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141
 Meaning and scope

4 of supply and
levy of GST

4.1 Background
The Goods & Services Tax will subsume many taxes described in
Chapter 1. Most important of them are excise duty, service tax and
VAT. Excise duty is levied on manufacture of goods but payable at the
time of removal from factory, service tax is levied on rendering of service
and sales tax is levied when property in goods is transferred from one
person to another.
As per section 9 of CGST Act, GST will be levied on intra-State supply
of goods or services at the specified rate. As per section 5 of IGST Act,
IGST will be levied on inter-State supply of goods or services. Therefore,
it is essential to understand the meaning of ‘supply’ as supply of goods
or services will attract GST. The taxable event is now ‘supply’ and not
other events explained above.
The provisions relating to levy of GST under all four Acts are also
discussed in this chapter from para 4.15 onwards.

4.2 Statutory provisions

Supply has been defined in section 7 of GST Act. Schedule I specify the
activity which are considered as supply even when they are rendered
without consideration. Schedule II of Act specifies the matter which
are to be considered as supply of goods or supply of services.

4.2-1 Definition of supply

The word supply has been defined u/s. 7 of the GST Act in an inclusive
manner. The Section 1 of the GST Act provides that the supply will
include all forms of supply of goods or services or both agreed to be
made for a consideration by the person in a course or furtherance of
business. The Section 7(1)(b) of the Act provides that the import of

142
143 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.2

service made in the course or furtherance of business or not for

consideration shall be considered as ‘supply’.
The Schedule-I specifies certain activities which will be considered as
‘supply’ even if made without consideration. The sub-section (1A) pro-
vides that the transactions specified in Schedule-II is only for the
purpose of classifying the activity or transaction into goods or services.
The sub-section (2) provides the power to specify the activities of
transaction under taken by Central Government, State Government or
Local Authority when the function is public authority which shall not be
considered as supply of goods or services. The Schedule-III specifies
certain transactions which are not considered as supply of goods or
services.
The scope of various transactions are discussed in detail in subsequent
sub-paras.

4.2-2 Supply without consideration

As per section 7(1)(c), the activities specified in Schedule I shall be
considered as supply even when these are performed without
consideration. Further the sub-section (3) provides power to Central or
State Government on recommendation of council to specify by
notification to consider any transaction as supply of goods or services
or neither of them.

4.2-3 Activities either goods or services

Section 7(1)(d) of the GST Act has been deleted w.e.f. 01/07/2017 and
Section 7(1A) has been incorporated in Section 7 from 01/07/2017. The
Section 7(1A) provides that the activities of transaction listed in Sched-
ule-II shall either be considered as goods or services as specified in the
Schedule.

4.2-4 Activities which are neither supply of goods nor supply of services
Sub-section (2) of section 7 of GST Act provides that the activities or
transactions specified in Schedule III and notified by government, will
not be considered as supply of goods or supply of services. Please refer
to Chapter 6 for detailed discussion.

4.2-5 Composite or mixed supply

As per section 8 of GST Act, the tax liability on a composite or a mixed
supply shall be determined in the following manner:
Para 4.2 DIV. 1 : BASIC CONCEPTS 144

(a) a composite supply comprising two or more supplies, one of which

is a principal supply, shall be treated as a supply of such principal
supply; and
(b) a mixed supply comprising two or more supplies shall be treated
as a supply of that particular supply which attracts the highest rate
of tax.
(Please refer to para 4.14)

4.2-6 Definition of supply as given in statutory provisions of other countries

There are many countries in the world where the goods and services
tax is levied on supply of goods or services. Most of the countries defines
the word ‘supply’ in very wide manner. Many countries have defined
the words in an inclusive manner and not exhaustive manner. As an
example, definition of supply given in sections 9-10 of Australian GST
Act is reproduced below:
(1) A supply is any form of supply whatsoever.
(2) Without limiting sub-section (1), supply includes any of these:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of real property;
(e) a creation, grant, transfer, assignment or surrender of any
right;
(f) a financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything;
(ii) to refrain from an act;
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to
in paragraphs (a) to (g).
(3) It does not matter whether it is lawful to do, to refrain from doing
or to tolerate the act or situation constituting the supply.
(3A) For the avoidance of doubt, the delivery of:
(a) livestock for slaughtering or processing into food; or
(b) game for processing into food;
145 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.3

