IGST applicable on Interstate ex-factory sales

As it is always said that GST is a destination-based tax. It means that GST is levied on goods/ services at the place where they are consumed rather than the place of its origin. So taking this basic concept in mind, IGST applicable on ex-factory Supply, ie, the state where the goods or services are terminated or where goods and services are consumed, has the right to retain GST on such goods and services.

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So the crucial concept of the place of supply decides which state is considered as place of consumption of goods and services and it helps in determining whether the transaction of goods/services is interstate or intrastate supply and accordingly, the transaction will be subject to IGST or  CGST/SGST.

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However, there are some transactions like when the receiver takes the goods ex-factory where the property in goods is obtained by the recipient on the factory gate itself. Whereas goods are actually delivered to another state. In this matter Advance Ruling has been issued by Hon’ble Telangana State Authority for Advance Ruling in the matter of applicant M/s Penna Cement Industries Limited (“The applicant”)  vide TSAAR order No. 03/2020 and clarified that IGST would be levied in case of Ex factory Interstate supply.

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Held by Hon’ble AAR: Thus applying the legal provisions of the GST Act it can be concluded that in case of ex-factory sales, if the “location of the supplier” and the place where the goods are consigned for are situated in two different states or union territories then such a transaction qualifies for interstate supply and IGST is leviable on such a transaction.

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The same can be understood with be the help of below table

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1. IGST to be charged in case of ex factory sale 

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The applicant supplies goods on an ex-factory basis, i.e., property in goods is transferred to the recipient at the factory gate itself. However, goods are taken by the recipient to another state on its own. 

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Accordingly, the applicant raised the question that whether such transactions should be considered as inter-state supply or intra-state supply and accordingly, should be subject to CGST & SGST or IGST. 

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Hon’ble AAR held that given case involves movement of goods therefore, “place of supply” shall be the place where movement of goods terminates. Accordingly, in the given case, such transactions shall be considered as inter-state supply and will be liable to IGST.

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2. IGST applicable on ex-factory sales : Detailed interpretation of case

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2.1 Brief Facts of the case

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1. M/s Penna Cement Industries (“The applicant”) are the manufacturers of cement in Telangana.
2. They make inter-state supplies of cement on an ex-factory basis from their plants. This implies that the property in cement is transferred to the party on their factory gate itself.
3. However, post termination of supply by the applicant, the recipient takes such goods to the billing address (lying in another state) on its own.
4. So now the applicant contends that applying section 10(1)(a) of IGST Act 2017, place of supply for such transactions should be the factory gate as they have sold the goods on an ex-factory basis. Therefore, the movement of goods for them terminates at the gate of their factory.
5. Hence the applicant applied to Hon’ble Telangana State Authority of Advance Ruling to determine the matter.

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2.2 What tax should be charged on interstate ex-factory  supply?

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Thus considering the above-mentioned facts the applicant raised the query as

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“ What tax should be charged on interstate ex-factory supply made by the applicant?”

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2.3 Legal Extracts of GST Law

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Considering the facts of the case following legal provisions are applicable to the same:

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1. Section 7(1) and section 7(2) of CGST Act and IGST Act 2017

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These sections elaborate on interstate supplies. As per section 7 of IGST Act, 2017, where “location of supplier” and “place of supply” are in two different states or union territories then such transaction is considered as “Interstate supply”.

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2. Section 8(1) and section 8(2)

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These sections elaborate on intrastate supplies. Similarly, when the “location of supplier” and “place of supply” is in the same state or union territories then such transaction is considered as “intrastate supply”.

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3. Section 10(1)(a) of IGST Act

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This section helps in determining “place of supply” for supply of goods other than imports into and exports from India.

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The extract of the section are :

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“10  Place of supply of goods other than the supply of goods imported into, or exported from India.

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 10. (1) The place of supply of goods, other than the supply of goods imported into, or

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exported from India, shall be as under,––

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(a) where the supply involves the 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;”

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2.4 Applicatent Contention - Why CGST & SGST to be charged on ex factory sale

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• Considering the facts of the case as given above and also applying the various sections of the IGST Act 2017 and CGST Act 2017, the applicant contended that as per section 10(1)(a) of IGST Act, 2017, “Place of supply” should be the place where delivery of the goods terminates.
• In the given case, as delivery of goods terminates at the factory gate itself, therefore, such transactions should be considered as “Intra-state Supply”..
• Therefore, such transactions should be subject to CGST & SGST.

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2.5 Department Contention - Why IGST to be charged on ex factory sale:

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With respect to the provisions as contained in Section 10(1)(a) of IGST Act, 2017, the concerned officer contended that IGST should be charged on the ex-factory interstate sales.

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3. Finally IGST to be charged on Interstate ex-factory Supply

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• For the purpose of determining the nature of transaction, it is pertinent to determine “Place of Supply” for transaction.

• Given case involves movement of goods, therefore, for the purpose of determining “Place of Supply” provisions of section 10(1)(a) of IGST Act, 2017 shall apply.

• As per section 10(1)(a), place of supply shall be the location of goods where movement of goods terminates for delivery to the recipient. Further, movement can be caused by the supplier or recipient or by any other person.

• Therefore, section 10(1)(a) of IGST Act, 2017 clearly indicates that movement can be caused by the supplier or recipient.

• Accordingly, in the given case, movement of goods doesn’t terminate at the factory gate itself rather it is terminated in another state at the billing address. Charge of movement of goods is taken by the recipient.

• Now putting all the provisions together the contention of the officers concerned says that though the goods may be supplied to the recipient at the gate of the factory on ex-factory basis, the goods are destined to be supplied in the other state. And the supply of goods terminates only at the location where the goods are consigned for. 

• Therefore, in the given case, “Place of Supply” shall be the place of billing address where movement of goods terminates. As “Location of Supplier” and “Place of Supplies” falls in different states, therefore, such transactions shall be considered as “Inter-state Supply”.

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Held by Hon’ble AAR: Thus applying the legal provisions of the GST Act it can be concluded that in case of  ex-factory Aupply basis, if the “location of the supplier” and the place where the goods are consigned for are situated in two different states or union territories then such a transaction qualifies for interstate supply and IGST is leviable on such a transaction.