JULY 22, 2016

By Bharat Bhushan, Advocate

SEAMLESS flow of Input Tax Credit is soul of GST. In case tax is levied upon Stock Transfers, it would certainly adversely affect the Cash Flow. But, chain of Input Tax Credit cannot be completed without imposing Tax on Stock Transfers. As per Charging Section, the Tax is levied on Supply of Goods and Services. The term 'supply' pre-supposes existence of two persons, i.e. one supplier and other recipient. A person cannot supply to himself. Some of the leading judicial Pronouncements on the topic are as under.

"Supply is inherent the furnishing or providing of something which is wanted." R Vs. Delgado, (1984) 1 All ER 449, 452 (HL)

"The word 'supply' in its ordinary natural meaning, conveys the idea of furnishing or providing to another something which is wanted or required in order to meet the wants or requirement of the other. It connotes more than the mere transfer of physical control of some chattel or object from one person to another." R vs. Maginnis, (1987) 1 AII ER 907, 909 (HL).

"The Proper Meaning of Supply is the delivery of goods as delivered by the seller or notification that they are available for delivery if they are to be collected by the buyer." Rees vs, Mundey, (1974) 3 AII ER 506, 509 (QDB).

From the above judicial pronouncements, it is clear that 'supply' can take place only between two distinct persons. In draft GST Law also the terms 'supplier' and 'recipient' are used at various places. Thus, even as per Draft Law, there cannot be any supply to oneself. It is correct that under Section 3 of the draft Law, an inclusive definition of 'Supply' is given, which is reproduced below for ready reference.

"3. Meaning and scope of supply

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be
treated as-

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator."

A careful reading of the aforesaid definition shows that supply to self is nowhere covered under the said definition. Further, certain specific inclusion also ensures it. Like, principal and agent has been deemed to be treated as distinct persons to include transfer of goods between them can be covered under the scope of supply. Similarly, in schedule II, provisions have been incorporated to treat supply of goods by an un-incorporated association to a member as supply of goods. This provision has been incorporated to overcome the judgment of Hon'ble High Court in Saturday Club - 2004-TIOL-48-HC-KOL-ST case, wherein the Hon'ble High Court had held that un-incorporated association and its members are not distinct persons. If supply to oneself or stock transfer are liable to tax, then there was no need to incorporate such deeming provisions. Inclusion of such deeming provisions clearly shows that Stock Transfers are not liable to tax. In valuation Rules, it is stated that the Stock Transfers will be assessed at Transaction Value. When there is no levy in the parent Act, then incorporating provisions in subordinate legislature, for measurement of the quantum of levy is of no help. As it is a settled law that tax cannot be levied by a delegated legislation. Moreover, these provisions in valuation rules are apparently incorrect. As in cases of stock transfer, there cannot be any Transaction Value. At the most there can be only a Transfer Price.

Now the question is as to whether tax can be levied by amendments in GST Acts. By virtue of Residuary powers, the Central Acts may levy Tax on Stock Transfers. The problem is with State Enactments. Any effort in State GST Law, to impose tax on Stock Transfers may not sustain judicial scrutiny and can be struck down as beyond legislative competence. As the proposed Constitutional Amendment authorizes the State Legislature to levy tax on supply of goods and services. As already discussed, Stock Transfers are not covered under the term 'supply'.

In view of the above, it is suggested that necessary amendments be made in Integrated GST Law to levy tax on Stock Transfers. In CGST and SGST Acts, provisions should be incorporated authorizing assesses to transfer credit from one location to other within a State or maintenance of a Common Credit Account.