under an arrangement under which the entity making the delivery

only relinquishes title after food has been produced, is the supply
of the livestock or game (regardless of when the entity relinquishes
title). The supply does not take place on or after the subsequent
relinquishment of title.
(4) However, a supply does not include a supply of money unless the
money is provided as consideration for a supply that is a supply of
money.
Australian Government publishes GSTR Rulings giving clarification on
various issues raised by trade and industry in Australia. It will be
observed from definition of supply given in Australian GST Act that
‘supply’ has been defined in very wide manner. These rulings are very
helpful in understanding the scope of various terms including ‘supply’.

4.3 Scope of supply

Meaning and scope of ‘supply’ can be explained by understanding the
meaning of various terms which have been used in the definition as
reproduced in above para. The meaning of various terms are discussed
in this Chapter in following paras :
(a) It is an inclusive definition and not exhaustive definition (See para
4.4)
(b) All forms of supply are included (See para 4.5)
(c) As an example, sale, transfer, barter, exchange, license, rentals,
lease or disposal made or agreed to be made are considered as
supply (See para 4.6)
(d) Supply specified in clause (a) of section 7(1) should be for
consideration (See para 4.7)
(e) Supply should be made by person. For meaning of person (See
para 4.8)
(f) Supply should be in course of or furtherance of business (See para
4.9)
(g) Importation of service is considered as supply (See para 4.10)
(h) Scope of supply without consideration (See para 4.11)
(i) Transaction considered as transaction in goods or services (See
para 4.12)
(j) Meaning of Goods & Services (See para 4.13)
Para 4.5 DIV. 1 : BASIC CONCEPTS 146

(k) Mixed or Composite supply (See para 4.14)

(l) Levy of Tax (Refer para 4.15 to para 4.23)

4.4 Inclusive definition

It has been defined in inclusive manner and not exhaustive. The word
‘includes’ used in the statutory provision enlarges the meaning of supply.
It also indicates that the definition given in the statute is not exhaustive.
The Hon. Supreme Court in the case of CIT v. Taj Mahal Hotel [1971] 82
ITR 44 observed as follows with :
“The word ‘includes’ is often used in interpretation clauses in order to
enlarge the meaning of the words or phrases occurring in the body of
the statute. When it is so used, these words and phrases must be
construed as comprehending not only such things as they signify
according to their nature and import, but also those things which the
interpretation clause declares that they shall include”.
Clause (a) of section 7(1) specifies certain form of supply. These specific
forms are only given as example. Any other form of supply will also be
included in the definition. Sections 9-10(2) of Australian GST Act
reproduced above inter alia provides following activity as supply:
(a) Provision of advice or information
(b) A grant, assignment or surrender of real property.
These activities are not specifically specified in the definition of supply
in section 7(1) as it is inclusive definition. The above form of supply will
also be covered under the meaning of supply given in section 7.

4.5 All forms of supply are taxable

The clause (a) of sub-section (1) provides that all forms of supply are
covered in definition. The various proposition for characterizing the
activity as supply and different aspects of supply are briefly discussed
in this para. The various propositions are as follows:
(a) For every supply there should be a supplier. It is essential to
determine the person who has made the supply as tax is levied on
supply.
(b) Generally, for every supply there is a recipient i.e. person who
acquires the supply. However, the statute may provide for tax on
self-supply.
(c) The supply may be exclusively of goods or services or mix of goods
and services. Sub-section (3) of section 7 empowers the State
147 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.5

