Inter-state Supply or intra-state Supply of goods – Scope and meaning of the term “Supply involves movement of goods”

Inter-state Supply or intra-state Supply of goods – Scope and meaning of the term “Supply involves movement of goods”

As we all know, the fundamental power to levy taxes on sale of goods lies with the States.  Immediately after independence, situations arose that when there was an inter-state sale, every State having territorial nexus with a transaction of sale, attempted to levy and collect tax on it, thereby, giving rise to multiple demands by different States on the same sale transaction. In order to address this issue, the sixth amendment of the Constitution was made and the Central Sales Tax Act, 1956 was enacted. Section 3 of the erstwhile Central Sales Tax Act, 1956 while discharging the duty entrusted by the Article 269 (3) of the Constitution of India laid the basic principle that ‘a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another or the sale or purchases is effected by a transfer of documents of title to the goods during their movement from one State to another.

The State from which the movement commenced was authorised to collect and retain taxes on sales and purchases under the indirect tax regime before GST was implemented in India. Thus irrespective of the nature of sales, i.e., whether inter-state sale or intra-sate sale, tax on all sales was collected by the originating State and the State receiving the goods was not entitled for any tax on sale of goods. Therefore, there was almost no dispute relating to inter-state or intra-state character of B to C sales in the old tax regime. However lots of disputes arose in case of B to B transactions, because of the benefit of concessional rate of tax on fulfilling of certain conditions for inter-state sales. Furthermore, there were some disputes on stock transfers vs. inter-state sales, on which interest of the revenue of two states conflicted.

After introduction of Goods and Service Tax, there has been a major paradigm shift in the indirect tax regime from origin based tax system to destination based tax system and consequentially, the taxation on inter-state sales or supply of goods has also seen major change.  Like in the earlier tax regime, during GST regime also, the state tax on intra-State sales or supply of goods goes to the credit of the State from where the supply is originated.  However, unlike during CST era, the state tax on inter-State supply goes to the coffer of the recipient (destined) States. Thus, during current tax regime, the fact that whether a particular sale is inter-state or intra-State will decide that which state will get the State tax on such sale/ supply. Thus, the question that whether a sale/supply is inter-state supply or intra-state supply has become very critical in the GST era. Unless and otherwise, the law is drafted in a lucid manner and the principles formulated to decide inter-state supply properly, inter-state disputes are inevitable.

Say for example, an individual from Tura (Meghalaya) comes to Guwahati (Assam) and purchases a car and asks the dealer to deliver the same at Tura. The Assam dealer obtains insurance and temporary registration in the name of the purchaser and issues an invoice charging IGST. Say after a span of time, the officer of Assam determines the same transaction as intra –state and asks the dealer to deposit CGST & SGST. As per Section 19 of IGST Act, in such case, the dealer will be entitled for refund of IGST paid by him erroneously. The question arises whether the IGST paid will be refunded without the consent of the Meghalaya officer. Can the decision of the Assam officer bind the Meghalaya officer to grant refund to the Assam dealer or can the Meghalaya officer differ and resist this refund based on his interpretation of the provisions of Section 10(1)(a) of IGST Act.

This kind of issue and many more such issues, where the claim for revenue by one State may be challenged or objected by another State will arise in the history of federal indirect tax system, perhaps for the first time. The principles determining the inter-state sale/ supply will be affected by many factors, not one, like, the location of supplier of goods, place of supply and the address of delivery to the recipient, so as to ensure the protection of interest of the recipient as well as the dispatching States. All these issues can be examined and interpreted by arising by critically though harmoniously, analyzing the provisions of Section 7 and Section 10 of the IGST Act, as has been legislated.

Before initiating discussion on Section 10, i.e. determination of place of supply of goods, let us first refer to Section 7 of the IGST Act, to evaluate the importance of the term “place of supply of goods” dealt by Section 10.

Section 7 (1) of the IGST Act defines inter-state supply of goods as follows;-

“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.”

