase Contract - Market rate of cotton prevalent on Commodities Exchange such as MCX on the day on which such settlement is ....
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....ties to completely rule out the possibility of GST implications in eventuality of "Settlement", "Washout" or "Closure" of Contract. In this regard, reference is made to serial no 5(e) of Schedule Il which is reproduced below for ease of reference: "Agreeing to the obligation to refrain from an act or to tolerate an act or situation or to do an act" 5. Schedule II of the CGST Act provides for specific transactions on which GST applies. In other words, Schedule Il is an exhaustive compendium of transactions on which GST applicability is re-emphasized by inclusion in the said Schedule. GST would have applied on such transactions invariably even in absence of Schedule Il if such transactions qualified as supply of goods and/ or services. Hence, Schedule II of the GST Act is merely clarificatory in nature and in no manner tends to expand the ambit of transactions on which GST applies under the GST laws. 6. In the above backdrop, Serial No 5(e) of Schedule Il should be construed to mean that GST liability arises in the eventualities enlisted below as the same would be deemed to be supply of "services" under the GST law: - agreeing to the obligation to refrain from an act; &nb....
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....d to state that the Party which faces the "Washout" tolerated such act of the other Party to the Contract by not opting for arbitration and hence rendered a "Service" in terms of the GST Act. Not taking a legal recourse envisaged by the Contract cannot be termed as "Service" as the same cannot qualify as "refraining from an act" or "to tolerate an act or situation". 10. In this regard, reference may be made to Para 6.7.1 of the Education Guide issued by Central Board of Excise and Customs in respect of earlier Service Tax regime governed by Chapter V of Finance Act, 1994 wherein a similar entry existed in the list of Services termed as "Declared Services": "6.7.1 Would non-compete agreements be considered a provision of service? Yes. By virtue of a non-compete agreement one party agrees, for consideration, not to compete with the other in any specified products, services, geographical location or in any other manner. Such action on the part of one person is also an activity for consideration and will be covered by the declared services." 11. The above explanation of "agreeing to an obligation to refrain from an act or to tolerate an act or situation or to do an act" by ....
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....have the same meaning as assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956." 16. The definition of 'securities' as given in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 ("SCRA") is as follows: "(h) "securities include- (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to bes ecurities; and (iib) rights or interest in securities. " From the above, it appears that 'securities' include derivative, amongst other things. 17. As per in clause (ac) of the Section 2 of the SCRA, ....
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....l not be deemed to be a ready delivery contract;] 21. On a conjoint reading of the above provisions of SCRA, it emerges that Contract entered into for supply of cotton should qualify as "Commodity Derivative" in the scenario where Contract is settled financially pursuant to which physical delivery of Cotton does not take place. 22. It is apparent that "Commodity Derivatives" are included in the definition of "Derivatives" and in turn the same is included in the definition of "Securities". "Securities" are specifically excluded from the definition of "goods" and "services" 23. This is supported by Frequently Asked Questions ("FAQ") no. 36 & 37 issued by GST authorities. The relevant extract if said FAQ is reproduced hereunder for easy of reference: S.no. Question Answer 36 Would 'future contracts' be chargeable to GST? Future contracts are in the nature of financial derivatives, the price of which is dependent on the value of underlying stocks or index of stocks or certain approved currencies and the settlement happens normally by way of net settlement with no actual delivery. Since future contracts are in the nature of derivatives these qualify a....
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....es and the relevant legal provisions required to answer the questions raised by the applicant. The question which had been posed by the applicant in Sr. No. 14 of Form GST ARA-01, in the context of activity of sale/purchase of Cotton by the applicant, was: "To determine the applicability of GST on the differential payment received by a party to the aforesaid contract from the other party to the contract is (in) event of "settlement", "washout" or "closure" of contract by it." 2. To answer this question, we would first like to go through the legal structure under the CGST Act, 2017 (which should be hereinafter read to also mean Punjab GST Act, 2017, the provisions in both Acts being similar) imposing the tax. The charging Section i.e. Section 9 reads as follows: "1) . . . . ......there shall be levied a tax called the central goods and services tax on all intra-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 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be pre....
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....' under GST law. It is clear that once an activity does not fall under scope of the term 'service', it becomes immaterial whether it falls under scope of the term 'supply' for deciding questions of applicability of tax on services under Section 9. The Section 2 (102) of CGST Act, 2017 defines 'Services' as under- "Services means 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". The applicant claims that his activity of closure of contract by way of settlement is covered under the term 'securities' which have been specifically excluded from the definition of 'Services' under CGST Act, 2017, a situation which would entail no taxation. This claim of the applicant requires examination under legal provisions." 4.1 The Section 2 (101) of CGST Act, 2017 defines 'Securities' as "Securities shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);". The definition of 'Securities' ....
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....eemed to be a ready delivery contract." 4.3 While examining legal provisions to understand the meaning of the Term 'securities' under the SCRA, it becomes important to understand Section 18A of SCRA which lays down that: "18A. Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are- (a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange. (c) between such parties and on such terms as the Central Government may, by notification in the Official Gazette, specify" 4.4 The applicant has not laid any information which points to the transactions regarding sale/ purchase of cotton and closure of such contracts being traded on recognised stock exchange or being settled on the clearing house of the recognised stock exchange or the contracting parties and the terms being notified by the Central Government. Therefore, on harmonious reading of above provisions of SCRA, especially in view of the said Section 18A, it emerges that the term securities which cov....
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....the CGST Act, 2017, future contracts are not chargeable to GST. However, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be a consideration for supply of service and chargeable to GST. Therefore, it is evident that intention of the Government, evident from the answer to the above FAQ, is not to tax settlements under forward contracts where settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date. Therefore, we feel that if the executive instruction interprets legal provisions in a manner which provides relief to a taxpayer and publishes these on its website, such relief should flow to the taxpayer. 6. However, once such an executive decision passes on relief to a taxpayer, it is natural that the relief must be to the extent mentioned in such executive decision. In the answer to FAQ No. 37 it had been inter-alia specified that "Where the settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date, the same would be falling within ....
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....ule II to Section 7, inter-alia, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is to be treated as supply of services. 9. In the present case, there is clearly an agreement between the contracting parties to refrain from bringing in arbitration, which is also built in the contract, if the contract is settled by payment of agreed amount of monies. Therefore, this activity can clearly be considered as supply of service by 'agreeing to the obligation to refrain from an act', and would therefore by subject to applicable tax. The present activity is also a toleration of the act of not providing the other party to the contract, the agreed quantity of goods at agreed prices at the agreed date, on payment of agreed amount of monies to settle the contract. Therefore, this would be liable for consideration as supply of service by way of agreeing to the obligation to tolerate an act or a situation. It is also clear that the applicant and the other contracting party are agreeing to the obligation of doing an act viz. settling the contract by payment of agreed amount of monies if goods are not delivered in terms of the contra....