Article 246A(2) read with Article 269A(1) of the Constitution of India gives exclusive power to the Parliament to make law to provide levy and collection of goods and services tax, by the Union, on supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce. Clause (5) of Article 269A of the Constitution provides that the Parliament may, by law, formulate the principles for determining place of supply, and when a supply of goods or services or both takes place in the course of inter-State trade or commerce. The said clause (5) of Article 269A runs as follows:–
“(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”.
In my personal opinion, power of formulation of principles for determining when a supply of goods or services or both takes place in the course of inter-State trade or commerce, does not include power of including supplies of goods or services or both which take place in the course of export of goods or services or both out of the territory of India or which, in all respects, take place within a single State or Union Territory. Expression “supply of goods or services or both in the course of inter-State trade or commerce” is a supply in which expressions “supply of goods or services or both” and “inter-State trade or commerce” are so integrally connected that they cannot be dissociated from each other. This is because of use of words “in the course of” in between the said two expressions. In my opinion, inter-State trade or commerce is the trade or commerce in between two States, or two Union Territories, or one State and a Union Territory, and inter-State trade or commerce essentially involves movement of goods or services from one State to another or from one Union Territory to another or from one State to a Union Territory or vice-versa.
Article 269 of the Constitution relates to levy and collection of tax on sale or purchase of goods where such sale or purchase takes place in the course of inter-State trade or commerce. Clause (3) of the said Article 269 provides that the Parliament may, by law, formulate the principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce. Clause (3) of Article 269 of the Constitution runs as follows:–
“(3) Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-State trade or commerce.”
Power, similar to the power given to the Parliament in clause (3) of Article 269, in respect of a sale or purchase of goods which takes place in the course of inter-State trade or commerce, has been given to the Parliament in clause (5) of Article 269A in respect of a supply of goods or services or both which takes place in the course of inter-State trade or commerce.
For the purpose of levy and collection of tax on sale of goods, the Parliament has enacted the Central Sales Tax Act, 1956. Section 3 of the said Central Sales Tax Act relates to the principles referred to in clause (3) of Article 269 of the Constitution. Prior to the enactment of the Central Sales Tax Act, 1956, the Union Government had referred, to the Law Commission of India, the matter of formulation of principles for determining when a sale or purchase of goods takes place in any of the following ways:–
(i) in the course of inter-State trade or commerce; or
(ii) in the course of import of goods into the territory of India; or
(iii) in the course of export of goods out of the territory of India.
The Law Commission of India, in its Second Report on Parliamentary Legislation relating to Sales Tax, had submitted its recommendation on sale of goods which can be said in the course of inter-State trade or commerce; or in the course of import into the territory of India; or in the course of export of the goods out of the territory of India. Para 12 of the said report had run as follows:-
’12. No doubt the expression “in the course of inter-State trade or commerce” has a very wide connotation. In India we are, however, not concerned with the regulation of commerce generally among several States as under the commerce clause in the American Constitution. What we have to determine is what is a sale or purchase in the course of inter-State trade or commerce. The problem, therefore, is to ascertain what transactions of sale or purchase can fairly be said to arise in the course of inter-State trade or commerce. For this purpose we have to fix upon some characteristics of these transactions which can well be said to stamp them with an inter-State character. In the large mass of American decisions under the commerce clause the one element which is stated to be an indispensable incident of commerce between the States is the movement of the goods which are the subject-matter of the sale or purchase from one State into another. We may refer in this connection to the definition of “inter-State commerce” given by Rottschafer in his “Constitutional Law” (1939 Ed. p. 299):–
“The activities of buying and selling constitute inter-State commerce if the contracts therefor contemplate the movement of goods in inter-State commerce”.
Later he adds (p. 235):
“The decisive factor that renders making a contract an act of inter-State commerce is that it contemplates or necessarily involves the movement of goods in inter-State commerce and this test applies whether it be a contract to buy or one to sell”.’
The Law Commission had made its recommendation, in Para 13 of the report as follows:–
’13. The principles for determining when a sale or purchase takes place in the course of inter-State trade or commerce may be framed in the following manner:–
“A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce, only if the sale or purchase-
(a) occasions the movement of the 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.
Explanation.-Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of sub-c1ause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.”‘
Paragraphs 5, 6 and 7 of the said report had been related to sale or purchase of goods in the course of import into, or export out of, the territory of India. These paragraphs had run as follows:
“5. It is convenient to take first the question of the appropriate principles to determine when a sale or purchase takes place in the course of import or export. The formulation of these principles presents the least difficulty.
