Q. Whether a GST Tax invoice by a consignor to a consignee, under an agreement to that effect, essentially construes a transfer of ownership in the goods to the latter?
Background:
Pre GST regime allowed consignment sale to Consignees as well as stock transfers (against Form ‘F’ within the same PAN, but different VAT TIN’s), without payment of VAT. This made business easier and in tune with the intent of not transferring the ownership in goods to the consignee.
Consequently, the ownership and hence the Insurable Interest in the goods rested with the Consignor/Transferor, and there weren’t any qualms about that.
A consignor used to issue a Goods Transfer Note (GTN), under pre-GST regime, accompanied with Form F, and the commercial appreciation of this instrument of transfer was different than an ‘invoice’, the latter being construed as an authoritarian document to pass ownership in a movable property.
Things have since changed with the introduction of new GST regime w.e.f. 1st July 2017.
In order that the chain of supply and incidence of tax doesn’t suffer a break, ‘Tax Invoice’ is the only instrument available under the GST regime, when it comes to supply of goods between different GSTIN’s with different PAN (i.e. to an independent third party) or between different GSTIN’s with same PAN (i.e. in case of interstate Branch Transfers of the same person, also known as ‘Distinct Persons’ as defined u/s 25(4) and S.25(5) of CGST Act 2017).
Whether it be an inter-branch, interstate ‘supply’ between ‘distinct persons’ (as defined u/s 25(4) and 25(5) of CGST Act 2017), or a supply in a ‘Goods sent on consignment’ case, one must issue a GST invoice in terms of S. 31 of the CGST Act 2017, r/w Chapter VI of the CGST Rules 2017, to execute the intended ‘taxable supply’.
This now gives rise to questions as to the ownership claims to the stock, as ‘invoice’ has long been held to be ordinarily an instrument through which title to the goods is transferred along with the physical goods.
The moot question is that with whom lies the classic ‘Title’ to the goods once he, being a ‘supplier’, issues a tax invoice.
Treatment of Consignment Sale under current regime.
Law/Acts referred to:
1. The Constitution of India – A. 366(12-A)
2. The Central Goods and Services Act, 2017 (CGST Act)
3. The Sale of Goods Act, 1930
Question: How title of the goods sent on consignment, is still retained with the Consignor, in-spite of issuance of a Tax Invoice by the Consignor to the consignee, to comply with the GST law?
Ans: There apparently is no direct mechanism under the GST law which clearly facilitates the ‘Consignment Sales’ as understood normally, as under the new GST regime, all ‘supplies’ are to be executed vide a ‘Tax Invoice’, which gives an impression that issuance of an ‘invoice’ essentially entails transfer of ownership in the consigned goods as well.
This is not always the case, as explained hereinafter.
A consignment sale has the following features:
1. Goods are ‘supplied’ to a consignee (different PAN and GSTIN)
2. Title to goods is retained by the consignor at all times.
3. Insurable interest therefore remains with the Consignor only.
4. There’s no consideration, immediate and upfront, for the transaction of this supply, except for the gradual and eventual secondary Sales made by the Consignee, which is remitted to the consignor’s account as per the terms of Agreement, as and when such sales are realized, subject to Consignee’s commission and agreed expenses.
Lets examine the law :-
I. The Constitution of India
Vide 101st Constitutional Amendment, 2016, sub-clause 12-A was introduced in the Article 366 (the Definitions Article), as under :-
(12-A) ”goods and services tax” means
-any tax
-on supply of goods, or services or both,
-except taxes on the supply of the alcoholic liquor for human consumption
This clearly means that the GST is a tax on ‘supply’. For definition of supply, the CGST Act has to be referred to therefore.
It may be noted that the terms “sales” or “ownership in goods” have not been defined in the said A.366 of our Constitution. Not even the term ‘supply’ has been defined therein.
II. CGST Act, 2017–
a. Preamble:
An Act to make a provision for levy and collection of tax on intra-State supply of goods or services or both by the Central Government and the matters connected therewith or incidental thereto.
Note: Preambulatory intent is to levy tax on ‘supply’ and not merely sale.
b. Section 2 of the CGST Act is the definitions section containing following reference to the term ‘supply’
i. S.2(83)- “Outward Supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course of furtherance of business.
Note:
This is an inclusive definition of ‘supply’ and includes all modes of supply, under an agreement or a contract between the supplier and the recipient, along with sale, transfer etc.
ii. S.2(66)-“invoice” or “tax invoice” means the tax invoice referred to in section 31.
