Input Tax Credit (ITC) is a critical aspect of the GST framework, allowing businesses to reduce their tax liability by claiming credits for taxes paid on inputs used in the provision of goods and services. The transition from the Cenvat Credit Rules, 2004 (CCR, 2004) to the GST regime has brought about significant changes in how ITC is claimed and utilized, particularly concerning the ‘Place of Supply’ rules. This article delves into the nuances of ITC on services under the GST Act, with a focus on outward services and the pivotal role of the Place of Supply.
1. The Cenvat Credit Rules, 2004 (CCR, 2004) make available the Cenvat credit for Central Excise Duty and Service Tax paid on inputs, capital goods, and input services used in or related to the manufacture of goods or the provision of output services. All relevant terms are defined in these rules, and any terms which are not defined in these rules but are defined in the Excise Act or the Finance Act will have the meanings assigned to them in those Acts. One of the most important definitions is provided in Rule 2(1) of the CCR, 2004, as follows: “Input service” means any service-
(i) Used by a provider of taxable service for providing an output service;
(ii) Used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearances of final products from the place of removal.
(iii) And includes services used in relation to setting up, modernization, renovation or repairs of a factory………….., inward transportation of inputs or capital goods and outward transportation upto the place of removal.
2. From the above, we can see that in the definition, the word “from the place of removal” is used in the first part and the word “upto the place of removal” in the second part. In the second part, which shows what types of services are to be considered as “outward transportation”, the words “upto,” is used. In the past, a lot of services such as “off-site” factory setup and “business” or “industry” related services were considered “outdoor transportation”. It has a very wide coverage. This is to show the legislative intent that Cenvat wants to provide “credit” to the industry to cover the “taxes and duties” they pay for using different services, to avoid the “cascading” effect, which is what the legislation is really about. So, the question is what is the right interpretation?
3. In the second and broad part, it doesn’t limit itself to the “place of relocation”; it simply doesn’t include it. However, since it covers so many other services, and has such a wide scope, why is it given such a narrow definition for only transportation services? And since the “main part” uses clear and unambiguous words with no ambiguities or misunderstandings, why shouldn’t that part be given importance and interpreted in its positive sense?
4. In the case of M/s Ultratech Cements Ltd v. CCE., Bhavnagar – 2007-TIOL-429-CESTAT-AHM, it was held that after the final products are cleared from the place of removal, there will be no scope of subsequent use of service to be treated as input. The above observations and views explain the scope of the relevant provisions clearly, correctly and in accordance with the legal provisions. In conclusion, a manufacturer/consignor can take credit on the service tax paid on outward transport of goods up to the place of removal and not beyond that.
5. In the previous Service Tax, as per Cenvat Credit rule, a manufacturer of excisable goods or provider of taxable services including exporter was eligible for taking the credit of excise duty paid on Inputs or capital goods in addition to credit of service tax paid on input services. However, there were lots of restrictions for taking credits. To remove the controversy and restriction of Cenvat Credit of goods and services, new tax regime has come in the form of GST Act. In GST Act, GST is destination-based tax i.e. consumption tax, which means tax will be levied where goods and services are consumed and will accrue to that state. Under GST, there are four types of Tax i.e. IGST, CGST, SGST & UTGST and based on the ‘’place of supply’’ so determined and the location of the supplier, the respective tax will be levied.
Firstly, we shall know the meaning of Place of Supply.
6. What is Place of Supply?
The ‘Place of Supply’ is an important factor in deciding the type of GST is levied. It is where goods or services are sold and their final destination. If transactions done within the same state (intra-state), both CGST and SGST are applied. However, for sales between different states (inter-state), IGST is applied. The customer’s location is considered the place of supply for a GST transaction. The IGST Act, 2017 specifies the Place of Supply for goods and services, and the tax calculation is based on this location. Hence, the customer’s location plays a main role in determining GST charges. Sections 10 to 13 of the IGST Act, 2017 lay down rules for determining the specific Place of Supply in different scenarios. These sections explain how the location of the supplier and the nature of the transaction (inter-state or intra-state) are vital in deciding the applicable tax rate.
