GST Updates

Complete Analysis of Sales in Transit in GST: -Room for More Clarity

This article seeks to analyse concept of Sales in Transit as envisaged in GST. There is a lack of clarity regarding the treatment of Sales in Transit in GST from the point of view of the third party who endorses the bilty in favour of the recipient.  This article throws light on applicability of provisions Section 10(1)(b) of IGST Act on Sale in Transit and tries to analyse concept of place of supply, location of supplier between the supplier and the Third Party vis-à-vis the recipient. 

  1. Points for determination: Following are the three points for determination around which entire article would revolve 
  1. Place of Supply
  2. Location of Supplier of Goods
  3. Location form where the supplier has to seek registration

 

 Let’s try to understand the above three points in detail before moving ahead in the article:

  • Section 10(1)(b) of the IGST Act: Let’s try to analyse provisions of Section 10(1)(b) of the IGST Act with the help of an Example:

Case Study:

Consider an Eg. A in Delhi purchased goods from B in Mumbai. However, before the movement of the goods starts, A instructs B to dispatch goods to C in Chennai.

 

Let’s Understand the Transaction Matrix:

 

The Players Role Played
A-Buyer i.e. third party a)      “A” gives direction to deliver goods to “C”b)     The direction is given before or during the movement of the goods.
B-Supplier a)     “B” delivers the goods to “C
C-Recipient a)     “C” receives the goods as per direction of “A”.b)     The goods are delivered to “C” by way of transfer of documents of title to the goods or otherwise.
  • The provision can be divided into three different parts for better understanding:

 

  1. Part –I:-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.

The provision can be detailed out as follows:

 

 

Particulars Relevant Extract of the Section Implications on the Provision
Who should have made the delivery of the goods to “C” 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 The goods should have been delivered to “C” by “B” on the direction of “A”
When direction should have been given by “A” to deliver goods to “C” Before or during movement of goods The direction should have been given by “A” to deliver goods to “C” either before or during the movement of goods
How should the direction be carried out Either by way of transfer of document of title to the goods or otherwise The direction should be carried out by transfer of documents of title to the goods or otherwise.

 

  • Part II: Deeming fiction that goods have been received by the third party i.e. “A” although no physical/actual delivery of goods have been received by “A”

 

Particulars Relevant Extract of the Section Implications on the Provision
Goods should be deemed to have been received by the third party i.e. “A” It shall be deemed that the said third person has received the goods It shall be deemed that although the goods have been physically received by “C” but “A” has also received the goods.

 

  • Part III:-Place of supply of goods between “B” and “A” shall be the principal place of business of “A”. i.e. the place at which it would be deemed that the goods have been received by “A” would be the principal place of business of “A”.

 

Particulars Relevant Extract of the Section Implications on the Provision
Place at which it would be deemed that goods have been received by third party i.e. “A” Place of supply of such goods shall be the principal place of business of such person It shall be deemed that goods have been received by “A” at his principal place of business i.e. Gujarat

 

  • Conclusion: Basic premise around which Section 10(1)(b) revolves around the basic premise as follows:

 

  1. Who delivers the goods: Supplier i.e. “B”
  2. To whom the goods are delivered by the supplier: Recipient or any other person i.e. “C”
  3. Why the goods are delivered to the recipient by the supplier: Third party i.e. “A” gives the direction either before or during movement of goods to deliver goods to recipient i.e. “C”.
  4. How the delivery is affected by the supplier to the recipient: Delivery is effected by way of transfer of documents of title to the goods or otherwise.
  5. How “A” has received the goods: It would be deemed that “A” has received the goods.
  6. Which would be the place at which it would be deemed that goods have been received by “A”: It would be deemed that “A” has received the goods at his principal place of business.

 

  • Location of Supplier of Goods:

The term location of supplier of services has been defined under the law but the term location of supplier of goods has not been defined under the law. However, as the term suggests, we can say Location of supplier of goods is a place where he has goods in his effective control and goods ready to be supplied. The term itself says location form where the goods have been supplied.

