Scope of supply

Section 7 — SCOPE OF SUPPLY

BLOCK 1 — VERBATIM TEXT

Marginal note — Scope of supply

BLOCK 2 — PRE-GST AND PARALLEL ARCHITECTURE

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE — INCLUSIVE DEFINITION AND FOUR PILLARS

Section 7 chose an inclusive definition over an exhaustive one — the most consequential drafting choice in the Act. The four pillars: (i) sub-s. (1)(a) supply for consideration in furtherance of business; (ii) sub-s. (1)(aa) club / association supplies to members (FA 2021 retrospective insertion); (iii) sub-s. (1)(b) import of services for consideration (regardless of furtherance); (iv) sub-s. (1)(c) Schedule I activities without consideration. Sub-s. (1A) then classifies as goods/services per Schedule II. Sub-s. (2) carves out Schedule III no-supplies.

JUDICIAL EVOLUTION — Constitutional scope and ocean freight

Union of India v. Mohit Minerals (P) Ltd. — (2022) 10 SCC 700; (2022) 61 GSTL 257 (SC) [Two-Judge Bench (Hon'ble Justices D.Y. Chandrachud and Surya Kant)]

Brief Facts: Mohit Minerals, a coal importer under CIF contracts (where ocean freight is paid by the seller and bundled into the CIF price), challenged the validity of IGST reverse-charge levy on ocean freight component. Two key arguments: (i) the importer had already paid IGST on the assessable value of imports (including freight) under s. 3(7) Customs Tariff Act; (ii) the additional RCM on ocean freight under Notifications 8/2017-IT(R) and 10/2017-IT(R) was a duplicative levy on the same transaction.

Issue: Whether GST Council recommendations are binding; whether the RCM on ocean freight is a valid second levy; whether the federal architecture under Articles 246A and 269A permits such overlapping levies.

HELD: Supreme Court delivered foundational judgment: (i) GST Council recommendations are RECOMMENDATORY not binding — both Parliament and States have simultaneous power under Article 246A; (ii) the RCM on ocean freight (Notifications 8 and 10/2017-IT(R)) was DUPLICATIVE — same component had already been taxed via Customs Tariff Act s. 3(7); (iii) the RCM notifications struck down; (iv) constitutional architecture is cooperative federalism with Council as deliberative forum.

"Both Parliament and the State Legislatures have simultaneous power to legislate on GST. The recommendations of the GST Council are not binding... The same transaction cannot be subjected to tax twice under different charging provisions of the same Act."

Relevance: Mohit Minerals is the single most-cited GST authority. Practitioners should invoke it for: (i) any double-taxation challenge — same transaction two levies; (ii) any constitutional challenge to a Council-recommendation-driven notification; (iii) any argument on Article 246A's cooperative-federal architecture. The structural ruling on Council recommendations also has implications for State refusals to align with Centre.

JUDICIAL EVOLUTION — Mutuality and the FA 2021 retrospective override

State of West Bengal v. Calcutta Club Ltd. — (2019) 19 SCC 107; (2019) 29 GSTL 545 (SC) [Three-Judge Bench (Justices R.F. Nariman, Surya Kant, V. Ramasubramanian)]

Brief Facts: Calcutta Club, an unincorporated members' association, supplied refreshments and facilities to its members for subscription. Under pre-GST sales tax and service tax, Department demanded tax on the supplies. Club resisted on doctrine of mutuality.

Issue: Whether the doctrine of mutuality survives the 46th Constitutional Amendment for unincorporated clubs supplying to members.

HELD: Doctrine of mutuality survives for unincorporated clubs under pre-GST regimes. Sales by an unincorporated club to its members are not ‘sales’ under sales tax; services to members are not ‘services’ under service tax. The 46th Amendment Article 366(29A)(e) deemed-sale provision covers INCORPORATED bodies only.

"The doctrine of mutuality is recognised by this Court in CTO v. Young Men's Indian Association (1970) 1 SCC 462. The 46th Amendment expanded the meaning of sale by deeming fiction in sub-clause (e) of Article 366(29A) but unincorporated clubs continue to enjoy the mutuality defence."

Relevance: CRITICAL post-GST: Calcutta Club governs PRE-GST legacy proceedings. For GST periods from 01.07.2017 onwards, the doctrine has been legislatively SUPERSEDED by retrospective insertion of cl. (1)(aa) in s. 7 by FA 2021 (enforced 01.01.2022). Practitioners — (i) for pre-01.07.2017 legacy — invoke Calcutta Club; (ii) for GST period — engage with s. 7(1)(aa); (iii) constitutional validity of retrospective insertion is challenged before HCs / SC — preserve the Vatika Township defence on retrospective fiscal-statute operation.

JUDICIAL EVOLUTION — Constitutional validity of GST on lottery / actionable claims

Skill Lotto Solutions (P) Ltd. v. Union of India — (2021) 15 SCC 667; (2020) 78 GSTL 561 (SC) [Three-Judge Bench (Justices Ashok Bhushan, R. Subhash Reddy, M.R. Shah)]

Brief Facts: Skill Lotto, a lottery distributor, challenged the levy of GST on the face value of lottery tickets. Argued (i) lottery is an actionable claim, most of which are excluded under Schedule III; (ii) the inclusive definition of ‘goods’ in s. 2(52) extends only to lottery, betting and gambling — selectively bringing these within tax violates Article 14; (iii) face-value valuation violates Article 19(1)(g).

Issue: Whether inclusive definition of ‘goods’ and the schedule treating only lottery / betting / gambling as supply (excluding other actionable claims) is constitutionally valid.

