In Re : M/s Rajarathnam's Jewels
GST
2018 (8) TMI 932 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – 2018 (15) G. S. T. L. 623 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – AAR
Dated:- 27-7-2018
Advance Ruling No. KAR ADRG 16/2018
GST
Sri. Harish Dharnia, Joint Commissioner of Central Tax And Dr. Ravi Prasad M.P., Joint Commissioner of Commercial Taxes
For The Represented : Sri Gopal Mundra, Chartered Accountant
ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICE TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017
1. M/s Rajarathnam's Jewels, (called as the 'Applicant' hereinafter), having its registered office at B-12, Devatha Plaza, Residency Road, Bengaluru 560025, having GSTIN number 29AABFR5632E1ZA, has filed an application for Advance Ruling under Section 97 of CGST Act, 2017, KGST Act, 2017 & IGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST
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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?
e) Whether conversion of e-Units into diamonds would be treated as supply liable to GST?
3. The applicant furnishes some facts relevant to the stated activity:
a. The applicant states that he is desirous of entering into a derivative contract in diamonds through ICEX which is a recognized Commodity Derivative Exchange regulated by SEBI to provide a nation-wide online trading platform in commodity derivatives and ICEX has obtained a registration with SEBI.
b. Securities Contracts (Regulation) Act, 1956 (SCRA) has been enacted by the Parliament for the purpose of regulation of the business of transaction in securities. The definition of the securities under SCRA al
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to follow the process prescribed by ICEX:
i. Such person would need to register with the Exchange as a member by depositing a one-time membership fee and a nominal amount as annual subscription fee every year.
ii. Further, any person who is not registered as a member with ICEX can also enter into diamond derivative contracts on the online platform through a member who is registered with the Exchange;
iii. ICEX would take and/or recover an initial margin amount as deposit, sufficient to cover its potential exposure, from any member desirous of entering into a derivative contract (taking buy or sale position) using the online platform;
iv. The diamond 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
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There will be no physical delivery of diamond of 24 cents by the member A and similarly there will be no physical delivery of diamond of 16 and 8 cents to member B and C respectively;
x. If the seller defaults in delivering the agreed number of e-units on the appointed day, a penalty of 3% of the Delivery Order ('DOR') will be imposed on such defaulting seller. Out of such penalty, 1% will be credited to the buyer, 1.75% to Settlement Guarantee Fund (SGF) and balance 0.25% will be retained by the Exchange as administrative expenses;
xi. Further, every seller on the Exchange platform pays Commodity Transaction Tax (CTT) as payable under Income Tax Act, 1961; xii. ICEX would also recover transaction fees, as applicable, for every transaction undertaken using the online platform;
xiii. A person having e-Unit in its e-Account can hold the same and retain the same as per its discretion in his e-Account without any restriction;
xiv. Even a person who does not possess any physical dia
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will be inscribed on the stone;
iv. The grading report and diamond stone will be deposited with the Exchange accredited vault and an electronic vault receipt (EVR) 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 applic
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and its weight on the Exchange's official website on periodical basis;
iv. Delivery of physical diamond will be made available from ICEX's designated security vault at Surat, tull new centres to offer physical delivery are set up;
v. Such person shall submit a letter, indicating its intention to obtain physical diamonds and containing requisite details, with the Exchange;
vi. On receipt of such letter, the Exchange will send Delivery Order (DO) to the Vault authorities directly. Based on the DO received, the Vault will hand over the requested stone(s) to such interested person or its representative;
vii. If on the date of conversion of e-Units into diamonds, such person has accumulated 103 e-Units in his e-Account, however, exchange inventory is carrying only two stones having 101 cents and 105 cents, the following options would be available with the unit holder:
1. The person can take delivery of a stone having 101 cents and keep the remaining 2 units in his e-Account; or
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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.”
6. The applicant states that from a perusal of the aforesaid extracted portion of Section 7, a position can be taken that the following conditions should be cumulatively fulfill
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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 term “goods” is defined to mean every kind of movable property, therefore, diamonds would constitute goods. The term “service” has been defined to mean everything other than goods. A conjoint reading of the definition of the term “goods” and “services” under CGST Act suggests that “securities” are specifically excluded from the definition of the term “goods” as well as “services”. Further, section 2(101) of the CGST act adopts the definition of the term “securities” from SCRA.
