TMI Blog2018 (10) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... ing party would not amount to supply of goods and therefore, no goods and service tax would be applicable as far as supply of goods is concerned. Whether the activity of closure of contract by the applicant or the other contracting party would fall under the scope of the term ‘service’ or under the scope of the term ‘supply’ under GST law? - Held that:- 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. From Section 18A of SCRA, it emerges that the term securities which covers commodity derivatives refers to only those contracts which are traded or settled in recognised stock exchange, unless the contracts are notified by the Central Government. By this measure, the claim of the applicant that the closure of purchase/sale of cotton contract by way of settlement between him and the other contracting party in terms of the contract, would be covered under the term 'securities' in the definition of 'services' in Section 2(102) of the CGST Act, 2017 and hence would not entail tax on services, does not se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent considering a price different from the market price of cotton on the day of settlement would be a supply of service under each of the three limbs i.e. agreeing to the obligation to refrain from an act, agreeing to the obligation to tolerate an act or a situation, or agreeing to the obligation to do an act, mentioned in para 5(e) of Schedule Il to Section 7 of the CGST Act, 2017. Ruling:- In forward contracts in cotton sales, being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other party to the contract by way of payment of the differential of forward rate and prevailing market rate on the settlement date, the same would be falling within the purview of 'securities' as defined in Section 2(101) of the CGST Act, 2017and would therefore not be chargeable to GST. In forward contracts in cotton sales: being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other party to the contract by way of payment of the differential of forward rate and rate fixed by the applicant using his discretion, such rate being different than the market price of cotton on the date of settlement, the same would not be falling within the purview of 'securities' as define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Town, Phase-I, Bhatinda, 151001 (Punjab) of signing forward contracts for sale/purchase of Cotton wherein the contract is closed by settlement without supply of goods would not be covered under the term Services as defined under section 2(102) of the CGST Act, .2017, in as much as these above said activity would be covered under the term Securities which has been excluded from the scope of Services . They argued that the legal scope of Services would prevail over the scope of Supply as defined in section 7 of the CGST Act, 2017. They also stressed that the question raised by them in the present advance ruling application has been clarified by the Government in FAQ on Banking, Insurance and Stock Brokers section which is entered at Sr. No. 36 and 37 and available at the website www.cbic.gov.in . They further stated that the activity of M/s. Louis Dreyfus Company India Private Limited, Ground Floor, House No. 378, Model Town, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Twenty Eight Thousand Four Hundred Only) Indian Rupees/ Candy K. Taxes The Price is exclusive of all applicable taxes like the Goods Service tax, duties, cesses, local taxes and any other indirect taxes. Any additional tax burden, duties and cesses etc. at the time of invoicing shall be borne by the recipient. L. Incoterms Ex-Gin/Warehouse, G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of: 162 Kg. for Gujarat/ Maharashtra/ MP/ Lower Rajasthan and 164 Kg. for Telangana/ Karnataka/AP/ Punjab/ Haryana/ Upper Rajasthan shall be considered. MCX price for forward contracted month/ CAI spot price or mutually agreed price to be used for establishing mark to market differential for mutual settlement. 4. It is apparent that the intention of the Parties is to effect supply of cotton pursuant to execution of aforesaid Contracts. The Contracts also stipulates well defined methodology for settlement / closure of Contract (generally referred to as closure or washout of contract), in the event of Supply of goods not being effected by Supplier 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not in the course or furtherance of business; (c) the activities specified in Schedule l, 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 ll. 3. It is apparent that in case of Settlement , Washout or Closure of Contract, there is no supply of goods (i.e. Cotton in the instant case) and applicability of GST on supply of goods is as a corollary not triggered. 4. It is, however, important to determine whether any Service is being transacted between Parties to the Contract in event of Settlement , Washout or Closure of Contract by either of such Parties 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an act is not fulfilled in the instant case as both the Parties to the Contract are bound by Contractual terms to settle the Contract financially. None of the Parties to the Contract perform an act or tolerate the same either in lieu of the transaction involving financial settlement. In simple words, the Party which faces the proposition of the other Party to Washout the Contract cannot do anything but accept the exclusive fall out of Wash out of Contract i.e. to accept the payment for settling the non-delivery financially. If either of the Parties do not follow the financial settlement as per the terms of the Contract, arbitration entails. In this regard, it would be too far-fetched 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be severed before supply. However, Securities and Money is specifically excluded from the definition of goods. 14. Further, Section 2(102) of the CGST Act defines 'services', reads as follows: 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 Section 2(102) defined services as 'anything other than goods, money and securities'. 