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My apprehension is that definitions of expressions supply of goods in the course of inter-State trade or commerce provided in sub-section (1) of section 7, and intra-State supply provided in section 8, of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act) are not Constitutionally valid. In my opinion, a supply of goods or services, or both in the course of inter-State trade or commerce essentially involves movement of goods or services or both from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa. In the expression “supply of goods in the course of inter-State trade or commerce”, activities of supply of goods or services or both, and movement of goods or services or both from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa, are so inextricably linked that they cannot be dissociated. They form a single transaction of supply of goods or services or both in the course of inter-State trade or commerce. So far as it is related to definition of expression “intra-State supply” (intra-State supply of goods or services or both), I am of the view that the Constitution of India (hereinafter referred to as the Constitution) does not give power to Parliament to define a supply of goods or services or both with respect to which Legislatures of States can make their goods and services tax laws.

I am also of the opinion that─

(a) clause (5) of Article 269A of the Constitution requires the Parliament to formulate principles for determining place of supply of goods or services or both where supply of goods or services or both takes place in the course of inter-State trade or commerce, and the said clause does not require formulation of principles for determining place of supply of goods or services or both for the purpose of levy of goods and services tax by the States;

(b) Parliament can, under clause (1) of Article 269A of the Constitution, make law for apportionment of tax collected in between the Union and States, where such tax has been collected on two kinds of supplies of goods or services or both, viz. (i) supply of goods or services or both in the course of inter-State trade or commerce, and (ii) supply of goods or services or both in the course of import into the territory of India;

(c) law made by the Parliament under clause (1) of Article 269A of the Constitution, for apportionment of tax in between the Union and States, cannot be applied to tax collected on any supply of goods or services or both, except two supplies of goods or services or both referred to in clause (b) hereinabove;

(d) principle for determining place of supply of goods, provided in clause (b) of sub-section (1) of section 10 of the IGST Act,  is against the destination based tax principle of GST and creates a situation in which certain supplies may escape taxation;

(e) the Constitution gives powers to States to make goods and services tax law with respect to all supplies of goods or services or both with which the State has real territorial nexus, except a supply of goods or services or both which takes place─

(i) in the course of inter-State trade or commerce; or

(ii) outside the State; or

(iii) in the course of export of the goods or services or both out of the territory of India; or

(iv) in the course of import of the goods or services or both into the territory of India.

(f) When any goods are delivered by a supplier to a person on direction of a third person, where supplier and third person are located in different States, or Union Territories, or in a State and a Union Territory; and person to whom goods are delivered is located in the State or Union Territory in which supplier is located, supply made by the supplier to such third person, in view of provision of section 7 (1) of the IGST Act, becomes a supply of goods in the course of inter-State trade or commerce, notwithstanding that the agreement of supply in between the supplier and the third person does not involve inter-State movement.

(g) When any goods are delivered by a supplier to a person on direction of a third person, where supplier and third person are located in the same State or Union Territory, and person to whom goods are delivered is located in a State or Union Territory which different from the State or Union Territory in which supplier and third person are located, supply made by the supplier to third person, in view of provision of section 8 (1) of the IGST Act, becomes an intra-State supply of goods, notwithstanding that the agreement between supplier and third person involves inter-State movement, i.e. movement of goods from the State or Union Territory in which supplier is located to a State or Union Territory in which goods are delivered.

So far as it relates to goods and services tax law making powers of Legislatures of States, Legislature of each State, including a Union Territory which has its Legislature can, subject to provisions of clause (2) of Article 246A, and clause (1) of Article 286, of the Constitution, make goods and services tax law, for whole or any part of such State, in exercise of its power under clause (1) of Article 246A of the Constitution.

