Inter state/intra state supply under GST
A buyer registered outside Maharashtra has purchased goods from a supplier in Maharashtra on ex-depot basis. Whether such supply by Maharashtra supplier will be an inter-state supply or intra-state supply?
The supply of goods is the taxable event under GST. However, as we know there is dual system of levy in the form of Inter-state supply and Intra-state supply under GST. In case of Inter-state supply of goods, the Central Government levies IGST and in case of Intra-state supply of goods, the Central Government levies CGST and State Government levies SGST. Therefore, determining nature of supply as intra state or inter state supply is necessary to discharge correct tax liability. Further, the said determination is even more important because, if a person wrongly pays IGST instead of CGST + SGST, the law requires to pay CGST + SGST and claim refund of the IGST wrongly paid and vice versa. Thus, wrong payment of IGST or CGST + SGST can result in blockage of working capital and will require to follow refund procedure.
Article 286 provides that Parliament may, by law, formulate the principles for determining when a supply of goods, or of services, or both takes place:
in the course of interstate trade or commerce; or
outside the state; or
in the course of import of the goods or services or both into, or export of the goods or services or both out of, the territory of India
Accordingly, the Parliament has enacted Integrated Goods and Services Tax Act, 2017 (“IGST Act”) which defines the principles for determining supply of goods and/or services in the course of inter-state trade or commerce, and also in the course of intra-state trade or commerce. The IGST Act also defines when a supply of goods and/or services will in the course of export and import.
Section 7 of the IGST Act defines what is an Inter-State supply and Section 8 of the IGST Act determines what is an Intra-State Supply. On perusal of said definitions, it can be concluded that there are two important variables to determine whether a particular transaction of supply is an Inter-state supply or an Intra-state Supply:
Variable 1: Location of the Supplier
Variable 2: Place of Supply
When both the above variables are in two different States, then the said supply will classify as Inter-State supply.
When both the above variables are present in the same State, then the said supply will classify as Intra-State supply.
Now for the purpose of present question i.e. how to determine the inter-state or intra-state nature of supply of goods, we are only concerned with supply of goods and hence there is no necessity to refer to the provisions relating to supply of services. As discussed above, for the purpose of determining the nature of supply for goods, the two variables required would be the location of the supplier of goods and the place of supply of goods. In the present query the supplier is in Maharashtra, so location of supplier is in Maharashtra.
Place of supply of goods:
The other variable for determining the nature of the supply of goods, is the place of supply of goods. The Place of supply of goods is defined under Section 10 and Section 11 of the IGST Act.
Section 10 of the IGST Act defines the Place of Supply of goods for domestic transactions. The said Section 10 of IGST Act is reproduced below for ready reference:
(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.
The principle laid down in section 10(1)(a) is that, if the goods involve movement, whether by supplier, recipient or any other person, the place of supply will be the location of goods at the time at which the movement of goods terminates for delivery to recipient. Further, the movement suggests physical movement from location of supplier. For example, if there is constructive delivery by delivery challan, like a supplier transferring ownership in goods lying in his godown by making sale and issues delivery challan which is accepted by the buyer, while goods still remaining in said godown. Here it can be said that no movement is involved in this supply and hence section 10(1)(c) will apply. Obviously the place of supply in such case will be the said godown and it will be intra-state supply.
The issue will arise mainly in relation to section 10(1)(a) i.e. where movement is contemplated either by supplier or recipient or any other person.
Section 10(1)(a) lays down that the place of supply shall be the location where the movement terminates for delivery to recipient.
In case of sale of goods there can be broadly two situations, namely; spot delivery, also referred to as ex-godown delivery or ex-depot delivery etc. and other, the home delivery to buyer, where goods are to be delivered at place of buyer. If the terms about home delivery are clear in contract of sale then the issue becomes easy, in the sense, the location of termination of movement of goods becomes clear.
