Place of Supply of Goods under GST

Introduction

‘One Nation One Tax’ – The
new system for indirect tax – GST, is now set to commence in India. For quite a
long time it has generated public debate and its shape was eagerly awaited by
all stakeholders. Now the parliament has passed the laws required by the
Centre, and, the States are in the process of doing so. At present, the Central
Goods and Services Tax (CGST), Union Territory Goods & Services Tax Act
(UGST), State Goods and Services Tax (SGST) for many States and Integrated
Goods and Services Tax (IGST) Acts are available.

On going through the
provisions contained in these Acts, it appears that the laws are drafted by
incorporating provisions from different existing Acts, which are being subsumed
in GST like Excise, Service Tax and State VAT etc. Therefore, for the
trading class, some of the provisions are very new and they feel that the
system will be a bit complicated along with too much time-consuming compliance
requirements. However, it is said that any new law has such teething problems,
which may get resolved in the days to come as well as due to steps taken by the
Government to resolve such issues by necessary modifications and clarifications
from time to time. We expect the same, in relation to GST.

Situs of sale

So far as indirect tax on
goods is concerned the basic requirement is to identify the place where tax is
to be discharged.

For sale transactions of
goods, there are various ingredients connected with same like, place of buyer,
place of preparing invoice, place of payment, place of actual despatch, place
of transfer of ownership in goods etc.

In the old days, (prior to
incorporation of Central Sales Tax Act) the States used to levy tax on sale
transaction on the basis of ‘nexus theory’. In other words, taking nexus of any
one ingredient happening in their State, tax was sought to be levied in that
state. A simple example can be that a seller in Maharashtra sells goods to
buyer in Delhi. Maharashtra Government used to levy tax on said sale
transaction in Maharashtra as the seller and the goods were located in their
State. The Delhi Government would try to levy tax on said transaction on the
ground that actual sale i.e. transfer of ownership took place in their State.
Thus on one transaction, more than one State could lay their claim of tax.

This created chaos and
trading community was required to face multi-state tax on one sale
transaction.        

Central Sales Tax Act (CST
Act)

To avoid the above
confusion and unwarranted multi-state levy, the Central Sales Tax Act, 1956 was
enacted. One of the main objects of the Act was to determine place of sale i.e.
situs of sale. Section 4(2) of CST Act reads as under:

“S.4. When is a sale or
purchase of goods said to take place outside a State.—

(1) Subject to the
provisions contained in section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2) to take place inside a State,
such sale or purchase shall be deemed to have taken place outside all other
States.

(2) A sale or purchase of
goods shall be deemed to take place inside a State, if the goods are within the
State –

(a) in the case of specific or ascertained goods, at
the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at
the time of their appropriation to contract of sale by the seller or by the
buyer, whether assent of the other party is prior or subsequent to such
appropriation.

Explanation.- Where there is a single contract of sale or
purchase of goods situated at more places than one, the provisions of this
sub-section shall apply as if there were separate contracts in respect of the
goods at each places.”

Thus, the ‘place of ‘sale’
was linked with physical ascertainment of goods towards sale. By the above
provision, it was laid down as to which state the sale will be deemed to have
taken place and once it was held to be taking place in one particular state, it
was to be outside all other States. This brought finality to place of sale and
this gave much required relief to the trading community. The nature of
transaction whether interstate or intra state can be decided based on movement
of goods. However, it cannot be taxable in more than one State. Till today, the
system has worked satisfactorily.

GST/IGST Act/SGST Act

The above Acts are collectively
referred to as “GST laws/GST” in this article.

Under GST, the concept of
‘sale’ is replaced by ‘supply’ which is a broad term and includes supply of
goods as well as services.

There are several
incidences by which “supply” can take place and “sale” is one of them.

So far as supply of goods
is concerned, unlike the CST Act, there is no direct provision about situs of
supply of goods. However, the supply of goods may be intra-state or
inter-state. The tax will be attracted accordingly. If it is held to be
intra-state, it will be liable to CGST/SGST and if it is held to be
inter-state, it will be liable to IGST. Situs of supply is required to
be determined to find out the State from which the supply is made and then to
decide its nature i.e. whether intra state or interstate.

Under GST, the provisions
to determine the nature of interstate/intra state supplies are contained in
IGST Act.

Relevant Provisions of
IGST Act        

Section 7 defines the nature of interstate supply.

Section 8 defines the nature of intra state supply.

The nature of supply, as
to whether intra state or interstate, depends upon location of supplier and
place of supply. If both fall in same state, it will be intra state and if in
different states, it will be interstate.

The aspects related to the
above are discussed subsequently in this article.

