Ex-Factory / Ex-Works Sales and the Place of Supply Dilemma under GST — Time for the GST Council to Act
Summary: The supplied article examines the unresolved GST place-of-supply issue for Ex-Factory or Ex-Works sales where the supplier transfers risk and title at the factory gate and the buyer arranges transportation. It explains that Section 7(1) of the IGST Act treats supplies as inter-State where the supplier’s location and place of supply are in different States, while Section 10(1)(a) applies where goods involve movement terminating at the delivery location and Section 10(1)(c) applies where goods do not involve movement and are made available at the supplier’s premises. The article highlights two competing interpretations: treating the factory gate as the place of supply, attracting CGST and SGST, or treating the buyer’s location as the place of supply, attracting IGST. It cites divergent positions in Kun Motor Co. Pvt. Ltd. v. CST (Kerala High Court, 2018) and In re Penna Cement Industries Ltd. (Telangana AAR, 2020), besides the Supreme Court’s decision in Tata Engineering & Locomotive Co. Ltd. v. State of Bihar under the erstwhile CST Act. The article states that a draft GST Council circular considered in 2019 and later placed before the 37th GST Council meeting was not finalised due to lack of consensus, leaving taxpayers with interpretational and litigation risks.
1. Introduction
GST was conceived as a destination-based, or consumption-based, tax — meaning that the State where goods or services are finally consumed should have the right to the revenue. However, translating this philosophy into practice has left certain fact-patterns genuinely litigation-prone. Chief among these, and pending before the GST Council for years, is the determination of place of supply for “Ex-Factory” or “Ex-Works” sales.
In an ex-factory sale, the supplier transfers risk and title in the goods to the buyer right at the factory gate or godown, after which the buyer arranges (or appoints) the transportation of the goods. The dispute arises when the buyer is located in a different State: should the supplier charge CGST plus SGST, or IGST? This article examines the issue through the statutory framework, judicial and advance ruling precedents, and the GST Council’s continuing inaction.
2. Statutory Framework — Section 7(1) and Section 10(1) of the IGST Act
The starting point is Section 7(1) of the IGST Act, 2017, which provides that where the location of the supplier and the place of supply are in two different States (or Union Territories), the supply is treated as an inter-State supply, attracting IGST.
Place of supply is determined under Section 10(1). Two sub-clauses are critical to this issue:
- Clause (a): Where the supply involves movement of goods — whether by the supplier, the recipient, or any other person — the place of supply is the location at which the movement of goods terminates for delivery to the recipient.
- Clause (c): Where the supply does not involve movement of goods, the place of supply is the location of the goods at the time they are made available to the recipient — that is, the supplier’s own premises or factory gate.
The entire dispute turns on whether an ex-factory sale falls under clause (a) or clause (c) — because that classification directly decides whether IGST or CGST-plus-SGST is chargeable.
3. Two Competing Views
One view holds that in an ex-factory sale, the supply is “concluded” at the factory gate itself — risk and title pass there, and whatever movement follows is post-supply rather than part of the supply. On this reasoning, clause (c) would apply, making the supplier’s factory gate the place of supply regardless of the buyer’s State. The result is that the supplier always charges CGST plus SGST, and an out-of-State buyer is unable to claim credit for that tax — undermining GST’s core principle of seamless input credit.
The competing view — more consistent with the destination-based spirit of GST — is that movement does not “terminate for delivery” until the goods physically reach the buyer, even where the buyer arranges the transport. Section 10(1)(a) explicitly contemplates movement “by the supplier, the recipient, or any other person,” so on this reading clause (a) applies, the buyer’s State becomes the place of supply, IGST is charged, and the buyer is able to take credit.
4. Judicial and Advance Ruling Precedents
Courts and advance ruling authorities have taken divergent positions on this question:
- Kun Motor Co. Pvt. Ltd. v. CST — Kerala High Court (2018): The Court treated the terms of sale as determinative and held that such an ex-factory sale constitutes an intra-State supply, attracting CGST and SGST.
- In re Penna Cement Industries Ltd. — Telangana AAR (2020): The Authority took the opposite view, holding that even in an ex-works sale, movement of goods terminates at the buyer’s location, making IGST applicable.
- Tata Engineering & Locomotive Co. Ltd. v. State of Bihar — Supreme Court (decided under the erstwhile CST Act, 1956): The Court held that a “sale occasioning movement of goods” arises only where the terms of sale themselves require the goods to be transported to another State — a principle that also supports the destination-based interpretation.
Notably, while a High Court ruling carries greater precedential weight than an advance ruling, the Telangana AAR’s view in Penna Cement arguably sits closer to the object and purpose of GST as a destination-based tax.
5. The Practical Difficulty — ‘Delivery’ Is Not Defined
A significant complication is that GST law does not define the term “delivery.” Borrowing the meaning from the Sale of Goods Act, 1930, delivery is essentially the transfer of possession — which, in an ex-factory sale, happens right at the factory gate. This imports yet another layer of ambiguity into the analysis.
A further practical issue arises where the buyer appoints its own transporter and the supplier simply hands the goods over to that transporter. Does this handover itself amount to “delivery to the buyer”? If so, movement terminates there and the place of supply remains the supplier’s State. If not, the supplier typically has no documentary evidence of where the goods were ultimately delivered — increasing both compliance burden and litigation risk.
The safer commercial practice, therefore, is for the contract to clearly specify where delivery is deemed complete, and — where feasible — for the supplier itself to arrange transportation (even if the cost is recovered from the buyer). This keeps the movement within the ambit of the “supply,” places the point of supply in the buyer’s State, and preserves the credit chain.
6. GST Council’s Inaction — Where the Draft Circular Stands
What makes this particularly frustrating is that the GST Council is fully aware of the issue. It was placed before the Law Committee for deliberation in 2019, and a draft Circular — proposing separate treatment for registered and unregistered buyers — was placed on the agenda of the 37th GST Council meeting. However, the Circular could not be finalised for lack of consensus among the States, and the matter was sent back to the Committee for reconsideration. No final decision has emerged since.
As a result, taxpayers continue to bear the interpretational risk on every transaction, and identical fact-patterns are being decided differently by different authorities — an outcome that sits uneasily with the idea of a unified GST regime.
7. Practical Recommendations for Businesses
Clearly document the exact point of delivery and the party responsible for transportation in the purchase order or contract.
Where feasible, have the supplier arrange transportation itself (even if the cost is later recovered from the buyer) — this strengthens the case for clause (a) of Section 10(1), enabling IGST treatment and credit availability for the buyer.
Where a third party is involved in the transaction, evaluate whether the bill-to-ship-to structure under Section 10(1)(b) — which carries its own deeming fiction — applies instead.
Until the GST Council finalises a Circular, maintain consistent, well-documented positions, since the litigation risk on both sides of the debate remains very real.
8. Conclusion
The place of supply for ex-factory sales sits at a classic tension point between GST’s destination-based philosophy and a simple factual scenario that the law has not clearly addressed. Until the GST Council finalises its long-pending draft Circular, businesses will need to rely on contractual clarity and careful documentation to defend their position in this grey area. It is hoped that the Council will soon clear this backlog and provide a unified, predictable position that reduces both compliance cost and litigation.