For example, if Mumbai seller agrees to deliver goods to Pune buyer, the transaction will be intra-state. Equally, if the supplier sells goods to buyer of other state, with home delivery term, than also the issue is clear. It will be inter-state supply without debate.
However, majorly issue will arise if the recipient is from other state and the contract is ex godown or depot delivery. In such case the movement can be said to be terminated for delivery to such recipient at such godown or depot itself. If such position happens then the issue based on address or location of recipient in other state would be, whether it can be considered inter-state supply or, whether based on termination of delivery it becomes intra-state supply? There are divergent views on above issue. One view says the GST is destination based tax system and once the location of buyer is other state, the supply should be considered as inter-state supply irrespective of termination of movement of goods.
The other view can be, as stated above, the termination point. If it is within the State, then irrespective of location of buyer, it will be intra-state supply. In this respect, reference can be made to following Advance Ruling.
Advance Ruling in case of Deputy Conservator of Forest (71 GSTR 429) (Kar).
Relevant portion of the Advance Ruling is reproduced below for ready reference:
“f. Regarding the other issues, the applicant submits that the Karnataka Forest Department disposes by e-auction and e-tender cum auction methods, timbers of various species both, harvested from forests/ plantations as well as confiscated being involved in forest offences. These are disposed through various depots in the State, including Jarakbande Sandal Godown, Bengaluru.
g. In the sales of timber and red sanders that have been taken place since 22nd November, 2017, the department has mentioned in its sale conditions that the point of sale is the Depot and the destination of sale is also the depot. Thus, 9% SGST and 9% CGST is made applicable on sales. It is reasoned by the department that only after a buyer pays all the amounts due towards the lots purchased, is the lot his/ her/ theirs. After the purchase is complete, the buyer is free to request for and transport it to any place, within or outside Karnataka.
h. In case of buyers based in States outside Karnataka, they have represented (particularly the ones of 20th February, 2018 red sanders sale) that the insistence of the forest department on payment of SGST and CGST is wrong. Their contention is that since the material sold/ purchased is being taken to and consumed outside the State of Karnataka, they should be paying 18% IGST under the IGST Act, 2017.
i. In view of the above, the applicant has sought advance ruling.
FINDINGS & DISCUSSION:
5.9 Regarding the second question, the activity of the Government Corporation done to the Forest Department is independent of the nature of the activity involved in the growing of trees and hence what applies to the naturally grown trees applies to the trees which are nurtured, managed and protected by the Forest Department.
5.10 Section 10 of the IGST Act which deals with the Place of Supply reads as under
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 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;
The contention of the applicant that the department had mentioned in its sale conditions that the point of sale is the depot and the destination of sale is also the depot. It is only after the buyer pays all the amounts due towards the lots purchased, the transfer of property takes place and after the completion of such transfer, the buyer is free to transport it to any place within or outside Karnataka.
5.11 As per the contention of the applicant there is no condition in the sale offer that there must be an interstate movement or local movement of goods and the applicant also submitted that the permit to transport the goods so purchased shall be issued only after the completion of sale and delivery of goods. The persons participating in the auction are aware of the condition that the transfer of title to goods is happening at the depot and they have to take possession of the goods at that place. The supply gets completed the moment the goods are delivered to the purchaser and the purchaser applies and obtains permit from the Forest department later to transport the goods to his place or any place, on which the Forest department has no control or conditions. In view of all the above reasons and specifically since the delivery is given in the place of depot itself, as per section 10, the place of supply is Karnataka.