Government or Central Government to specify by notification

that transaction shall be considered as supply of goods or supply
of service or either supply of goods or supply of services.
(d) The transaction may involve two or more supply. The word
‘composite supply’ has been defined in section 2(30) as follows:
(30) “composite supply” means a supply made by a taxable person to
a recipient consisting of two or more taxable supplies of goods or
services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary
course of business, one of which is a principal supply;
Illustration : Where goods are packed and transported with
insurance, the supply of goods, packing materials, transport and
insurance is a composite supply and supply of goods is a principal
supply.
Sometimes supply consists of two or more supply of goods or
services or any combination thereof. These services are naturally
bundled and supplied conjunction with each other in the ordinary
course of trade. One of the supply is principal supply and other
supply is provided to facilitate the enjoyment of principal supply.
Such supply is called composite supply. For Example, the
passengers travel in Rajdhani Express from Bombay to Delhi. The
price paid for purchase of tickets consist of three services (1)
Transportation of passenger. (2) Supply of food. (3) Supply of bed
rolls. All the services are bundled together. Passenger has no
option but to avail both the services. As per clause (a) of section 8
of the GST Act such supply of three service shall be treated as
composite supply of which supply of transportation of passenger
will be considered as principle supply.
The CBEC has vide DOF letter No. 334/1/2008-TRU dated 29-2-2008
has clarified about classification of incidental or ancillary service to
this effect. The clarification is reproduced below:
3. Classification of taxable services:
3.1 Taxable services are defined separately under clause (105) of
section 65 of the Finance Act, 1994. Services are supplied as a single
composite service by bundling number of different services or
disaggregating a single supply into different components. Tax liability
may vary depending upon the treatment of the transaction either as
a single composite service or multiple supply of service. For the
purpose of levy of service tax, a single composite service is to be
classified under any one of the specified taxable services.
Para 4.5 DIV. 1 : BASIC CONCEPTS 148

3.2 For the purpose of classification of a service covering number of

separate services, a view has to be taken as to whether an individual
service is merely a component of the overall supply or is itself a
distinct and independent supply i.e., whether the component is merely
ancillary to the principal supply or the component can be considered
as separate taxable service in its own right. A service, which does
not constitute for a customer an aim in itself but a means of better
enjoying the principal supply, is considered as a supply ancillary to
the principal supply.
3.3 Section 65A states the principles for classification of taxable
services. Classification of a composite service is based on that
component of the service which gives the essential character. There
is a need to determine whether a given transaction is the one
containing major and ancillary elements or the one containing
multiple and separate major elements. In the case of a transaction
containing a major and ancillary elements, classification is to be
determined based on the essential features or the dominant element
of the transaction. A supply which comprises a single supply from
an economic point of view should not be artificially split. The method
of charging or invoicing does not in itself determine whether the
service provided is a single service or multiple services. Single price
normally suggests a single supply though not decisive. The real nature
and substance of the transaction and not merely the form of the
transaction should be the guiding factor for deciding the
classification.
It is evident from the same that ancillary and incidental services
which are provided for better enjoyment of principal service will
be classified along with the principal service. For example, the
person goes to stay in the hotel primarily for the purpose of
accommodation provided by the Hotel, but he is provided with
other facilities of TV, telephone, air conditioner, etc. to make his
stay more convenient and enjoyable. Therefore, these services
cannot be considered as independent service but it will always be
considered as part of accommodation service. The entire service
thus will be considered as accommodation service. Such supply
can be considered as composite supply.
(e) To make supply the entity must do something. The ordinary and
natural meaning of term supply as per “Revised updated oxford
Dictionary” is ‘to furnish or provide’. It follows that an entity must
take action to make supply. The person who make supply must
carry out some activity. The activity may be passive or physical.
For example, wholesalers store the goods and make supply of
goods either of full consignment or sell part consignment. The
149 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.5

wholesaler carries the activity of storing and breaking up the

consignment into various parts. Therefore, wholesaler makes
supply. The tax will be payable by him. It was held by Court in New
Zealand that person supplying must do something for the recipient
and not against recipient. The Court in the case of section 65
reported in 1996 (17) NZTC 7408 has observed as follows:
“In that case a costs order was made against a solicitor who was
truck off the roll by the New Zealand Law Practitioners Disciplinary
Tribunal. The costs order required the solicitor to pay amounts to
the New Zealand Law Society and the District Law Society for their
costs and expenses relating to the disciplinary proceedings. Willy DJ
held that these payments were not consideration for a supply of
service by the Law Societies to the solicitor. He ruled that the
ordinary meaning of the word supply limited the breadth of the
phrase ‘supply of services’ which was only so wide as to include
activities where the provider has done something for, not against,
the recipient. To rule otherwise would lead to absurdity because it
would allow the concept of a supply to encompass situations where
a person sues for recovery of property, or steals something from
someone else.”
(f) Supply cannot be made by more than one person. Whenever
supply is made, the person making the supply must be identified
and tax is recoverable from that person. There is normally one
person for making supply.
The applicability of provision to some of the activities are discussed
below:
(a) Illegal activities (Refer para 4.5-1)
(b) Providing of goods or services by recipient (Refer para 4.5-2)
(c) Services provided by Liquidator (Refer para 4.5-3)
(d) Vesting of property with Government Authority (Refer para 4.5-
4)
(e) Two-way supply in case of barter (Refer para 4.5-5)
(f) Transaction i.e. occurrence should be analysed (Refer para 4.5-6)
(g) Supply under tri party arrangement (Refer para 4.5-7)
(h) Payment by money cannot be considered as supply (Refer para
4.5-8
(i) Goods sent for exhibition (Refer para 4.5-9)
(j) Display of name or placing of name plates of donor (Refer para
4.5-10)
Para 4.5 DIV. 1 : BASIC CONCEPTS 150

