In Re : M/s. Louis Dreyfus Company India Private Limited
GST
2018 (10) TMI 1145 – AUTHORITY FOR ADVANCE RULING, PUNJAB – 2018 (18) G. S. T. L. 377 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, PUNJAB – AAR
Dated:- 28-9-2018
AAR/GST/PB/001
GST
NAVDEEP BHINDER AND G.S. BAINS, MEMBER
Present for the Applicant: Sh. Abhishek Mishra, C.A. & Sh. Anand Aggarwal, C.A.
(Note: An Appeal against this order lies with the Appellate Authority in terms of Section 99 and Section 100 of the CGST Act, 2017 and Section 99 and Section 100 of the PGST Act, 2017 within a period of thirty days from the date of communication of this order.)
M/s. Louis Dreyfus Company India Private Limited, Ground Floor, House No. 378, Model Town, Phase-I, Bhatinda, 151001(Punjab) hereinafter referred to as 'applicant' had submitted an application for advance ruling in form GST ARA-01 vide his letter dated 07.06.2018 received on 20.06.2018 seeking “to determine the applicability of Goods and Services
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shra & 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 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 appl
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ing on the question(s) on which advance ruling is required
Background
1. The Applicant is a Company incorporated under the Indian Companies Act, 1956, and is inter alia engaged in the business of purchase and sale of cotton, oil and grains. The Appellant, for the purposes of carrying on its business, is registered under the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the 'CGST Act') and State Goods and Services Tax Act, 2017 vide Goods and Services Tax Identification No. 03AAACL7361E1ZV.
Nature of activity proposed to be undertaken by the Applicant
2. In order to stay competitive in the trading of commodities and to ensure minimal profitability in highly volatile commodities market, 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
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ice 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, Gujarat (INCOTERMS 2010)
M.
HSN Code
5201
N.
Payment Terms
Margin Money at 10% value of goods (plus taxes) to be paid by recipient to supplier within 3 working days from the contract generation date. Balance payment as per last date of payment.
O.
Cash Discount
Cash discount for a maximum 15 days at the rate of 15% p.a. prorated for early payment before the last date of payment shall be given to recipient, on total contract value including taxes or received amount whichever is lower
P.
Interest on Margin Money
Not Applicable
Q.
Last Payment/ Carry Terms (Supplier's Exclusive Option and sole discretion)
On any unpaid Outstanding amount inclusive of taxes last date of payment (clause l) carry will be charged prorated as follows:
1. For rest of India except Punjab, Ha
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r the time period stipulated in the Contract at as and when demanded by the Supplier as the Contractual terms, or delays approval (clause 4 of the GTCs), Supplier has the exclusive right exercisable as its 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 Thou
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nd empty/loaded weights at time of receipt.
L.
HSN Code
5201
M.
Payment Terms
Payment will be made within 8 days from date of pressing but after lifting of goods by the Recipient from Supplier's designated gin/ warehouse.
N.
Cash Discount
Cash discount of 16.8% per 360 days for max 8 days pro-rated will be deducted by the Recipient for early payment on total Invoice value including taxes, if any. Bank charges, if any, to Recipient's account.
Clause 3 of the General Terms and Conditions applicable to Cotton Purchase Contracts / Agreements (“GTC”) –
“In case of non-delivery or failure to fulfill the contract by Suppliers per
Specification (Clause F of the contract), the contract will be settled as per CAI Rules and By-laws,
Supplier to give written intimation via Broker or directly to the Recipient if it cannot fulfill the delivery of the contracted quantity (Clause E of the contract) as per Specification (Clause F of the contract).
For Settlement/ Non-Delivery, average bal
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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 made.
The fixation of rate as per the Contract is binding on the other Party to the Contract without any room for aberration or further delibe
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ervices or both), made for consideration in course or furtherance of business such as sale, transfer, barter, exchange, license, rental, lease or disposal. Section 7(1) of the CGST Act reads as under:
“7. (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 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 goo
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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;
– agreeing to the obligation to tolerate an act or situation
– agreeing to the obligation to do an act
7. It is noteworthy that the aforesaid Entry in Schedule II is a combination of two activities on part of the deemed supplier of services, which are as follows:
– An overt act to agree to the obligation
– An activity which follows the agreement to the obligation i.e. to actually refrain from an act or to actually tolerate an act or situation
A combination of aforesaid two acts would result into rendering of “Service” in terms of Serial No. 5(e) of the Sched
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The second pre-requisite act of either “refrain from an act” or actually “tolerate an act or situation or to do 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
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y way of an example is apt as in such case one of the Parties agrees, out of his free will and discretion, to enter into non-compete agreement and also takes an “action” by not competing with the other Party to the Contract. Both the said ingredients of “agreeing to an obligation” and 'to refrain from and act or to tolerate an act or situation or to do an act” are being fulfilled and hence qualification of such “actions” in unison qualify as “Service” in terms of erstwhile Service tax law governed by Chapter V of the Finance Act, 1994. On the other hand, in the present factual matrix, neither following the exclusive mandate of the Contract is “agreeing to an obligation” nor not opting to take legal recourse i.e. to arbitrate can qualify as “refrain from and act or to tolerate an act or situation or to do an act”.
