CONCEPT OF SUPPLY

Section 7: Meaning and Scope of Supply

• Defines what constitutes a supply under the CGST Act.
Schedule I: Deemed Supply
• Lists activities to be treated as supply even if made without consideration.
Schedule II: Supply of Goods or Services
• Specifies activities or transactions to be treated as supply of goods or as supply of
services.
Schedule III: Neither Supply of Goods nor Services
• Identifies activities or transactions which shall be treated neither as supply of goods
nor as supply of services.
Section 8: Taxability of Composite and Mixed Supplies
• Details the taxability rules for composite and mixed supplies.
SECTION 7: MEANING AND SCOPE OF SUPPLY
7(1) Supply Includes:
• a. All forms of supply of goods or services (e.g., sale, transfer, barter, exchange,
license, rental, lease, disposal) made or agreed to be made for consideration in the
course or furtherance of business.
• aa. Activities or transactions by a person (other than an individual) to its members or
constituents, or vice versa, for cash, deferred payment, or other valuable
consideration.
• b. Importation of services for consideration, whether or not in the course or
furtherance of business.
• c. Activities specified in Schedule I, made or agreed to be made without
consideration.
7(1A) Supply Classification:
• Activities or transactions that constitute a supply under sub-section (1) are treated
as either supply of goods or supply of services as per Schedule II.
7(2) Exceptions:
• a. Activities or transactions specified in Schedule III.
• b. Such Transactions by the CG, SG, or any local authority as public authorities, as
notified by the Government on the Council’s recommendations, are treated neither as
supply of goods nor supply of services.

IMPORTANT CIRCULARS
1. Donations to Charitable Institutions:
o GST Exemption Conditions:
▪ Gift/donation made to a charitable organization
▪ Payment has the character of a gift or donation
▪ Purpose is philanthropic and not for advertisement
o Examples:
▪ “Donated by Mr. X” on a bench: No advertisement, no supply (no
consideration)
▪ “Donated by Mr. X Publishing House, UP” on a bench: Advertisement,
supply
2. Artworks Sent to Galleries:
o Not considered a supply as no consideration flows from the gallery to the
artists.
3. Alcoholic Liquor License:
o Grant of alcoholic liquor license (against license fee or application fee) is not
treated as a supply.
4. No Claim Bonus (NCB) in Insurance:
o No supply of service by the insured to the insurance company in lieu of NCB.
o NCB is a deduction from the gross insurance premium when no claim is made.
o The insured is not under any contractual obligation to refrain from claiming
insurance.
o NCB is not considered as consideration for any supply provided by the insured
to the insurance company.
ANALYSIS OF SEC 7(1)(c)
SCHEDULE I: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT
CONSIDERATION (DEEMED SUPPLY)

