2025 (7) TMI 455 - AAR - GST

Suppy or not - supply of goods or services - different types of transactions undertaken - classification of supplies - applicability of N/N. 2/2017-Central Tax (Rate) or 12/2017 Central Tax (Rate) as amended relating to exemption for goods and services. Supply of stationery items without consideration - HELD THAT - The activity mentioned herein involves supply in the course or furtherance of business and is made for a consideration. Therefore all the conditions stipulated for falling within the scope of supply as envisaged under Section 7 of the CGST Act are fulfilled in this case. In this regard as per Notification No. 36/2017 Central Tax (Rate) dated 13-10-2017 we find that Used vehicles seized and confiscated goods old and used goods waste and scrap supplied to any registered person by Central Government State Government Union territory or a local authority is subject to GST under reverse charge mechanism - the stationery items supplied by the applicant to various government departments and authorities without receipt of consideration in any manner do not fall under the scope of business as envisaged under Section 2(17) of the CGST Act 2017. When the supply fails to fall under the scope of business as envisaged under the GST law Section 17 (1) of the CGST Act 2017 stands applicable and accordingly. Supply of stationery items for consideration - HELD THAT - As per Section 7 (1) (a) of the CGST Act 2017 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 . Supply of goods for a consideration i.e. where amounts in money or otherwise are obtained is a commercial transaction that squarely falls within the scope of Supply as envisaged under Section 7 of the CGST Act 2017. Being a commercial transaction it is also found that this is in the course or furtherance of business. Facilitating the procurement of stationery as intermediaries - HELD THAT - The applicant has stated that this activity is not done against consideration. They facilitate the procurement of stationery by various departments in their official capacity and no payment is received by them against such service. The activity tantamount to service but in so far as the same is not for a consideration based on the logic explained in paragraph (a) above it is opined that the said supply does not fall within the scope of Supply as envisaged under Section 7 of the CGST Act 2017. Levy of recoveries/ fines/ penalties for undue loss of stationery and supplies from departmental staff - HELD THAT - The nature of activity here is that the applicants in their official capacity conduct inspection of the stationery supplied to various departments and in case of undue loss initiate action against the responsible persons for recovery of loss and also to impose fine. Recovering the loss made to government or imposing fine for mistakes committed does not fall within the scope of Supply under Section 7. In order to be a supply within the meaning of this Section goods or services or both should be supplied against a consideration. In the instant case no such supply is made but is just recovery of loss to Government and is not ordinarily within the purview of Supply under the Act. Now it has to be considered whether the activity falls under the scope of Schedule I or II of the CGST Act 2017. The service tax education guide issued in 2012 on advent of negative list regime of services explained that fines and penalties paid for violation of provisions of law are not considerations as no service is received in lieu of payment of such fines and penalties. It was also clarified vide Circular No.192/02/2016-Service Tax dated 13.04.2016 that fines and penalty chargeable by Government or a local authority imposed for violation of a statute bye-laws rules or regulations are not leviable to Service Tax. The same holds true for GST also . Hence the activity does not fall under the scope of supply under Section 7 of the CGST Act 2017. Levy of recoveries/ fines/ penalties from suppliers as liquidated damages EMD/SD forfeiture for breach of contract etc. - HELD THAT - As per Schedule II to the GST Act agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act is a taxable activity. In so far as such a recovery/fine/penalty is made pursuant to a contract to do an act to tolerate an act or to refrain from an act the activity is taxable. It is found that as reported by the applicant such charges/damages/deposits are collected or recovered in pursuance to a contract - the taxability of such amounts received by the applicant can be decided only on a case-to-case basis on examination of the specific contract from which the payment is received by the applicant. Repair services for stationary-related equipment for other government departments - HELD THAT - If the repair services are done for a consideration or if done in the course or furtherance of the business of the applicant the activity falls within the scope of Supply under Section 7 and if the same is done not for a consideration the activity does not fall within the scope of Supply as per Section 7 of the Act. No blanket ruling can be given in this case without information on whether the services are done for a consideration or not. Disposal of waste paper and printing supplies as scrap or otherwise or Auction thereof - HELD THAT - The activity mentioned herein involves supply in the course or furtherance of business and is made for a consideration. Therefore all the conditions stipulated for falling within the scope of supply as envisaged under Section 7 of the CGST Act are fulfilled in this case. In this regard as per Notification No. 36/2017 Central Tax (Rate) dated 13-10-2017 it is found that Used vehicles seized and confiscated goods old and used goods waste and scrap supplied to any registered person by Central Government State Government Union territory or a local authority is subject to GST under reverse charge mechanism - the disposal of waste paper and printing supplies as scrap or otherwise or Auction thereof falls under the Scope of Supply within the meaning of Section 7 of the CGST Act 2017. Sale of physical tender forms - HELD THAT - It is evident that the sale of tender forms is made against a consideration. Tender notice is issued in the furtherance of business and sale of tender form is ancillary to such an act and in this case is done for a consideration. Therefore as per the ratio discussed in paragraph (b) above we are of the opinion that such sales falls within the meaning of Supply as envisaged under Section 7 of the Act. Sale of used motor vehicle - HELD THAT - The sale falls within the meaning of Supply as envisaged under Section 7 of the Act. Classification of goods - HELD THAT - No Annexure is seen placed with the application and hence no ruling can be given in this regard. Entitlement to avail ITC on all procurement of goods and services - HELD THAT - No blanket answer is possible in this regard. Restrictions on availing ITC exist on account of the provisions of Section 17 of the CGST Act and Rule 42/43 of the CGST Rules 2017. Whether the applicant is liable to reverse the ITC availed as on date? If yes what is the reversal-From the submissions made by the applicant it is evident that they have both taxable and non-taxable/exempted supplies? - HELD THAT - Rule 42/43 of the CGST Rules 2017 stipulates the formula for apportioning ITC already availed (i.e. ITC eligible to be credited to electronic credit ledger) between exempted and taxable supplies and the manner of reversing the ITC attributable to supplies that do not attract GST. Accordingly we are of the opinion that if the applicant has availed ITC on inputs or input services which are used partly for the purpose of any business and partly for other purposes or partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies they are liable to reverse the ITC availed by them. The second leg of the question is if so what is the reversal . The reversal is to be calculated as per the formula given in Rule 42/43 of the CGST Rules 2017. No specific ruling can be given in this regard since the question is not in respect of items falling under Section 97 (2). The math may be done by the applicant themselves. Whether the activities undertaken by the Department are covered by Notification 2/2017-CT as amended relating to exemption for goods or Notification 12/2017-CT as amended relating to exemption for services? - HELD THAT - There is no possession of the exhaustive list of activities provided by them and therefore this question cannot be answered owing to paucity of material.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) are:

- Whether various transactions undertaken by a Government stationery department constitute a 'supply' under Section 7 of the CGST Act, 2017.

- If such transactions amount to supply, whether they are supply of goods or services.

- The appropriate classification, rate of tax, and valuation applicable to these supplies.

- Whether the department is entitled to avail Input Tax Credit (ITC) on all procurements of goods and services related to its activities.

- Whether the department is liable to reverse ITC availed and, if so, the manner and extent of such reversal.

- Whether the department's activities are covered under exemption notifications 2/2017-CT (goods) or 12/2017-CT (services) as amended.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether various transactions constitute 'supply' under Section 7 of the CGST Act, 2017

Legal framework and precedents: 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)(i) defines 'business' to include activities undertaken by government departments as public authorities. However, supplies without consideration generally do not constitute supply unless specifically covered under Schedule I. CBIC explanatory notes clarify that GST applies only to commercial transactions in the course or furtherance of business.

Court's interpretation and reasoning: The AAR examined each category of transaction:

• Supply of stationery without consideration: These are statutory supplies to other government departments without consideration. The AAR held these do not fall within 'supply' as they are not in the course or furtherance of business and are not covered under Schedule I. Hence, no GST applies.
• Supply of stationery for consideration: Supplies made against payment to entities other than government departments constitute commercial transactions and fall squarely within 'supply' under Section 7.
• Facilitating procurement as intermediaries without consideration: Such facilitation without consideration is not supply under Section 7.
• Levy of recoveries/fines/penalties for undue loss of stationery from departmental staff: These are recoveries for loss or penalties imposed under disciplinary proceedings without any supply of goods or services for consideration. The AAR held these do not amount to supply under Section 7, supported by CBIC Circular No. 178/10/2022-GST and earlier service tax precedents clarifying penalties and fines imposed for violation of law are not consideration for supply.
• Levy of recoveries/fines/penalties from suppliers as liquidated damages, EMD/SD forfeiture for breach of contract: The AAR distinguished these as recoveries pursuant to contracts. It relied on Schedule II and CBIC Circular No. 178/10/2022-GST which clarified that liquidated damages are taxable only if they arise from an agreement to tolerate or refrain from an act. Mere compensation for breach without such agreement is not taxable. Therefore, taxability depends on the specific contract terms and must be decided case-by-case.
• Repair services for stationery-related equipment: No definitive ruling was given due to lack of information on whether the service is for consideration. If for consideration, it is supply; if not, it is not supply.
• Disposal of waste paper, scrap, auction of used goods: These are supplies made for consideration in the course of business and fall within the scope of supply under Section 7. The AAR referred to Notification 36/2017-CT (Rate) and Circular No. 76/50/2018-GST clarifying such supplies by government entities to registered persons attract GST under reverse charge mechanism.
• Sale of physical tender forms: Sale against consideration ancillary to business activities is supply under Section 7.
• Sale of used motor vehicles: Sale of used vehicles by the department is supply under Section 7.