Thus, whether a supply of goods from a state is inter-state supply or not will depend on two venues, i.e., ‘the Location of the supplier of goods’ and ‘the place of supply of goods’. The term, ‘location of the supplier of goods’ has not been defined in the Act, however it has been widely accepted that location of supplier of goods will be normally determined on the basis of the place of business of the supplier of goods.

Let us now refer to what Section 10 says. Section 10 of IGST Act explains the term “Place of Supply of goods” in the following terms;-

“S. 10. 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,––

• 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
• 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;
• 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;
• where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly;
• 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.

(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.”

Specific to the issue illustrated in the example above and such other transactions involving purchase of goods and delivery thereof terminating in different States, where determining the nature of supply as inter-state or intra state is required, clause (a) under sub-section (1) of Section 10, as reproduced above, is to be studied along with the provisions of Section 7 of the IGST Act (supra).

The Section 10 (1)(a) appears to have three distinct limbs, i.e.,

• 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.

 (A) Where the supply involves movement of goods:-

The phrase “supply involves movement” is most important and is going to be discussed in various court judgments, sooner or later. Let us first discuss the meaning of the term ‘supply’ and ‘involves’.

(i) Meaning of the term “Involve”:-

As per Oxford dictionary, the verb ‘involve’ mean “have or include (something) as a necessary or integral part or result”. It is a wider term than the term occasion.

(ii) “Involves” versus “Occasions”:-

Earlier the word used in Section 3(a) of the CST Act was “occasions”, which literally means “to reasons” or “to cause”. However, when interpreting the meaning of the word “occasions”, much wider meaning has been assigned to the said term in the context of Section 3 (a) by the highest Court of the country. It has been held on numerous occasions that the said term not only includes the movement of goods caused by a contract itself, but also includes the movement of goods caused as a necessary incident of the contract of sale. In the case of Coffee Board, Bangalore vs Joint Commercial Tax Officer, 1970 SCR (3) 147 (SC)], it was held that the word “occasion” does not necessarily mean immediately cause; it also means “to bring about especially in an incidental or subsidiary manner”. The Apex Court in TISCO’s case, also says that the sale will be covered by section 3(a), even if the inter-state movement is covenant or incidental of the contract of sale.

Apparently, the meaning of the term “involves” is wider than the term “occasions”. It so appears that the new term “involves” has been used by the law makers of GST as a better substitute of the old word “occasions” in sync of the liberal interpretation of the said old term by various Courts of the country in the old regime.  Thus, in no case, this term can be assigned a narrower meaning than that of the earlier term. It would not be an exaggeration thus to say that the GST law makers in their own vision and wisdom have replaced the phrase “the sale occasions the movement of goods” by the phrase “the supply involves movement of goods” to widen the scope whilst retaining the spirit of the view taken by the Courts of this country in such cases.

Recently, Hon’ble Kerala High Court in the case of Kun Motor Co. Pvt. Ltd. vs The Asstt. State Tax Officer has also used the term “involves” and “occasions” in the same meaning while discussing the clause (a) of Section 10 (1) of the IGST Act. The said use of the word “occasions” several times in place of the word “involves” under GST law affirms of the above belief.

(iii) Meaning of the term “Supply”:-

The term ‘Supply’ is the most important word of the GST law and has been defined under clause (21) of Section 2 of IGST Act stating that that the term “supply” shall have the same meaning as assigned to it under Section 7 of the CGST Act. Section 7 of the CGST Act provides an inclusive definition of the term ‘supply’, without specifying what the term ‘supply’ is. It merely says that it will include all form of supply of goods or services or both such as sale, transfer, barter, etc.   It is thus clear that, the Entry 1(a) of Schedule II of CGST Act treats a transfer of the title in goods as a supply of goods, but does not in any manner restrict the term “supply of goods” to the act of transfer of the title in the goods.

(iv) “Sales” versus “Supply”:-

In clause (a) section 10(1), the word “Supply” has been used in the same fashion in which the word “Sale” is used in section 3(a) of the CST Act. Unlike CST Law, GST is applicable on sales as well non-sales transactions and therefore using the term “Supply” in place of the word “sale” was a compulsion and not a choice.

