How to Determine the Place of Supply

in Case of Bill to-Ship to Transactions

Mar 13 2017
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Last updated on June 20th, 2017 at 12:36 pm

In the Bill to – Ship to model, the billing and shipping of goods are done to two
states and entities. In order to avoid the cascading of multiple taxes through the
course of the transaction, the first sale will be taxable, and any subsequent sale
during the movement of goods is exempt from tax. Today, Bill to – Ship to
transactions are a common occurrence.

Let us understand ‘Bill to – Ship to’ transactions with an example.

Ganesh Traders, a dealer in hardware goods, located in Maharashtra receives an

order from Maruthi Traders, located in Karnataka. The order is for the supply of
100 aluminium ladders, with an instruction to ship the ladders to Prime
Hardwares, located in Tamil Nadu. Prime Hardwares is a customer of Maruthi
Traders.

There are two parts to this transaction:

 First part of the transaction – between Ganesh Traders and Maruthi
Traders: Ganesh Traders is the supplier of ladders and Maruthi Traders is the
buyer. Accordingly, Ganesh Traders bills the transaction to Maruthi Traders,
and as per the instruction, ships the goods to Prime Hardwares in Tamil Nadu.
 Second part of the transaction – between Maruthi Traders and Prime
Hardwares: Maruthi Traders is the supplier and Prime Hardwares is the buyer.
Maruthi Traders bills the transaction to Prime Hardwares, and endorses the
lorry receipt (goods shipped in a lorry by Ganesh Traders) in favour of Prime
Hardwares. This lorry receipt (LR) will enable Prime Hardwares to take the
delivery of the goods.
Before we proceed to understand Bill to-Ship to transaction in GST, we will
understand how these transactions are taxed under the current regime.

Current regime: how Bill to – Ship to transactions are taxed

In Bill to -Ship to transactions, there is a first sale and a subsequent sale. In the
current regime, tax should be levied on both parts of the transaction – on the first
sale by Ganesh Traders to Maruthi Traders, and the subsequent sale by Maruthi
Traders to Prime Hardwares.
However, in order to avoid tax being calculated multiple times through the course
of the transaction, exemptions are provided on subsequent sales. These
exemptions however, are subject to the furnishing of the prescribed forms. To get
the exemption on the subsequent sale, a declaration Form E1 has to be issued by
the first seller, and C-Form has to be issued by the buyer for levy of CST at a
reduced rate of 2%.

Let us understand this with an illustration.

In the above illustration, Ganesh Traders bills to Maruthi Traders, and ships the
goods to Prime Hardwares. Ganesh Traders issues Form E1 to Maruthi Traders,
and the C form is produced by Maruthi Traders for availing CST @ 2%.
Subsequently, Maruthi Traders bills to Prime Hardwares against C Form without
charging tax, and endorses the Lorry Receipt in favour of Prime Hardwares.

Treatment of Bill to – Ship to transactions under GST

Under GST, the place of supply of goods is very critical to determine the
transaction as interstate or intrastate. Accordingly, the applicable taxes can be
levied. We have discussed about Place of Supply in detail in our blog what is place
of Supply in GST.

Under GST, the place of supply of goods is very critical to

determine the transaction as interstate or intrastate.CLICK TO

TWEET

In GST, if the goods are supplied by the supplier to the recipient on the direction
of a third person, it will be deemed that the third person has received the goods,
and the place of supply will be the principal place of business of such third person.
Let us understand this with an example.
Ganesh Traders is a dealer in hardware goods, located in Maharashtra. They
receive an order from Maruthi Traders, located in Karnataka, to supply 100
aluminium ladders, with an instruction to ship the ladders to Prime Hardwares,
located in Tamil Nadu.

In the example, on the instruction from Maruthi Traders, Ganesh Traders ships
the aluminium ladders to Prime Hardwares located in Tamil Nadu. Here, Maruthi
Traders is deemed as the third person. Therefore, the place of supply will be the
principal place of business of the third person i.e., Karnataka. Accordingly, Ganesh
Traders charges IGST on billing to Maruthi Traders. The second part of transaction
between Maruthi Traders and Prime Hardwares will also be interstate, and IGST
will be charged.

Let us discuss further with various scenarios.

Scenario 1
Place of Type of
Particulars Supplier Third Party Recipient
Supply Transactions
State Maharashtra Maharashtra Karnataka
Ganesh Maruthi Prime Maharashtra Intra-state
Party Name
Traders Traders Hardwares
In the example, on the instruction from Maruthi Traders, Ganesh Traders ships
the aluminium ladders to Prime Hardwares located in Karnataka. Here, Maruthi
Traders is deemed as the third person. Therefore, the place of supply will be the
principal place of business of the third person i.e., Maharashtra. Accordingly,
Ganesh Traders charges CGST+ SGST on billing to Maruthi Traders. The second
part of transaction between Maruthi Traders and Prime Hardwares will be
interstate, and IGST will be charged.

