Schedule III of CGST Act 2017: Related to Legal/Court/Tribunal services

General Overview

As we are aware that any transactions/activities which fall within the scope of "Supply" as per Sec 7 of the CGST Act, 2017 will be chargeable to GST. Further, while analyzing the nature of transactions/activities for the purpose of chargeability of GST, there are instances-

(i) Where there is no Consideration involved, but still it would be considered as "Supply" as per Schedule I of CGST Act, 2017.

(ii) There are certain transactions/activities which are either treated as supply of goods or supply of services as per Schedule II of CGST Act, 2017.

Under this Article, I am going to describe the activities/transactions, which although are falling within the scope of Supply i.e.

• There is supply of goods or services
• Made or agreed to be made for a consideration
• In the course or furtherance of business.

Still such activities/transactions shall neither be treated as supply of goods nor Supply of services as per Schedule III of CGST Act, 2017.

SCHEDULE III OF CGST ACT

Schedule III of the CGST Act, 2017 enlist such transactions/activities which shall not be considered as supply of goods or supply of services depending upon its nature which are elaborated here. Let's discuss all these one by one.

(II) SERVICES BY ANY COURT OR TRIBUNAL ESTABLISHED UNDER ANY LAW FOR THE TIME BEING IN FORCE

The term "Court" includes District Court, High Court and Supreme Court. Court refers to a part of legal system which are established to give their decisions on civil and criminal cases.
Tribunals are judicial or quasi-judicial institutions established by law. They intend to provide a platform for faster adjudication as compared to traditional courts, as well as expertise on certain subject matters. Tribunals were not part of the original constitution, it was incorporated in the Indian Constitution by 42nd Amendment Act, 1976 to deal with Administrative Tribunals under Article 323-A and to deal with other matters like Taxation, Foreign exchange, import and export, Industrial and labour, Land reforms, Ceiling on urban property etc under Article 323-B.

EXEMPT LEGAL SERVICES

(a) Legal services provided by an arbitral tribunal to the following persons will be exempt

• Any person other than a business entity.
• A business entity with an aggregate turnover upto Rs. 20 lakhs in the preceding financial year (Rs. 10 lakhs in the case of special category states).

(b) Services provided by an individual as an advocate or a partnership firm of advocates by way of legal services to,-

(i) an advocate or partnership firm of advocates providing legal services ;
(ii) any person other than a business entity; or
(iii) a business entity with a turnover up to rupees 20 lakh in the preceding financial year; or (Rs. 10 lakhs for special category states)

(c) Services provided by a senior advocate (legal services) to

• Any individual other than a business entity or
• To a business entity with a turnover up to Rs. 20 lakhs (Rs. 10 lakhs for special category states) in the preceding financial year.

(d) a person represented on an arbitral tribunal to an arbitral tribunal;

SOME CASE LAWS

BAI MUMBAI TRUST Versus SUCHITRA (213 OF 2017)

Where a Court receiver is appointed by the Court as legal representative of the Court on account of prime facia finding of the court about the trespass/ illegal occupation in any premises by the accused party, and on the basis of such finding the Court has directed the accused party who is in the present possession of the premises to pay compensation/Royalty as an award of damages for trespass/ illegal occupation to the Court Receiver in favour of the complainant party to the Court Receiver (where this accused party is registered under GST and since this compensation is actually the income of the complainant party which is collected by the Court receiver on his behalf ). This royalty will be deposited by the Court Receiver in the Fixed deposit of Nationalised Bank.

Issue Involved

Whether GST is liable to be paid on royalty or payments under a different head paid by an accused party to the Court Receiver in respect of properties over which a Court Receiver has been appointed ?

Where the complainant party alleges that the accused party is in illegal occupation of the Suit Premises: Whether there is any 'supply' within the meaning of the CGST Act? Whether payment of royalty for remaining in possession of the Suit Premises, either during the pendency of the Suit, or at the time of passing of the decree, falls within the definition of 'consideration' for a 'supply' chargeable to payment of GST under Section 9 of the CGST Act ?

Decision

It shall not be chargeable to GST on these grounds:

• An award of damages for trespass / illegal occupation is not an agreement to the obligation to refrain from an act, to tolerate an act or situation, or to do an act as contemplated by Paragraph 5(e) of Schedule II to the CGST Act.
• Liability to pay GST would arise only where the payment received can be linked to a supply. In case of compensatory damages, the payment is for loss suffered and not supply effected. While the process of determining loss suffered may be the value of the consideration receivable if the contract had been performed, such process of computing damages will not alter the character of the payment, namely a compensation for loss suffered.
• In the facts of the present Suit, there is no agreement or contract for supply by the complainant party to the accused party. Rather, the complainant party's grievance is that the accused party is a trespasser / illegal occupier of the Suit Premises. Whilst the royalty / monthly amount may be calculated in accordance with prevailing rate of market rent, the transaction itself will not constitute a supply, as the reference to prevailing rent is only a means to arrive at the amount of damages.
• A payment made by a accused party is in satisfaction of a judgment debt created by an order of court and not for any supply made by the party in whose favour the suit is decided.
• Section 92 of the CGST Act is to permit GST to be determined and collected from the Court Receiver provided he is running the business of a taxable person. The running of a business is sine qua non to levying and collecting GST from the Court Receiver under Section 92 of the CGST Act as a representative assessee.
• If the dispute is settled out of court the payment made by the accused party may be characterised as an agreed estimate of the true worth of the plaintiff's claim, rather than consideration for an alleged supply, and as such will be outside the scope of GST. In such cases, compensation may be considered to be repatriation or restitution in respect of loss or damage. Any compensatory payment made would not be consideration for a supply.
• The portion of the payment which is related to past infringement will not be taxable as the same will not constitute a consideration for any supply made but it will be in the nature of damages for the alleged wrong.
• Payment ordered in an action for damages arising out of property damage, illegal trespass, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury is made to compensate loss suffered, and is not a payment towards any supply and hence no GST liability would arise.