 

  • Place from where a person has to seek registration

Section 22(1) of the CGST Act provides that

Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:

 

The liability for registration is from the place from where the supplier makes the taxable supply. The location of supplier would govern the case of new registration, return filing etc.

 

  1. How Sales in Transit Takes place

 Let’s take two examples for better understanding of how sales in transit takes place and this entire article would revolve around those two examples:

  1. Example-1: “A” at Gujarat instructs “B” at Rajasthan to dispatch goods to “C” at Delhi. “B” (Rajasthan) takes out the bilty in favour of “C” (Delhi) and raises the bill wherein “A” (Gujarat) is shown as the buyer and “C” (Delhi) is shown as the consignee.

Bilty is directly made by “B” in favour of “C” on the direction of “A” and bill issued by “B” contains detail of “A” as buyer and “C” as consignee. In the given case, goods are being directly dispatched by the supplier to the recipient on the direction of the third party.

 

Example-2: “B”(Rajasthan) supplies goods to “A”(Gujarat). Bilty is taken out in the name of “A”(Gujarat). “A”(Gujarat) without taking the delivery endorses the bilty in Favour of “C” (Delhi).

In the given case, goods are not directly dispatched to “C” (Delhi) but the bilty is first taken out in the name of “A” (Gujarat) and then the bilty is endorsed by “A” Gujarat in favour of “C” (Delhi).

 

  1. Understanding Example 1 and Example 2 vis-a-vis concept of Sale in Transit and provisions of Section 10(1)(b)

Let’s now try to decode Example 1 and Example 2 as stated above in the given backdrop:

Example 1: Goods are delivered by “B” to “C” as per the directions received from “A” before movement of goods. “B” takes bilty in the name of “C” and then goods are dispatched directly to “C”. Therefore, only action by “A” in this entire transaction is that of providing direction to “B” that the goods be delivered to “C”. The example squarely falls within the conditions prescribed under section 10(1)(b).

 

Let’s refer the table for further understanding of the supply transaction between A, B and C

 

S. No. Particulars Supply between A and B Supply Between A and C
1. Location of Supplier Rajasthan Gujarat
2. Place of Supply Gujarat Delhi
3. Place where Supplier needs to be Registered under GST Rajasthan Gujarat

 

Example 2: The situation gets a bit complicated here and the dilemma starts. We need to have a detailed understanding of the sequence of the events which have taken place:

  1. A places an order for supply of goods with B.
  2. B prepares bill in the name of A.
  3. B then dispatches the goods by preparing bilty in the name of A.
  4. A then before receiving the goods, endorses the bilty in the name of C.

 

Lets refer the table for further understanding of the supply transaction between A, B and C

S. No. Particulars Supply between A and B Supply Between A and C
1. Location of Supplier Rajasthan ????
2. Place of Supply Gujarat Delhi
3. Place where Supplier needs to be Registered under GST Rajasthan ????

 

It’s the Question Mark in the table for which the article seeks to find the Answers. The relevant points for discussion are following which have been discussed in Para 4 below:  

 

  1. Points for Discussion

The questions which are to be answered with reference to Example-2 above are as follows:

Question 1:Whether endorsement of bilty by “A” in favour of “C” and subsequent redirection of the goods to Delhi would at first deemed to be delivery of goods to “A”:- Section 10(1)(b) of IGST Act contemplates a deeming fiction of “A” receiving the goods although “A” never actually receives the goods. A deeming fiction has been inserted to provide that although “A” has not taken delivery of goods but if the conditions given in law are fulfilled, then it would be deemed that A has taken delivery of goods and place of supply for “A” would be the principal place of business of “A”.

However, If it is concluded that “A” has taken delivery of the goods, then provisions of section 10(1)(b) do not comes into play because if the goods have been delivered to “A” then there is no requirement for the deeming provision to be brought in place.

Question 2:-Whether endorsement of bilty by “A” in favour of “C” and subsequent redirection of goods to Delhi would be deemed to be termination of movement of goods.