Para I of Schedule I
1. Permanent Transfer or Disposal of Business Assets:
o Condition: Input tax credit (ITC) has been availed on such assets.
o Example: Computer Purchased
▪ A. ITC availed:
▪ A-1: Sold with or without consideration - Treated as supply
▪ B. ITC not availed:
▪ B-1: Sold with consideration - Treated as supply
Limits in ITC Chapter
▪ B-2: Sold without consideration - Not a supply
Para II of Schedule I
2. Supply of Goods or Services or Both:
o Between related persons or distinct persons as specified in section 25.
o Condition: Made in the course or furtherance of business.
o Exception: Gifts not exceeding ₹ 50,000 in value in a financial year by an
employer to an employee are not treated as supply of goods or services or
both.
▪ Example: If the value is ₹ 51,000, then tax will be liable on ₹ 51,000,
not just on ₹ 1,000.
RELATED PERSON
• Definition: Persons who have specific relationships, including:
o Officers or directors of one another’s business
o Legally recognized partners in business
o Employer and employee
o A third person controls/owns/holds (directly or indirectly) ≥ 25% voting
stock/shares of both
o One controls (directly or indirectly) the other
o A third person controls both (directly or indirectly)
o Together control a third person (directly or indirectly)
o Members of the same family
o One is the sole agent, sole distributor, or sole concessionaire of the other
o
DISTINCT PERSONS SPECIFIED UNDER SECTION 25
• Registration: GST registration is PAN-based. A supplier must register in each
State/UT where they operate and make taxable supplies under the same PAN.
o Single vs. Multiple Registrations:
▪ Normally, a single registration per State/UT.
▪ Option for separate registrations for multiple places of business
within a State/UT.
• Establishments: Separate registrations within the same State/UT or in different
States/UTs are considered distinct persons.
o Section 25(5) of the CGST Act: Establishments in different States/UTs
are treated as distinct persons.
o Stock Transfer: Even if one branch is registered and another is not, stock
transfer is considered a supply.
Example:
• Rishabh Enterprises:
o Owns an air-conditioned restaurant in Virar, Maharashtra (registered).
o Owns a liquor shop in Raipur, Uttarakhand (unregistered, non-taxable
supply).
o Both establishments are treated as distinct persons.
o Supply from the Maharashtra restaurant to the Uttarakhand shop, even
without consideration, qualifies as supply.
Para III of Schedule I: Principal-Agent Relationship
Supply of Goods:
• By Principal to Agent: Without consideration, where the agent undertakes to supply
such goods on behalf of the principal, it is considered as supply.
• By Agent to Principal: Without consideration, where the agent undertakes to receive
such goods on behalf of the principal, it is considered as supply.
Determining Factor:
• The key factor is whether the invoice for the further supply of goods on behalf of
the principal is issued by the agent.
o Authority to Pass or Receive Title: The agent’s authority to pass or receive
the title of the goods on behalf of the principal is crucial.
Scenarios:
• Invoice Issued by Agent in His Name:
o Any provision of goods from the principal to the agent falls within Para 3 of
Schedule I.
• Invoice Issued by Agent in Principal’s Name:
o Such an agent does not fall within the ambit of Para 3 of Schedule I.
• Goods Procured by Agent on Behalf of Principal:
o If invoiced in the agent’s name, further provision of the goods by the agent to
the principal is covered by Para 3 of Schedule I.
Summary:
• Invoice Issued in Agent’s Name: Falls under Schedule I, Para 3.
• Invoice Issued in Principal’s Name: Does not fall under Schedule I, Para 3.
Para IV of Schedule I: Importation of Services
Import of Services:
Import of services by a person from a related person or from his establishments located
outside India, without consideration + In the course or furtherance of business shall be
treated as "supply."
• With Consideration: Always treated as supply.
• Without Consideration:
o B-1. From Related Person + In Course or Furtherance of Business:
Treated as supply.
o B-2. From Others: Not treated as supply.
Course or Furtherance of Business:
• Normal Case: From the supplier’s view.
• Import of Services: From the receiver’s view.
Examples:
1. Jhumroo Associates:
o Received legal consultancy services from its head office in Malaysia for free.
o Since Jhumroo Associates and the head office are related persons, the
services qualify as supply even without consideration.
2. Chakmak:
o Sought architect services from his son in the US for his house in Delhi.
o Services received without consideration from a related person, but not in the
course of business, so not treated as supply.
o If the services were for his office in Delhi, it would be treated as supply
because it is in the course of business.
3. Mr. Ankit:
o Imported interior designing services for his house from his son in the USA
for free: Not a supply.
o Imported interior designing services for his office from his son in the USA
for free: Treated as supply (related person + in course of business).
Clarification of Issues Pertaining to Del-Credere Agent (DCA)
Overview:
• Role of DCA:
o Guarantees payment to the supplier.
o Pays the principal if the buyer fails to pay by the due date.
o Collects payment from the buyer along with interest.
Issue 1: Whether a DCA Falls Within the Scope of Para 3?
• Invoice Issued by DCA in His Own Name: DCA is covered under Para 3.
• Invoice Issued by DCA in the Name of Principal: DCA is not covered under Para 3.
Issue 2: Temporary Short-Term Transaction-Based Loan Extended by DCA to Recipient
with Interest Charged by DCA
• Scenario A: DCA is Not an Agent Under Para 3:
o Supply of Goods: From principal to recipient.
o Agency Services: From DCA to supplier or recipient or both.
o Loan Services: By DCA to recipient.
o Treatment: Independent supply; interest is exempt.
• Scenario B: DCA is an Agent Under Para 3:
o Supply of Goods: From principal to DCA, then from DCA to recipient.
o Agency Services: From DCA to supplier or recipient or both.
o Loan Services: By DCA to recipient.
o Treatment: Incidental supply; value of supply includes interest and is taxable.
SCHEDULE II: ACTIVITIES OR TRANSACTIONS TO BE TREATED AS SUPPLY OF
GOODS OR AS SUPPLY OF SERVICES [Section 7(1A)]
Section 7(1A)
• Classifies certain activities/transactions as either supply of goods or supply of
services.
Matters Listed in Schedule II:
1. Transfer:
o 1-A:
▪ Activity/Transaction: Transfer of title in goods.
▪ Type: Title in goods under an agreement where property in goods
passes at a future date upon full payment.
▪ Nature of Supply: Goods.
o 1-B:
▪ Activity/Transaction: Transfer of right/undivided share in goods
without transferring title.
▪ Type: Right/undivided share in goods.
▪ Nature of Supply: Service.