Scenario 2
Place of Type of
Particulars Supplier Third Party Recipient
Supply Transaction
State Maharashtra Karnataka Karnataka
Ganesh Maruthi Prime Karnataka Interstate
Party Name
Traders Traders Hardwares
The principal place of business of the third party in the above scenario is
Karnataka, and the place of supply will be Karnataka. This is an interstate
transaction, and is liable for IGST. The second part of the transaction between
Maruthi Traders and Prime Hardwares will be intrastate, and CGST+SGST will be
charged.

Read this blog post to understand CGST, SGST and IGST in detail.

The draft India Goods and Services Tax (GST) law, if passed, will represent the most significant
indirect tax reform the country has seen in a quarter century. While the law seeks to streamline a
currently complex web of state- and Centre-level VAT systems, many questions remain — for
example, which levies apply when goods move from agent to supplier to the ultimate customer.

This infographic illustrates the various scenarios that could play out when the law goes into effect.
Depending on whether goods or services are moved across state lines, or where the third party
agent initiating a transaction is located, either the IGST (India Goods and Services Tax) or both
the CGST and SGST (Centre and State Goods and Services Tax, respectively) may be levied.

If it sounds complex, that’s because it is — but this infographic, based on an article by Vertex
Senior Tax Analyst Ramnarayan Balakrishnan and published in Tax India Online, will walk you
through various bill-to ship-to scenarios and their potential outcomes under the new law, as it’s
currently written. Fill out the form to read the full article and to learn more about the draft India
GST law.
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 Eye on GST: Place of Supply and
the dilemma of bill-to ship-to
transaction
The GST laws definitely have the potential to keep the industry,
consultants and courts busy in times to come

BY KPMG IN INDIA

PUBLISHED: JUN 10, 2017

 5147



Image: Shutterstock (For illustrative purposes only)

The ’Place of Supply’ provisions determine ‘where the goods are destined
to’, as GST is a destination-based consumption tax. Subsequently, the state
where the ‘goods are destined to’, will get the GST revenue. In scenarios,
where the location of the supplier and the place of supply are two different
states, the tax charged by the supplier would be IGST. In cases, where, they
are in the same state, the tax charged would be a combination of
CGST+SGST. All of this becomes, more complex when a transaction
involves three parties.
Let us try to understand this with an example:

Person A in Maharashtra ships goods to Person C in Tamil Nadu on the

instructions of Person B in Maharashtra. Here answering the question -
Which would be the ’Place of Supply’ will not be easy. The transaction will
look similar to what is stated below.

While goods are billed to B in Maharashtra, they are shipped by supplier A,

as per B’s instructions, to C in Tamil Nadu. Here, goods are moving from
one state to another. Normally IGST should be applicable in this case, if
Tamil Nadu were to get the tax. But the presence of B makes the transaction
complex, as his/her state (Maharashtra) also needs to get the revenue. The
law therefore creates a fiction in the following manner in Section 10(1) (b)
of IGST Act –

(b) 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, it shall be deemed that the
said third person has received the goods and the place of supply of such
goods shall be the principle place of business of such person

The law creates a fiction such that when supplier A delivers goods to
recipient C at the instructions of third person B, the goods will be deemed
to have been received by B and the place of supply shall be B. Therefore,
even if the goods were moved by A in Maharashtra to C in Tamil Nadu, they
would be deemed to be received by B in Maharashtra and therefore
CGST+SGST would be charged by A.

The reason this fiction arises is because, tax should follow the commercial
transaction to avoid any loss of credits. In a commercial scenario, there
would be a second sale transaction between B and C which then would
attract IGST so that both B and C can claim GST credit and the GST chain
remains unbroken.
Moving further there are certain issues with this well-intentioned provision.
Let us look at them. For one the question that comes to mind is?

Who is the recipient?

While in the paragraph above, we have called C as the recipient, the law
defines a recipient as someone ’who is liable to pay consideration’ [CGST
Act section 2(93)]. In our example B is the person who pays the
consideration to A and therefore would be a recipient, as per the stated
definition. As stated earlier B is the recipient, who is the ‘third person’
mentioned in the provision, at whose instructions goods are dispatched to
C. The problem here is the whole provision stops making sense unless we
interpret the word recipient as ‘receiver of the goods’ and accept C as the
recipient instead of B.

However, can one deviate from the definition given in the act? May be, if
one uses the commencing qualifying words of Section 2 of CGST act i.e. ’in
this act unless the context otherwise requires.’ to one’s advantage. Many
court judgements have held such a reading valid, provided it can be proved,
that the context required a different interpretation of the word ‘recipient’.
In the future, the legal mandarins may want to examine this, so as to bring
in an appropriate amendment to the Act at a later stage. This interpretation
is also supported by the provision in Section 16(2) (which allows credit to B
even when goods are never received by him/her), while using the word
recipient in reference to C as below

Section 16(b) Explanation:—For the purposes of this clause, it shall be

deemed that the registered person (in our example B) has received the
goods where the goods are delivered by the supplier (in our example A) to a
recipient (in our example C) or any other person on the direction of such
registered person (in our example B).

