DECEMBER 18, 2017

By Harini Sridharan, ACA, ACS

A confession should be made that the Place of Supply provisions under GST has been framed in line with Henry Miller's quote "One's destination is never a place, but a new way of seeing things".

GST being a consumption based destination tax, makes it pertinent to determine the final destination for the supply. Though the physical destination may be a place, various other factors like contractual terms between the parties, business practices, place where the supplier /recipient are located, etc. needs to be considered before determining the final destination. This article is an attempt to analyze various scenarios of domestic place of supply of goods and services.

Following is a detailed examination of Sec 10 of the IGST Act, 2017 explaining various scenarios covering the Place of supply of goods other than imports into / exports from India.

I. SUPPLY INVOLVES MOVEMENT OF GOODS:

Sec 10(1) (a) of the IGST Act, 2017 discusses of a scenario where the Supply involves movement of goods. And such movement can be done either by the supplier or by the recipient or by any other person.

In such a case the place of supply shall be the location of goods where the risks and rewards of such a contract gets terminated from the supplier's end and gets passed on to the recipient.

This provision will have to be read along with the International Commercial Terms (INCO terms) first published by the International Chamber of Commerce in 1936 and has been amended from time to time.

a. Ex-works (EXW) :

Under the Ex-works, the maximum obligation is on the buyer and the minimum obligation is on the seller. Buyer takes the responsibility of loading the goods on collecting vehicle or if the seller does it, it is done at the buyer's risk and cost.

So effectively, the risks and rewards of the contract terminates for delivery to the recipient at the factory gate. Hence All Ex-works contract are Intra-state supplies.

b. Free Carrier (FCA) :

Under the FCA contract, the seller delivers the goods to a carrier, nominated by the buyer at the named place. The goods get terminated for delivery at the named place nominated by the buyer where the goods are handed over to the carrier.

Hence the place of supply in FCA is place where the goods are handed over for delivery to the carrier as nominated by the buyer.

c. Free Alongside (FAS) :

Under the Free Alongside contract the seller fulfills his obligation to deliver the goods alongside the vessel designated by the buyer. The risks and rewards rests with the seller till that point of time. Once the goods are reached by the seller to the named place of delivery the buyer is responsible after that. Hence, in the GST context such designated place of delivery by the seller to the buyer becomes the place of supply

d. Cost Insurance and Freight (CIF):

Under the CIF contract, the seller is required to arrange for carriage of goods to the destination and provide the buyer the necessary documentation to obtain the goods from the carrier.

Hence the risks and rewards of the contract lies with the seller till the stage goods reach the designated place of delivery as specified in the contract for unloading from the carrier. The responsibility of unloading the goods and the activities from thereon becomes the buyer's obligation. In most cases, the designated place of delivery is the place of the buyer.

e. Delivered Duty paid (DDP) :

If EXW means minimum obligation on the seller, DDP means maximum obligation on the seller. The risks and rewards of the contract rests with the seller until such time the goods are delivered at the disposal of the buyer, with the seller incurring the contract of carriage, loading, unloading, insurance, etc.

In such a contract, the place of supply is generally the place of the buyer or a place of delivery based on the buyer's directions.

II. SUPPLY MADE TO ANOTHER PERSON ON DIRECTION OF THIRD PERSON:

If A Ltd, Gujarat has agreed to send the goods to B Ltd, Kolkata based on the direction of C Ltd, in Karnataka – the place of supply shall be deemed to be the Location of the Principal place of the business of the person on whose directions the transaction has been fulfilled, i.e. Location of C Ltd.

Though receipt of goods is an important pre-condition to enable availing credit, explanation to Sec 16(2) specifies that if the goods are delivered to some other person / recipient based on the direction of the third person – it shall be deemed that the third person has received the goods and can enjoy the input tax credit w.r.t that transaction.

The following points shall be noted:

1. Goods can be delivered either to the recipient or any other person on direction of a third person :

The recipient of Supply of goods or services is defined u/s 2(93) of the CGST Act, 2017. Person liable to pay the consideration for the supply is treated as the recipient of the supply.

Sec 10(1) (b) states that the delivery of the goods need not necessarily be made to the person liable to pay the consideration. It may be made to any other person also.

2. The third person so directing the delivery to the recipient or any other person can act in the capacity of agent or otherwise :

a. The person based on whose direction the supplier makes the supply of goods can either act as in the capacity of an agent or otherwise.

b. The term ‘Agent' has been defined u/s 2(5) of the CGST Act, 2017 as a person carrying on supply/receipt of goods/services on behalf of another. The term ‘Agent' includes the following persons:

i.   Factor :

- Factor, in Latin means "Doer, maker".

- A Factor is a mercantile fiduciary who receives and sells goods on commission.

- Factor transacts business in his own name without disclosing his Principal.

- A Factor takes possession of the goods in consignment.

ii Broker :

- Broker is a third party arranging transactions between a buyer and a seller for a commission when the deal is executed.

- Broker provides market information regarding prices, products and market conditions.

