Treatment of ‘Bill To-Ship-To’ Transactions In GST

One of the practiced business model in trade is that of ‘Bill-to-Ship-to’ model, which raises eyebrows in the Indirect tax world.

The bill-to ship-to transaction typically involves two supplies-

1. The supply between the one who supplies the goods and the one who pays for it and

2. The supply between the one who receives the goods and the one who paid the supply in the first leg.

In 2(93) of the CGST Act, 2017, the recipient of supply of goods is defined as the person who pays the consideration. In cases where there is no consideration, the recipient is the one to whom the goods are delivered.

In the above representation of Bill-to Ship-to transaction, there are two suppliers involved:

1. Supplier X-The main supplier, based on the purchase order of Y, supplies the goods.-SUPPLY 1.

2. Supplier Y-The second-level supplier, who makes an order with Y and also contracts to sell the goods to Z.-SUPPLY 2.

We shall assume that the consideration is paid by Y to X and by Z to Y for their respective inward supplies (for obtaining clarity over recipient of supply).

Hence the recipient for the supply of goods in Supply 1 is Y and Supply 2 is Z.

Now let us analyse the various facets of GST under “Bill to Ship to” concept:

1. Place of Supply:

Section 10 of the IGST Act deals with place of supply of goods other than imports and exports.

Section 10(1)(b) reads as follows:

The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under

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;

Mere reading of the section would lead to confusion, when it comes to the interpretation of the word “recipient” and “third person”. The reader has to interpret the words without applying the definition of the word recipient as given in 2(93).

In other words, for the limited purpose of Sec.10 (1) (b):

Recipient would mean the person who receives the goods (Z in our example) and

Third person would mean the one who instructs delivery ;( In our example, it will be Y who instructs delivery to X and the one who pays consideration to X);

The PoS will be the location of the principal place of business of the “third person”-Y.

Hence even if the movement involves two different states, it is very well possible to have an Intra-state supply. On the contrary, even if the movement is within a state, it is possible to have an inter-state supply.

As far as Supply-2 is concerned, the provisions of Section 10(1)(a) would apply and not 10(1)(b).

Sec. 10(1)(a) states as follows:

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

Hence the PoS for the second supply between Y and Z will be based on the location where the movement terminates. With specific reference with our example, for Supply-2, the place of supply will be the principal place of business of Z.

Let us understand this by an example:

Place of Supply for “Supply-1”

Scenario	Location of Supplier – X	Place of delivery of goods – Office of Z	Principal place of business of Y who instructed delivery to Z	Place of supply for X	Type of tax payable by X
1	Nashik	Nashik	Chennai	Chennai	IGST at Maharashtra
2	Nashik	Chennai	Chennai	Chennai	IGST at Maharashtra
3	Nashik	Kolkata	Bhbuaneshwar	Bhubaneshwar	IGST at Maharashtra
4	Nashik	Chennai	Nashik	Nashik	CGST + Gujarat GST at Maharashtra

Place of Supply for “Supply-2”

Scenario	Location of Supplier – X	Place of delivery of goods – Office of Z	Principal place of business of Y who instructed delivery to Z	Place of supply for Y	Type of tax payable by Y
1	Nashik	Nashik	Chennai	Nashik	IGST at Tamil Nadu
2	Nashik	Chennai	Chennai	Chennai	CGST+SGST at Tamil Nadu
3	Nashik	Kolkata	Bhbuaneshwar	Kolkata	IGST at West Bengal
4	Nashik	Chennai	Nashik	Chennai	IGST at Maharashtra

2. Imports/exports in Bill-to ship-to supplies:

Two important sections determine the taxability of Bill-to ship-to transactions in case of exports/imports.

Sec.11 determines the place of supply in case of goods for imports and exports. In case of import of goods, the place of supply shall be the location of the importer. In case of exportation of goods, the place of supply shall be the place where the goods are exported to.

Sec.16 deals with zero-rated supplies of goods or services-which means export of goods or services or supply of goods or services to SEZ/SEZ developer.

As stated bluntly in the section, it is the ultimate place where the goods reach-either the importer in India/recipient outside India, which would determine the taxation impact.

Further, it is important to discriminate between “Export/zero-rated supply” and “supply by way of export”. Export/zero-rated supply would involve taking the goods from India to a place outside India.