So far as it is related to goods and services tax law making powers of Parliament, the Parliament derives its goods and services tax law making powers from─

(a) Article 245, and clause (1) of Article 246A, of the Constitution where supply of goods or services or both does not take place─

 (i) in the course of inter-State trade or commerce; or

 (ii) in the course of import of the goods or services or both into the territory of India;

(b) Article 245, and clause (2) of Article 246A and Article 269A, of the Constitution where supply of goods or services or both takes place─

 (i) in the course of inter-State trade or commerce; or

 (ii) in the course of import of the goods or services or both into the territory of India.

Total amount of goods and services tax (GST) collected by the Central Government (Union) in any State does not form part of the Consolidated Fund of India. Clause (1A) of Article 270 of the Constitution provides that out of the amount of tax collected by the Union under goods and services tax laws made by the Parliament under clause (1) of Article 246A, such percentage, as may be determined by the Finance Commission, of tax collected shall be assigned to the State in which such tax has been collected.

So far as it is related to goods and services tax collected in a State by the Union under goods and services tax law made by the Parliament under clause (2) of Article 246A, and Article 269A, of the Constitution, clause (1) of Article 269A provides that amount of tax collected shall be apportioned in between the Union and the States in the manner as may be provided by law by the Parliament, and thereafter, clause (1B) of Article 270 of the Constitution provides that out of the amount of tax apportioned to the Union, a certain percentage of the amount, as may be determined by the Finance Commission, shall be assigned to the State in which such tax has been collected.

Here in this article, I will be referring to certain provisions of the Constitution and certain provisions of the IGST Act. For the purpose of convenience of readers, relevant parts of such provisions are being quoted hereunder.

Article 245 of the Constitution.-

245. Extent of laws made by Parliament and by the Legislatures of States.—(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”

Article 246A of the Constitution.-

246A. Special provision with respect to goods and services tax.—(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.”

Article 269A of the Constitution.-

Levy and collection of goods and services tax in course of inter-State trade or commerce

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.

(2) —

(3) —

(4) —

(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.’’

Article 270 of the Constitution.-

270. Taxes levied and distributed between the Union and the States.(1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268, 269 and 269A, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2).

(1A) The tax collected by the Union under clause (1) of article 246A shall also be distributed between the Union and the States in the manner provided in clause (2).

(1B) The tax levied and collected by the Union under clause (2) of article 246A and article 269A, which has been used for payment of the tax levied by the Union under clause (1) of article 246A, and the amount apportioned to the Union under clause (1) of article 269A, shall also be distributed between the Union and the States in the manner provided in clause (2).

(2) Such percentage, as may be prescribed, of the net proceeds of any such tax or duty in any financial year shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax or duty is leviable in that year, and shall be distributed among those States in such manner and from such time as may be prescribed in the manner provided in clause (3).

(3) In this article, “prescribed” means,—

(i) until a Finance Commission has been constituted, prescribed by the President by order, and

(ii) after a Finance Commission has been constituted, prescribed by the President by order after considering the recommendations of the Finance Commission.”

Article 286 of the Constitution.-

“286. Restrictions as to imposition of tax on the sale or purchase of goods.—(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place—

(a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).”

We see that title of Article 286 relates to restriction on levy of tax on sale or purchase of goods, but provisions of said Article relates to restrictions on levy of goods and services tax on supply of goods or services or both. This is a mistake. Secondly, in clause (2) of the Article 286, words “takes place” are missing after word “both”.

Sub-section (1) of section 7 of the IGST Act.-

“Inter-State supply.

(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.”

Sub-section (1) of section 8 of the IGST Act.

“Intra-State supply.

8. (1) Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply:

Provided that the following supply of goods shall not be treated as intra-State supply, namely:—

(i) supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit;

(ii) goods imported into the territory of India till they cross the customs frontiers of India; or

(iii) supplies made to a tourist referred to in section 15.”

Section 10 of the IGST Act.

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.”