6. In the Tranvancore-Cochin. Cases [(1952) S.C. 1{ 1112 and (1954) S.C.R. 53}] the Supreme Court considered Article 286 (1) (b) and held that the clause covered two classes of cases: (i) sales and purchases which themselves occasioned the import or export, (ii) sales or purchases effected by a transfer of shipping documents when the goods are beyond the customs frontiers of India.
7. The interpretation put by the Supreme Court on the clause was considered by the Taxation Enquiry Commission who stated that the position arising from the interpretation put by the Supreme Court was “perfectly satisfactory so far as foreign trade is concerned”. (T.E.C. Report, p. 48, para 7). The Law Commission had also before it the views of the Ministry of Finance on this question.
The Ministry was of the view that the decision given by the Supreme Court had been accepted by almost all the States and no difficulties were reported to have arisen as a result of the Supreme Court judgment.”
The judgments referred to in the report and the report suggests that location of seller and buyer are irrelevant for the purpose of determining sale or purchase in the course of inter-State trade or commerce, or in the course of import of goods into the territory of India or in the course of export of goods out of the territory of India. Various judgments, given by the Honorable Supreme Court, go to show that in the case of a sale of goods which takes place in the course of inter-State trade or commerce, situs of sale (the place or State where the property passes from seller to the buyer) is also irrelevant for the purpose of determining a sale of goods which takes place in the course of inter-State trade or commerce.
The Central Government had accepted the report of the Law Commission of India and on that basis sections 3 and 5 of the Central Sales Tax Act, 1956 were enacted.
We should not forget that definition of word “supply” includes a sale. Also even after roll out of GST, the Central Sales Tax Act, 1956 applies to sale of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel where such sale takes place in the course of, inter-State trade or commerce or import of goods into the territory of India or export of goods out of the territory of India. Since, the inter-State commerce is understood as trade or commerce of goods or services which involves movement of goods from one State to another, therefore, a supply of goods or services or both in inter-State trade or commerce cannot be given a different meaning. Such supply has to be understood as a supply which involves movement of goods from one State to another.
Section 7 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act) relates to those supplies of goods or services or both which are to be treated supply of goods or services or both in the course of inter-State trade or commerce. Sub-section (1) of the said section 7 runs as follows:–
“7. (1) 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.”
Section 10 of the IGST Act, quoted in sub-section (1) of section 7 above, runs as follows:–
“Place of supply of goods other than supply of goods imported into, or exported from India.
10. (1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,—
(a) 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;
(b) 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;
(c) 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;
(d) where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly;
(e) 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.
(2) Where the place of supply of goods cannot be determined, the place of supply shall be determined in such manner as may be prescribed.”
Let us consider case of a person P who needs some goods which are supplied by another person Q, but for any reason person P cannot make purchase from Q. He contacts another person R. But R does not deal in such goods. Person Q, on direction of person R, delivers goods to P. Suppose, Business places of P, Q and R are located as follows:–
P’s business place is located at Lucknow in U.P.;
Q’s business place is located at Kanpur U.P.; and
R’s business place is located at Jaipur in Rajasthan.
Let us say that the person Q, on direction from person R, dispatches goods to Lucknow and sends document of title to person R at Jaipur. Person Q makes supply of goods to R by transfer of documents of title to the goods. Person P takes delivery of goods on the strength of the documents. In this case, there will be two supplies of goods, one by person Q to person R and other by person R to person P. In respect of first supply, supplier Q will be located at Kanpur in U.P. State, and place of such supply, according to clause (b) of sub-section (1) of section 10 of the IGST Act, will be at Jaipur in Rajasthan State. Supplier and place of supply will be located in different States. Therefore, in view of Section 7(1), supply of goods will be a supply in the course of inter-State trade or commerce. In second case, person R will be supplier and will be located at Jaipur, and place of supply to P will be Lucknow in U.P. In this case, supplier and place of supply will be in two different States. Again in view of section 7(1) of the IGST Act, supply of goods will be in the course of inter-State trade or commerce.
In the case discussed in earlier paragraph, we see that goods do not move from one State to another even then, in view of provisions of section 7 read with section 10(1) (b); there are two supplies of goods in the course of inter-State trade or commerce.
Chapter IV of the Integrated Goods and Services Tax Act, 2017 relates to “Determination of Nature of Supply”. The chapter contains three sections viz. sections 7, 8 and 9. Marginal notes of the said sections run as follows:–
(i) Section 7, with marginal note “Inter-State supply.”;
(ii) section 8, with marginal note “Intra-State supply.”; and
(iii) Section 9, with its marginal note “supplies in territorial waters.”
