Central Tax Circulars

CGST Circular 35/2018

To,

The Principal Chief Commissioners/Chief Commissioners/ Principal Commissioners/
Commissioner of Central Tax (All) / The Principal Director Generals/ Director
Generals (All)

Madam/Sir,

Subject: Joint Venture —taxable services provided by the members of the Joint
Venture (JV) to the JV and vice versa and inter se between the members of the
JV-reg

1) I am directed to say that in the Service Tax regime, CBEC vide Circular
No. 179/5/2014 – ST issued from F.No. 179/5/2014-ST dated 24 September 2014
had clarified that if cash calls are merely transaction in money, then they are
excluded from the definition of service provided in Section 65B (44) of the
Finance Act, 1994. Whether a cash call is merely a transaction in money and
hence not in the nature of consideration for taxable service, would depend on
the terms of the Joint Venture Agreement, which may vary from case to case. The
Circular clarified that cash calls, sometimes, could be in the nature of
advance payments made by members towards taxable services received from joint
venture(JV); and that payments made out of cash calls pooled by a JV towards
taxable services received from a member or a third party is in the nature of
consideration and hence attracts Service Tax. The Circular further stated that
JV being an unincorporated temporary association constituted for the limited
purpose of carrying out a specified project within a time frame, a
comprehensive examination of the various JV agreements (at times, there could
be number of inter se agreements between members of the JV) holds the key to
understanding of the taxation of transactions involving taxable services
between the JV and its members or inter-se between the members of a JV.
Therefore, officers in the field formations were advised to carefully examine
the leviability of service tax with reference to the specific terms/clauses of
each JV agreement.

2) In the Service Tax Law, service was defined as an activity carried out by a
person for another for consideration [Section 65B(44) of the Finance Act
1994]. Explanation 3 to the said definition stated than an unincorporated
association or a body of persons as the case may be, and a member thereof shall
be treated as distinct persons.

3) GST is levied on intra-State and inter-State supply of goods and services.
According to section 7 of CGST Act, 2017, the expression “supply” includes
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, and
includes activities specified in Schedule II to the CGST Act,
2017. The definition of “business” in section 2(17) of CGST Act states that
“business” includes provision by a club, association, society, or any
such body (for a subscription or any other consideration) of the facilities or
benefits to its members. The term person is defined in section 2(84) of the
CGST Act, 2017 to include an association of persons or a body of individuals,
whether incorporated or not, in India or outside India. Further, Schedule II of
CGST Act, 2017 enumerates activities which are to be treated as supply of goods
or as supply of services. It states in para 7 that supply of goods by any
unincorporated association or body of persons to a member thereof for cash,
deferred payment or other valuable consideration shall be treated as supply of
goods. A conjoint reading of the above provisions of the law implies that
supply of services by an unincorporated association or body of persons (AOP) to
a member thereof for cash, deferred payment or other valuable consideration
shall be treated as supply of services. The above entry in Schedule II is
analogous to and draws strength from the provision in Article 366(29A)(e) of
the Constitution according to which a tax on the sale or purchase of goods
includes a tax on the supply of goods by any unincorporated association or body
of persons to a member thereof for cash, deferred payment or other valuable
consideration.

4) Therefore, the law with regard to levy of GST on service supplied by member
of an unincorporated joint venture (JV) to the JV or to other members of the
JV, or by JV to the members, essentially remains the same as it was under
service tax law. Thus, it is clarified that the clarification given vide Board
Circular No. 179/5/2014 – ST dated 24.09.2014 ibid in the context of service
tax is applicable for the purpose of levy of GST also. It is reiterated that
the question whether cash calls are taxable or not will entirely depend on the
facts and circumstances of each case. ‘Cash calls’ are raised by an operating
member of the joint venture on other members in proportion to their
participating interests in the joint venture(unincorporated) to meet the
expenditure on the operations to be carried out as per the approved work
programme and budget. Taxability of cash calls can be further explained by the
following illustrations:

Illustration A: There are 4 members in the JV
including the operating member and each one contributes Rs 100 as part of their
share. A total amount of Rs 400 is collected. The operating member purchases
machinery for Rs 400 for the JV to be used in oil production.

Illustration B:There are 4 members in the JV including the operating member and each one
contributes Rs 100 as part of their share. A total amount of Rs 400 is
collected. The operating member thereafter uses its own machine and performs
exploration and production activities on behalf of the JV.

4.1 Illustration A will not be the subject matter of ‘ST/GST’ for the reason
that the operating member is not carrying out an activity for another for
consideration. In Illustration A, the money paid for purchase of machinery is
merely in the nature of capital contribution and is therefore a transaction in
money.

4.2 On the other hand, in Illustration B, the operating member uses its own
machinery and is therefore providing ‘service’ within the scope of supply of
CGST Act, 2017. This is because in this scenario, the operating member is
recovering the cost appropriated towards machinery and services from the other
JV members in their participating interest ratio.

5) Difficulty if any, in the implementation of this circular may be brought to
the notice of the Board.