My concerns about validity of provisions

1. My first apprehension is about the supply of goods or services or both which has been recommended by the GST Council to the States for the purpose of levy of tax by the States. Model State Goods and Services Tax Act, recommended by GST Council to States, had provided imposition of tax on intra-State supply of goods or services or both, as defined in section 8 of the IGST Act. In my opinion, such recommendation had not been in conformity of the provisions of the Constitution. Clause (1) of Article 246A, read with clause (2) of Article 246A and Article 286, of the Constitution gives powers to Legislature of each State to make law to provide levy and collection of goods and services tax on every supply of goods or services or both, where such State has territorial nexus with such supply, subject to the condition that State cannot make law to provide levy and collection of goods and services tax on any 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 export of the goods or services or both out of the territory of India; or

(iv) in the course of import of the goods or services or both into the territory of India.

In addition to supplies of goods or services or both referred to in clauses (i) to (iv) of preceding paragraph, Parliament and Legislatures of States cannot make law to provide levy of goods and services tax on supply of─

(a) alcoholic liquor for human consumption (definition of expression “goods and services tax”, provided in clause (12A) of Article 366 of the Constitution”, does not include any tax on supply of alcoholic liquor for human consumption); and

(b) petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas or aviation turbine fuel unless provisions of Article 246A of the Constitution come into effect in respect of supply of these goods, and unless the GST Council makes its recommendation about levy of tax on supply of these goods.

Clause (5) of Article 269A of the Constitution provides that Parliament may, by law, formulate principles for determining when a supply of goods or services or both takes place in the course of inter-State trade or commerce, and clause (2) of Article 286 provides that Parliament may, by law, formulate principles for determining when a supply of goods or services or both takes place─

(i) outside the State; or

(ii) in the course of export of the goods or services or both out of the territory of India; or

(iii) in the course of import of the goods or services or both into the territory of India.

In my opinion, until the Parliament makes the law required in clause (5) of Article 269A, and clause (2) of Article 286, of the Constitution, scope of supply of goods or services or both, for the purpose of levy of goods and services tax by the States, could not have been determined.

2. My second apprehension is about sub-section (1) and sub-section (3) of section 7 of the IGST Act. The said provisions refer to supply of goods, and supply of services, which are to be treated supply of goods, or of services, respectively, in the course of inter-State trade or commerce. Clause (1) of Article 269A of the Constitution gives power to the Parliament to make law to provide levy and collection of tax 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 the said Article 269A provides that Parliament may, by law make 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.

In my opinion, in the expression “supply of goods or services or both in the course of inter-State trade or commerce, two expressions, viz. (i) supply of goods or services or both, and (ii) inter-State trade or commerce”, have been connected by using term “in the course of”. Meaning and scope of word “supply” have already been provided in section 7 of the Central Goods and Services Tax Act, 2017, and this provision also applies to provisions of the IGST Act. So far as it is related to expression “inter-State trade of commerce”, inter-State trade or commerce is understood as trade or commerce which involves movement of goods or services from one State to another. In Indian context, word “State” also includes “Union Territory”. Therefore, inter-State trade or commerce should involve movement of goods or services from▬

(i) one State to another; or

(ii) one Union Territory to another; or

(iii) a State to a Union Territory, or vice-versa.

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 requires framing of principles or rules on the basis of which it could be determined that whether or not a particular “supply of goods or services or both” had taken place in the course of “inter-State trade or commerce”.

In reference to sale of goods in the course of export of the goods out of the territory of India, the Constitution Bench of Honorable Supreme Court has, in State of Travan-Core Cochin vs. Shanmugha Vilas Cashew Nut Factory and Ors., judgment dated February 8, 1953, explained the meanings of word “course”, and expression “in the course of”. In the said case, the Honorable Court has made following observations, namely:-

“The word “course” etymologically denotes movement from one point to another, and the expression “in the course of” not only implies a period of time during which the movement is in progress but postulates also a connected relation. For instance, it has been held that the words “debts due to the bankrupt in the course of his trade” in section 15(5) of the English Bankruptcy Act, 1869, do not extend to all debts due to the bankrupt during the period of his trading but include only debts connected with the trade [see In re, Pryce, ex parte Rensburg(1).] A sale in the course of export out of the country should similarly be understood in the context of clause (1)(b) as meaning a sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities. The time factor alone is not determinative. The previous decision proceeded on this view and emphasised the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of export. It is, however, contended that on this principle of connected or integrated activities a purchase for the purpose of export must be regarded as covered by the exemption under clause (1) (b). We are unable to agree.”