Section 9 specifically deals with supplies in territorial
waters. It is provided that when the location of supplier or place of supply is
in territorial waters, the supply should be deemed to be in the Coastal State
or Union Territory where the nearest point of the appropriate baseline is
located. The further categorisation as to intra state or interstate should be
determined taking into consideration above position of place of location of
supplier and place of supply.         

As per above provisions,
the Taxable person is required to First determine place of supply of goods. If
such place of supply creates a situation that the location of supplier is in
one state and the place of supply is in different State, there will be
interstate supply. If both are in same state, there will be intra state supply.

There is no definition of
“location of supplier”. However, place of supply is to be determined as per
section 10 reproduced below.

“10. (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;

(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;

(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;

(d) where the goods
are assembled or installed at site, the place of supply shall be the place of
such installation or assembly;

(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.

(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.”

Analysis of Section 10

One of the critical issues
to decide nature of supply transaction will be to decide place of supply.
Section 10 provides clue to find the place of supply. There will be in all five
situations envisaged by section 10(1). All are required to be interpreted
harmoniously.

(a)   Situation
contemplated by section 10(1)(a)- Goods involving movement

This section is applicable
where the supply involves movement of goods. Since it refers to ‘supply
involves movement’, it is understood that the situation is required to be seen
per supply transaction. The nature of goods, whether capable of movement or not
etc., is not relevant. The position can be seen with simple examples:-

A machinery as installed
in factory is for sale by auction. The term of ‘auction’ is that it will be
supplied on “as is where is basis”. Under this situation, it can be said that
movement is not involved in supply.

In the same example, if
condition appears that the recipient should move the goods to its factory, then
it can be said that movement is involved in supply transaction. Section
10(1)(a) appears to cover the second example.

The movement may be
available from written contract/purchase order or any such other relevant
documents.

If not in written form
then it can be inferred from intention of parties. In normal cases the supply
of goods will be deemed to involve movement as the recipient is expected to
take goods to its place.

However, for clarity of
nature of transaction, it will be advisable that parties mention about movement
of goods in the contract document.

Once the goods involve
movement, the next step will be to decide place of supply. As per the said
section, the place of supply will be the location of goods at the time at which
the movement of goods terminates for delivery to recipient.

It is a settled law that
the provisions should be interpreted in its plain language. Reference can be
made to the judgment of Hon. Supreme Court in case of M/s. Polestar
Electronic P. Ltd. (41 STC 409)(SC), where in the Hon. Supreme Court has
observed as under about interpretation of provision:-

“A statutory enactment
must ordinarily be construed according to the plain natural meaning of its
language and no words should be added, altered or modified unless it is plainly
necessary to do so in order to prevent a provision from being unintelligible,
absurd, unreasonable, unworkable or totally irreconcilable with the rest
of  the statute. This rule of literal
construction is firmly established and it has received judicial recognition in
numerous cases.”

Applying the above
principle, the place of supply will be where the movement terminates for
delivery to recipient.

The essential fact will be
to decide when the movement terminates. If any express term in documents, the
issue can be decided accordingly. If no express term in contract, the delivery
point can be decided on inference and intention of parties and relevant facts.
There can be different situations about termination of delivery. For example,
the supply is ex-work. When such is the position, the delivery can be said to
have terminated at place of work/godown, shop of the supplier. This will be
place of supply in above transaction. Obviously, location of supplier and place
of supply being same, it will be considered to be intra-state transaction
attracting CGST/SGST.

The other situation will
be that the delivery is home delivery to recipient. In such a case, the
supplier will carry goods to godown/shop of recipient and delivery will
terminate at such place. If the location of supplier and place of  supply are in different states, it will be interstate sale, attracting IGST.

There can be many other
situations arising on facts of the case. Suppose a supplier in Maharashtra has
agreed to deliver goods to recipient at its godown in Karnataka. In between,
there is a breakdown of transport vehicle, before crossing Maharashtra border.
The parties renegotiate and it is agreed that recipient will take delivery at
breakdown point (which is within Maharashtra) and will carry goods on its own
to Karnataka. Here, though initially the transaction appeared to be inter-state
(delivery point to be in Karnataka), due to change in terms, the delivery will
be deemed to terminate within Maharashtra and the transaction will be intra
state transaction.

It is felt that the
parties should make delivery termination point/place clear in the documents, to
avoid any confusion in future.

The above analysis shows
that the principle of seamless credit is not fulfilled. If a trader of
Karnataka acquires any goods within Maharashtra, where delivery terminates
within Maharashtra, the supplier will charge CGST/SGST. Even if the goods are
taken to Karnataka and consumed there, still no ITC will be eligible to trader
of Karnataka and the ITC will lapse. There will also be cascading effect,
though GST is meant for avoiding the same.

(b)   Section
10(1)(b)- “Bill to ship to” model

This section is not worded
very happily. It appears that the above section is meant to cover cases where
more than two parties are involved before termination of delivery (bill to ship
to model). In existing law such transactions are identified as sale by transfer
of documents and hence have special status as per provisions of section 6(2) of
the CST Act, 1956.