4.5-1 Illegal activities

The activity may be carried out legally or illegally i.e. without compliance
with statutory provisions. Assuming the thief has stolen car and sells
the car to person X. It is illegal to steal a car and thereafter sell it to
another person. However, sale of car by thief to the person X will
constitute supply liable to be taxed. But, however, if a particular
activity is totally prohibited, such activity cannot constitute supply.
The European Court in the case of Vereniging Happy Family
Reustenburgerstrat v. Inspecteur der Omzetbelasting [1989] 4 BVC 216
has held that there was no liability of VAT on illegal distribution of
prohibited drugs because their supply was subject to total prohibition
in the member States.

4.5-2 Providing of goods or services by recipient

The recipient of a supply may provide or make a thing available for the
supplier to use in making the supply. However, the provision of such a
thing is not necessarily for a consideration. The corollary of this
proposition is that providing or making the things available does not
necessarily give rise to a supply. It will depend on the facts and
circumstances of the transaction between the parties whether the
supplier’s use of, for instance, facilities provided by the recipient in order
to make the supply is simply part of the circumstances in which the
supply is to be made, or does in fact involve a supply by the recipient to
the supplier.
For example, a supplier may need to perform services on the recipient’s
premises. The recipient may agree to allow the supplier to use its
computer facilities and stationery in performing the services. Depending
on the particular circumstances, allowing the use of these things could
be a condition of the contract that goes to defining the supply which
the supplier makes rather than being a supply of these things to the
supplier by the recipient.

4.5-3 Services provided by Liquidator

In many cases, the borrowers/creditors of the company file petition
before Hon. High Court for liquidation of the company and appointment
of liquidator to sell the assets. The proceeds by selling the assets are
utilized for making payment to borrowers/creditors. The liquidator
provides different types of services like considering appointment of
valuers, inviting tenders for sale, evaluate the tender and selling the
asset to deserving person. The services provided by liquidator are also
151 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.5

considered as supply and the income earned by the liquidator will be

chargeable to tax.
It may be statutory requirement to appoint liquidator for liquidating
the assets of the company, but in this case, the liquidator performs
various activities for receiving consideration. This activity is different
than compulsory acquisition of property by government under different
statute.

4.5-4 Vesting of property with Government Authority

The Government for public interest for various purposes acquires land
or other property by issuing notification in gazette. The effect of gazette
notification is that the ownership of the land or other property described
therein is vested in Government authority and not in the owner. The
owner’s interest in the property is extinguished and it vests with the
Government. It appears that in such case, the owner have not made
any supply as Government has compulsorily acquired the property
without any action on the part of the owner. Mere acceptance of amount
by the owner as compensation of acquisition does not mean that the
owner has made the supply. However, if the owner does something/
undertakes any action for transfer of land, the owner is said to have
made the supply.