Question 3:-Whether at the time when “B” takes out bilty in favour of “A”, provisions of section 10(1)(b) ceases to have any role to play as now “B” cannot deliver the goods to “C” and all the rights to deliver the goods lies with “A”:- The question becomes important because provisions of Section 10(1)(b) of IGST Act do not come into play when goods are not delivered by supplier to recipient on the direction of third party. Thus, for the purpose of provisions of Section 10(1)(b) coming into play, goods should have been delivered by “B” to “C” on the  directions of “A”.

Now let’s try to answer all these questions and try to reach to a conclusion of what will be the location of supplier and place of supply in Example 2 as given above. Location of Supplier and Place of Supply are clear in case of Example-1.

 

  1. Question 1:Whether endorsement of bilty by “A” in favour of “C” and subsequent redirection of the goods to Delhi would at first deemed to be delivery of goods to “A”. 
  • CGST Act, 2017 and IGST Act, 2017 do not define “delivery”. The question now arises is whether delivery of goods for the purpose of CGST/IGST law would be actual/physical delivery or would include constructive or symbolic delivery? Although law does not specifically lays down any condition but then it has to be gathered from the intention of the law makers.
  • Therefore for gathering the intention of the law makers we have to refer Section 10(1)(a), 10(1)(b) and 10(1)(c)of the IGST Law.

 

  • Section 10(1)(b) of IGST Act, 2017: 

Thus, essential conditions as envisaged by Section 10(1)(b) of the IGST Act are as follows:

 

goods are delivered by the supplier to a recipient or any other person on the direction of a third person..”

  1. Goods should be delivered to a third person
  2. The delivery should be as per the direction of the third person
  3. The direction should be before or during the movement of the goods and can be executed by way of transfer of document to the title of goods or otherwise.

If the above conditions are satisfied then it would be deemed that goods have been received by the third party irrespective of the fact that he has actually not received the goods. Thus, the need to put in the deeming provision shows that the law contemplates physical delivery of the goods as “goods being delivered”. The law brings in deeming provision for delivery of goods to the third party because if it would have treated constructive/symbolic delivery as “goods being delivered” then provision of section 10(1)(b) of the IGST Act, 2017 were not required at all.

 

  • Section 10(1)(a) of IGST Act: Where Supply involve movement of goods

Section 10(1)(a) lays down the condition for place of supply where the supply involve movement of goods: The relevant extract of the provision is as follows:

“where the supply involves movement of goods, ……………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

The section emphasizes that the place of supply shall be the location of the goods at which the movement of goods terminates for delivery to the recipient. Here also if we see that the movement is treated as terminated only when the goods are actually delivered to the recipient.

 

  • Section 10(1)(c) of IGST Act: Where supply does not involves movement of goods:

“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

The section emphasizes that the place of supply shall be the location of goods at the time of delivery to the recipient.

 

  • Therefore what we can broadly say the provisions of Section 10(1)(a), 10(1)(b) and 10(1)(c) of the IGST Act covers three different provisions as follows:

 

Whether there is actual delivery of goods Supply with/without movement of Goods Deming Provision Place of Supply/ Place where it would be treated that the goods have been supplied
Yes Supply involves movement of Goods No Place where the movement terminates for delivery to the recipient
Yes Supply does not involves movement of goods No Place where the goods are located at the time of delivery to the recipient
No Yes Principal Place of business of the Third party who instructs supplier to deliver the goods to the recipient

 

  • Whether reference to provisions of Sales of Goods Act, 1930 would have any impact on ascertaining the meaning of delivery for the purpose of CGST/IGST Act, 2017
  • Sub-section (2) of Section 2 of Sales of Goods Act, 1930 defines “delivery” as follows:

“delivery” means voluntary transfer of possession from one person to another;

The term “delivery” as defined under the Sales of Goods Act, 1930 is very wide enough and seems to cover actual/physical delivery and constructive as well as symbolic delivery.

