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CA. O. P. Agarwalla, Guwahati

Background:

Issues and disputes regarding determination of the nature of inter-state sales and also regarding powers of the states in levying taxes on such sales were exist since independence. To resolve the disputes, the constitution of India was amended vide the constitution (sixth Amendment) Act, 1956. By the said amendment, the States were debarred from levying tax on inter-state sales or purchases and the parliament was authorised to levy tax on inter-state sales or purchases and to formulate the principles for determine the followings:-

  1. When a sale or purchase of goods takes place in the course of inter-state trade or commerce;
  2. When a sale or purchase takes place outside the State;
  3. When a sale or purchase of goods takes place in the course of import into, or export of the goods out of, the territory of India.

The ministry of law on 23/03/1956 referred the above three questions to the Law Commission and accordingly the commission came out with a full-fledged report and principles on the aforesaid three questions. The suggestion of the Law Commission was enacted respectively as section 3, 4 and 5 of the CST Act, 1956 was finalised.

Section 3 of the CST Act prescribes the principles for determining when a sale or purchase of goods takes place in the course of inert-state trade or commerce. It seems worth to reproduce the text of section 3 of the said Act for the ready reference:-

“A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase –

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.” Explanations appended to the section has not been reproduced here.

Inter-state transactions under GST Laws:

By introduction of the GST Laws there has been few major change in the field of indirect taxation. GST is principally a destination based taxation system and tax moves with the goods and services. In case of intra- state supply of goods SGST and CGST is collected and the SGST goes to the coffer of State Government and the CGST goes to the coffer of Central Government. Whereas in case of inter-state supply of goods or services or both the tax is collected by centre and by state in which the location of supplier is located. SGST part of the said amount goes to the credit of the State where goods ultimately reaches.

In order to ensure that the credit of SGST goes to the proper State, two points must be determined properly:-

  1. Whether the supply is inter-state or intra-state?
  2. If it is inter-state supply, which state is liable to get the credit of SGST.

Though there has been a paradigm shift in taxation policy, but even after the Constitution (101st Amendment) Act, the power to formulate principles to determine whether a supply is in course of inter-state trade or commerce or not is vested with the parliament. The parliament is also authorised to formulate the principles for determining the place of supply.

Accordingly, as in the case of earlier provision of inter-state sales or purchases where Parliament had enacted section 3 of the Central Sales Tax Act, 1956 to formulate such principles, it has now enacted sections 7 of the IGST Act, 2017 for the said purpose. Sections 10,11,12, and 13 of the IGST Act are enacted by the parliament in order to define the term “place of supply”

The scope of this write-up is limited to analysing and understanding the principles to determine the inter-state or intra-state character of domestic supply of goods, which are covered by section 7(1) and section 10 of the Act. Let us begin by first analysing the provisions of sub-section (1) of section 7 of the IGST Act and for this purpose the relevant text of the said sub-section is reproduced herein below:-

Section 7(1): IGST Act

“Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in––

(a) two different States;

(b) two different Union territories; or

(c) a State and a Union territory,

shall be treated as a supply of goods in the course of inter-State trade or commerce.”

On plain reading of the provisions, it becomes clear that the sub-section formulates a clear principle that if the location of supplier of goods and place of supply of goods are not in the same state or union territory, the supply will be treated as inter-state supply. Accordingly in order to understand the principles, these two terms i.e. place of supply of goods and location of supplier of goods need to be understood properly.

Place of Supply of goods:

As discussed above, the parliament has enacted section 10 of IGST Act, 2017 to formulate the principles to determine the ‘Place of Supply of goods’. Text of the section 10 is reproduced here-in-below:-

Section-10

Place of supply of goods, other than supply of goods imported into, or exported from India

  • The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,––
  • where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient;
  • where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and  the place of supply of such goods shall be the principal place of business of such person;
  • where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient;
  • where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly;
  • where the goods are supplied on board a conveyance, including a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board.”
  • The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,––

Provision relating to movement of goods [10(1)(a)]:

Let us now first analyse clause (a) of sub-section (1) of section 10 of IGST Act.  The said clause deals with a situation where the supply of goods involves movement of such goods from one place to another and such movement is made by the supplier or the recipient or by any other person and specifies that place of supply will be the place where the movement of the goods terminates for delivery to the recipient.