4.5-5 Two-way supply in case of barter

In case of barter, the consideration is not in monetary form but it is in
a non-monetary form. The consideration itself is separate supply. In
these kinds of transaction, there are two-way supply. Therefore, each
party to the transaction must pay GST on supply it makes. Each party
will be entitled input tax credit provided the input has been used in the
course or furtherance of business.
Assuming that person ‘A’ approaches professional, say, ‘X’ for certain
advice with regard to dispute of his property. He agrees to give share of
part of the property in case the dispute is resolved and he acquires the
property. The consideration paid by Mr. A to Mr. X is not in monetary
terms. Here Mr. X is providing professional advice and receiving property
in consideration of providing professional service. Mr. A is receiving
professional advice and paying the amount by way of part of property.
In this case two-way supply is made; one by Mr. X of professional advice
and second by Mr. A by providing right in the property. Thus in case of
barter, always two-way supply is made.
Para 4.5 DIV. 1 : BASIC CONCEPTS 152

4.5-6 Transaction i.e. occurrence should be analysed

There are number of ways by which transaction can take place. Both
the parties may plan the transaction in a particular way which may not
attract GST, but ultimate transaction may occur in a different manner.
The actual occurrence of transaction must be analysed to determine
whether the supply has been made or not.
For example, X could provide Y with money so that Y can pay to receive
a particular service from another entity. X has not made a supply as
the provision of money cannot be considered as supply. Further assume
that X did not provide money to Y but the particular service required
by Y is provided by X. In such case X made the supply of service. It is
not open to X to argue what it could have done. That is, it is not open to
X to argue that if it had provided cash it would not have made a supply
for GST purposes and therefore, it should not be considered to be
making a supply when it provides those services directly. Similarly, if X
did provide money to Y so Y can pay to receive a particular service
from another entity, it would not be open to Y to argue that X could
have provided the service and Y should be considered to have made an
acquisition from X.

4.5-7 Supply under tri party arrangement

The agreement entered into between person is the basic document to
determine as who made supply and to whom. Therefore, the entire
agreement must be analysed to determine the nature of supply and the
person making the supply. The supply may be made to one person, but
provided to another person. This can be explained by way of an example.
Say person X instructs the shopkeeper B to deliver the medicine to his
ailing father C. Shopkeeper delivers the medicine to C and recovers the
money from X. The contract to supply medicine is between X and B.
Therefore, B is said to have made supply to X, but the medicines are
provided to C. B will be liable to pay tax on the amount which is
recovered from X.

4.5-8 Payment by money cannot be considered as supply

Normally recipient of supply makes payment by cash or cheque or
equivalent thereof. In such case, it cannot be said that recipient has
made supply of money to person making supply. Say A has supplied
100 kg. of B material to X at a price of Rs. 1 lakh. X has made payment
by cheque to A. In this case A has made supply to X of the product B,
but it cannot be said that X has made supply of money to A chargeable
153 CH. 4 : MEANING AND SCOPE OF SUPPLY AND LEVY OF GST Para 4.5

to tax. The definition of supply given in sections 9-10 of Australian GST

Act has been reproduced above. It has been specified in sub-section (4)
of sections 9-10 of Australian GST Act that payment of consideration
by money will not constitute supply. Even though there is no provision
in section 7 of Act, similar to provisions contained in sections 9-10(4) of
Australian GST Act, yet payment of consideration by money cannot be
considered as supply.

4.5-9 Goods sent for exhibition

The CBIC vide Circular No. 108/27/2019-GST dated 18/07/2019 has
clarified with regard to levy of GST on the goods sent or taken out of
India for exhibition. It has been clarified that the activity of sending/
taking specified goods outside India does not amount to supply. The
records required to be maintained by the registered person has been
explained in para 7of the circular which is reproduced below:
7. Since the activity of sending/taking specified goods out of India is not
a supply, doubts have been raised by the trade and industry on issues
relating to maintenance of records, issuance of delivery challan/tax in-
voice etc. These issues have been examined and the clarification on each
of these points is as under:—
Sr. Issue Clarification
No.
1. Whether any records are The registered person dealing in specified
required to be maintained goods shall maintain a record of such
by registered person for goods as per the format at Annexure to
sending/taking specified this Circular.
goods out of India?
2. What is the documentation 1. As clarified above, the activity of
required for sending/taking sending/taking specified goods out
the specified goods out of of India is not a supply
India? 2. The said activity is in the nature of
“sale on approval basis” wherein the
goods are sent/taken outside India
for the approval of the person lo-
cated abroad and it is only when the
said goods are approved that the
actual supply from the exporter lo-
cated in India to the importer lo-
cated abroad takes place. The activ-
ity of sending/taking specified
goods is covered under the provi-
sions of sub-section (7) of section 31