15. Securities has been defined in Section 2(101) to read as under: Securities shall 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) deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays after the date of the contract and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in respect of any goods, the period under such contract not being capable of extension by the mutual consent of the parties thereto or otherwise: Provided that where any such contract is performed either wholly or in part: (i) by realization of any sum of money being the difference between the contract rate and the settlement rate or clearing rate or the rate of any offsetting contract; or (ii) by any other means whatsoever, and as a result of which the actual tendering of the goods covered by the contract or payment of the full price therefor is dispensed with, then such contract shall 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same would be falling within the purview of 'securities' as defined in Section 2(101) of the CGST Act, 2017. As securities are neither 'goods' nor 'services' as defined in 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. Accordingly, the differential payment made for financially settling the Contract for supply of Cotton can be said to have been made against transaction in Securities , which cannot entail GST implications as GST is applicable only on the supply of goods or services or both, which is not the case herein. Discussion and Findings: We have carefully gone through the case details submitted by the party along with annexures 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 dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese. While it is clear that this activity is not a sale transfer, barter, exchange, licence, rental or lease, it is also apparent that the situation of closure of contract which was related to supply of goods, would also not be covered under the term disposal. The term disposal carries a connotation that the goods physically leave the possession of the supplier, which is not the situation in the present case. Therefore, we reach the conclusion that the scenario of closure of contract by the applicant or its other contracting party would not amount to supply of goods and therefore, no goods and service tax would be applicable as far as supply of goods is concerned. 4. Now, it needs to be seen whether the activity of closure of contract by the applicant or the other contracting party would fall under the scope of the term service or under the scope of the term supply 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od not exceeding eleven days after the date of contract and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in respect of any goods, the period under such contract not being capable of extension by the mutual consent of the parties thereto or otherwise: Provided that where any such contract is performed either wholly or in part: (i) by realization of any sum of money being the difference between the contract rate and the settlement rate or clearing rate or the rate of any offsetting contract; or (ii) by any other means whatsoever, and as a result of which the actual tendering of goods covered by the contract or payment of the full price therefor is dispensed with, then such contract shall not be deemed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined amount of a commodity or currency at a pre- determined future date at a pre-determined price, The settlement could be by way of actual delivery of underlying commodity/currency or by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date. Where the settlement takes place by way of actual delivery of underlying commodity/currency, then such forward contracts would be treated as normal supply of goods and liable to GST. 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 the purview of 'securities' as defined in Section 2(101) of the CGST Act, 2017. As securities are neither 'good nor 'services' as defined in 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, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of settlement. The terms of purchase contract mentioned by the applicant are however in line with the settlement envisaged in answer to FAQ No. 37. Therefore, it follows that the purchase contracts entered between the applicant and the other contracting party where settlement is made without supply of goods on the above terms, the activity would be covered under the term 'securities' and therefore would not entail tax. 8. However, in sales contracts entered between the applicant and the other contracting party, where settlement is made without supply of goods on the above terms in as far as the applicant considers a discretionary price other than the market price of cotton on the day of settlement, these would not be covered under the term 'securities' and would therefore become subject to section 9 and section 7 of the CGST Act, 2017. In the schedule 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by the jurisdictional officer while interpretation of the legal definition of Services. The Advance Ruling passed by the Maharashtra Authority for Advance Ruling was on completely different facts and had nothing in common with the specific question raised by the applicant. Therefore, we feel that the comments of the jurisdictional officer do not address the questions raised by the applicant in the present Advance Ruling application and therefore are not relevant while deciding the present application. 10. In view of the above discussion and Findings we pronounce the following Advance Ruling on the question 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 in event of settlement , washout or closure of contract by it. posed by M/s. Louis Dreyfus Company India Pvt. Ltd in the context of purchase/ sale contracts of cotton, and specified in their Application dated 7.6.2018 under provisions of Section 98(4) of the CGST Act, 2017: Advance Ruling (i) In forward contracts in cotton sales, being settled by M/s. Louis Dreyfus Company India Pvt. Ltd. with the other pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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