The term “Supply involves movement of goods” in this sub-section is very important. Supply is an activity of supplying of goods to another legal person or to a distinct person. In case of supply to another legal person, the act of supply is a bi-lateral act and in case of supply to a distinct person it is a unilateral act. In the case of a bi-lateral transaction, the supply must be backed by a contract, whether oral or written. In case of a unilateral transaction, there is no scope of any contract but such a transaction would be backed by the intent of supplying goods by one distinct person to another.

Readers may recall that in section 3(a) of the CST Act, 1956, it is contained that a sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if the sale or purchase occasions the movement of goods from one state to another. While interpreting the said sub-section, the judiciary had held in a number of occasions that for the purpose of being deemed to be an inter-state sale of goods, the goods must be moved from one state to another and the said movement must be under a covenant or incident of the contract of sale.

It seems quite logical to apply the said ratio in the instant case and the term “Supply involves movement of goods” should be interpreted in the same spirit. In my opinion, the term “supply involves” should be interpreted to mean that the contract of supply (or the intention of the supplier in case of supply to distinct person) includes expressed or implied intention of movement of goods to a specific place.

As per the clause, the provision will be applicable irrespective of the fact that who is executing the movement, the clause contains “whether by the supplier or the recipient or by any other person”. Thus it can be said that irrespective of the fact that who is transporting of goods, the place of supply will be the place where the movement of goods is terminated for delivery of the same to the recipient, if such movement is as per the contract of supply.

Now let us examine the situations separately in which the goods are carried by (a) the supplier, (b) the recipient or (c) any other person to deliver the goods to the recipient.

  • Goods are carried by the supplier:

Missing of the word transporter in the clause (a) of sub-section (1) and using of the phrase any other person has also caused some doubts. Can it be said that the term any other person will also include transporter? Can it be said that the term ‘by the supplier’ does not include the situation where goods are moved by the supplier through transporter. It seems more reasonable interpretation that the term by the supplier denotes the movement of goods by the supplier or its agent through its own or hired conveyances.

It seems proper to conclude that in case where in terms of the contract of supply, goods are moved by the supplier or his agent, the place of supplier will be the location of goods at the time of termination of movement for delivery of such goods to the recipient.

Furthermore, the meaning of the term recipient as used in the clause is liable to be construed in a wider sense in tune with the definition given in clause (93) of section 2 of CGST Act. Here the term ‘recipient’ will mean-

  • where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
  • where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

and any reference to a person to whom a supply of goods is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods supplied;

Let us take an example- “A Husband (unregistered person) who is working and residing at Assam place an order and make advance payment to Amazon to deliver a television set of Rs. 75,000/- to his in-laws in the state of Meghalaya. Amazon from its west Bengal office, sent the goods to Meghalaya. Being the GST is a destination based taxation system, it is but obvious that the credit of GST should goes to the coffer of the revenue of Meghalaya and this can be possible only if the ‘Meghalaya based recipient’ is treated as the recipient for the aforesaid clause.

  • Goods are carried by the recipient:

Here the term ‘recipient’ needs to be understood carefully because of the presence of the term for delivery to the recipient. It seems like a jigsaw puzzle to solve how a movement of goods can be executed by the recipient for delivery to the recipient. Normally, goods are moved by the recipient after taking the delivery from supplier, but in this case the clause foresee a situation where the delivery of goods to the recipient will be preceded by the movement of goods by the said recipient from the control of the supplier.

The only reasonable interpretation of this part of the clause should be that in the case where in terms of the contract of supply, goods are moved by the recipient or his agent, the place of supplier will be the location of goods at the time of termination of movement for delivery of such goods to the place of the recipient.

It is worth to be mentioned that the term “delivery to the recipient” makes it clear that the provision of this clause will not be applicable if the goods are directly delivered to any person other than the recipient or his agent.

  • Goods are carried by any other person:

As discussed above, any other person in this clause denotes the transporter or other person acting on behalf of the recipient or supplier.

GST is a destination based tax and in principle, the tax must go to the State where the goods are ultimately consumed. This movement or allocation of tax will be done on the basis of the invoice raised by the supplier and if he does not mention the place of supply or puts a wrong place of supply, the eligible State may be deprived from its due share of revenue. That is why rule 46 mandates that in case of a supply in course of inter-state trade or commerce, the tax invoice must contain the “place of supply” and it is beyond dispute that such tax invoice should be issued before the removal of the goods for supply to the recipient. It means that the supplier must have accurate and authentic information regarding the place where the proposed movement of goods is going to be terminated for delivery to the recipient. Such a prior information can be with the supplier only if the contract of supply (or intention to supply) lays down the same. Once the supplier hands over the goods to the recipient, he loses control over such goods and unless the recipient of goods is under bound by the contract of supply to move the goods to a specific place, the supplier will not be in a position to mention the correct place of supply in the tax invoice.