The term ‘supplier’ in the GST Act is a wider term and is larger enough to take ‘sale’ in its ambit. In case of a sale of goods, the term ‘supply’ may also be read and understood as the word “sale”.

(v) “Contract of Sale/ Supply” and “Intent of Supply”:-

The Apex Court and many high courts have repeatedly indicated that the term “if the sale or purchase occasions the movement” should mean as “if the contract of the sale or purchase occasions the movement”.

In Tata Iron and Steel Co. Ltd.  … v. S. R. Sarkar (1961 AIR 65) (SC) held that “The question then arises, when does a sale occasion the movement of goods sold ? It seems clear to us that a sale can occasion the movement of the goods sold only when the terms of the sale provide that the goods would be moved; in other words, a sale occasions a movement of goods when the contract of sale so provides”.  The Court also says that the sale will be covered by Section 3(a), even if the inter-state movement is covenant or incidental of the contract of sale. After the enactment of the CST Act, 1956, this interpretation of the Honorable Apex Court of the country is the first and the continuous position of law governing the meaning and concept of the phrase “the contract of sale or purchase occasions the movement of goods”.

It seems logical to understand the phrase “if the supply involves movement of goods” as “if the contract of supply involves movement of goods” because the term ‘sale’ in context of Section 3 (a) is to be read and understood as “contract of sale”.

Furthermore, it needs to be noted that under GST, the term “supply” does not remain restricted to “sale” as earlier. Every sale is backed by a contract, however, every supply does not bring in a contract, like, supply to distinct persons under same PAN (earlier known as stock transfers) are not backed by any contract. Thus, in spirit of the principle laid by the Supreme Court in the case of TISCO (supra), the position under GST may be interpreted as indicative of “if the intent of supply involves movement of goods”.

 (vi) Transaction of Supply:-

Some experts are of the view that the term “supply involves movement” stands for “if the transaction of supply involves movement”. I do not have any reservation on using the said term, unless and otherwise a restrictive meaning is assigned to the term “transaction”. The said term also covers all the aspect of buying and selling and is also synonyms of the word “contract”. Neither the term ‘Sale’ under section 3(a) of CST Act, 1956 was treated as being confined to the Act of transfer of property in goods and nor  the term “supply’ in section 10(1)(a) can be restricted to the Act of transfer of property in goods or handing over the possession of the goods.

(B) Whether by the supplier or the recipient or by any other person:-

Movement as contemplated by Section 10(1)(a) has to either be by the supplier or by ‘the recipient’ or by any other person.

(i) Movement of the goods by the Supplier:-

The word “supplier” has been defined by clause (105) of section 2 of CGST as “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied.

This part of the second limb is confined to the cases where goods are moved by the supplier himself or his agent. While considering the definition of the term “agent” as per clause (5) of section 2, it is clear that the goods moved through transporter does not come under this part of the limb.

(ii) Movement of the goods by the ‘Recipient’:-

The term ‘recipient’ has been defined in clause (93) of Section 2 of CGST Act and accordingly recipient of goods means the person who is liable to pay the consideration and also includes agent of the recipient.

Thus, use of the phrase “by the recipient” in Section 10(1)(a) also indicates that  law makers have an intent that even if the goods are moved by the recipient to his place, the place of supply of goods will be the place where such movement is terminated i.e. place of the recipient.

Experts who are in favour of the narrower interpretation of the term “supply involves movement” argue that presence of the term ‘by the recipient’ would include only those cases where movement is undertaken by the recipient with a condition that the transfer of property will only take place after the goods are moved to the place of delivery.   The wordings of the Act, in my opinion do not vouch for such interpretation. Generally, once the goods are handed over to the recipient, the property in goods stand transferred to the recipient, however delivery may terminate at a later point of time as indicated in the contract or agreement, whether written or verbal.

It needs to be categorically noted and appreciated that instead of using a single phrase “by any person”, three different terms i.e. ‘Supplier’, ‘Recipient’ and ‘any other person’ have been deliberately used in the second limb. This itself indicates that the law makers wanted to cover those instances where the recipient himself moves the goods in case of inter-state supply, even though the transfer of title in goods may have been completed in the supplier’s state itself.  The restriction, during the CST regime that the buyer cannot move the goods in case of inter-state trade, unless and otherwise he is under a contractual or legal obligation of doing so, has been intentionally and specifically given a go bye and a fresh intent has been conveyed in the form of the legislated Section 10(1)(a) to cover those cases, where the recipient himself has collected the goods with a disclosed intention to move the said goods to a pre-disclosed place of the recipient.

