The Hon’ble AAR, Goa in the matter of M/s Goa Industrial Development Corporation [AAR No. GOA/GAAR/01 of 2019-20/1875 dated October 17, 2019] has held that the compensation paid by the Applicant on lessor’s deposit would clearly qualify as ‘supply of service’ under clause 5 of Schedule II of the CGST Act, 2017 (“CGST Act”) and therefore liable to GST.
M/s Goa Industrial Development Corporation (“the Applicant”) is a Government of Goa Undertaking and vide Deed of Lease had allotted land to 7 parties for setting up Special Economic Zone (“SEZ”). However, this could not materialize due to protest from the people. As a result, deposit taken from the parties had to be refunded. However, the Applicant refused to pay compensation on this deposit, as the original Deed of Lease never mentioned such clause. The parties approached the Supreme Court, who intervened and directed the Applicant to compensate parties with interest at the rate of 8.25%. The Government of Goa through the Council of Ministers in its 33rd Cabinet Meeting resolved to approve the proposal of the Applicant to take back all the land allotted to 7 parties for setting up SEZ and refund the amount paid by SEZ parties along with interest, earned on such amounts paid by the parties amounting to ₹ 256,56,90,593/-.
Whether an obligation to refrain from an Act, or to tolerate an Act or a situation treated as supply of Goods/Services under Section 7 read with Schedule II of CGST Act?
The Hon’ble AAR, Goa in AAR No. GOA/GAAR/01 of 2019-20/1875 dated October 17, 2019 held as under:
- In the entire process discussed above, the Applicant has agreed to do an act of vacating the claim by parties of setting up SEZ units for which the Applicant has paid consideration.
- Thus, the original amount which is paid back along with compensation would clearly qualify as ‘Supply of Services’ under clause 5(e) of Schedule II to the CGST Act.
The above ruling has discussed the definition of supply under Section 7(1)(d) of the CGST Act as it existed prior to retrospective amendment w.e.f. July 1, 2017, vide the CGST Amendment Act, 2018. Thus, the above ruling fails to appreciate the fact that Section 7(1)(d) of the CGST Act which included items of Schedule II under the ‘includes’ portion of term ‘supply’, has been omitted w.e.f. July 1, 2017, with insertion of Section 7(1A) which states that “where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II”. Hence, reference of Schedule II is now restricted to only classification as supply of goods or services if the activity/ transaction qualifies as supply in terms of Section 7(1) of the CGST Act.
Section 7 of the CGST Act:
“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 I, made or agreed to be made without a consideration; and
1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1).-
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.”
Para 5(e) of Schedule II of the CGST Act:
“5. Supply of services
The following shall be treated as supply of services, namely:
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and.”