HELD: Constitutional validity upheld: (i) inclusive definition of ‘goods’ is competent under Article 246A read with Article 366(12); (ii) classifying lottery / betting / gambling distinctly from other actionable claims has rational nexus with public policy; (iii) face-value valuation is reasonable and within the legislature's competence.

"The Parliament has legislative competence to impose GST on lottery, betting and gambling under Article 246A. The inclusive definition of ‘goods’ in section 2(52) is constitutionally valid."

Relevance: Skill Lotto endorsed Parliament's power to define the scope of ‘goods’ to include selectively-notified actionable claims. The principle was extended by Finance (No. 2) Act, 2023 to online money gaming, casinos and horse racing — effective 01.10.2023 at 28% on face value of bets.

INTERPRETATIVE POSITION — Liquidated damages and toleration of breach

The pre-2022 jurisprudence on liquidated damages, notice-pay recovery and cancellation charges (under both service tax and GST) consistently distinguished a contractual remedy for breach from consideration for an agreed service. A clause providing for damages in the event of breach is not a positive obligation to perform a service; it is a remedy. The recipient of damages did not undertake any service for the payer; the transaction is therefore not a supply within s. 7(1). This interpretative position is now codified by CBIC Circular No. 178/10/2022-GST dated 03.08.2022, which is the principal authority practitioners should cite in any LD / notice-pay / cancellation dispute.

CIRCULARS AND NOTIFICATIONS

• Notification No. 39/2021-Central Tax dated 21.12.2021 — Enforcing the retrospective insertion of s. 7(1)(aa) by FA 2021. Brought s. 7(1)(aa) into force from 01.01.2022 — superseding Calcutta Club for GST periods.

• Circular No. 178/10/2022-GST dated 03.08.2022 — Treatment of liquidated damages, compensation, penalty arising out of breach of contract or for tolerance of an act. Foundational circular codifying the position that damages, notice-pay, cancellation charges generally do NOT amount to supply unless the contract specifically contemplates the act / forbearance as a service rendered for the price. Practitioners should cite this circular in any LD / notice-pay / cancellation dispute.

• Circular No. 35/9/2018-GST dated 05.03.2018 — Joint venture / consortium supplies — taxability analysis. Clarified when JV / consortium activities constitute taxable supply between JV partners and the JV vehicle.

• Circular No. 199/11/2023-GST dated 17.07.2023 — Taxability of services between distinct persons (HO-BO) — Schedule I Entry 2 applicability. Eased the cross-charge burden — clarified that internally-generated services not always taxable; cost recovery not mandatory in all cases.

• Schedule I, II, III to the CGST Act, 2017 dated Statutory — Schedule I — supply without consideration; Schedule II — classification as goods/services; Schedule III — no-supply activities. Read together with s. 7 to determine taxability. Schedule III in particular excludes employee services, court services, sale of land, actionable claims (other than lottery/betting/gambling), pre-completion certificate building sales.

PROCEDURE — SCOPE-OF-SUPPLY ANALYSIS

Step 1: Identify the transaction

Document the transaction — parties, goods / services / both, consideration (monetary / non-monetary), timing, context (business / personal).

Step 2: Apply s. 7(1) inclusive limbs

(a) Is there consideration AND course/furtherance of business? OR (b) supplies between unincorporated body and members? OR (c) import of services for consideration? OR (d) Schedule I activities without consideration?

Step 3: Apply Schedule II classification under sub-s. (1A)

Once supply established, classify as goods or services per Schedule II.

Step 4: Apply Schedule III carve-out under sub-s. (2)(a)

Verify whether the transaction falls within Schedule III (employee services, court services, sale of land, etc.) — no supply.

Step 5: Apply notified public-authority carve-out under sub-s. (2)(b)

For Government / local authority activities as public authorities — verify notification.

Step 6: Apply notified s. 7(3) re-classification

Check whether Government has issued s. 7(3) notification re-classifying the transaction.

Step 7: Document the analysis

Prepare file note with each step's analysis; preserve commercial documentation; cite controlling authorities.

WORKED EXAMPLES

Example 7.1 — Liquidated damages for delay in supply

Example 7.2 — Sale of pre-completion-certificate flat

Example 7.3 — Schedule I — Employee gifts

PRACTITIONER PLANNING

• For every taxable transaction — apply the s. 7 scope-of-supply test before any other analysis.

• For damages / cancellation / notice-pay — invoke Circular 178/10/2022-GST as the principal authority.

• For real-estate transactions — verify OC date vs consideration receipt date; pre-OC = supply, post-OC = no supply.

• For Schedule I activities — maintain documentation of consideration (or lack thereof) and related-person relationships.

• For unincorporated clubs / associations post-01.01.2022 — comply with s. 7(1)(aa); register if turnover crosses threshold.

LITIGATION DEFENCE

• Liquidated damages — Circular 178/10/2022-GST is the principal authority; rely on the no-positive-obligation analysis.

• Ocean freight RCM (pre-Mohit Minerals period) — invoke Mohit Minerals.

• Mutuality (pre-GST period) — Calcutta Club.

• Schedule III carve-outs — strict construction in favour of taxpayer where the transaction fits the entry.

• Schedule II classification disputes — apply Card Protection Plan natural-bundling test where bundled.

CROSS-REFERENCES

• s. 2(31) ‘consideration’; s. 2(17) ‘business’; s. 2(52) ‘goods’; s. 2(102) ‘services’

• s. 8 CGST — Composite and mixed supplies — operates on supplies established under s. 7

• s. 9 CGST — Charging section — operative on s. 7 supplies

• s. 15 CGST — Value of taxable supply

• Schedules I, II, III to CGST Act

• Section 7 of IGST Act — inter-State supply; s. 8 IGST — intra-State