 

  • Section 33 of the Sales of Goods Act, 1930 provides that
  1. Delivery.—Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf.

 

  • Section 39 of the Sales of Goods Act, 1930 provides that
  1. Delivery to carrier of wharfinger.—

 (1) Where, in pursuance of a contract of sale, the seller is authorised or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to a wharfinger for safe custody, is prima facie deemed to be a delivery of the goods to the buyer.

 

  • Section 23(2) of the Sales of Goods Act provide that

(2) Delivery to carrier.—Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract.

 

  • Sales of Goods Act, 1930 contemplates that act of doing anything which the parties agree shall be treated as goods being delivered or which has effect of putting goods into possession of either buyer himself or any person authorised by him in this behalf.

Thus, if we go strictly by the provisions of Section 33 read with Section 39 of the Sales of Goods Act, once goods are delivered to recipient or for that matter to the carrier for the purpose of transportation of goods on the direction of third party, it would be treated as simultaneous delivery to third party without goods actually being received by him.

 

  • If lawmakers would have strictly abided by theory of symbolic/constructive delivery as contemplated in Sales of Goods Act, 1930 being considered as “goods being delivered” under GST, then there would have been no requirement to bring in deeming provisions of Section 10(1)(b) under IGST Act, 2017.

 

  • By bringing in Section 10(1)(b), it shows that they had a different meaning in mind of “goods being delivered” for the purpose of GST Law and they thought that without inserting deeming provision, delivery would not have been completed for the third party merely on the pretext that goods have been delivered to the recipient by the supplier on the direction of third party. On the other hand, similarly provisions of Section 10(1)(a) would not have linked delivery with the termination of the movement.
  • The lawmakers while drafting the GST Law seems to have not been guided by the provisions of Sales of Goods Act and therefore thought it fit to have a deeming provision under the IGST Law itself and thereby holding that unless until provided specifically GST Law treats the “goods being delivered” only on the actual delivery of the goods on the termination of movement of goods. If the intention of the law is otherwise then there would be deeming fiction to that effect.
  • Thus, without any specific provision regarding deemed delivery under the law that endorsement of the bilty would be delivery of the goods being taken by the recipient, delivery of the goods would not completed as CGST/IGST Act treats actual delivery of goods as “goods being delivered”. 
  • Conclusion to Question 1: Goods being delivered” under GST means goods being delivered actually/physically. Delivery contemplated under the Act is not constructive or symbolic delivery. Therefore, unless until law contemplates that constructive/symbolic delivery is delivery of goods by specific or deeming provision, merely endorsement of bilty would be treated as delivery of goods to third party.

 

  1. Question 2: Whether endorsement of bilty by “A” in favour of “C” and subsequent redirection of the goods to Delhi would be deemed to be termination of movement of goods
  • Reference to the decision of Hon’ble Rajasthan High Court in the matter of Guljag Industries Limited vs State Of Rajasthan And Anr. on 30 August, 2002

Explanation-1 to Section 3 of the Central Sales Tax Act, 1956 provided that

Explanation-1.-Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

The fact that Explanation 1 specifically provided that the movement of the goods terminated at the time when the delivery is taken from such carrier or bailee made the concept of constructive delivery irrelevant and it was the actual delivery when taken from the carrier or bailee that the movement was treated as terminated.

 

Relevant Extract of Judgment of Hon’ble Rajasthan High Court in the matter of Guljag Industries Limited vs State Of Rajasthan And Anr. on 30 August, 2002 Is as follows:

 The assertion of the department to the effect that there was constructive delivery of the goods at the branch office of the appellant is on the basis of stock entries in the daily sales register and preparation of invoices/delivery of challans favouring the subsequent buyers. In this regard, Explanation I provides the clue. It defines commencement of the movement of goods and their termination and, as such, it overrides any other concept regarding commencement and termination of movement of goods for the purpose of Section 3(b). We do not find anything in the language of the Explanation I, which may indicate that the movement of the goods contemplated therein would terminate on the basis of constructive delivery being presumed on account of certain entries. The delivery contemplated is only actual delivery and till such delivery is taken by the buyer from the

transporter, the movement of goods continues.