In the case, referred to above, the Honorable Supreme has found two types of sales of goods which could be said “sale of goods in the course of export of the goods out of the territory of India, namely:-

(i) sale of goods which has occasioned the export from India; and

(ii) sale of goods which is effected by transfer of document of title of goods while the goods were in export stream.

 It is noteworthy that both sales of goods were independent of seller, and the place where the sale has taken place (the place of supply). Vide the Constitution (Sixth Amendment) Act, 1956, Article 269 of the Constitution was amended. The amended Article 269 had given power to Parliament to make law to▬

(a) provide levy and collection of tax on sale or purchase of goods in the course of inter-State trade or commerce; and

(b) formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce.

Clauses (1) and (2) of Article 286 of the Constitution, after the Constitution (Sixth Amendment) Act, 1956, and before the commencement of the Constitution (One Hundred First Amendment) Act, 2016, had stood as follows:-

286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place—

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).”

Before enactment of the Central Sales Tax Act, 1956, the Government of India had referred the matter of formulation of principles to the Law Commission of India. The Law Commission of India, in its Second Report on Parliamentary Legislation relating to Sales Tax, had submitted its recommendation on sale or purchase of goods which could be said in the course of inter-State trade or commerce; or in the course of import of the goods 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 Commission, after making detailed study about the sale or purchase of goods in the course of inter-State commerce, had found that movement of goods from one State to another was indispensible feature of inter-State trade or commerce. The Law Commission had, in its report, suggested following principles for the purpose of determining when a sale or purchase of goods could be said to have taken place in the course of inter-State trade or commerce, namely:-

“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.”

Entry 54 of List II of Seventh Schedule of the Constitution, as amended by the Constitution (One Hundred and First Amendment) Act, 2016, runs as follows:–

“54. Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”

 We know that “international trade or commerce” refers to trade or commerce in between two countries. International trade or commerce is trade or commerce which involves import, or export, of goods or services from one country to another. Export or import involves movement of goods or services from one country to another. On this analogy, “inter-State trade or commerce” may be understood as trade or commerce in between two States involving movement of goods or services from one State to another.

  Dictionary meanings of word “inter-State” are “existing or carried on in between States, especially in US; relating to or connecting different states : existing or occurring between states especially in the U.S; etc.”

Meanings of word “course”, according to dictionaries named below, are as follows:–

1. Merriam Webster:

“the act or action of moving in a path from point to point”

2. Lexico Oxford:

“The route or direction followed by a ship, aircraft, road, or river.”

In view of the facts stated above, my personal opinion is that in case of a supply of goods or services or both in the course of inter-State trade or commerce, movement of goods or services from one State to another, or from one Union Territory to another, or from a State to a Union Territory, or vice-versa, is indispensible requirement. A supply of goods in the course of inter-State trade or commerce can also be effected by transfer of documents of title of goods during their inter-State movement.  Supply in the course of inter-State trade or commerce may take place in between two persons even if they are located in the same State or same Union Territory. The only requirement is that goods or services, under the supply, should move from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa.

In my opinion, provision of sub-section (1) of Section 7 of the IGST Act, which provides that when a supply of goods shall be treated a supply of goods in the course of inter-State trade or commerce, is not legally valid. The provision lacks the concept of movement of goods from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa. Location of supplier of goods, in absence of definition of expression “location of supplier of goods”, cannot be interpreted to mean that goods are also supplied from the State in which supplier is located. Secondly, in view of clause (b) of sub-section (1) of section 10 of the IGST Act, place of supply may be outside the supplier’s State even if goods do not move from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa.

