In this article we will discuss about which GST will be applicable on ex-factory supply of goods. As we know GST is charged on taxable supplies of goods or services or both. Further such supplies can be intra-State if the location of supplier and place of supply are in same State / UT or inter-State where the location of supplier and place of supply are in different State / UT. In case of intra-State supply CGST + SGST shall apply and else IGST shall be applicable.
In case of supply of goods an issue arises in regard to treatment of ex-factory supplies i.e. goods are made available to the recipient at the factory gate itself the risk and rewards are transferred at the factory gate only and post that, the supplier can’t be held responsible for the goods as the risk is transferred from supplier to the buyer.
The issue is whether such supplies will be intra-State or inter-State where the recipient actually belongs to other State and after receiving the goods at factory transports them to his place in other State. The solution to issue as to which GST is applicable on ex-factory supply of goods hinges on determination of place of supply. Lets start our deliberations:
Statutory Provisions:
The Place of supply of goods within India is governed by Section 10 of the IGST Act,2017. The relevant extract of said Section is 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)……….
(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), (e)……
Two school of thoughts:
In regard to treatment of ex-factory supplies there can be two school of thoughts.
First one being, that in case of ex-factory supply, goods are made available to the recipient at the factory gate itself. Therefore, the movement of goods terminates at the factory gate and consequently place of supply shall be the location of the factory as per Section 10(1)(a). Thus, it shall be treated as an intra state supply.
Another view in line with above is that in case of ex-factory sales there is no movement involved in the transaction; therefore, the said transaction is to be covered by section 10 (1) (c) and consequently the place of supply shall be the location of goods at the time of delivery to the recipient of the goods i.e. the location of the factory.
As per above school of thought all ex-factory supplies will always be intra-State and subject to CGST + SGST even if the recipient is of / takes goods to other State. This view seems to contradictory to the soul of GST being a consumption based tax i.e. tax should accrue to State where goods / services are consumed.
The second school of thought appears to be on right footing. According to which the ex-factory supplies will be governed by Section 10(1)(a). This Section states that movement can be caused by ‘supplier or the recipient or by any other person’ , therefore when the recipient takes the goods to its State after collecting goods at factory gate and since the movement actually terminates at the location of the recipient where the goods are destined to, the place of supply should be the state where the goods are destined by the recipient for consumption.
Thus as per above view, GST to be charged on ex-factory supply to recipient located outside State would be inter-State supply will be IGST.
Ruling of Telangana AAR on GST on ex-factory supply
Telangana AAR in the case of M/s. Penna Cement Industries Limited has ruled that IGST is chargeable on ex-factory inter-State supply of goods.
Facts of the Case:
- The applicant M/s. Penna Cement Industries Limited, are manufacturers of cement having two cement plants in Telangana;
- They occasionally make inter-State sale of cement on ex-factory/works basis from their plants in Telangana;
Issues on which ruling was sought:
The applicant raised the following query:
i) What tax (GST) should be charged on ex-factory inter-State supply made by them?
Order of Telangana AAR; Deliberation and Ruling on GST on ex-factory supply of goods
- In the case on hand, the applicant has no uncertainty as regards to ‘the location of supplier’ and they sought clarity only with regard to the ‘place of supply’. This leads us to refer to Sec. 10(1)(a) of IGST Act, 2017 which contains provisions relating to determination of ‘place of supply’ of goods where the supply involves movement.
- In terms of the above provision, it is apparent that place of supply in respect of goods (where supply involves movement of goods) shall be the location of goods at the time when movement of goods terminates for delivery to the recipient.
- As stated by the applicant, there is a scope for inference that in case of ex-factory sales, since the delivery of goods to recipient takes place at factory gate so far as supplier is concerned, location of the supplier’s factory can be reckoned as place of supply. However a careful appraisal of the provisions of Sec. 10(1)(a) does not suppose such inference.
- We noted that the usage of the words ‘whether by the supplier or by recipient’ after the words ‘where the supply involves movement of goods’ under the said section perceptibly indicates that the movement can be effected by the supplier or by the recipient or by any other person authorized by the recipient. This leads to the conclusion that, in terms of Sec. 10(1)(a), movement of goods in case of ex-factory inter-State sales does not conclude at factory gate but terminates at the place of destination where the goods finally are destined as per the billing address. Accordingly, it can be inferred that the place of supply in respect of goods where the supply involves movement of goods whether by the supplier or by the recipient or by any other person authorized by him has to be determined with reference to the location where the movement of goods ultimately terminated.
- What we perceive from the statement made by the applicant, is that,in case of ex-factory inter-State sales affected by the applicant, the goods are made available by the supplier to the recipient at the factory gate, but this is not the point where movement terminates since the recipient subsequently assumes the charge for transportation of the goods up to the destination in another state. Thus, termination of the movement of goods evidently takes place at the location (in a different state) to which the goods are consigned/destined and such movement is effected by the recipient or by any other person such as transporter authorized by the recipient. Applying the inference made by us in the preceding para to the facts of the case on hand, the place (in the other state) where the goods are destined turns out to be the ‘place of supply’ in terms of Sec. 10(1)(a) ibid. Consequently, the ‘location of supplier’ and the ‘place of supply’ fall under different states and the supply qualifies as inter-State supply. Accordingly, we hold that, the supplier in the stated instance is liable to charge IGST in respect of ex-factory inter-State supplies made by them.
In view of above deliberations Telangana AAR consisting of J. Laxminarayana and B. Raghukiran held that IGST is chargeable on ex-factory inter-State supplies.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