(iii) Movement of the goods by “any other person”:-

This part of the limb make it open that the movement of goods can be by any person. Transporters whether assigned by the supplier or the recipient will also come under this.

(C ) 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:-

The concluding part of the clause (a) i.e. the third limb states that the place where the movement of the goods terminates for delivery to the recipient is the place of supply. Thus, it so appears that this limb cannot independently operate except under the framework of the preceding two limbs read with the definition of the term “address of delivery” as defined under the sub-section (2) of Section 2 of the CGST Act. Meaning thereby, the phrase “to the recipient” used in Section 10(1) (a) can be understood as “to the address of delivery” as recorded in the invoice issued by the registered supplier at the instance of the recipient, irrespective of the person who is causing the movement of the goods.

This interpretation also finds solace in the provisions under Section 31 of CGST Act, which mandates issue of tax invoice before or at the time of removal of goods, in a case of supply which involves movement of goods. A Tax invoice essentially needs to mention place of supply in terms of Rule 46 of the CGST Rules. Since, this tax invoice is to be raised before commencement of the movement of goods, particularly, by the recipient, the supplier is bound to rely upon the declaration/ statement of the recipient in this regard. In no circumstances, the onus to prove that the goods were moved accordingly can be forced upon the supplier, especially when the supplier has not gained any special benefit like concessional rate of tax or any exemption etc. against the said supply of goods.

Inter-state supply in light of the Judgment of the Hon’ble Kerala High Court

Recently, the division bench of Hon’ble Kerala High Court in the case of “Kun Motor Co. Pvt. Ltd. & Vishnu Mohan Vs. ASTO, Kerala State GST Department and others dated 06/12/2018” has pronounced a judgment in the context of Section 10 (1)(a) of IGST Act. The facts of this case were more or less similar to the facts of the example illustrated for initiating the discussion under this article.

The case before the Hon’ble High Court was basically relating to penalty under Section 129 for violation of the provisions of Rule 139. In the said case, a person from Trivandrum went to Pondicherry and purchased a car. He instructed the dealer to dispatch the Car to Trivandrum in the state of Kerala. The dealer dispatched the Car to Pondicherry. However, before dispatching the Car, as per the requirement of law under Motor Vehicle Act, the dealer covered the Car with Insurance and obtain a temporary registration at Pondicherry showing the address of the purchaser at Trivandrum. The dealer raised an invoice and charged IGST. The Car was intercepted in Kerala and penalty was levied for non-accompanying of the consignment with the E-way bill.

The court delved into the aspect of whether the sale was an intra-state one or an inter-State one and concluded that the supply of Car was an intra-state sale. Their lordships observed “When, a resident of Trivandrum purchases a car in Puthuchery, takes possession of the same, obtain temporary registration in his name and takes out an insurance cover for a period of one year, also in his name; which insurance cover is mandatory under Section 146 of the M.V. Act, the presumption can only be that the delivery was effected in Puthuchery itself. All of these factors indicate that the transfer of property in goods vests with the purchaser, at Puthucherry itself, wherein the supply terminated. The Court has observed that as the transaction of supply was terminated at Puthucherry it-self and the property in vehicle was transferred in puthucherry, the supply was intra-state only.

The Hon’ble Court though has not agreed with the principles emerging out of the above discussion, still observed that “A transaction which terminates with the supply within a State is an intra-State supply. However, when a dealer or manufacturer within the State of Kerala purchases goods for the purpose of further sale or manufacture within the State of Kerala, from an outside State dealer and transports it to their manufacturing unit or dealership, then the transaction occasions the movement of goods. Though the sale occurs in that outside State, the place of supply of goods is in this State since the transaction of sale occasions the movement of goods from one State to another and the supply is terminated in this State; whether the movement is by the supplier or the recipient himself. But, when a person residing in one State goes to another State and purchase goods for his own use, the supply with respect to the transaction terminates on the individual taking possession of the goods in that other State. The movement of the goods, after such sale is terminated and delivery is effected, whether it be inside the State or to outside that State, would be the prerogative of the purchaser, who owns the goods, in whom the property in such goods vests and such movement would not be that occasioned by the sale transaction or the supply thereon.”