2. Land and Building:

o Activity/Transaction: Lease, tenancy, easement, license to occupy land;
lease/letting out of building (commercial, industrial, residential) for
business/commerce.
o Type: Lease, tenancy, easement, license.
o Nature of Supply: Service.
o
3. Treatment or Process:
o Activity/Transaction: Applied to another person’s goods.
o Type: Treatment or process.
o Nature of Supply: Service.
o Example: Damani Dying House dyes clothes for Shubham Textiles Ltd. on a job
work basis.
4. Transfer of Business Assets:
o 4-a:
▪ Activity/Transaction: Goods forming part of business assets are
transferred or disposed of by/under directions of the person carrying
on business.
▪ Nature of Supply: Goods.
o 4-b:
▪ Activity/Transaction: Goods held/used for business are put to private
use or made available for non-business purposes by/under directions
of the person carrying on the business.
▪ Nature of Supply: Service.
o 4-c:
▪ Activity/Transaction: Goods forming part of business assets of a
person who ceases to be a taxable person, deemed to be supplied
immediately before ceasing to be taxable.
▪ Exceptions:
▪ Business transferred as a going concern.
▪ Business carried on by a personal representative deemed to be
a taxable person.
▪ Nature of Supply: Goods.

5. Various Services:
o Activity/Transaction:
▪ Renting of immovable property.
▪ Construction of complex, building, civil structure, etc.
▪ Temporary transfer or permitting use/enjoyment of intellectual
property rights.
▪ Development, design, programming, customization, adaptation,
upgradation, enhancement, implementation of IT software.
▪ Agreeing to obligation to refrain from an act, tolerate an
act/situation, or do an act.
▪ Transfer of right to use any goods for any purpose (whether or not
for a specified period) for cash, deferred payment, or other valuable
consideration.
o Nature of Supply: Service.

6. Composite Supplies:
o Activity/Transaction:
▪ Works contract.
▪ Supply of goods, being food or any other article for human
consumption or any drink (other than alcoholic liquor for human
consumption) for cash, deferred payment, or other valuable
consideration.
o Nature of Supply: Service.
Analysis
1. Construction of Building
• Sale of Under-Constructed Units: Treated as supply of service.
• Sale of Completed Units: Falls under the negative list (not considered a supply).
2. Composite Supply
• General Rule: Treated as supply of service.
• Negative List: Not considered a supply.
Composite Supply Details:
• a. Restaurant/Outdoor Catering (Food/Drink): Always treated as supply of service.
• b. Work Contract Services: Always treated as supply of service.
• c. Other Composite Supplies: Treated as per Section 8.
SCHEDULE III: ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED
NEITHER AS SUPPLY OF GOODS NOR AS SUPPLY OF SERVICES
Non-Supplies Under GST [Section 7(2)(a) Read with Schedule III]
1. Employee Services:
o Services by an employee to the employer in the course of or in relation to
employment.
o Examples:
▪ Casual workers employed by a construction contractor for a building
contract.
▪ Casual workers employed by a security agency for providing security
services.
o Note: Perquisites provided by the employer to employees as per contractual
agreement are not taxable.

2. Services by Courts or Tribunals:

o Services by any court or tribunal established under any law.

3. Functions and Duties:

o a. Functions performed by Members of Parliament, State Legislature,
Panchayats, Municipalities, and other local authorities.
o b. Duties performed by any person holding a post under the Constitution.
o c. Duties performed by a Chairperson, Member, or Director in a body
established by the Central or State Government or local authority, who is not
deemed an employee before this clause.

4. Funeral Services:
o Services of funeral, burial, crematorium, or mortuary, including transportation
of the deceased.

5. Sale of Land and Buildings:

o Sale of land.
o Sale of buildings, subject to paragraph 5(b) of Schedule II.

6. Actionable Claims:
o Actionable claims, other than specified actionable claims.

7. Supply of Goods in Non-Taxable Territory:

o Supply of goods from a place in the non-taxable territory to another place in
the non-taxable territory without entering India.