Application of law to facts: The AAR applied the definitions and CBIC clarifications to the department's activities, differentiating between supplies with and without consideration and between compensatory penalties and contractual liquidated damages.

Treatment of competing arguments: The applicant argued that supplies without consideration are statutory functions and not business activities. The AAR agreed for supplies without consideration but held that supplies for consideration are taxable. On penalties and fines, the AAR distinguished between penalties imposed for violation of law (non-supply) and contractual liquidated damages (potentially supply).

Conclusions: Supplies without consideration do not amount to supply under GST. Supplies for consideration are taxable supplies. Liquidated damages are taxable only if they arise from an independent contract to tolerate or refrain from an act. Penalties and fines imposed for breach of law or disciplinary action are not supplies.

Issue 2: Whether the supplies are goods or services

Legal framework: Section 2(52) defines 'goods' as movable property excluding money and securities; Section 2(102) defines 'services' as anything other than goods, money, and securities.

Court's reasoning: The AAR held that supplies of stationery items, waste, scrap, auctioned goods, tender forms, and used motor vehicles constitute supply of goods. Liquidated damages, EMD/SD forfeiture for breach of contract, and repair and maintenance services constitute supply of services.

Issue 3: Classification, rate of tax, and valuation

The applicant did not provide the annexure listing the specific items for classification. Hence, the AAR declined to provide any ruling on classification, rate, or valuation.

Issue 4: Entitlement to avail ITC on all procurements

Legal framework: Section 16 entitles registered persons to ITC on inputs and input services used in the course or furtherance of business, except those barred under Section 17(5). Rule 42/43 provides for apportionment and reversal of ITC where inputs are used partly for business and partly for other purposes or for exempt supplies.

Court's reasoning: The AAR held that the applicant is entitled to avail ITC on all procurements except:

• Input tax attributable exclusively to non-business purposes.
• Input tax attributable exclusively to exempt supplies.
• Input tax on goods or services barred under Section 17(5).

Therefore, ITC must be appropriately apportioned and reversed as applicable.

Issue 5: Liability to reverse ITC and manner of reversal

Legal framework: Section 17(1) and (2) and Rule 42/43 of CGST Rules govern ITC reversal where inputs are used partly for taxable and partly for exempt supplies.

Court's reasoning: Since the applicant undertakes both taxable and exempt/non-business activities, they are liable to reverse ITC attributable to exempt or non-business use. The reversal must be calculated as per the formula in Rule 42/43. The AAR declined to provide an arithmetic ruling, leaving it to the applicant to compute.

Issue 6: Applicability of exemption notifications 2/2017-CT (goods) or 12/2017-CT (services)

The applicant did not furnish an exhaustive list of activities. Hence, the AAR declined to provide a ruling on exemption applicability due to insufficient material.

3. SIGNIFICANT HOLDINGS

"Any transaction involving supply of goods or services without consideration is not a supply, barring few exceptions, in which a transaction is deemed to be a supply even without consideration."

"GST is essentially a tax only on commercial transactions. Hence, only those supplies that are in the course or furtherance of business qualify as supply under GST."

"Recovering the loss made to government or imposing fine for mistakes committed does not fall within the scope of Supply under Section 7. In order to be a supply within the meaning of this Section, goods or services or both should be supplied against a consideration."

"Where the amount paid as 'liquidated damages' is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money... Such payments do not constitute consideration for a supply and are not taxable."

"The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a 'supply' within the meaning of the Act, otherwise it is not a "supply"."

"The applicant is entitled to avail ITC on all procurements of goods and services other than on the following supplies: (a) input tax attributable to inputs and input services intended exclusively for purposes other than business; (b) input tax attributable exclusively for effecting exempt supplies; (c) input tax on goods or services barred under Section 17(5)."

"Since the applicant has both taxable and exempted supplies, the applicant is liable to reverse the ITC availed by them, from 01-07-2017 onwards, as per the formula stipulated under Rule 42/43 of the CGST Rules, 2017."