One of the most frequently asked and discussed query under GST by clients and practitioners alike has been the tax implications in the case of scenarios where the billing and shipping addresses are different, or the customer and consignee are two different parties. It is an accepted business norm for a purchaser to direct the seller to deliver the goods directly to a third party, whether within the same State or otherwise. It helps to save transportation cost for the purchaser while also reducing the lead time required for delivery of goods. This practice has been in vogue in most businesses dealing in goods and having operations in multiple States in the country.
Under the erstwhile VAT and CST laws, this scenario of billing to a party in one particular State and delivering to another party in another State was dealt with by way of a combination of C forms, E-1 forms and E-2 forms. This concept was broadly known as a “sale-in-transit” transaction. To explain briefly, I will take help of an example. “A” is a seller of goods registered in Maharashtra. “B” is a customer of “A” in Gujarat. “B” wants to purchase some goods from “A” and sell such goods to “C” who is located in Karnataka. “B” places the order to “A” and asks him to deliver the goods to “C”. Since this is an interstate sale for “A”, he would be required to obtain C form from “B” for charging tax at a lower rate. However, if the goods are delivered to “C”, “C” will also be required to issue a C form to “B”. To avoid paying tax on this transaction at both stages of sale, “B” could obtain an E-1 form from “A” and not charge tax to “C”. On production of both the C form and the E-1 form, the transaction would become taxable only once in the hands of the original purchaser, which is “B” in this case. E-2 form came into the picture for subsequent sales from the last buyer (“C” in the example above.)
This procedure was as difficult and controversial as it sounds from the above explanation. It invited unending litigation lasting years due to different reasons, the most common being the delay in application and issuance of C forms and E-1 / E-2 forms. The advent of GST gave the Government an opportunity to simplify the mechanism and streamline the flow of this transaction. It also became paramount to introduce a simplified method, as the input credit mechanism under GST allows credit of interstate supplies. On this cue, the Government has done away with the requirements of declarations and abated rates of tax for inter-state supplies. At the same time, the introduction of input tax credit on inter-state supplies has reduced the effective cost for all the parties concerned. While this has worked towards elimination of barriers on inter-state supplies, the issues regarding the transactions of separate billing and delivery addresses are still brewing confusion. This confusion can, in part, be owed to the drafting of the provision in law for dealing with such transactions.
Chapter V of the IGST Act, 2017 deals with the determination of Place of Supply of goods or services or both. Section 10 of the IGST Act, 2017, contained in Chapter V, lays down the provisions for determining the Place of Supply of goods other than those imported into or exported from India. Clause (b) of Sub-section (1) to Section 10 reads as under –
“(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;”
A brief reading of this clause would suggest that in case of delivery of goods to any person on the direction of a third person, the third person will be deemed to be the recipient of such goods and the place of supply shall be the principal place of business of such third person. This brief explanation seems fair enough as it meets the purpose of maintaining the credit flow in the transaction, which is one of the motives behind introduction of GST. Under GST, which is a destination based tax, if we were to go strictly by the movement of goods, the tax to be charged would depend on the place of delivery which would result in loss of credit to the buyer (when located in a different State) and loss of revenue to the State of such buyer (since goods are consumed in the State of delivery).
The clause seems easy enough to understand when read in a layman’s language without paying attention to the punctuations in the clause. However, the punctuation is exactly what alters the meaning of the clause to some extent, introducing conditions and pre-requisites to the application of this clause. The abundant use of ‘commas’ in the clause change its interpretation, giving rise to some rather complicated requirements that may not always be compliable in the practical scenario.
A ‘comma’ is commonly used to separate different items in lists to distinguish between the different elements of the list. One of the other uses of ‘comma’ is to separate different clauses of a sentence. The use we are interested in for this discussion is when the ‘comma’ is used to mark off what are known as “parenthetical phrases” and “dependent and independent clauses”. “Parenthetical phrases” (similar to “parentheses”) are explanatory or qualifying words, clauses or sentences inserted into a sentence. These phrases could be left out from a sentence and yet the sentence would make grammatical sense. These phrases are usually separated by commas on both ends.