If section 10(1)(b) is
dissected for proper interpretation it shows following position:

“Where the goods are
delivered by the supplier to a recipient

or any other person

on the direction of third
person

whether acting as agent or
otherwise

before or during movement
of goods

either by way of transfer
of documents of title to 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.”    

The section contemplates
delivery to recipient or any other person as per direction of third person.

The reference to third
person is not comprehensible.

Normally, the owner or
would be owner of goods who has power to give direction. In my opinion, the
recipient is the correct person to give direction to supplier. What is locus
standi of third person to give direction is not clear from section and hence,
there is ambiguity in the provision.  

The term ‘recipient’ is
defined in section 2(93) of CGST Act as under:

“(93) “recipient” of supply of goods or services or both, means—

(a) where a
consideration is payable for the supply of goods or services or both, the
person who is liable to pay that consideration;

(b) where no
consideration is payable for the supply of goods, the person to whom the goods
are delivered or made available, or to whom possession or use of the goods is
given or made available; and

(c) where no
consideration is payable for the supply of a service, the person to whom the
service is rendered, and any reference to a person to whom a supply is made
shall be construed as a reference to the recipient of the supply and shall
include an agent acting as such on behalf of the recipient in relation to the
goods or services or both supplied.”

Thus the person who is
going to pay consideration is the recipient. Only buyer of goods can be liable
to pay consideration and therefore, buyer can be recipient. While placing order
on supplier or afterwards, such buyer can give direction to deliver goods to
third person and the place of supply could be decided accordingly. Instead of
above logical situation, the section refers to “third person” for even delivery
to recipient and provides to consider principal place of business of third
person as place of supply.

It is felt that in the
present form, the above section does not serve any purpose.

Following pictorial
example can be seen to ascertain the position as per literal meaning of section
10(1)(b).

In this case, C will be
third person. As per plain reading of section, C should give direction to
Supplier. It appears to be unrealistic but for the sake of discussion, it is
assumed that C gives direction. In this case, the place of supply will be
principal place of C and it being in Tamil Nadu, for A the sale to B will be
interstate supply.

However, there is no clue
to decide place of supply when B bills to C. There is no third person to give
direction to B and therefore section 10(1)(b) cannot apply for transaction
between B and C. Similar will be the position in all further supply
transactions in chain like from C to D etc.  

Thus, section 10(1)(b)
gives illogical and unexpected results in present form.

There is another view that
one should interpret the section in a workable manner. Under such view it is
suggested that the third person should be considered to be recipient and the
position should be analysed accordingly.

For example, in above diagram,
‘B’ will give direction to ‘A’ to delivery to ‘C’. The place of supply will be
the principal place of business of ‘C’ i.e. Tamil Nadu and the transaction
between ‘A’ and ‘B’ will be liable under IGST. The further transaction between
‘B’ to ‘C’ will also be IGST as in this supply transaction, ‘B’ is supplier and
‘C’ recipient have principal places of business in different States. Thus every
transaction will be required to be seen separately. This appears to be workable
interpretation of section 10(1)(b). However, though the above view is practical
and certainly gives desired meaning one cannot ignore the plain language and
even adjudicating authority may not agree to above workable interpretation. It
is reported that the authorities are going to issue certain guidelines about
place of supply. We hope the above confusion in section is clarified to remove
the ambiguity, which will guide traders for deciding correct nature of
transaction.

In both the above sections
10(1)(a)/(b), one more aspect is about location of supplier. Suppose the place
of business of supplier is in Delhi but goods are located in Maharashtra and
supplied to recipient of Maharashtra, the issue will arise as to in which state
the liability will arise for supplier?

Above difficulties are
being faced as neither situs of sale is provided nor “location of
supplier” is defined. 

It is expected that all
such issues will be clarified at the earliest for ease of business. 

With the above pending
issues of interpretation, the section 10(1)(b) lays down that place of supply
is principal place of business of third person. There is no connection with
actual place of delivery of goods or termination of delivery.

Unlike under CST Act,
under this section there is no continuation of nature of transaction during one
movement by transfer of documents of title to goods. Under the CST Act, all
transactions effected during one interstate movement of goods will remain
inter-state sales till movement terminates, irrespective of addresses of
parties etc. Under GST, every transaction will be different and one
transaction may be inter-state, the next one can be intra state, depending upon
location of supplier and place of supply. The issue of seamless credit may also
get affected due to nature of transaction being different at each stage.

(c)   Section
10(1)(c) – Not involving movement

Section 10(1)(c) – appears to be supplementary to section
10(1)(a)/(b). This section seems to take care where no movement is involved in
the given supply transaction. The example is already given above.