Thus the author is of the view that, clause (a) of sub-section (1) of section 10 of CGST Act speaks that in a case where the goods move from one place to another in terms of the contract of the supply or intention of the supply, the place of supply will be the location where the movement of goods has been terminated for delivery to the recipient. The place from where supply is made is immaterial in finding the place of supply of goods. Similarly, who is moving the goods is also immaterial in finding the place of supply of goods.

Provision relating to delivery of goods to others [10(1)(b)]:

Let us now look at clause (b) of sub-section (1) of section 10 of IGST Act. The clause has the following limbs:

  1. where the goods are delivered by the supplier
  2. to a recipient or any other person
  3. on the direction of a third person,
  4. whether acting as an agent or otherwise,
  5. before or during movement of goods,
  6. either by way of transfer of documents of title to the goods or otherwise,
  7. it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person;

The clause provides for an exception to the principle determined as per clause (a). As per this clause where the supplier delivers the goods to a recipient or any other person on the direction of a third person, who is a registered person under the Act, it shall be deemed that the said third person has received the goods and the place of supply shall be the principal place of business of the said third person. The said deeming clause also includes the situation where the supply of goods has been made by the supplier while acting as an agent or otherwise. The delivery may be made by the supplier by way of transfer of documents of title to goods or otherwise and further, such delivery may be made either before, or during the movement of goods.

A similar explanation has been inserted below clause (b) of sub-section (2) of section 16 of the CGST Act, 2017 which deals with eligibility and condition for taking input tax credit. The said explanation reads “For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise.”

With the introduction of GST laws, the concept of E-1 sales, i.e subsequent sales during the movement of goods, has been given a go-bye. Now, each and every transaction of supply of goods will attract tax and this clause has been inserted to regularise the taxation of in-transit and tripartite supplies.

It may also be seen that the clause speaks about delivery of goods to a recipient or any other person. Here the term ‘recipient’ needs to be understood in the light of the definition provided under clause (93) of section 2 of the CGST Act, 2017. Recipient of goods according to the said definition is the person who is liable to pay the consideration, or where there is no consideration, the person to whom the goods are delivered or made available or to whom possession of goods is given or made available, and includes an agent acting on behalf of the recipient. In my view, here the term recipient denotes an agent acting as such on behalf of the recipient (who is liable to pay the consideration).

Similarly, the word ‘supplier’ in the aforesaid clause will include an agent acting as such on behalf of the supplier in relation to the goods supplied.

Provision relating to supply not involving movement of goods [10(1)(c)]:

We now come to clause (c) of sub-section (1) of section 10 of IGST Act. The clause starts with the phrase “where the supply does not involve movement of goods”

Here again the same ratio, as discussed in context with the provisions of clause (a)  should apply and the term “supply does not involve movement” should be interpreted as- ‘’if the contract of supply or the intention of supply does not include any expressed or implied intention of movement of goods to any specific place’. In such cases, neither the supplier nor the recipient is under any obligation to move or carry the goods to any specific place and the goods are delivered to the recipient at the place where the goods are located at the time of supply.

In my view, this clause may also covers supplies where delivery is made by the supplier at the shop counter, or at his godown or other place, where the goods are located, or by the auctioneer from the place where the goods are located. In nut and shell, this clause covers the cases where the delivery of goods is not backed by any contract, undertaking or agreement of any movement of the goods. The term supply does not involve movement of goods does debar the movement of goods, rather it covers the cases where the contract or intent of supply does not stipulate any condition or obligation of movement of goods.

Provision relating to assembling or installation at site [10(1)(b)]:

This clause prescribes that in cases where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly. It will be interested to note that if such supply falls under the ambit of works contract, the place of supply will be determined as per section 12 of the IGST Act.

Provision relating to assembling or installation at site [10(1)(c)]:

This clause prescribes that where the goods are supplied on board a conveyance, including a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board. Say, some goods are loaded at Guwahati Airport in a flight going to Kolkata for sale to the passengers during journey. Irrespective of the fact that in which state the goods have actually been sold, place of supply will be deemed to be Guwahati i.e. Assam.

