TaxTMI 
TaxTMI 
TaxTMI 
Dear Sir
Please clarify as under
Ex-factory or ex-works sale – Can it be treated as intra-State supply?
Now the provisions are to be analyzed to test a transaction which is popularly known as an ex-factory or ex-works sale of goods. Typically, in such transactions the supplier is responsible for making goods available at its factory site, the title, risk and possession of the goods are transferred by the supplier to the recipient at the supplier’s factory gate, where after the recipient is responsible for transportation of goods up to the destination, bears the risk of any loss in transit and is free to dispose the goods in any manner it deems fit. Further, the address in the ‘bill to’ field of the invoice raised by the seller would be the recipient’s location, where the goods may or may not be shipped to by the buyer.
While some may argue that the supply in this case does not involve movement because the movement of goods by the recipient is only a post supply activity invoking Section 7(4), it is also possible to argue that usage of the words ‘whether by the supplier or by recipient’ after the words ‘where the supply involves movement of goods’ has widened the scope to include such transactions where the movement is a direct result of the supply of goods and therefore, the transaction in question will be governed by Section 7(2).
For the sake of exhaustiveness, it would be appropriate to examine the results by applying both the provisions. However, for application of both the provisions it is relevant to determine what constitutes ‘delivery to the recipient’. As per the definition of delivery discussed supra the delivery to recipient would be the point where voluntary possession of goods is given to the recipient and the recipient is put in the same position of control over the goods which the supplier himself had immediately before such delivery.
Thus, in this example it can undoubtedly be said that the delivery takes place at the factory of the supplier. Now by application of Section 7(4) of the Model IGST Act, the place of supply of goods would be the factory site of the supplier. Interestingly, for the purposes of Section 7(2), termination of movement for delivery would also be the factory gate of the supplier resulting in the place of supply again being the factory site of the supplier. Thus, irrespective of the provision applied, in case of an ex-factory transaction the place of supply would be the supplier’s factory, which being the same as the location of the supplier will make the transaction an intra-State supply of goods.
However, this interpretation of the provisions may result in various complications and contradictions. Firstly, if an ex-factory transaction is treated as an intra-State supply subject to levy of CGST-SGST in the supplier’s State, then will a recipient located in a State outside such supplier’s State, without business or registration in the supplier’s State, be allowed to avail and utilize the SGST credit of the purchase while making output GST payment in its home State? If the SGST credit of one State is blocked for availment and utilization in another State, then GST model is not very different from the current VAT regime for the purpose of cross utilization of credit under different VAT legislations. Secondly, if the recipient dealer is expected to take registration in each of the States of suppliers and then stock transfer the goods to its own unit in the other State by charging IGST which can be paid by utilizing the CGST-SGST credit of the procurement, then the same will be in complete contradiction of not only prudent business practices but also the ‘hub and spoke’ model in which GST in India is expected to operate.
Place of supply – Can ultimate destination provide the solution?
In view of the above, one may take a view that it is the location of goods at the time of ultimate termination of movement by the recipient himself that would be relevant for determining the place of supply. However, it is not for the supplier to be sure of whether and where the recipient chooses to move the goods as the recipient is free to move or dispose the goods in any manner in transit itself. This will result in taxability of transaction in the hands of the supplier contingent upon events not under its control. In order to avoid such uncertainties, the buyer’s ‘bill to’/ ‘ship to’ address can be assumed to be the place where the movement of goods will eventually terminate after making necessary modifications in the agreement curtailing the buyer’s right of diversion. If the address of the recipient is outside the supplier’s State, then the transaction will be deemed to be an inter-State supply irrespective of the terms of supply.
This view, though meritorious on account of its simplicity and objectivity, may be prone to dispute because it does not flow from an interpretation of the draft provisions as they currently exist. The view is especially disputable in light of the fact that the draft law makers have defined the phrase ‘address of delivery’ but refrained from using it in this provision. Further, if the intention was to make the ‘bill to’ address of the recipient as the place of supply then the draftsmen could have done so by adopting the phrase ‘principal place of business’ of the recipient which has been done in sub-section (3) of Section 7 and also other provisions of the Model IGST Act determining place of supply of goods and services in different contexts.
Thus, the Model IGST Act in its current form, though clearly had intended to and seeks to address the problem, has only ended up creating more peculiar ones.
D K AGGARWAL