Section 10 of the IGST Act relates to place of supply of goods. Clause (b) of sub-section (1) of section 10 of the IGST Act runs as follows:–

“10. (1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,—

(a) —

“(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;”

Sub-section (1) of section 7 of the IGST Act runs as follows:–

“(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.”

Let us assume that a person A is supplier of any goods and is located in State P. Person A supplies goods from his godown located in State P. Another person B places order with supplier A for supply of certain goods and directs him to deliver the said goods to person C at his business place, where business place of person C is located in State Q.  Supplier A, from his business place located in State P, dispatches goods for delivery to person C at his business place in State Q, and sends supply invoice to person B. In this case, principal place of business of person B may possibly be located, ▬

(a) at any place inside the same State, or Union Territory in which supplier A is located; or

(b) at any place inside a State, or a Union Territory, which is different from the State or the Union Territory in which supplier A is located; or

(c)  outside the territory of India.

In the example given in the preceding paragraph, for supply of goods made by person A, the place of supply, in accordance with provision of section 10(1)(b) of the IGST Act, shall be the principal place of business of person B on whose direction goods have been delivered to person C. In view of this, in a case referred to in ▬

(i) clause (a) of preceding paragraph, location of supplier A, and place of supply, i.e. principal place of business of person B, both will be located within the same State, or same Union Territory. Therefore, in view of sub-section (1) of section 7 of the IGST Act, although supply of goods made by person A will involve movement of goods from State P to State Q, yet supply of goods will not be a supply of goods in the course of inter-State trade or commerce.

(ii) clause (b) of the preceding paragraph, supplier A will be located in State P and place of supply will be located in any State or Union Territory which is different from State P.  Therefore, in view of sub-section (1) of section 7 of the IGST Act, supply of goods will be a supply of goods in the course of inter-State trade or commerce.

(iii) clause (c) of the preceding paragraph, supplier A will be located in State P and place of supply (place of business of B) will be located outside the Territory of India i.e. place of supply will not be located in any State or Union Territory. Therefore, sub-section (1) of section 7 of the IGST Act will not be attracted, and supply of goods will not be a supply of goods in the course of inter-State trade or commerce.

Supply of goods, referred in clause (c) of the preceding paragraph, will also not be a supply of goods in the course of the export of the goods out of the territory of India, because transaction does not involve export of goods out of the territory of India. Similarly, the supply of goods shall also not be supply of goods in the course of the import of the goods into the territory of India, because transaction does not involve import of goods into the territory of India. Since, place of supply will also not be within the State in which supplier is located, therefore, supply of goods can also not be treated an intra-State supply of goods in view of provisions of section 8 of the IGST Act.

In certain circumstances, provision of section 10(1) (b) of IGST Act also does not support principle of destination based tax. Suppose person A is supplier of goods and he is located in State P, person B is another person located in State Q. Another person C is located in State R. Person B places order for supply of certain goods with person A and directs him to ship and deliver said goods to person C in State R. Person A, from his own State P, ships goods to person C in State R, and sends sale invoice of goods to person B. In view of provision of section 10(1) (b), place of supply of goods, for supply made by A, will be location of person B in State Q.

Now if person B is a registered person then he, depending on the circumstances, may or may not claim input tax credit of the amount of tax charged by person A. If person A does not claim input tax credit, or if he is not eligible for claiming input tax credit, amount of tax collected and paid by person A will be available in State P for apportionment in between the Union and the State in which place of supply is located, i.e. State Q. If person B is not a registered person, he will not be eligible for claiming input tax credit, and amount of tax collected by person A will be available in State P for apportionment in between the Union and the State in which place of supply is located, i.e. State Q. We see here that destination of goods will be in State R, but State R will not get any tax. In the same example, if person B is a registered person and if he makes supply of those goods to person C, then tax collected by person A will get neutralized as a result of claim of input tax credit by A, and tax collected by B from C, on supply of goods made by B to C, will be available for apportionment in between the Union and the State R, in which place of supply, made by B to C, will fall. In this case, destination State C will get tax apportioned to it.