 When the appellant effected subsequent inter-State sale by endorsing the documents of title forthwith and accordingly, the transporter who brought the goods from outside the State took the goods to the subsequent buyers, who obtained delivery thereof, there is no question of any notional or constructive delivery to the appellant. The appellant did not take delivery of goods. Inter- State movement of goods continued and terminated only upon taking delivery of goods by subsequent buyers.”

 

  • Similar intention of the law can be gathered from the wordings of Section 10(1)(a), 10(1)(b) and 10(1)(c) of the IGST Act, 2017. Section 10(1)(a) of the IGST Act is as follows:

“where the supply involves movement of goods, ……………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

 

  • Thus, the decision of Hon’ble Rajasthan High Court would be helpful in analyzing when the movement of goods would be terminated for the purpose of delivery of goods to the third party under GST as language employed under both Central Sales Tax and CGST/IGST law are similar to each other.
  • Comparative Analysis of the language of Explanation 1 to Section 3 of the CST Act and Section 10(1)(a) of the IGST Act shows that whereas Explanation 1 of Section 3 treats the movement being terminated when “delivery is taken from such carrier or bailee” whereas section 10(1)(a) treats the movement being terminated when goods being delivered to the recipient.
  • Similar to Explanation 1 to Section 3 of the CST Act, 1956, it can be seen that GST law also contemplates that movement of the goods would be terminated only when the goods are actually delivered to the recipient. 
  • Conclusion to Question 2: We can conclude that movement of goods is not terminated unless goods are actually handed over to recipient. Therefore, until goods are handed over to recipient, goods would be deemed to be under transit and merely endorsement of the bilty by the supplier would not be treated as termination of the movement of goods and delivery of the goods to the person who has endorsed the bilty.

 

  1. Question 3: Whether at the time when “B” takes out bilty in favour of “A”, provisions of section 10(1)(b) ceases to have any role to play as now “B” cannot deliver the goods to “C” and all the rights to deliver the goods lies with “A”:- 
  • Section 10(1)(b) of IGST Act revolves around the basic premise that 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”.

One of the most important ingredients of Section 10(1)(b) of IGST Act is that goods are delivered by the supplier to the recipient on the direction of the third party.

  • Thus what we can say is
  1. Who delivers the goods: Supplier
  2. To whom the goods are delivered: Recipient or any other person
  3. Why the goods are delivered to the recipient by the supplier: Goods are delivered to the recipient on the direction of the third party.
  4. How the delivery is affected by the supplier to the recipient: Delivery is affected by way of transfer of documents of title to the goods or otherwise.

 

  • In case of Example 1, goods are delivered by “B” to “C” on the direction received from “A” before movement of the goods. “B” takes bilty in the name of “C” and then goods are dispatched directly to “C”. Therefore, the only action by “A” in this entire transaction is that of providing direction to “B” that the goods be delivered to “C”. The example falls within the conditions prescribed under section 10(1)(b).
  • In case of Example 2, situation gets a bit complicated. We need to have a detailed understanding of the sequence of the events which have taken place:
  1. “A” places an order for supply of goods with “B”.
  2. “B” prepares bill in the name of “A”.
  3. “B” then dispatches the goods by preparing bilty in the name of “A”.
  4. “A” then before receiving the goods, endorses the bilty in the name of “C”.

 

The key questions which remain to be answered here are as follows:

  1. Whether the goods were delivered by supplier “B” to the recipient “C”- Yes, although at the first glance, view comes out that delivery of goods has not been made by “B” to “C” but goods have been delivered to “C” by “A”.