This is premised on the principle that the supply doctrine does not encompass a wrongful unilateral act or any act resulting in payment of damages.

SHAKTI INTERNATIONAL PRIVATE LIMITED VS. EXCEL METAL PROCESSORS PRIVATE LIMITED

This Court has held that the office of the Court Receiver is an establishment of the High Court and a permanent department of the High Court. Accordingly, services provided by the Court Receiver fall under Sr. No. 2 of Schedule III read with Section 7 of the CGST Act, namely-

'Services by any court or Tribunal established under any law for the time being in force' which transaction or activity is not to be considered a supply of goods or services under the CGST Act.

With respect to monies paid to the Court Receiver which are not towards the Court Receiver's fees or remuneration, but paid in the course of litigation pursuant to an order of the Court, it must be seen if the underlying relationship between the parties, or claims made in that regard fall within the ambit of the CGST Act. If they do not, the taxable event of 'supply' cannot be any alleged or notional contract between either of the parties and the Court Receiver.

HUMAYUN DHANRAJGIR VS. EZRA ABOODY

Under this case two agreements were entered by the plaintiffs and the defendant of which one was the licence agreement which grants the right to defendant to occupy premises for 3 years and the other which render an option to the defendant to purchase the property.

Plaintiffs contended that the defendant was not entitled to exercise the option to purchase the property due to breaches committed by him.

It is submitted that the true nature of the payments made by one party to another / the Court Receiver for use and occupation of property is to be decided by the Court looking to the circumstances of the case and evidence on record.
Strictly speaking, during the tenure of contractual tenancy, what is paid by the Tenant to his landlord is the contractual rent. After quit notice from the date of termination of tenancy, the characteristic of the subject matter is changed to damages for use and occupation of the premises and after filing of the suit for eviction till the possession is handed over, if the decree of possession is passed in favour of the landlord, the characteristic is changed to mesne profit. The term "mesne profit" is used for damages for trespass, a wrongful act relating to immovable property.

• If the payment is made by the occupier to the right owner during the tenure of permissive use of the property , this is contractual consideration on which GST is chargeable. If payments made pursuant to or under an order of receivership in a given case attracts CGST, that liability may be discharged by the Court Receiver under Section 92 of the CGST Act (akin to a representative assesse), or by the party acting as agent of the Receiver under Section 2(105) of the CGST Act.
• If such permissive use or occupation is terminated or comes to an end and the occupation becomes unlawful, the nature of payment to be paid to the right owner changes from contractual consideration to damages or mesne profts for unauthorized use and occupation of the property.

M/S. MANSI OILS AND GRAINS PVT. LTD. [2020 (7) TMI 141 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL

The liquidator is appointed under section 34 (1) of IBC after NCLT initiates liquidation in terms of section 33 of lBC. As the applicant - the corporate debtor
- is not a going concern, the liquidator is required to sell its assets under clauses

(a) to (d) of Regulation 32 of the lnsolvency and Bankruptcy Board of lndia (liquidation process) Regulations. The sale of the applicant's assets like the plant and machinery, office equipment & furniture is, therefore, a supply of goods by the liquidator. Liquidator is required to take registration under section 24 of the GST Act.

NCLT appoints the 'resolution professional' (hereinafter RP), as defined under section 3 (27) of lBC, as the liquidator subject to her consent. lf liquidator is already registered as a distinct person of the corporate debtor in terms of Notification No. 1112020 - Central Tax dated 2110312020, liquidator should continue to remain registered till the liability ceases under section 29 (1) (c) of the GST Act.

lt may be noted that the RP/liquidator acts as the authorized person of the corporate debtor. Once an insolvency professional takes registration as the authorized person of the corporate debtor, it remains in effect.

According to the applicant, the goods sold are plant and machineries, office equipment and furniture. They are broad categories classifiable under different HSN and taxable under appropriate Sl Nos of the Schedules under Notification No. 11/2017.

Ruling

The sale of the assets of the applicant by NCLT appointed liquidator is a supply of goods by the liquidator, who is required to take registration under section 24 of the GST Act. lf liquidator is already registered as a distinct person of the corporate debtor in terms of Notification No. 11l2O2O - Central Tax dated 21lO3l2O2O, liquidator should continue to remain registered till the liability ceases under section 29 (1) (c) of the GST Act.

This Ruling is valid subject to the provisions under Section 103 until and unless declared void under Section 104(1) of the GST Act.