7. Place of supply given in two ways:
(a) Place of Supply of Goods
(b) Place of supply of Services
(a) Place of Supply of Goods: – If you have requested goods to be delivered to a different location (known as the Bill to Ship to Concept) and the final destination of the goods is the actual Place of Supply as per Section 10(1) (b) of the IGST Act. If any of your suppliers incorrectly mention the Place of Supply Code in their returns, this would prevent us from being able to claim Input Tax Credit in GSTR-3B.
Section 10 of the IGST Act provides the following- Place of supply of goods other than supply of goods imported into, or exported from India.
(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;
Clause (a) of Section 10 is explained with the example
Mr. A of Delhi makes a supply of goods to Mr. B of Noida (UP). The place of supply in this case shall be Noida where the movement goods terminate and it will be a case of inter-State supply liable to IGST. On the other hand, if Mr. B is also located in Delhi, the place of supply shall be Delhi and it will be a case of intrastate supply liable to CGST and Delhi SGST.
(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;
Clause (b) of Section 10 is explained with the example
Mr. A of Delhi has supplied goods to Mr. B of Surat (Gujarat). During the movement of goods Mr. B directed Mr. A to transfer the documents of title to C of Mumbai. The place of supply of such goods shall be Gujarat and it will be a case of inter-State supply liable to IGST.
(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;
“(ca) where the supply of goods is made to a person other than a registered person, the place of supply shall, notwithstanding anything contrary contained in clause (a) or clause (c), be the location as per the address of the said person recorded in the invoice issued in respect of the said supply and the location of the supplier where the address of the said person is not recorded in the invoice.
Explanation. — For the purposes of this clause, recording of the name of the State of the said person in the invoice shall be deemed to be the recording of the address of the said person;”
(d) Where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly;
Clause (c,d) of Section 10 is explained with the example
Suppose Mr. A of Delhi enters into an agreement with Mr. B of Jaipur (Rajasthan) for installation of TV tower at Kanpur (U.P.). The place of supply in this case shall be the place of installation of TV tower i.e. Kanpur (UP). Thus it will be a case of inter-State supply and Mr. A will have to pay IGST at Delhi.
On the other hand, if this TV tower has to be installed by Mr. A on behalf of Mr. B in Delhi, it will be a case of intra-State supply and Mr. A will have to pay CGST and Delhi SGST at Delhi.
(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.
Clause (e) of Section 10 is explained with the example
Mr. A, a flight caterer, of Delhi has loaded food and drinks on Air India aircraft at Delhi on its flight from Mumbai to Chandigarh via Delhi for passengers on board. The place of supply in this case shall be Delhi from where foods and drinks were loaded on the aircraft and it will be a case of intra-State supply and Mr. A will have to pay CGST and Delhi SGST at Delhi.
(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.
b) Place of Supply of Services – If you have requested to provide services to a different location, it is difficult to determine the place of supply of services in comparison to the place of supply of goods, as services are intangible. The principle of “destination based consumption tax” is a guiding factor for determining the place of supply of services under various circumstances. Thus the place of supply would be in most cases fixed at the place where the services are destined. Section 12 of the IGST Act, 2017 provides s the rules for determining the place of supply of services.
Section 12 of the IGST Act provides the following
8. As per section 12 of the IGST Act, 2017, when the location of supplier of service and the location of recipient of service is in India, the place of supply of services is governed by
(a) General Provisions
(b) Specific Provisions
(a) General Provisions [Section 12(2)]- The general provisions are applicable only if the supply of service does not fall in any of the specific cases provided under section 12.
(b) Specific Provision [Section 12 (3 to 14) ]- The specific provisions are applicable if the supplies are related to immovable properties, Hotels, Accommodations, Restaurant service, personal grooming/fitness/beauty and health services, Training and performance appraisal services, amusement park, Organisation of events, Transportation of goods including mails, Passenger transportation service, Service supplied on board a conveyance, Telecommunication service, Banking, financial and stock broking services, Insurance services, Advertisement service to the Government.
