In the midst of cynicism and love & hate between Union and States, if we have to imagine a poster boy for “cooperative federalism” then at least for me, it is none other than GST Council. To the best of my knowledge all the issues discussed in GST Council after routing through various committees formed, have been finally decided and implemented unanimously, till the issue w.r.t online gaming where despite some descending States, the GST Council has gone ahead and implemented GST on online gaming @28%. This is really a commendable achievement.
I personally feel that in continuation to all past issues, GST council should attempt to get consent of all the States even on the online gaming issue. However, in this article, I don’t have any intention to be critical about the said decision. Rather, I would like to discuss few pending issues before the GST Council since a long time. These are quite important topics and rightfully taken up by the Council but somehow, have been deprioritized subsequently, for reasons best known to the Council. And, hence, there is a need to jog their memory and as the subject of this article suggests, the time has come when Council should reshuffle their cards to clear the backlog, at the earliest.
One of such issues which require immediate attention of the Council is:
Determination of place of supply for ex-factory and ex-warehouse supply where goods are transported to a different State by the recipient.
In layman’s language these are the supplies where risk and title of a good are getting passed on to the recipient at the doorstep of suppliers and thereafter, the recipient only arranges for the transportation of such goods. Now, the contentious issue arises when recipient is situated in a different State from that of supplier. Such issue, in turn, has again two facets – when recipient is registered and when recipient is unregistered.
And the question is for such supplies whether the supplier should charge IGST or CGST & SGST/UTGST? In other words, which State will have the right over the Revenue? The originating State or the destination state?
Now, before we dive into the issue, let us first revisit Section 7(1) and 10(1)(a) of the IGST Act, which read as below:
Section 7(1) of the IGST Act:
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.
Section 10(1)(a) of the IGST Act:
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;
In the context of the afore-stated provisions, let us now try to find out the answer of the following questions, which will be the fulcrum to determine the “place of supply” for ex-factory supplies:
Should the “place of supply” be the factory/warehouse gate of supplier, where the movement of goods terminate at the factory gate of supplier for delivery to the buyer?
Or,
Should it be premises of the buyer where he transports the goods for his own subsequent use?
In the quest of finding answer to these questions, one cannot and should not forget the paradigm shift brought by the GST to make the Indian Indirect Tax system a destination or consumption based tax from erstwhile Origin based tax. Therefore, ideally, it is the State where the final use/consumption takes place, should have the right over the tax, irrespective of the fact as to where the risk and title to the said goods are getting transferred to the recipient.
But as usual, thanks to our judiciary system and bureaucracy, we have been successful to make this issue an opaque one and litigation prone.
I have gone through few articles which have gone into nitty-gritty of interpretation of expression “involves” as used in Section 10(1)(a) of the IGST Act and it went into discussion as to whether “involves” should be considered as noun or as verb? Whether “involves” resembles with the expression “occasions” as expressed in the CST Act, 1956, while defining inter-State sales and so on.
With due respect to the intellectual value of those articles and in-depth research and efforts of their authors, my humble submission is that when GST has been made a destination / consumption-based tax, isn’t it obvious that place of consumption will be the place of supply? Further, it is a settled legal principle that where plain reading of the law is ambiguous, object and purpose of the statute should serve as a guiding factor to harmoniously interpret the statute.
Therefore, are we not looking at a simple issue with a very complex lens? But how can it be only our fault, when judiciary also gets fun to encourage such debates?
Starting with Kerala High Court, in the case of Kun Motor Co. Pvt. Ltd. v. CST, 2018-VIL-554-KER, the Court while dealing with an ex-factory sale situation considered terms of sale to be a determinative criterion for ascertaining the Place of Supply and held that such sales to be an intra-state supply entailing levy of CGST and SGST.
Then came the advance ruling in the matter of Penna Cement Industries Limited, 2020-VIL-129-AAR, where the Telangana Advance Ruling Authority has held that movement of goods in case of ex-works sales terminates at destination of goods i.e., location of buyer and thus, such supplies are subject to IGST.
Though High Court Orders stand on a much higher footing than an advance ruling and though we have witnessed numerous weird rulings pronounced by Advance Ruling Authorities; I think considering the object and purpose of GST Statute, the AAR in this case has correctly interpreted the law which the HC has missed out.
Further, the said advance ruling is also in line with the Supreme Court’s decision in the case of Tata Engineering & Locomotive Co. Ltd. v. State of Bihar, 1970-VIL-02-SC. In this case, the Supreme Court while interpreting the expression ‘sale occasioning movement of the goods’ employed under Section 3 of the CT Act, held that sale occasioning movement of goods occurs only when terms of sale require goods to be transported to other State.
But still there is a scope of contradiction left in the law because the term “delivery” is not defined under GST law. Hence, if we try to pip in some other related law like Sale of Goods Act, 1930; to borrow the meaning of “delivery”, it is used synonymously to transfer of possession of goods which in the case of ex-factory or ex-warehouse supply is the place of supply. And this is good enough to germinate countless litigations across the country?
Who is the savior who can ensure that the time, energy and resource of the dealers and judiciary system (which is already overburdened with pile of cases) are not getting wastes in such a silly issue? Obviously, it is GST Council.
Ironically, they are also fully aware of the issue. This issue was placed before Law Committee for deliberation in the months of May and June 2019. Basis recommendation of the Law Committee, in 37th GST Council meeting, a draft Circular was also placed for discussion [Agenda item 7(iii) read with Annexure A] which could not be finalized due to lack consensus amongst the States. Hence, the proposal was sent back to the Committee for reconsideration after taking into account the views of the States. Alas, since then neither the Law Committee, nor the GST Council has deliberated on this issue and attempted to conclude the same. Hence, I would like to jog their memory on this point with the hope that very soon, they will give due importance to this issue and conclude it once for all.
I am not sure why any or few States have objection to the said Circular but in my view, it was on a right direction and in sync with the objective and purpose of GST statute and legal precedents. The Circular even separated the supply of goods to registered and unregistered customers and correctly, suggested different treatment for each of them. Need and time have come to clean the dust accumulated on this draft circular and give a nod for its implementation.
Let’s keep our fingers crossed for the good sense of the Council.
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