3. My third apprehension is related to formulation of principles by Parliament for determining “place of supply”. I am of the view that clause (5) of Article 269A of the Constitution, at the most, requires formulation of principles for determining place of supply only in respect of the following supplies of goods or services or both, namely:-

(i) supply of goods or services or both in the course of inter-State trade or commerce; and

(ii) supply of goods or services or both in the course of import of the goods or services or both into the territory of India.

My above conclusion is based on following facts, namely:-

1. Marginal note of the said Article 269A runs as Levy and collection of goods and services tax in course of inter-State trade or commerce”.

2. Article 269A of the Constitution gives powers to Parliament to make law to provide-

(i) levy and collection of goods and services tax on supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce, and a supply of goods or services or both in the course of import into the territory of India; and

(ii) the manner in which goods and services tax collected on two supplies referred to in clause (i) above shall be apportioned in between the Union and the States.

1. Clause (5) provides that Parliament may, by law, formulate the principles for determining 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.

2. Expression “goods and services tax” referred to in marginal note of Article 269A of the Constitution has been defined in clause (12A) of Article 366 of the Constitution to mean any tax on supply of goods or services or both, except on supply of alcoholic liquor for human consumption.

What is noticeable is that in clause (5) of Article 269A of the Constitution, expression “place of supply” has been used in conjunction with expression “when a supply of goods or services or both takes place in the course of inter-State trade or commerce”. Therefore, use of expression “place of supply” should be understood in relation to “supply of goods or services or both in the course of inter-State trade or commerce”. Secondly, marginal note of the said Article, read with clause (12A) of Article 366, of the Constitution, refers to levy and collection of tax on supply of goods or services or both in the course of inter-State trade or commerce. Marginal note is part of the Article. For these reasons, expression “place of supply” should be understood as place of supply with respect to supply of goods or services or both in the course of inter-State trade or commerce.

In exercise of its powers under clause (2) of Article 246A, and clause (1) of Article 269A, of the Constitution, Parliament has enacted the Integrated Goods and Services Tax Act, 2017. In the said Act, expression “place of supply” has been used for two purposes, viz. (i) for defining nature of supply, and (ii) for apportionment, of tax collected on supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce, or in the course of import into the territory of India, in between the Union and the States.

In my personal opinion, for the purpose of defining supply of goods or services or both in the course of inter-State trade or commerce, situs of supply of goods is not needed, because, essential and indispensible feature of supply of goods or services or both in the course of inter-State trade or commerce is movement of goods or services or both from one State to another, or from one Union Territory to another, or from one State to a Union Territory or vice versa. Same is true about the supply of goods or services or both in the course of the export of the goods or services or both out of the territory of India, and supply of goods or services or both in the course of import into the territory of India. Essential feature of such transactions is also movement of goods from one country to another.

4. My forth concern is related to expression “intra-State supply”, defined for the purpose of levy of goods and services tax (in short ‘GST’) by the States. Although the Constitution gives power to Parliament for formulating principles for determining when a supply of goods or services or both takes place in any of the following ways, 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 export of the goods, or services or both out of the territory of India; or

(iii)  supply of goods or services or both in the course of import of the goods or services or both into the territory of India; or

(iv) supply of goods or services or both outside the State,

yet the Constitution does not give power to Parliament for defining or describing supply of goods or services or both on which States can levy GST. Conjoint reading of Articles 245, 246A and 286, of the Constitution reveals that Legislature of a State can make law for imposing goods and services tax on any supply of goods or services or both, where the State has real territorial nexus with such supply, except a supply of goods or services or both which falls in any of the clauses (i) to (iv), referred to above.