8. Supply of Warehoused Goods:

o a. Supply of warehoused goods to any person before clearance for home
consumption.
o b. Supply of goods by the consignee to any other person, by endorsement of
documents of title to the goods, after dispatch from the port of origin but
before clearance for home consumption.
SOME IMPORTANT & RELEVANT CLARIFICATIONS
1. Sales Promotion Schemes:
o Goods or services supplied free of cost (without consideration) are not
treated as “supply” except for activities in Schedule I of the CGST Act.
o Example: “Buy One Get One Free” offers are treated as two goods for the
price of one. Taxability depends on whether it is a composite or mixed supply.
2. Taxability of Tenancy Rights:
o Transfer of tenancy rights against consideration (tenancy premium) is
considered a supply of service and is liable to GST.
3. Taxability of Printing Contracts:
o Composite Supply:
▪ Books, Pamphlets, Brochures, etc.: If only content is supplied by the
publisher and physical inputs belong to the printer, it is a supply of
service.
▪ Printed Envelopes, Letter Cards, etc.: If printed with design/logo
supplied by the recipient but made using printer’s physical inputs, it is
a supply of goods.
4. Servicing of Cars:
o Taxability depends on the facts and circumstances of each case.
o If both goods (spare parts) and services (labor) are supplied and shown
separately, they are taxed at their respective rates.
5. Retreading of Tyres:
o Composite Supply: Predominant element is the process of retreading, treated
as a supply of service.
o Supply of Retreaded Tyres: If old tyres belong to the supplier, it is a supply
of goods.
6. Cost Petroleum:
o Contractors in oil exploration get a license/lease and enter into a Production
Sharing Contract (PSC) with the government.
o Cost Petroleum: Value of petroleum taken for recovery of contract costs, not
taxable.
o Profit Petroleum: Government’s share of profit petroleum is exempt from
GST.
7. Moulds and Dies:
o Moulds and dies sent free of cost by Original Equipment Manufacturers
(OEM) to component manufacturers do not constitute supply as there is no
consideration and they are not related/distinct persons.
 8. Clarification on GST Applicability on Liquidated Damages, Compensation, and
Penalty
“Agreeing to the Obligation” as Supply of Service
• Para 5(e) of Schedule II of CGST Act: Declares “agreeing to the obligation to
refrain from an act, tolerate an act or a situation, or to do an act” as a supply of
service if it constitutes a “supply” within the meaning of the Act.
Examples:
❖ Agreeing to Refrain from an Act:
o Non-Compete Agreements: Payment for agreeing not to compete.
❖ Agreeing to Tolerate an Act or Situation:
o Example: A shopkeeper allowing a hawker to operate from the pavement in
front of his shop for a monthly payment.
❖ Agreeing to Do an Act:
o Example: An industrial unit installing zero emission equipment for a residential
complex against a consideration, even if not legally required.
Taxability of Various Transactions:
✓ Liquidated Damages:
o Payments to compensate for injury, loss, or damage are not taxable as they
are not consideration for any supply.
o Examples:
▪ Damages from property damage: Not taxable.
▪ Penalty for delayed construction: Not taxable.
▪ Forfeiture of earnest money by the government: Not taxable.
▪ Early termination fee in lease contracts: Taxable.
✓ Cheque Dishonour Fine/Penalty:
o Not taxable as it is not consideration for any service.
✓ Penalty for Violation of Laws:
o Not taxable as it is not consideration for any supply.
o Examples: Traffic violations, pollution norms.
✓ Forfeiture of Salary or Bond Amount:
o Not taxable as it is to discourage non-serious employees and not a
consideration for any supply.
✓ Late Payment Fees or Surcharge:
o Treated as ancillary to the principal supply and taxed at the same rate as the
principal supply.
o Examples: Electricity, water, telecommunication, cooking gas, insurance.
✓ Fixed Capacity Charges for Power:
o Not taxable as electricity is exempt from GST.
✓ Cancellation Charges:
o Treated as part of composite supply and taxed at the same rate as the service
contract.
o Examples:
▪ Forfeiture of earnest money: Not taxable.
▪ Cancellation charges for railway or air tickets: Taxed at the same rate
as the class of travel.
9. Sale of Land After Development
• Developed Land: Sale of land after development (levelling, drainage, etc.) is still
considered a sale of land and does not attract GST (Schedule III, Sr. No. 5).
• Development Services: Services for land development (levelling, drainage) attract
GST at the applicable rate.
10. Holding Shares in a Subsidiary
• Holding Shares: Holding shares of a subsidiary by a holding company is not treated as
a supply of services and is not taxable under GST. Purchase or sale of shares or
securities is neither a supply of goods nor services.
11. Services by Directors in Personal Capacity
• Personal Capacity Services: Services like renting immovable property by a director to
the company are not taxable under Reverse Charge Mechanism (RCM). Only services
provided in the capacity of a director are taxable under RCM.
12. Supply of Food or Beverages in Cinema Halls
• Restaurant Service: Supply of food or beverages in a cinema hall is taxable as
‘restaurant service’ if supplied as part of a service and independent of cinema
exhibition.
• Bundled Supply: If cinema tickets and food/beverages are bundled and meet the
composite supply test, the entire supply is taxed at the rate applicable to cinema
exhibition.
13. Taxability of Personal and Corporate Guarantees
• Personal Guarantee by Directors:
o Treated as a supply of service even without consideration.
o If no consideration is mandated by RBI, the open market value is zero, and no
GST is payable.
o If remuneration is paid, it is taxable.
• Corporate Guarantee:
o Treated as a supply of service between related parties.
o New sub-rule (2) of Rule 28 provides a standardized method for determining
taxable value.
o Applicable to all cases of corporate guarantees between related persons,
regardless of ITC availability.
o Not applicable to personal guarantees by directors.