12. In light of the above argument, it emerges that payment of differential sum by the Party to the Contract for effecting “Washout” of the Contract can at best be constr
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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) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security rece
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ty derivatives” is defined as Section 2(bc) of SCRA, to read as follows:
“commodity derivative means a contract –
(i) 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 contract; or
(ii) 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) and (B) of clause (ac);]”
19. In this regard, reference is made to Entry No. 59 of Notification No. S.C. 3068(E) dated 27 September 2016 issued under Section 2(bc) of the SCRA which includes Cotton as follows:
“Cotton Complex (including Kapas, fibre, loose, half pressed, full pressed, yarn, pods, cloth)
20. Further, reference is made to Section 2(ea) of the SCRA which defines “Ready Delivery Contract” to mean as under:
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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
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ermined 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 '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
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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 prescribed and shall be paid by the taxable person”
Further, the scope of supply has been laid down in Section 7 of the CGST Act, 2017. Relevant portion of which reads as under:-
“7 (1) For the purposes of this Act, the expression “supply” includes all forms of supply of goods or services or both such as sale, tran
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disposal” mentioned in Section 7(1)(a) to see whether the situation of closure of the contract as per agreed terms, would be covered under these. 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 sc
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T 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' as given in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (SCRA) is as follows:
“(h) securities include-
(i)………………
(ia) derivative;
………………”
From the above definition of 'securities', it is clear that securities include derivative.
4.2 Further, Section 2 (ac) of SCRA defines 'derivative' as:
“derivative”- includes
(A) …………………………………………..;
(B) …………………………………………..;
(C) commodity derivatives; and
(D) …………………………………………..;
The term “commodity derivatives” is defined as Section 2 (bc) of SCRA, to read as follows:
“commodity derivative means a contract –
(i) for delivery of such goods, as may be notified by
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od 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 recognised stock exc
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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 seem to be valid.
5.Therefore, while it is forthcoming that legal provisions discussed above do not exclude the closure of purchase/sale of cotton contract by way of settlement between applicant and the other contracting party in terms of the contract from scope of services, and the applicant would therefore be liable to the provisions of Section 9 of the CGST Act, 2017, it is also noteworthy that executive instructions by way of answers to Frequently Asked Questions (FAQs) published under the FAQs on Financial Service on the Central Board of Indirect Taxes and Customs (CBIC) website www.cbic.gov.in include settlement under forward contracts within the purview of 'se
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w 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, 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 ta
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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 made”
7. It is seen that the settlement rate described by the applicant in sale contract is at variance from the settlement considered to be falling within the purview of securities as defined in Section 2(101) of the CGST Act, 2017 in the answer to FAQ No. 37. In the answer to FAQ No. 37, the settlement was described as differential of the forward rate over the prevailing market rate on the settlement date, while in the sale contract of the applicant, he has discretion to settle/ close the Contract at the rate fixed by him which may vary from sale price of cotton on commodity market on the day of settlement. The terms of purchase contract mentioned by the applicant are however in line with the settlement envisaged in answer to F
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ties 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 contract, and therefore this activity of theirs, by this measure too
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, it was a service and liable to taxation, The jurisdictional officer also relied upon an Advance Ruling passed by the Maharashtra Authority for Advance Ruling in support of his view. Perusal of the definition of Service in Section 2(102) shows that the specific inclusions which follow the specific exclusions, have to be read completely and not in piecemeal. We feel that the words 'use of money' cannot be read in isolation as has been 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 discussio
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s 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 defined in Section 2(101) of the CGST Act, 2017 and would therefore be chargeable to GST.
(iii) In the forward contracts in cotton purchase 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.
(Note: It may be noted that this Advance Ruling is based on the contract conditions conveyed by the applicant in his Advance Ruling Application and may
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