A supply is a composite transaction involving as it does several ingredients or elements such as agreement to supply, appropriation of goods towards the agreement, payment of the price, delivery of the goods and, so forth, which may take place at different places. It is difficult to say that any one of the ingredients mentioned above is more essential to a supply than the others. Ingredients of transaction of supply may be located in more than one State. On this basis, each such State, within the territory of which one or more ingredients are located, can be said to have territorial connection or nexus with the supply. If there is no restriction on tax levy powers of the States, each State, within whose territory one or more ingredients of a transaction of sale happen to take place, can make law to provide levy of tax on such transaction of sale or supply. Such theory is popularly known as territorial nexus theory of taxation. What is essential is that there should be real territorial nexus (connection) between the taxing State and what the State seeks to tax. Territorial nexus should not be illusory.

To know the supply of goods or services or both with respect to which Legislature of a State can make goods and services tax law, we can divide all supplies in two following  categories, namely:-

(i) Category 1. supplies of goods or services or both with which a State has real territorial nexus; and

(ii) Category 2. supplies of goods or services or both with which a State does not have real territorial nexus.

Any State which does not have real territorial nexus with a supply cannot levy tax on the supply. State can levy tax if it has real territorial nexus with a supply (any supply falling in category 1) but such power of States is subject to provisions of clause (2) of Article 246A, and clause (1) of Article 286 of the Constitution. These provisions take away tax levy powers of States in respect of following supplies of goods or services or both, namely:-

(i) supply of goods or services or both in the course of inter-State trade or commerce;

(ii) supply of goods or services or both in the course of export of the goods, or services or both out of the territory of India;

(iii)  supply of goods or services or both in the course of import of the goods or services or both into the territory of India; and

(iv) supply of goods or services or both outside the State.

If we can refer to these supplies of goods or services or both as prohibited supplies, then we can say that the Constitution gives powers to Legislatures of States to make law to provide levy and collection of goods and services tax on all supplies of goods or services or both with which the State has real territorial nexus, except on prohibited supplies.

Principle of territorial nexus theory of taxation does not require that all ingredients of the supply should be within the State. For a State, to have territorial nexus with a supply, it is sufficient if the State has territorial nexus only with one ingredient of the supply. For this reason, more than one State may have territorial nexus with a single transaction of supply. If each State, which has territorial nexus with the supply, is allowed to tax the supply, then a single transaction of supply will be taxed by many States. Such levy will be against the interest of consumers and will also be a hindrance in achieving economic unity of the nation. For this purpose, sub-clause (a) of clause (1) of Article 286 of the Constitution has been made. The said provision provides that no law of a State shall impose, or authorise the imposition of, goods and services tax on any supply of goods or services or both  where such supply takes place outside the State.  Clause (2) of Article 286 of the Constitution inter-alia provides that Parliament may, by law, formulate principles for determining when a supply of goods or services or both takes place outside the State. Unfortunately, no such law could be made so far. History and background of clause (a) of clause (1) of Article 286 of the Constitution reveals that it was included in the Constitution in order to overcome multi-taxation by more than one State on a single transaction of sale / supply of goods or services or both.

Restriction on power of levy of tax on a supply, which takes place outside the State, is not meant for taking away powers of levy of tax of all States, which are found to have territorial nexus with the supply. Purpose of restriction is to take away power of levy of tax of all States except one, where one or more States are found to have territorial nexus with the supply.

It is noteworthy that supply of goods or services or both in the course of inter-State trade or commerce happens to take place in between two States, or two Union Territories, or one State and a Union Territory. Where any goods or services are supplied, from any place located in any State, at any place located in territorial waters, supply cannot be defined as a supply of goods or services or both in the course of inter-State trade or commerce. But on the basis of real territorial nexus, the State which has real territorial nexus with the supply, has power for levying goods and services tax on the supply, unless such supply is found a supply which takes place outside the State in view of the principles as the Parliament may by law formulate, in exercise of its powers under clause (2) of Article 286 of the Constitution. Where under a supply, goods or services are supplied in a State from any place located in territorial waters, State, in which goods or services are delivered, will have real territorial nexus with the supply. In such cases, States can levy tax on the basis of reverse charge mechanism.

With respect 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, States or Union Territories are already exercising powers of levy of sales tax in cases in which goods are sold from a State and are delivered at any place in territorial waters. Such sales have not been declared sales outside the State by the Parliament.