5.12 Also, as per of sub-section (1) of section 10, the stress is on the words “supply” and “movement of goods”. If the movement of goods is involved within the supply contract then it, then clause (a) is attracted and the place of supply would be the place where the movement of goods terminates for delivery to the recipient. The words clearly say that the there must be termination of movement and delivery to the recipient is a subsequent action. In the pertinent case, it is seen that the goods are delivered to the buyer and the supply transaction is completed. The contract is over the moment the invoice is raised and the payment is made and there is no condition of the movement of goods being an ingredient in the supply contract. The buyer then after clearing the goods and taking possession of goods applies for permit and takes the goods to whichever place he wants. The delivery of the goods happens when the possession of goods is handed over to the supplier and the movement of goods is not a precondition for supply, they both being independent events. There is no breach of contract of supply, if the purchaser, being from outside the state does not actually take the goods to his place outside the state. Hence as per clause (c), the place of supply would be the place of the location of such goods at the time of the delivery to the recipient and hence Karnataka.
5.13 Further, sub-section (1) of section 8 of the Integrated Goods and Services Tax Act, 2017 reads as under –
“(1) Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intrastate supply”
In the pertinent type of transaction, since the location of the supplier, [Department of Forests, Government of Karnataka is within the state of Karnataka], is Karnataka and the place of supply (as per the conclusion arrived in the preceding paragraphs), is also Karnataka, as per section 8(1) of the IGST Act, 2017, the nature of supply would be an “intra-State supply” within Karnataka State and hence CGST and SGST would be applicable on the transaction and not IGST.
But, if the disclosure of destination is part of the supply contract and the contract makes it mandatory to issue transport permit to the place of such destination, then the place of supply would be the place of termination of movement of such goods and if both the place of supply and location of the supplier is within the same state, then it would amount to an “intra-State supply” and CGST and SGST would be chargeable. If the place of supply and the location of the supplier are in different states, then the transaction would amount to an “inter-State supply” and IGST would be chargeable.”
It can be seen that in this case, irrespective of recipient being registered outside State of Karnataka, the learned AAR has held that the depot delivery transaction is intra-state transaction. In light of above it can be derived that, irrespective of address or place of registration of recipient the nature of transaction will get decided based on place of termination of movement for delivery to buyer.
There can be situation that inspite of delivery to buyer at depot, the buyer undertakes inter state movement to his place in other state in the continuation of the said purchase. In such circumstances the movement will continue and it will terminate in other state, making the supply an inter state supply. But if no such express or implied condition of inter state movement is available in contract it will be intra state supply.
In this respect reference can also be made one more judgment i.e. in case of Lalitha Muraleedharan vs. Range Forest Officer, Marayoor Range, Marayoor, Idukki District and others (71 GSTR 236)(Ker). In the aforesaid case, the issue was about the nature of supply of forest products when the delivery to recipient is at depot. The Petitioner was recipient and SEZ unit. It was insisting for exempted sales being sales to SEZ is a zero rated sales. The Forest Department which is the supplier in that case was objecting that since the goods are delivered at depot itself, it is intra-state sale and hence cannot be covered under Zero Rated supply. The Hon’ble Kerala High Court after examining the facts held in favour of Petitioner. However, the observations of the High Court regarding determination of nature of supply are worth noting for the purpose of present question. The relevant portion of the said observations of the High Court are reproduced below for ready reference:
“14. This Court examines and applies the effect of a few provisions referred to and relied on by the petitioner to contend that contrary to the requirement of payment of 18% tax, the goods can be transported without the burden of duty/tax from Marayoor Depot to Madras SEZ for final utilisation by the petitioner. Treatment of inter-state and international supplies of goods and services is one of the most crucial elements of the design of a Dual GST regime. The approach under GST regime prescribes a set of rules for defining the place of taxation or place of supply. Now a supply is taxable in a given jurisdiction only if the supply is considered to take place in that jurisdiction. The basic principle behind provisions relating to place of supply is that GST is destination based tax. Therefore, tax is finally payable where goods and services are consumed. It is admitted that the supply of goods is to an SEZ Unit.