 

However, when we analyse provisions in greater detail, we see that it was B who has delivered the goods to “C”. As we have analyzed in detail that GST Law contemplates actual delivery as “goods being delivered” rather than constructive delivery. The sequence of events goes as follows:

 

  1. “B” had taken out bilty in favour of “A”.
  2. “A” did not take actual/physical delivery of the goods.
  3. “A” endorsed bilty in favour of “C”.
  4. “C” was the person who had taken the actual/physical delivery of the goods.
  5. The movement of goods did not terminate till the goods were delivered to “C”. There was an interrupted movement of the goods till goods being delivered to “C”.

Therefore, merely endorsing bilty in favour of “C” would not be deemed as delivery of goods by “A” to “C” unless “A” takes actual delivery of the goods from “B” and then sends the goods to “C”.

Therefore, we can conclude that as the uninterrupted movement started from “B” and ended upto “C” and law does not treat constructive delivery as goods being delivered, therefore act of “A” of endorsing the bilty would only be treated as direction and it would be treated as goods being delivered by “B” to “C”.

2. Whether goods delivered by “B” to “C” was on the direction of “A”–Another key condition is that the goods should have been delivered by the supplier to the recipient on the direction of third party.

 

“B” had taken out the bill in favour of “A”. The goods were then handed over to the transporter for being delivered to “A”. The act of “A” of endorsing the bilty would be sufficient to be treated as being direction for the goods being delivered to “C”.

If the law would have treated constructive delivery as “goods being delivered”, then in such case it would then have been treated that the goods have been delivered by “A” to “C” but as the law only contemplates actual/physical delivery as “goods being delivered”, therefore in such circumstances act of “A” of endorsing bilty would be treated as no more than direction of goods to be delivered to “C”.

  • Conclusion to Question 3: We can conclude that provisions of Section 10(1)(b) are applicable in Example 2 as goods have been delivered by the supplier “B” to the recipient “C” on the direction of “A”.

 

  1. Now let’s try to conclude Example 2 in the reference of the above discussion: 
  • Example-2: “B”(Rajasthan) supplies goods to “A”(Gujarat). Bilty is taken out in the name of “A”(Gujarat). “A”(Gujarat) without taking the delivery endorses the bilty in Favour of “C” (Delhi).
  1. “A” places an order for supply of goods with “B”.
  2. “B” prepares bill in the name of “A”.
  3. “B” then dispatches the goods by preparing bilty in the name of “A”.
  4. “A” then before receiving the goods, endorses the bilty in the name of “C”.

Although arriving at the other side of the view that delivery of the goods has been taken by “A” and provisions of Section 10(1)(b) are not applicable as goods have not been supplied by “B” to “C”, cannot be entirely rule out as situation is far from clear.  Clarification in this regard would be welcome.

However, situation is more favorable to the view that provisions of section 10(1)(b) of the IGST Act are applicable in Example-2. Lets refer the table for further understanding of the supply transaction between “A”, “B” and “C”:-

S. No. Particulars Supply between “A” and “B” Supply Between “A” and “C”
1. Location of Supplier Rajasthan Gujarat
2. Place of Supply Gujarat Delhi
3. Place where Supplier needs to be Registered under GST Rajasthan Gujarat

 

  • Location of Supplier: As the law does not defines location of supplier, however we can still say that location of supplier would be the place where the supplier is in effective control of goods.

 

Section 10(1)(b) clearly holds that in such case place of supply of goods shall be deemed to be the place where the principal place of business of “A” is located. Thus when the law clearly stipulates that delivery of the goods to “A” shall be deemed at the principal place of business of ‘A”, therefore location of supply for the purpose of transaction between “A” and “C” would also be deemed as Principal place of business of A as he would be deemed to be in effective control of goods at that place of business.

 

Provisions of Section 10(1)(b) of the IGST Act are applicable in Example-2 for the reasons as cited above, therefore it would be deemed that goods have been delivered to “A” at his principal place of business and therefore, location of supplier i.e. “A” would be his principal place of business.

 

  • Place where Supplier needs to be registered under GST: The place from where supplier needs to be registered is the location of supplier of the goods. In the instant case, location of supplier of goods “A” is principal place of business. Thus, “A” needs to be registered at the location where his principal place of business is situated.

 

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