An order is received from customer based in a different state for supply of goods on Ex- works basis ie delivery will be taken by customer at factory premises of supplier for their onward movement to intended destination.
This transaction was covered under Section 3 of CST Act as the movement of material from one state to another was in pursuance of a contract though the movement was by customer’s agent ie transporter designated by customer. Hence CST was charged.
Would the position under revised GST law be same as that under CST Act ?
In order to arrive at proper conclusion on above one needs to evaluate Sec.3 & Sec.4 for “ principles to determine whether a supply is inter state or intra state “ & Sec.7 for “ place of supply of goods “of IGST Act. As per Sec. 3 , in case of goods , a transaction will be inter- state if location of supplier & place of supply are in different states. If location of supplier & place of supply are in same state the supply will be treated as intra state – Sec.4. The term location of supplier of goods is not defined under the IGST/MGST Act , whereas one finds location of supplier of services is defined in Sec. 2(18).
Thus for our understanding location of supplier of goods will mean the place from which movement commences.
Sec.2(30) of IGST Act states that words & expressions not defined in IGST Act will have the same meaning assigned to them under Central Goods & services Act,2016. Further it needs to be kept in mind that provisions of Sale of Goods Act would no longer be applicable as under GST Act the charging event is supply & not sale as was under Sale of Goods Act & CST Act.
To determine place of supply of goods provisions of sec.7 need to be understood – relevant sections being Sec.7(2) & Sec.7(4).
As per Sec.7(2) where supply involves movement , whether by supplier or the recipient or by any other person , Place of supply will be location of goods at time at which the movement of goods terminates for delivery to the recipient. The moot point to be decided in case of Ex-Works contract is where does the movement of goods terminate for delivery to the recipient – whether it is at the factory gate as per purchase order of customer or to its intended destination in another state where goods are moved by transporter designated by customer. A point of view could be that as per contractual documents entered into , the delivery terminates when the goods are handed over to the recipient at the factory gate. The law in its wisdom has given us the basis to determine the place of supply & once this being so one has to determine place of supply as provided under the Act & one cannot go into intent of parties to the contract which is not manifested through the contract.
Thus if delivery terminates at factory gate then place of supply will be same state as that of supplier & he would be required to be charge SGST & CGST. If this is done then the customer will not be able to avail input tax credit in his state of SGST & CGST charged increasing his cost of procurement.
If one takes a stand that delivery terminates at intended location in another state , then IGST would be charged which will be available as input tax credit to customer maintaining the seamless flow of credit. However one needs to take proper care in terms of documentation :
1. Customer order should mention that goods are destined to another state.
2. Supplier keeps the copy of LR which indicates customer as consignor & consignee & delivery state.
These documents should be on record for supplier to prove 2/3 years down the line when audit takes place to prove his claim of transaction being inter-state as taxing authorities in all likely hood will take an alternative plea that delivery terminates at factory gate & supplier should have charged SGST & CGST instead of IGST. Only invoice with address of customer as of another state will not be sufficient proof to substantiate our claim for IGST. This can be potential area of dispute and the supplier would have to pay SGST & CGST and claim refund of IGST paid, thereby affecting cash flow positions depending on volume of transactions.
As per Sec.7(4) if supply does not involve movement , whether by supplier or recipient , then place of supply is the location of goods at time of delivery to recipient. If one takes a stand that in case of Ex-Works contract does not involve movement , then it would be an intra state sale.
As the position is likely to be contentious with respect to stand taken by revenue authorities to garner larger revenue appropriate care should be taken as it could have substantial financial implications for suppliers.