It’s been almost 3 years when for the first time GST got introduced and since then there have been many challenging issues in GST and one such challenging issue is, whether to treat ex-factory sale as an intra state transaction or an Inter-state transaction.
The actual issue is in the drafting of the relevant provisions and that is why experts have divergent views with respect to this particular transaction and that leads to interpretational issues. In view of the above, let us examine the relevant provisions reproduced below.
“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 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;
Many experts are of the view that in case of ex-factory supply, goods are made available to the recipient at the factory gate itself. Therefore,the movement of goods terminates at the factory gate and consequently place of supply shallbe the location of the factory. Thus, it shall be treated as an intra state supply. Inthis argument, emphasis is given on the words “for delivery to the recipient”
The other school of thought put a strong emphasis on the words, “whether by supplier or the recipient or by any other person”. Since the movement actually terminates at the location of the recipient where the goods are destined to, the place of supply should be the state where the goods are taken up by the recipient for consumption.
A third view on this issue is that in case of ex-factory sales there is no movement involved in the transaction; therefore, the said transaction is to be covered by section 10 (1) (c) and consequently the place of supply shall be the location of goods at the time of delivery to the recipient of the goods.
In ex-factory sale, the risk and rewards are transferred at the factory gate only and post that, the supplier can’t be held responsible for the goods as the risk is transferred from supplier to the buyer. So, it can be concluded that the supply ends at the factory gatebut it is pertinent to note here that the words “movement of goods by supplier or recipient” indicates that point of transfer of risk and reward is irrelevant as the place of supply is based on termination of movement of goods irrespective of the fact that the ownership of goods gets transferred at factory gate or not.The primary condition appears to be the movement of goods and not the completion of supply. Furthermore, If the the phrase “for delivery to the recipient, is to be seen in ex-factory sale and it is considered that the movement terminates at the factory gate only then the phrase “whether by the supplier or the recipient or by any other person,” is left with no meaning.Although, the supply is done at the factory gate itself but the movement still can be taken up by the recipient or by any other person. The concept of destination based tax also supports the above view and in this scenario the input tax credit also flows seamlessly.
Section 10(1) (c) attracts those transactions in which movement doesn’t take place but it uses the phrase “where the supply does not involve movement of goods, whether by the supplier or the recipient,” and by perusal of this, it can be concluded that in case of ex-factory supply, movement is involved and therefore, section 10(1) (c) doesn’t get attracted.
In the case of Lalitha Muraleedharan Vs. Range Forest Officer, the court pointed out that section 10(1)(b) to section 10(1)(e) are not applicable as the supply certainly involves movement of goods in spite of being sold at the sellers location, and mere acceptance of delivery of goods at the supplier’s location is not the conclusive circumstance for deciding the place of supply of goods in the present regime of GST.
One question that arises out of the interpretation of this section is that what kind of transactions are considered under section 10 (1) (c). One example of this could be the following:
Mr. A has given a furniture on rent to Mr. B and after a year of rent, Mr. B asked Mr. A to sell the furniture to him. In this case, there is no movement of goods as the goods are already there with Mr. B. Thus, section 10 (1) (c) applies and consequently the place of Mr. B shall be the place of supply.
In the same case of Lalitha Muraleedharan Vs. Range Forest Officer as mentioned above, the high court of kerala was of the view that the petitioner upon completion of other sale conditions receives the goods at the premises of the supplier, and the acknowledgment of goods at supplier’s premises does not result in termination of movement of goods but results in further movement of goods at the hands of recipient to his location. So the final destination i.e. the location of the recipient is the supply point. The actual place of supply by plain interpretation of Section 10(1) is the location of the recipient in the State of Tamilnadu, not in State of Kerala, where the goods were handed over to the recipient. Therefore, the contention of respondents that supply of goods is completed at supplier’s location and subject sets is an intra state transaction is unsustainable.
In a recent advance ruling of M/s Penna Cement Industries Limitedthis issue has been addressed quite well and the authority for advance ruling held that the said transaction is and inter-state supply. Some of the phrases of the advance ruling are reproduced below.
“In respect of ex- factory sale, though for them supply terminates at factory gate, yet further movement is carried by the recipient or transporter (other person) of goods up to the billing address state. Thus, the delivery in such cases terminates in another State and therefore they should charge IGST in respect of such supplies.”
“What we perceive from the statement made by the applicant, is that,in case of ex-factory inter-State sales affected by the applicant, the goods are made available by the supplier to the recipient at the factory gate, but this is not the point where movement terminates since the recipient subsequently assumes the charge for transportation of the goods up to the destination in another state. Thus, termination of the movement of goods evidently takes place at the location (in a different state) to which the goods are consigned/destined and such movement is effected by the recipient or by any other person such as transporter authorized by the recipient.”
CBIC has also addressed this issue and clarified it in one of its FAQ dated 15-12-2018. The relevant extracts of the same are as follows:
Q 6. What would be the place of supply wherein the supplier hands over the goods to recipient in his state and further movement is caused by the recipient?
Ans. The movement can be caused by supplier, recipient or any other person. Where the supply involves movement of goods, the place of supply shall be the location where the movement of goods terminates for delivery to the recipient.
Illustration: A person from Gujarat comes to Mumbai and purchases goods. He declared his Gujarat GSTIN, arranges transport himself and takes goods to Gujarat. The place of supply would be Gujarat in this case.
One more aspect of the ex-factory supply is to determine the ultimate destination of the goods and authority for advance ruling has also pointed out the billing address to know where the goods are actually destined to. In case,destination of goods is not known at the time of supply,the transaction could be considered to be an intra state supply as its not identifiable if the goods are to be taken by the recipient in the same state or any other state.
In view of the above, ex works sale is required to be seen keeping in mind where the goods are destined to, as the actual delivery takes place at the location of the buyer given in the billing address.However, in order to avoid litigations, a declaration from the recipient can be taken with respect to the further transportation of goods by the recipient or supply terms can be made onEx-factory plus transportation basis, in which, although, the risk gets transferred at the factory gate, the supplier transports the goods upto the premises of buyer and take only the reimbursement of transportation charges.
Member- GST Cell (ICAI-CMA)