In the light of the aforesaid discussion, the principles of determining ‘place of supply’ under GST laws may be summarised as follows:


Sl.
Particulars Place of Supply Section
1. Assam supplier send the goods to the Meghalaya recipient in terms of the contract of supply Meghalaya 10(1)(a)
2. The agent of the Meghalaya recipient carries the goods in terms of the contract to Meghalaya Meghalaya 10(1)(a)
3. Where any other person (including transporter) carries the goods in terms of the contract from Assam to Meghalaya Meghalaya 10(1)(a)
4. The Meghalaya recipient himself carries the goods in terms of the contract to Meghalaya Meghalaya 10(1)(a)
5. The Assam supplier sends goods to the recipient who is a distinct person in Meghalaya. Meghalaya 10(1)(a)
6. The recipient who is a distinct person carries goods in terms of the intention of the supply to Meghalaya. Meghalaya 10(1)(a)
7. Goods have been delivered in Assam to the agent of and on the direction of a Meghalaya based registered person. Meghalaya 10(1)(b)
8. Goods have been delivered at Nagaland by the supplier to any other person on the direction of a Meghalaya based registered person. Meghalaya 10(1)(b)
9. Where the goods have been delivered at Nagaland to any other person by transfer of document of title on the direction of a Meghalaya based registered person. Meghalaya 10(1)(b)
10. Goods have been retained by the supplier with him on the direction of a Meghalaya based registered person.

(It will be deemed that the supplier has delivered and retained the goods in the capacity of the agent/bailee)

Meghalaya 10(1)(b)
11. Meghalaya based unregistered Person purchased goods from Assam based person and instructed him to deliver to his friend at Nagaland. Nagaland 10(1)(a)
12. Meghalaya based unregistered Person purchased goods from Assam based person and instructed him to deliver to his agent at Nagaland. Nagaland 10(1)(a)
13. Where goods are delivered in Assam at the sales counter, godown or at any other place to the recipient or others without any stipulation regarding movement of goods. Assam 10(1)(c)

Location of Supplier of goods:-

Though the term “location of supplier of services” has been defined under IGST Act, 2017 and also under CGST Act, 2017, no definition of the term “location of supplier of goods” has been provided in any of the Acts. This omission, definitely is not an unintentional lapse. What is the intention behind the same can best be explained by the drafters.

I am of the view that in the absence of any such definition, this term should to be interpreted in its literal sense. In other words location of supplier of goods should be the registered place of business of the supplier and there is no scope to relate this term with the location of goods.

I would prefer to discuss few examples to understand the two terms as discussed above.

 Example-1:

Mr. ‘A’, who is a registered dealer in Meghalaya, places an order of supply of 200 bags of ‘Cement’ to Mr. ‘B’, a dealer registered in the state of Assam and directs him to deliver the goods to ‘C’ an unregistered person in the state of Assam. Mr. ‘B’ delivers the goods and raises tax invoice on Mr. ‘A’ (Meghalaya) charging IGST as per the provisions of section 10(1)(b) of IGST Act, 2017. Mr. ‘A’ claims ITC on such purchases in the state of Meghalaya, whereas the goods remained in the state of Assam. This is not the end of the story, Mr. ‘A’ is liable to dispose the said goods and to pay tax on such disposal. He will thus, raise a bill on Mr. ‘C’ and will charge IGST as per the provisions of section 10(1)(c).

Example-2:

Mr. ‘A’, who is a registered dealer in Meghalaya, places an order of supply of 1000 Meters of cloth to Mr. ‘B’, a dealer registered in the state of Assam and directs him to deliver the goods to ‘C’, who is a ‘Job worker- Tailor’ in the state of Assam. Mr. ‘B’ delivers the goods to Mr. ‘C’ and raises tax invoice on Mr. ‘A’ (Meghalaya) charging IGST as per the provisions of section 10(1)(b) of IGST Act, 2017. Mr. ‘A’ claims ITC on such purchases in the state of Meghalaya, whereas the goods remained in the state of Assam.

Mr. ‘C’ of Assam completes the stitching works and sends the shirts to Mr. ‘B’ of Meghalaya and will raises bills for Job work charges and will charge IGST as per section 12(2).

In this article, I have attempted to interpret the provisions relating to determination of principles of inter-state supply of goods and would solicit the valuable views, agreements and disagreements of the esteemed readers.

(Author can be reached at fca.opg@gmail.com)

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3 Comments

  1. S.C.Choudhury says:

    What will be place of supply if the non- advocate counsel stationed at Vizag represents before an Customs Appeal Commissioner @ Vizag on instruction of a party at Bilaspur in MP..

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