Assuming that goods are shipped to a destination outside India, with X and Y being in India, the second leg of transaction, i.e. Supply-2 shall constitute “Export/Zero-rated supply”. However, claiming zero-rated supply for Supply-1 shall be incorrect merely because Supply-2 is zero-rated. For Supply-1 to be zero-rated, the “bill-to” destination shall also remain outside India, and then this would qualify as “supply by way of export”, and X can call his supply as “zero-rated supply by effecting supplies by way of export outside India”

Let us look at different scenarios to understand the nuances.

Place of Supply in “Supply-1”

Scenario	Location of Supplier – X	Place of delivery of goods – Place of Z	Principal place of business of Y who instructed delivery to Z	Place of supply for X	Type of tax payable
1	Nashik	Sydney	Sydney	Sydney	Zero-rated supply as it would satisfy the condition-“supply by way of export”.
2	Nashik	Chennai	Sydney	Sydney(Operation of 10(1)(b) as Sec.11 will not apply since goods have not left India)	IGST at Maharashtra-Application of Sec.7(5)
3	Nashik	Sydney	Chennai	Tamil Nadu	IGST at Maharashtra
4	Nashik	Sydney	Colombo	Sydney	Zero-rated supply as it would satisfy the condition-“supply by way of export”.

Place of Supply in “Supply-2”

Scenario	Location of Supplier – X	Place of delivery of goods – Place of Z	Principal place of business of Y who instructed delivery to Z	Place of supply for Y	Type of tax payable
1	Nashik	Sydney	Sydney	Sydney	Y will not be liable to any tax in India.
2	Nashik	Chennai	Sydney	Y will not be liable to any tax in India.	Y will not be liable to any tax in India.
3	Nashik	Sydney	Chennai	Tamil Nadu	Zero-rated supply
4	Nashik	Sydney	Colombo	Y will not be liable to any tax in India.	Y will not be liable to any tax in India.

3. Input-tax credit

Section 16 of the CGST Act, lays down the conditions upon satisfaction, the ITC would be eligible to be taken. Amongst other conditions, receipt of the goods or services is one of the conditions for taking Input Tax credit.

To address the issue of Bill-to-ship to transactions, an explanation has been provided in Sec.16(2)(b) which reads as under:

For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise. 

This would mean that in case of “Supply-1” type of transactions, Y would be eligible to take credit of the invoice raised by X, even-though the goods have not been “physically” delivered to Y. A deeming fiction has been imposed on such scenarios.

As far as Z is concerned, he will be eligible to take ITC of the invoice raised by Y, only if the goods have been received by him physically.

4. Supply when there is no consideration:

The underlying principle of any contract is consideration and when there is no consideration, there cannot be a supply and when there is no supply, it is out of the ambit of GST.

Hence, it is possible that either Supply-1 or Supply-2 can be without consideration.

If Supply-1 is without consideration, and neither X, nor Y are related to each other, supply-1 shall not even be regarded as supply if neither Z nor Y pays for the goods. This is irrespective of the fact that the recipient in case of Supply-1 is Z(being the receiver of the goods). If Z pays for the goods, the transaction would be between X and Z and this would lead to a third supply between Z and X.

However, if Y pays for the goods to X, but in turn does not receive any payment from Z, Supply-2 will not be regarded as supply as such with the same assumption that none of them are related.

Further, the above two scenarios would doubt the commercial substance of such transactions.

More practically, coming to a case where either X&Y are related persons or Y and Z are related persons, one would have to refer to Para 2 of Schedule I of the CGST Act, where supplies between related persons made in the course or furtherance of business shall be regarded as “Supply” even when consideration is absent

Accordingly, valuation rules would have to be applied as specified in Section 15 and Rule28/30/31 of the Valuation rules. However, there won’t be any change in place of supply interpretation.

One example of this kind would be placement of order by Head Office(Y) with X to deliver the goods to branch office (Z). X will bill the Head Office and send the goods to branch office. The transaction between branch and head office shall be valued in accordance with Valuation rules-28,30 or 31 of the CGST Rules,2017.

5. Requirement of E-way bill:

E-way bill requires along with the consignment note-either a bill of supply/tax invoice/delivery challan to move the goods.

The contract of the GTA is with X, being the supplier of “Supply 1”. The e-way bill in case of Bill to ship to transaction can be generated by “X” or “Y”. In other words, “Z” being the recipient cannot generate the way bill.

Further, one e-way bill is sufficient in cases of bill-to ship-to mode. There is no requirement to generate a second e-way bill between “Z” & “Y”