- A broker represents either the buyer or the seller but not both at the same time.

iii Commission agent/Arhartia :

- Agents who solicit and procure business from potential customers on behalf of one or more Principals, usually against payment of a percentage of the realized sales revenue as commission.

- Unlike the broker, the Commission agents possess only basic information about the market and a detailed knowledge of the seller they represent.

- A Commission agent represents the seller.

iv. Del credere agent :

- Del credere, in Italian means ‘belief' or ‘trust'.

- A Del credere agent not only establishes a ‘Privity of contract' between the seller and the buyer but also guarantees to the seller the payment by the buyer.

- In case there is a default by the buyer, the agent undertakes the payment to the seller for an additional commission.

v. Auctioneer :

- An auction is a process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder.

- An Auctioneer generally represents the seller.

- Seller employing an auctioneer pays a commission regardless of whether an auctioneer procures a sale.

- No liability is attached, unless it is specifically agreed that the auctioneer is responsible for failure of sale.

c. It is a conclusive fact after the above discussion that an agent is a person different from the buyer / seller. Agent is a person unconnected to the liability of the transaction and carries out his agency for a commission.

d. Sec 10(1)(b) states that the person giving direction to the supplier to supply goods need not necessarily act in the capacity as an agent. Such third person can be the principal himself.

The importance of the term ‘otherwise' arises because under GST, there ascends an exclusive need to obtain registration for the same entity in different states / same entity in the same state with different business verticals by choice.

For Instance, Sec 10(1)(b) provides that if Chennai branch of A Ltd places order for its Mumbai branch to a supplier in Gurgaon, Chennai branch is treated as the person on whose direction the order is placed.

Here Chennai branch is not acting in the capacity of an agent, but it is the Principal itself.

3. Transfer can be done either by transferring the documents of title of goods or otherwise :

A document of title is a written instrument that in the usual course of business or financing is considered sufficient proof that the person who possesses it is entitled to receive, hold and dispose of the instrument and the goods that it covers.

A document of title is a written instrument such as bill of lading, a warehouse receipt, or an order for the delivery of goods.

The person directing the supplier to deliver the goods to the some other person can give directions either by executing the transfer documents or even otherwise. GST does not necessitate the execution of documents of title.

4. Direction by third person to deliver to recipient or any other person can be done either before or during the movement of goods.

Direction to deliver can be given before the movement of goods has been initiated or during the movement of goods.

No direction can be given after the movement of goods is complete as per the contract between the supplier and the third person.

III SUPPLY DOES NOT INVOLVE MOVEMENT OF GOODS:

As per the contract, if supply of goods does not involve movement of goods, for instance, a person has given an offer for sale of machinery on an "as is where is" basis- the place of supply of goods u/s 10(1)(c) is the location of the supplier itself once the machinery has been handed-over to the buyer for delivery.

iv. SUPPLY OF GOODS BY ASSEMBLING / INSTALLATION AT SITE :

Where the goods are assembled / installed at site, place of supply shall be the location of such assembly / installation. Contracts in pre-GST era classified as works contract, i.e. an agreement wherethere is a mixture of service /labour and transfer of goods generally gets covered under this clause.

However due to the following two facts, not all assembling / installation at site contracts qualify as work contracts:

- Works contract definition under GST is restricted to supply related to Immoveable property.

- Introduction of the concept of Composite supply under GST.

Supply from place of origin to the site "for" assembly/installation gets subsumed and merged with the supply to the recipient by virtue of such assembly / installation.

There is no requirement to vivisect the entire composite supply which is a supply cum installation as a supply plus installation. If such vivisection is to be done, in every supply cum installation contract, supplier would have to take registration as the casual taxable person in the state of installation / assembly. Hence for the contract for supply of goods for assembly/installation and the activity of carrying out the assembly / installation the place of supply is to be conclusively reported as the Location of such installation / assembly.

For example, Servers are supplied ex-works and installed by a supplier in Mumbai to a recipient in Chennai in his office – supply contract gets subsumed into the installation contract and for the complete value of the contract, which is to be treated as the composite supply, the place of supply shall be Chennai, i.e. place where the installation is made.

v. SUPPLY OF GOODS ON BOARD A CONVEYANCE :

In case of supply of goods on board a conveyance i.e. vessel, aircraft, train or motor vehicle, then place of supply shall be the location where the goods are taken on board.

This section refers only to the supply of goods on board the conveyance by the operator to the passenger during the journey.

It is to be noted that the place of supply is not determined by the location where the passenger boards the conveyance, but by the location where the goods are taken on-board the conveyance.

For Instance, a Gujarat snack manufacturer loads his stock of snacks in a conveyance in Goa and the snack is being sold to a passenger boarding the conveyance in Hyderabad. The place of supply in this case, is Goa, since that is the place where the goods were taken on-board.

The above analysis of Sec 10 of IGST Act, 2017 would illustrate, how each and every word in the GST Act is emblazoned with significance. As rightly quoted by Dr. A.P.J. AbdulKalam, "Without Involvement, one cannot succeed. With Involvement, one cannot fail", only when we have the time and verve to enjoy reading the Act, we shall explore the hidden treasure.

(The views expressed are strictly personal.)