9. Section 12 of the IGST Act provides the rules related to services provided. If services provided to recipient falls under section 12 (3) to Section 12 (14) then place of supply shall be determined according to the provisions of these sub sections.
10. Availment of Input Tax Credit based upon Place of Supply of goods and servicesunder GST
Understanding the relationship between the Place of Supply and Input Tax Credit (ITC) eligibility is important. This connection defines how a business can claim ITC. For example, if goods are supplied to a different port by air or ICD or Export, IGST applied, and the ITC must be claimed against IGST paid. On the other hand, in the case of Export under FOB contract, the Place of supply is Port/Airport/ICD and various services used in this scenario by supplier after supplying the goods from the Place of supplier. This mechanism prevents a cascading effect of taxes, ensuring a smooth credit flow from the seller to the buyer (Exporter).
As per the provisions of GST input tax credit is available seamlessly across the supply chain cycle. In case of Bill To and Ship To cases who are eligible to take input tax credit and on basis of which tax invoice the input tax can be claimed? This is the most common question which many are having in their minds. In the Case of Bill to and Ship to, if a person make supplies of goods then ITC would be claimed by the billing party of goods as per Section 10(1)(b) but no provision determined in the case of services.
11. Some examples of Services which can prove the eligibility of ITC in GST regime from the Place of supply to Port of Export or Airport of Export or ICD of Export. These are as under:-
a) Exported Goods: In the case of export of goods, the refund claims were denied by the authorities on the allegation that party has claimed the duty drawback of all industries rate. Inspite of the Fact, All industries rate of duty drawback fixed after considering the ITC as a part of refund including drawback. Therefore, Assessee is entitled to claim refund for services and input because these are the part and parcel of the Furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario.
b) Business Auxiliary Services: Due to the lack of a contract or agreement showing that the exporter received services from a commission agency outside of India, the reimbursement claim for input services used in the export of products is rejected. Assessee is entitled to claim refund for services and input because these are the part and parcel of the Furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario.
c) CHA Services: The Assessee is claiming a refund for the Service Tax paid on CHA services used in export. The issue arises from the denial of refund for outsourcing services by the service provider, despite the shipping bill number mentioned in the invoice. The Assessee is entitled to claim this refund for services and input because these are part and parcel of the Furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario.
d) GTA Services: The refund claim involves the use of input service in exporting goods, specifically GTA service, and the production of invoices from the transporter. The Assessee does not need proof of service tax payment, as the invoices indicate payment. The invoice and lorry receipt are sufficient for the refund claim because these are part and parcel of the Furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario.
e) Port Services: The Assessee is entitled to a refund for input services used in exporting goods, including terminal handling, documentation, and bill of lading charges. These services are covered under port services. The Assessee is entitled to claim refund for services and input because these are part and parcel of the Furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario. (Source 2017 (5) G.S.T.L. 186 (Tri. Chd.)
CONCLUSION
12. As per above discussion, we understood that the Place of supply of Goods and Services are different from the Place of Removal in Service Tax. In Service Tax regime, the manufacturer of goods availed the Tax credit on service Tax. But to avail the GST benefit of ITC and which is maximum litigation from the department officers and the supplier of exported goods who are entitled the ITC on services availed after the Place of supplier to respective Export Port/ Export Airport/ Export ICD. These all are part and parcel of the furtherance of Business. This was also clarified in Section 83 of the Finance Act 1994, which is mutatis mutandis applicable on GST scenario.
Disclaimer: The information provided by the author in the article is for general informational purposes only. All information provided is in the good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information in the article.
Author: Adv. Dinesh Verma
Co-Author: Adv. Sagar Verma, Adv. Diksha Verma and CA. Upkar Sharma
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