8. The term “securities” has been defined under section 2(h) of the SCRA as under:
“securities” include
(i) Shares, srips, 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
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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 under section 2(ac) of the SCRA as under:
“derivative” includes
(A) A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) A contract which derives its value from the prices, or index of prices, of underlying securities;
(C) Commodity derivatives; and
(D) Such other instruments as may be declared by the Central Government to be derivatives;”
The term “commodity derivative” has been defined under Section 2(bc) of the SCRA as under:
“commodity derivative” means a contract –
(i) for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, an
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rmed 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 therefore is dispensed with, then such contract shall not be deemed to be a ready delivery contract;”
9. The applicant also has submitted that the term “consideration” has been defined under Section 2(31) of the CGST Act and the term “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 diam
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ngement, the person surrenders EVR (constructive ownership in diamonds) and receives e-Units (securities). Section 7 of the CGST Act inter alia suggests that GST would be leviable on supply of goods or services or both made or agreed to be made for a consideration.
ii. The term “consideration” is very wide to include all forms of consideration whether monetary or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person. The only exception to this is subsidy given by the Government. Thus e-Units credited against supply of diamonds at the time of conversion can be said to constitute “consideration” under Section 2(31) of the CGST Act towards the supply of diamond.
iii. Keeping in view the definition of the term “consideration”, it can be said that the following conditions are fully satisfied at the time of conversion of diamonds into e-Units:
1. The transaction involves supply of diamonds at
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erson to another. The question that requires examination is whether transfer of e-Unit by the transferor 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 cont
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vative contract in e-Units and settlement thereof
i. The applicant submits Derivative contracts in e-Units are typically futures contracts in e-Units and also attract commodity transaction tax payable under the Income Tax Act, 1961. As e-Units are in the nature of securities, a derivative contract in e-Units on the Exchange Platform would also be treated as transaction in securities.
ii. In the instant case, the genesis of the whole transactional scheme is the approval issued by SEBI in terms of this approval issued under Section 9 read with Section 18A of the SCRA. Further, being in nature of the commodity derivative, the transaction attracts Commodity Transaction Tax (CTT) as payable under Income Tax Act, 1961.
iii. Thus, the applicant submits, being a transaction in securities, the arrangement of derivative contracts in e-Units does not involve supply of goods or services or both and it can be said that such arrangements does not constitute “supply” under section 7 of the CGST
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amonds 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
d. The Contracts of diamond derivative and settlement thereof would be treated as transaction in securities and thereby would remain out of the scope of the levy under GST
e. Conversion of e-Units into diamonds would be treated as supply of diamonds liable to GST at the end of Exchange
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ropose to convert the EVRs, which represent the diamonds in the possession of the bailee, to e-Units. The EVRs being documents to the title of goods represent the diamonds in possession of the bailee and any transfer of EVRs amounts to transfer of the title to the goods, i.e. diamonds. Hence there is a supply of diamonds. The consideration need not be in the form of cash, but in the form of securities. The submission of the applicant that he effectively loses the title to the same goods being diamonds once he surrenders the EVRs pertaining to those diamonds deposited points to the fact there is transfer of title of diamonds to the person who is receiving it and converting the same to e-Units. Hence this transaction amounts to supply of diamonds as per Section 7 of the Central Goods and Services Act and is liable to tax as per Notification No. 1/2017 -Central Tax (Rate) dated 27.06.2017.
iii. The transactions of e-Units are in the form of derivatives as they are done on an online – M/
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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 derivatives.
v. Section 2(bc) of the SCRA defines the commodity derivatives meaning a contract for delivery of goods, as may be notified by the Central Government in the Official Gazette, and which is not a ready delivery contract; or a contract for differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, in consultation with the Board, but does not include securities as referred to in sub-clauses (A) or (B) of clause (ac). Notification No, S.O.3068(E) F No. 17/2/2016-CD dated 27.09.2016 notified diamonds (entry no. 57) as goods specified for the purposes of clause (bc) of section 2 of th
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ices Tax Act, 2017 covers the supply of goods in the form of exchange under the scope of supply and the consideration received by the applicant is in the form of e-Units. The term consideration as per section 2(31) of the CGST Act is wide enough to consider any payment made or to be made and it is immaterial whether such payment is made in the form of money or otherwise. Hence this exchange of diamonds to e-Units constitute a supply under section 7(1) of the CGST Act and the applicant is liable to tax on the value of such transaction.
vii. Similarly, when the e-Units are surrendered to obtain the diamonds, there is a supply of diamonds by the Exchange to the applicant for a consideration in the form of e-Units surrendered and this constitute a supply under the provisions of section 7(1) of the CGST Act.
13. In view of the foregoing, we rule as follows
RULING
1. The mere deposit of diamond with safe vaults acknowledged by Electronic Vault Receipts (EVR) does not constitute of supp
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