5. My another apprehension is about creation of fiction in sub-section (5) of section 7 of the IGST Act. The said provisions run as follows:–

“Inter-State supply

7. (1) —

(2) —

(3) —

(4) —

(5) Supply of goods or services or both,—

(a) when the supplier is located in India and the place of supply is outside India;

(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or

(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,

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

Sub-section (1), and sub-section (3) of section 7 of the IGST Act are related to supply of goods and services where supply takes place in the course of inter-State trade or commerce. Sub-section (2), and sub-section (4) of section 7 of the IGST Act are related to supply of goods and services where such supply takes place in the course of import into the territory of India. Sub-section (1) of section 5 of the IGST Act provides for levy of integrated goods and services tax on all inter-State supplies of goods or services or both except inter-State supply of alcoholic liquor for human consumption. Clause (12) of section 2 of the IGST Act defines expression “integrated tax” to mean the integrated goods and services tax levied under the IGST Act. Section 17 of the IGST Act relates to apportionment of integrated tax in between the Union and the States. According to Clause (1) of Article 269A, the Parliament may by law provide the manner in which goods and services tax collected on following two supplies of goods or services or both shall be apportioned in between the Union and the States, namely:-

(i) supply of goods or services or both in the course of inter-State trade or commerce; and

(ii) supply of goods or services or both in the course of import into the territory of India.

 Tax levied and collected, on supplies of goods or services or both mentioned in sub-section (5) of section 7 of the IGST Act, cannot be apportioned in between the Union and the States. Tax collected on such supplies of goods or services or both also cannot be included in the tax collected on─

 (i) supply of goods or services or both in the course of inter-State trade or commerce; and

(ii) supply of goods or services or both in the course of import into the territory of India.

Supply of goods or services or both mentioned in clause (b) of sub-section (5) of section 7 of the IGST Act, i.e. “supply of goods or services or both to or by a Special Economic Zone developer or a Special Economic Zone unit” also includes certain supplies which are covered under supplies of goods or services or both referred to in sub-sections (1) to (4) of section 7 of the said Act. Apart from supplies of goods or services or both which are covered in supplies referred to in sub-section (1) to (4) of section 7 of the IGST Act, in respect of all other supplies of goods or services or both, mentioned or referred to in sub-section (5) of section 7 of the said Act, Parliament can make law in exercise of its powers under clause (1) of Article 246A of the Constitution. Power of Parliament under clause (1) of Article 246A does not include law making power for apportionment of tax in between the Union and the States. Tax collected in a State, under laws made by the Parliament under clause (1) of Article 246A of the Constitution, may be shared with such State in accordance with provisions of clause (1A), and clause (2) of Article 270 of the Constitution. Article 270 of the Constitution deals separately with taxes collected under laws those can be made by the Parliament in exercise of its powers under─

 (i) clause (1) of Article 246A of the Constitution; and

(ii) clause (2) of Article 246A, and Article 269A, of the Constitution.

In my personal opinion, goods and services tax on supplies of goods or services or both mentioned in sub-section (5) of section 7 of the IGST Act, except the supplies of goods or services covered any of the sub-sections (1) to (4) of section 7 of the said Act, tax could have been levied under the said Act only by exercising power under clause (1) of Article 246A of the Constitution. Powers available under Article 269A of the Constitution could not have been exercised.

*****

Disclaimer: Except the quoted versions, interpretations made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to follow the provisions of 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.

Author Bio

I am retired Government Servant. Prior to my retirement I had been working as Member Tribunal, Uttar Pradesh Commercial Taxes. Presently, residing in Noida, U.P. & enjoying fully my retired life. View Full Profile

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Debatable Provisions of GST Related Laws – Part I Constitutional Validity of Section 7(5) of Integrated Goods & Services Tax Act GST Law Making Powers in the Constitution of India GST Related Provisions in the Constitution of India Harmonised National Market for Goods and Services in GST View More Published Posts

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