The supply of goods/services or both to or by a Special Economic Zone developer or a Special Economic Zone Unit as inter-state supply of goods/services in the course of inter state trade or commerce. A reading of Section 7(5) of IGST Act shows thus: Supply of goods or services or both – When the supplier is located in India and the place of supply is outside India it is treated as inter-State trade or commerce. The supply of goods or services or both to or by a SEZ developer or the SEZ unit shall be treated to be a supply of goods in the course of inter- State trade or commerce. Section 7(5) deals with supply to SEZ and treats supply as a supply in the course of inter-State trade or commerce. Section 8(1)4 deals with intra state supply and proviso to Section 8 holds that supply of goods to or by a SEZ developer or SEZ unit shall not be treated as intra state supply. In other words the supplier and the purchaser if is located within the State and goods are supplied to one of them satisfying SEZ supply requirement, such supply is not covered by the meaning of intra state. Section 8 states that subject to the provisions of Section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union Territory shall be treated as intra-State supply. The presumption of that transaction being an intra-State sale is effaced by proviso when the supply of goods to or by a SEZ developer or a SEZ unit takes place. In other words, even if the transaction is within the State of Kerala, if the transaction originates from SEZ or terminates in SEZ, still it is not treated as intra-State transaction. Section 7(1) and Section 8(1) operate subject to section 10 of IGST.
Chapter V of IGST Act is captioned as Place of Supply of Goods or Services or Both. The Statute provides for determining what is the place of supply of goods or services or both. According to Section 10(1)5 of IGST Act the place of supply of goods shall be in cases where the supply involves movement of goods whether by the supplier or recipient i.e. recipient of goods, or by any other person, i.e. transport by road/rail etc.; 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 movement of goods terminates for delivery to the recipient.
Section 10(1)(b) to (e) are not applicable and hence are not adverted to. Therefore, from the above, assuming that the goods upon payment of sale price are handed over to petitioner at Marayoor Depot, such delivery of good is for onward movement to Madras SEZ in State of Tamil Nadu. The definition and the substantive provisions in the applicable Statute that is binding between the parties but not the inference respondents 1 and 2 draw on the alleged completed transaction at Marayoor. The place of supply of goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient. Therefore, as rightly contended by petitioner that the acceptance of delivery of sandal wood logs at Government Forest Department, Marayoor, is not the conclusive circumstance for deciding the place of supply of goods in the present regime of GST. Mr. Kumar does not dispute the circumstance that the petitioner upon completion of other sale conditions receives the sandal wood logs at Marayoor Forest Department depot, and the acknowledgment of goods at Marayoor Forest Department Depot does not result in termination of movement of goods but results in further movement of goods at the hands of recipient to SEZ. So the final destination i.e. SEZ in the case on hand is the supply point. The actual place of supply by plain interpretation of Section 10(1) is within the SEZ in Madras, State of Tamilnadu, but not in State of Kerala. Therefore, the contention of respondents 1 and 2 that supply of goods is completed at Marayoor Forest Department and subject sets is an intra state transaction is unsustainable. The second objection canvassed by respondents 1 and 2 on place of supply is rejected for the above reasons.”
In this case the Hon. high court has analysed the provisions of GST about inter-state /intra-state supply.The observations go to show that in case of depot delivery sale, it can be inter-state supply if movement by recipient is one of conditions of sale. The effect is that, if such condition not proved then it will be intra-state supply.
It appears that the issue again boils down to pre GST era i. e. Sales tax/Vat and CST. As per section 3(a) of CST Act, the sale occasioning inter state movement is inter state sale otherwise local sale. Same position applies under GST as per above rulings. The terms /conditions of contract are relevant to decide the nature of transaction. It will be beneficial if agreement clearly spells out termination of delivery to recipient. In absence of the same it may invite avoidable disputes. The above position is analysed as per section 10(1)(a) and 10(1)(c) where generally one supplier and one recipient are involved. In light of above legal position, the reply to the question is that, it is intra-state supply unless there is condition of continued movement to other State in the transaction. If there is an express / implied condition for inter-state movement of the goods, than it will fall under the category of inter-state supply.