Eye on GST: Place of Supply and the dilemma of bill-to ship-to transaction

The ’Place of Supply’ provisions determine ‘where the goods are destined to’, as GST is a destination-based consumption tax. Subsequently, the state where the ‘goods are destined to’, will get the GST revenue. In scenarios, where the location of the supplier and the place of supply are two different states, the tax charged by the supplier would be IGST. In cases, where, they are in the same state, the tax charged would be a combination of CGST+SGST. All of this becomes, more complex when a transaction involves three parties.

Let us try to understand this with an example:
 
Person A in Maharashtra ships goods to Person C in Tamil Nadu on the instructions of Person B in Maharashtra. Here answering the question - Which would be the ’Place of Supply’ will not be easy. The transaction will look similar to what is stated below.
 
While goods are billed to B in Maharashtra, they are shipped by supplier A, as per B’s instructions, to C in Tamil Nadu. Here, goods are moving from one state to another. Normally IGST should be applicable in this case, if Tamil Nadu were to get the tax. But the presence of B makes the transaction complex, as his/her state (Maharashtra) also needs to get the revenue. The law therefore creates a fiction in the following manner in Section 10(1) (b) of IGST Act –

(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 principle place of business of such person

The law creates a fiction such that when supplier A delivers goods to recipient C at the instructions of third person B, the goods will be deemed to have been received by B and the place of supply shall be B. Therefore, even if the goods were moved by A in Maharashtra to C in Tamil Nadu, they would be deemed to be received by B in Maharashtra and therefore CGST+SGST would be charged by A.

The reason this fiction arises is because, tax should follow the commercial transaction to avoid any loss of credits. In a commercial scenario, there would be a second sale transaction between B and C which then would attract IGST so that both B and C  can claim GST credit and the GST chain remains unbroken.

Moving further there are certain issues with this well-intentioned provision. Let us look at them. For one the question that comes to mind is?
 
Who is the recipient?
 
While in the paragraph above, we have called C as the recipient, the law defines a recipient as someone ’who is liable to pay consideration’ [CGST Act section 2(93)]. In our example B is the person who pays the consideration to A and therefore would be a recipient, as per the stated definition. As stated earlier B is the recipient, who is the ‘third person’ mentioned in the provision, at whose instructions goods are dispatched to C. The problem here is the whole provision stops making sense unless we interpret the word recipient as ‘receiver of the goods’ and accept C as the recipient instead of B.
 
However, can one deviate from the definition given in the act? May be, if one uses the commencing qualifying words of Section 2 of CGST act i.e. ’in this act unless the context otherwise requires.’ to one’s advantage. Many court judgements have held such a reading valid, provided it can be proved, that the context required a different interpretation of the word ‘recipient’. In the future, the legal mandarins may want to examine this, so as to bring in an appropriate amendment to the Act at a later stage. This interpretation is also supported by the provision in Section 16(2) (which allows credit to B even when goods are never received by him/her), while using the word recipient in reference to C  as below
 
Section 16(b) Explanation:—For the purposes of this clause, it shall be deemed that the registered person (in our example B) has received the goods where the goods are delivered by the supplier (in our example A) to a recipient (in our example C) or any other person on the direction of such registered person (in our example B).

The provision also raises many other doubts which are expected to be debated in the course of time: 
 
1. Does the provision apply only in case of a sale transaction or can it also apply in a situation where C is only a branch of B? If this is case, there would not be a second transaction of sale between B and C. How then would the state of C get its revenue? If this is the situation, does it become necessary that an invoice is raised by B to C to transfer the credit? Or is it a good idea for C to make a payment to A even if the order is placed by headquarter B specifically mentioning that the goods are to be delivered to C and payment will be released by branch C. This scenario poses the question: Should we change the way transactions are done till now, if it can reduce the possibilities of disputes in the future?
 
2. Would this provision apply in case one of the parties is not in India - Say, B is in the US and orders its subsidiary A in India to supply goods to C in India? Though the section commences  with the words  ‘the place of supply of goods, other than supply of goods imported into or exported from India, shall be as under…’   there is no export transaction in this case as export requires physical movement of goods out of India (Section 2(5) of IGST Act). Here the question, is can we apply this provision in such case and if we can, how do we apply CGST+SGST and IGST in various situations?
 
3. Can this provision be invoked when an importer in Delhi imports goods in Mumbai and requires goods directly to be shipped from Mumbai port to a customer in Maharashtra, while he/she raises a commercial invoice from his/her Delhi office for his Mumbai Customer?
 
All of these situations, bring us to the conclusion that the law cannot make provisions for all possibilities of transactions in real life. It is a skill to fit all such transactions into the five situations mentioned in the ’Place of Supply’ provisions for goods under Section 10. Law therefore becomes intriguing and interesting at the same time. It definitely has the potential to keep industry, consultants and courts busy in the times to come.

- By Dr Waman Parkhi, Partner, Indirect Tax, KPMG in India. The views and opinions expressed herein are those of the author and do not reflect the views and opinions of KPMG in India.