Note: the terms ‘ownership’ or ‘transfer of ownership’ are not defined in the GST law.
c. Sec. 9 of CGST Act,2017, is the charging section read along with the intent of the GST Law as stated in the preamble, reiterates the relevance of ‘supply’, which is defined inclusively.
S.9 : Levy and Collection
(1) subject to the provisions of sub section(2), there shall be levied a tax called the Central Goods and Services tax on all inter-State supplies of goods or services or both…………………………
Note:
– The GST law innately does not concern itself with ‘sale’ only, but rather ‘supply’ of goods/services.
– In fact, terms such as “Sale”, “ownership” or “transfer of property in goods” have not even been defined in the CGST/IGST Acts.
To make matters more evident as to intent of GST Law:-
S.31 of CGST Act . – Tax Invoice r/w R. 36 of CGST Rules (i.e Documentary requirements and conditions for claiming Input Tax Credit),
clearly indicates that the intent of the GST Law and its charging Sec. 9, is to establish the factum of ‘Supply’ only. It doesn’t concern with transfer of title to goods at all. In fact, neither S. 31 (Tax Invoice) nor R. 36/46 etc. mention the term ‘sale’ even once, as it is included in definition of ‘Supply’ u/s 2(83).
– A tax invoice is therefore essential for all kinds of supply, i.e. including sale, transfer, exchange, barter etc, as given u/s 2(83) of the CGST Act, 2017. This is only a machine provision and has nothing to do with transfer of ownership. Infact, inter-branch transfers by the same assessee is effected vide a Tax invoice. For e.g. X & Co.(Delhi) transfers goods to X & Co. (Maharashtra) vide a Tax invoice only. It is the necessity of a destination-based tax (i.e. GST) and cannot transfer ownership from Delhi to Maharashtra, while both branches belong to the same assessee. Noone can transfer ownership again to himself, tax-invoice notwithstanding in such cases.
– Also there is a concept of “Self Invoice” u/s 31(3)(f) r/w R.36(1)(b), which runs riot with the plain commercial understanding of the term ‘invoice’, which was hitherto construed to be an instrument that establishes the primitively understood ‘title’ to the goods. Noone can make a sale to himself but in GST law, even this has been provisioned for.
– Under the GST law, therefore, to ascertain the ‘title’ to the goods, one must refer to the commercial understanding reached to by the parties i.e. the ‘Supplier’ and the ‘receiver’.
– Section 2(83) is again reproduced as aid to understanding, as under:-
-
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- S. 2(83)- “Outward Supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course of furtherance of business.
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Lets now examine the most relevant law concerning ‘sale of goods’ i.e. The Sale of Goods Act 1930.
III. The Sales of Goods Act, 1930 :-
S. 4–
4. Sale and agreement to sell.—(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to, sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
Sec. 19– Sale of goods Act-“Property passes when intended to pass” (emphasis supplied to the word ‘Intended’)
19. Property passes when intended to pass.— (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to he transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.
(3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.
Plain reading of S. 19(1) and 19(2) clearly indicates that –
Where there’s a contract
– for sale of goods
– the property in them
– Is passed/transferred to the Buyer at such time
– as the parties to the contract intend it to be transferred
S.19(2) – For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the Contract,
– the conduct of the parties; and
– the circumstances of the case.
S.19(3)- Unless a different intention appears (i.e if the contract/agreement is unclear as to intention to transfer the property in the goods sent on consignment), rules contained u/s 20 to 24 shall apply.
# It is amply clear that terms of the contract shall prevail when it comes to transfer of title to the goods that are sent on consignment.
Also, as per Sec.3 of SOGA, 1930, the Indian Contract Act, 1872 shall apply to contract for the sale of goods.
Conclusion:
– A mere issuance of tax invoice pursuant to complying with the GST law doesnot mean that the ownership has transferred too, as invoice u/s 31 can be used for all forms of supply, as given u/s 2(83) of the CGST Act,2017.
– Terms of the Contract between the transacting parties shall predominate, as per S. 19(2) of SOGA, 1930, even if that were a contract for sale.
– The covenant with the consignees prevails over the form of supply to further know as to whether the title in the goods has also been transferred to the consignee. Doctrine of Substance over Form will apply in supplies pursuant to Consignment therefore.
– Even when the contract is for outright sale, the transfer in title of goods can still be regulated at the wish of the Seller, as per the Sale of Goods Act 1930.
DISCLAIMER:
Personal opinion only. To be used with discretion and due care.
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