In such a case, the
transaction will always be intra-state attracting CGST/SGST.

(d)  Section 10(1)(d) – Installation/assembly

Section 10(1)(d) deals with situation where installation or
assembly at site is required. The place of installation or assembly will be
place of supply. An example can be of installation of air conditioner. A
Maharashtra supplier supplies air conditioner to Gujarat recipient and installs
it as part of supply transaction. In such a case, the place of supply will be
State of Gujarat. Since the location of supplier and place of supply is in two
different States, transaction will be liable under IGST. However, there is
possibility that, Gujarat authority, considering the goods are brought in
Gujarat as branch transfer and installed in Gujarat may consider it a
intra-state state transaction in Gujarat based on above provision of section
10(1)(d).

This difficulty arises as
no connection is provided between movement of goods from Maharashtra and place
of supply, as under CST Act. Section 3(a) of CST Act provides to consider
transaction as inter-state sale if the movement  of goods from moving state is linked with ultimate sale in other State.

However, under GST, there
is no such inter linking provision. Therefore, even if goods are moved from
Maharashtra for assembly in other State, there is possibility that it may be
considered as intra state sale in assembly state.

The meaning of “assembly”
and “installation” may also be a bone of contention. Mere putting the goods in
place like putting fan in hook in ceiling, will amount to installation? There
may be such debatable issues.

To avoid litigation and
further adverse contingency it is better the transactions are clearly
identified as far as possible in relevant documents.

(e)   Section
10(1)(e) – On board a conveyance

Section 10(1)(e) – deals
with situation where goods are supplied on board a conveyance. “Conveyance” is
defined in section 2(34) of CGST Act as under:

(34) “conveyance”
includes a vessel, an aircraft and a vehicle;

This clause is a good
attempt to resolve the issue being faced presently. In normal course, taxation
of supplier on trains / aircrafts to passengers is a very debatable issue. It
requires per state wise detail about sales taking place in respective states.
To resolve such issue, it is provided that the place of supply will be deemed
to be place where such goods are taken on board. For example, the articles are
taken on board the train at Mumbai, which is actually sold to passengers on
running train travelling through several states.

The place of supply for
all such supplies will be one i.e. Mumbai and tax will be required to be
discharged accordingly. Whether such supply will be interstate or intra state
will further depend upon location of supplier and the place of supply, decided
as above.

Certain issues can still
arise under the above clause. For example, the goods are taken on board at
Mumbai on board an aircraft, which is travelling to Delhi. Certain goods are
sold out on board the aircraft which will mean the place of supply for such goods
will be Mumbai. After Delhi, suppose the aircraft moves to Lucknow as different
flight say from Delhi to Lucknow and remaining goods are sold on board the said
flight. Whether the place of supply will still remain Mumbai ?

The issue arises as one
journey is over and fresh journey starts with original stock. Looking to the
intention of the provision even such goods supplied on board the Lucknow
flight, the place of supply should be Mumbai. However, if a view is taken that
the goods were taken on board for particular flight and the goods taken on
board are for such particular flight, then the place of supply Mumbai will end
on termination of said flight. The next fresh journey will be separate. The
issue will again arise about place of supply. Some clarification on the above
issue will be appreciated.

Residuary – Section 10(2)   

The Act provided by
section 10(2) that where the place of supply cannot be determined with
reference to earlier provisions, then the place of supply should be determined
as may prescribed. The prescription may come by Rules or notification. It can
be presumed that the prescription will solve the issues for remaining
situations as well as debatable issues with reference to situations in section
10(1), discussed above.

Place of supply of goods
imported into or exported from India

Section 11 of IGST Act
reads as under:

“11. The place of supply of goods,––

(a) imported into
India shall be the location of the importer;

(b) exported from
India shall be the location outside India.”

This section is specific
for import/export supplies.

Place of supply is
normally meant to apply to supplies of goods so as to determine nature of
supply. When goods are imported, there is supply by foreign supplier and place
of supply will be relevant to said supplier, if nature of supply is to be
determined in its hands. However, normally such situation will not arise as no
tax is contemplated on foreign exporter, who is supplier.

It appears that the above
clause about place of supply for imported goods will also equally apply to
importer and the place of supply for importer of goods will be the location of
importer. Importer is required to discharge the IGST on imported goods. For
example, importer is in Delhi and the goods are physically unloaded and cleared
at Mumbai Port. The place of supply in such case will be location of importer
and it will be Delhi. The importer in Delhi will be required to pay IGST in
Delhi under GSTN of Delhi.

Section 11 also provides
place of supply for export. In case of export the place of supply will be
located outside India. It means in such a case, the place of supply will be
place in foreign country where the goods are exported.

Since Export is zero rated
supply, it appears that above provision has no practical effect.   

Conclusion