It was also observed “We cannot also comprehend how an intra-State sale would be converted to an inter-State sale merely for reason of it being transported in a carriage. A purchase of, say, a Television by a resident of Kerala from Bangalore would be an intra-State sale and the nature of the supply, whether it be an inter-state or intra-State, would not depend on whether the purchaser carries it as a head-load through the borders or transports it through his own conveyance or through a transporter.”

While referring to the above discussion and the facts and decision in the case of Kun Motor Co. P Ltd., it so appears that the said judgement has not differed significantly with the principles laid by the Court in the old regime with respect to the provisions and intent thereof under the CST Act, yet has taken a decision which is different from the principles laid thereunder. It is especially noteworthy that the Hon’ble Kerala High Court has suggested different treatment of sales in case of B to B and B to C sales, whereas neither the wordings of section 10 of IGST Act apparently suggests so, nor the said suggestion appears to be in line with the judgements of CST era.

Despite of all the difference of interpretations, it is beyond any doubt that drafting of section 10 of the IGST Act seems to be made hurriedly and is going to cause more and more litigations and as usual the business community will be sufferer.

The judgement in case of Kun Motor Co. P Ltd. of the Kerala High Court is also not in agreement with the principle laid by the judgment of Hon’ble Gauhati High Court in the case of “Buishi Yada Motors Vs. State of Arunachal Pradesh and others, [2004] 135 STC 438 (Gau)”, which is quite akin to the said case. In the case decided by Gauhati High Court, in a similar situation, an Arunachal based dealer has sold vehicles to unregistered dealers at Assam, it was held – “ In the case at hand, it has already been indicated hereinabove that in the face of the certificates granted by the petitioner in Form 21 of the Central Motor Vehicle Rules, 1989, showing addresses of the buyers located in the State of Assam, the movements of vehicles to the State of Assam for registration at the residential addresses of the buyers form the incident of contract, such movements were necessitated by the contracts themselves and that the movements of the vehicles were inextricably inter-linked with the sale inasmuch as for the transactions to be completed, vehicles were required to be moved to the State of Assam for the purpose of registration. In the face of the assertion of the petitioner that the vehicles had moved out in pursuance of the contracts of sale, the onus rested squarely on the respondents to show that contrary to the terms of the agreement of the sales, the vehicles, in question, had not moved out of the State of Arunachal Pradesh. Until it is so done, the sales will not be treated as intra-State sales.”

In the case of Hon’ble High Court of Kerala also, there was an apparent covenant or incident of the contract of sale that the vehicle will be moved to Kerala. The recipient has not only disclosed his name and address, but has also disclosed his intent to take the vehicle to his State. The said fact has been reflected in the invoices, which stated Kerala as place of supply and which charged IGST on such supply. But it seems that Hon’ble Court has not preferred to give importance to the contract of supply, intent of the supplier and recipient and has insisted on the ‘transactions of supply’ as such and has given weightage only to the point of ‘transfer of property in goods’ which is not determinative as per the other decisions on similar issue. I wonder, whether the recent judgment of the Kerala High court suggests more strict definitions of inter-state sales under GST laws.

It may sound unpleasant but I apprehend that in the light of the aforesaid judgment, principles of destination based taxation is losing its significance. The wise coining of terms in an unclear backdrop and without proper use of explanations and harmony between provisions can hardly help but only detoriate the position of settled propositions and trade practices in the bona fide. Let us hope that the seriousness of the issue will be addressed in the earnest and within the earliest possible time to deliver to the ideology posed by Learned author C.B. Fillebrown that:

“In the process of taxation the industry of the nation must be disturbed no more than is necessary”

Author can be reached at [email protected]