Let’s analyse clause 10(1)(b) in the light of the above. The first part of the clause reads ‘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,’. If we read this part without the assumed parenthetical phrase of ‘whether acting as an agent or otherwise’, it would read as ‘where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, before or during movement of goods, ..…’. The sentence makes sense grammatically, which provides a reasonable basis to assume that the phrase ‘whether acting as an agent or otherwise’ is a parenthetical phrase inserted only to provide more clarity for who the supplier can be (i.e. agent or otherwise.)
But the question that arises is how can one ‘deliver goods before or during the movement of goods’? The answer to this has been provided in the next phrase of the clause itself, which reads “either by way of transfer of documents of title to the goods or otherwise,”. This phrase can be classified as a dependent clause which relies on the earlier part of the provision to make grammatical sense. Putting it together with the previous phrase, the part clause would read ‘where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, ….. , before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, …..’. This phrase provides the much-needed explanation to the question above. The only way goods can be delivered before or during the movement of goods would be through transfer of documents of title.
But how does one go about proving that the goods have been delivered before or during movement of goods? The transfer of documents of title, of course. The classic example of document of title is the ‘Invoice’. As per section 33 of the Sale of Goods Act, 1930, “Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf.” So if the both the supplier and purchaser agree to it, once an invoice is raised, the title of the goods belongs to the purchaser. The purchaser is then the legal owner of the goods once they are delivered to him.
What does this imply? Let’s put all of the discussion above into perspective. If Clause 10(1)(b) is interpreted strictly following the rules of grammar, it would suggest that the Clause would be applicable only when the title to the goods are transferred to the consignee by the original buyer by raising an invoice, before or during the movement of such goods from the place of the supplier who is acting on his own account or as an agent.
The practical implications of this interpretation have a big impact on how these transactions have traditionally been carried out. It would imply that the invoicing from the original purchaser would have to be done before the goods are delivered to his customer, who is the consignee. Moreover, to complete the transfer of documents of title (and thereby, delivery of goods), the consideration would have to be received before the goods are delivered to the consignee. As absurd and outrageous as it sounds, the Clause is difficult to interpret in a different way. Of course, the words ‘or otherwise’ provide some breathing space to find a different way to ‘deliver goods before or during movement of goods’, but it is difficult to envision a scenario which affords a different method.
In case the conditions as mentioned above are not met, the Clause 10(1)(b) is rendered inapplicable to the transaction and, in the absence of any other provision, Clause 10(1)(a) of the IGST Act would apply. The latter Clause reads 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;”
This clause is so drafted as to include within its purview all transactions other than those covered by Clause 10(1)(b). Note that it does not mention who the recipient has to be. Therefore, any transaction that does not meet the requirement of Clause 10(1)(b) would be subject to 10(1)(a), where the supplier shall have to charge GST based on the place of delivery of goods as the place of supply. Needless to say, this would result in loss of ITC to the original purchaser as well as the consignee. I am sure that was not the intention of the Revenue.
Digressing a little, it has, interestingly, come to my notice that the e-Waybill portal has amended the format for application of e-Waybill to allow creating an e-Waybill for separate bill-to and ship-to addresses. This functionality was not present in the earliest versions. Here’s the fun part. While filling the tax details in the invoice details section, the IGST, CGST and SGST boxes get unfrozen based on the bill-to State. So, if you are in Maharashtra and your customer is in Maharashtra as well, but you are delivering to Gujarat, the e-Waybill portal itself does not allow you to input IGST in the invoice details. In fact, this also works the other way round, where you can not input CGST / SGST if you are delivering to the same State but billing to a different State. Does this imply that the interpretation of 10(1)(b) is the layman’s version where the place of supply shall be the place of the buyer irrespective of the time of delivery of goods or transfer of title? If that is the case, can one rely on the procedural formats of e-Waybill against a challenge regarding this transaction that may be raised by the GST department? (Note that there is no reference to section 10(1)(b) in the e-Waybill provisions in either the GST Acts or Rules.)
I stated earlier in this article that the drafting of this particular provision has created the confusion. The lack of clarification in regards to this transaction by the Government has left the interpretation at the mercy of the taxpayer and experts. In conclusion, the drafting of some provisions of both the CGST and the IGST Acts warrants a relook to simplify and ensure that the goal of a Simplified Taxation System is achieved uniformly. At the very least, the Government needs to actively release education material on a regular basis to clear out such controversial topics.
As always, this is my personal interpretation based on my limited knowledge. Discussion / constructive criticism is most welcome and in fact, solicited.