Various sub-sections of section 7 of the IGST Act describe that which supplies of goods or services or both shall be treated as or to be supply of goods or services or both in the course of inter-State trade or commerce. Certain supplies referred to in the section are import supplies or export supplies or supplies which take place in all respects either within a State or within a Union Territory. In respect of these supplies also, without assigning any purpose, provision has been made to treat them as supply of goods or services or both in the course of inter-State trade or commerce. There is nothing in the said Chapter IV to determine the nature of the following supplies of goods or services or both, namely:–
1. Supply of goods or services or both which takes place outside the State;
2. Supply of goods or services or both which takes place in the course of import of goods or services or both into the territory of India; and
3. Supply of goods or services or both which takes place in the course of export of goods or services or both out of the territory of India.
Article 269A(5) of the Constitution provides that the Parliament may, by law, formulate the principles for determining when a supply of goods or of services or both takes place in the course of inter-State trade or commerce. Similarly, Article 286(2) read with Article 286(1) provides that the parliament may, by law, formulate the principles for determining when a supply of goods or services or both takes place in any of the following ways, namely:–
(i) outside the State; or
(ii) in the course of export of goods or services or both out of the territory of India; and
(iii) in the course of import of goods or services or both into the territory of India.
Contrary to this, on recommendation of the Goods and Services Tax Council of India, the Parliament, in section 8 of the IGST Act, has enacted law to provide that which supplies of goods or services shall be treated as intra-State supply. While doing so, in respect of certain supplies of goods or services, which in all respects take place either within a State or within a Union Territory, provision has been made not to treat them as intra-State supply. It is noteworthy that-
(a) the Constitution does not give powers to the Parliament to specify the supply of goods or services which takes place inside the State or when a supply of goods or services or both takes place inside a State; and
(b) on recommendation of the Goods and Services Tax Council, States have enacted their State Goods and Services Tax Acts which provide for levy and collection of tax on intra-State supply of goods or services or both as defined in section 8 of the IGST Act.
Here, it is noteworthy that the Constitution gives powers to the Legislatures of the States to make law to provide levy and collection of tax on all supplies of goods or services or both, except the following supplies of goods or services or both, namely:–
(A) any supply of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel;
(B) supply of goods or services or both where such supply takes place─
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of import of goods or services or both into the territory of India; or
(iv) in the course of export of goods or services or both out of the territory of India.
In my personal opinion, the persons who have been responsible for preparing the draft of Model GST Law have, for reasons best known to them, not given effect to certain provisions of the Constitution. May be there would have been certain reasons for doing so but that cannot be a valid reason for not giving effect to the relevant provisions of the Constitution. I would also like to draw attention of learned readers of this article towards sub-sections (2) and (4) of section 7 of the IGST Act. The said sub-sections run as follows:–
“(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.”
Here it is to be noted that Clause (1) of Article 269A of the Constitution, with its explanation, runs as follows:–
“269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.”
In the Explanation quoted above, only for limited purposes, the explanation creates fiction of deeming ‘supply of goods or services or both in the course import into the territory of India’ as a supply of goods or services or both in the course of inter-State trade or commerce. But, in sub-sections (2) and (4) of section 7 of the CGST Act, supplies of goods or services referred to therein, provision has been made to treat them supplies of goods or services or both in the course of inter-State trade or commerce for all purposes. In my personal opinion, such provision cannot be said legally valid.
Manners of distribution of goods and services tax, collected on supplies of goods or services or both, on which such tax can be levied and collected under the law made by the Parliament under clause 246A (1), and collected on supplies of goods or services or both on which such tax can be levied and collected under the law made by the Parliament under clause 269A (1), read with Article 246A (2), are different. Therefore, in respect any supply of goods or services or both, on which such tax can be levied and collected under law made under Article 246A (1), provision cannot be made under the law made under Article 269A (1), read with Article 246A (2), to treat such supply of goods or services or both in the course of inter-State trade or commerce for all purposes.
In my personal opinion as the international trade or commerce refers to trade or commerce in between the two nations so the inter-State trade or commerce refers to trade or commerce in between two States or two Union Territories or one State and a Union Territory and as the international trade or commerce involves movement of goods or services from one country to another, so the inter-State trade or commerce involves movement of goods or services from one State to another, or from one Union Territory to another or from one State to a Union Territory or vice versa. Secondly, use of the words “in the course of”, in the following expressions, manifests that each expression represents a single transaction of supply of goods or services or both, namely:–
(i) supply of goods or services or both in the course of inter-State trade or commerce; or
(ii) supply of goods or services or both in the course of import of goods or services or both into the territory of India; and
(iii) supply of goods or services or both in the course of export of goods or services or both out of the territory of India;
Disclaimer: Except the quoted versions, interpretation made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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