The provision also raises many other doubts which are expected to be
debated in the course of time:
1. Does the provision apply only in case of a sale transaction or can it also
apply in a situation where C is only a branch of B? If this is case, there
would not be a second transaction of sale between B and C. How then
would the state of C get its revenue? If this is the situation, does it become
necessary that an invoice is raised by B to C to transfer the credit? Or is it a
good idea for C to make a payment to A even if the order is placed by
headquarter B specifically mentioning that the goods are to be delivered to
C and payment will be released by branch C. This scenario poses the
question: Should we change the way transactions are done till now, if it can
reduce the possibilities of disputes in the future?

2. Would this provision apply in case one of the parties is not in India - Say,
B is in the US and orders its subsidiary A in India to supply goods to C in
India? Though the section commences with the words ‘the place of supply
of goods, other than supply of goods imported into or exported from India,
shall be as under…’ there is no export transaction in this case as export
requires physical movement of goods out of India (Section 2(5) of IGST
Act). Here the question, is can we apply this provision in such case and if
we can, how do we apply CGST+SGST and IGST in various situations?

3. Can this provision be invoked when an importer in Delhi imports goods

in Mumbai and requires goods directly to be shipped from Mumbai port to
a customer in Maharashtra, while he/she raises a commercial invoice from
his/her Delhi office for his Mumbai Customer?

All of these situations, bring us to the conclusion that the law cannot make
provisions for all possibilities of transactions in real life. It is a skill to fit all
such transactions into the five situations mentioned in the ’Place of Supply’
provisions for goods under Section 10. Law therefore becomes intriguing
and interesting at the same time. It definitely has the potential to keep
industry, consultants and courts busy in the times to come.

- By Dr Waman Parkhi, Partner, Indirect Tax, KPMG in India. The views

and opinions expressed herein are those of the author and do not reflect
the views and opinions of KPMG in India.
 SHOW LESS

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GST Tax GST Bill Lok Sabha Arun Jaitley

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The ’Place of Supply’ provisions determine ‘where the goods are destined
to’, as GST is a destination-based consumption tax. Subsequently, the state
where the ‘goods are destined to’, will get the GST revenue. In scenarios,
where the location of the supplier and the place of supply are two different
states, the tax charged by the supplier would be IGST. In cases, where, they
are in the same state, the tax charged would be a combination of
CGST+SGST. All of this becomes, more complex when a transaction
involves three parties.

Let us try to understand this with an example:

Person A in Maharashtra ships goods to Person C in Tamil Nadu on the

instructions of Person B in Maharashtra. Here answering the question -
Which would be the ’Place of Supply’ will not be easy. The transaction will
look similar to what is stated below.

While goods are billed to B in Maharashtra, they are shipped by supplier A,

as per B’s instructions, to C in Tamil Nadu. Here, goods are moving from
one state to another. Normally IGST should be applicable in this case, if
Tamil Nadu were to get the tax. But the presence of B makes the transaction
complex, as his/her state (Maharashtra) also needs to get the revenue. The
law therefore creates a fiction in the following manner in Section 10(1) (b)
of IGST Act –

(b) 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, it shall be deemed that the
said third person has received the goods and the place of supply of such
goods shall be the principle place of business of such person

The law creates a fiction such that when supplier A delivers goods to
recipient C at the instructions of third person B, the goods will be deemed
to have been received by B and the place of supply shall be B. Therefore,
even if the goods were moved by A in Maharashtra to C in Tamil Nadu, they
would be deemed to be received by B in Maharashtra and therefore
CGST+SGST would be charged by A.

The reason this fiction arises is because, tax should follow the commercial
transaction to avoid any loss of credits. In a commercial scenario, there
would be a second sale transaction between B and C which then would
attract IGST so that both B and C can claim GST credit and the GST chain
remains unbroken.

Moving further there are certain issues with this well-intentioned provision.
Let us look at them. For one the question that comes to mind is?

Who is the recipient?

While in the paragraph above, we have called C as the recipient, the law
defines a recipient as someone ’who is liable to pay consideration’ [CGST
Act section 2(93)]. In our example B is the person who pays the
consideration to A and therefore would be a recipient, as per the stated
definition. As stated earlier B is the recipient, who is the ‘third person’
mentioned in the provision, at whose instructions goods are dispatched to
C. The problem here is the whole provision stops making sense unless we
interpret the word recipient as ‘receiver of the goods’ and accept C as the
recipient instead of B.

However, can one deviate from the definition given in the act? May be, if
one uses the commencing qualifying words of Section 2 of CGST act i.e. ’in
this act unless the context otherwise requires.’ to one’s advantage. Many
court judgements have held such a reading valid, provided it can be proved,
that the context required a different interpretation of the word ‘recipient’.
In the future, the legal mandarins may want to examine this, so as to bring
in an appropriate amendment to the Act at a later stage. This interpretation
is also supported by the provision in Section 16(2) (which allows credit to B
even when goods are never received by him/her), while using the word
recipient in reference to C as below

Section 16(b) Explanation:—For the purposes of this clause, it shall be

deemed that the registered person (in our example B) has received the
goods where the goods are delivered by the supplier (in our example A) to a
recipient (in our example C) or any other person on the direction of such
registered person (in our example B).

The provision also raises many other doubts which are expected to be
debated in the course of time:

1. Does the provision apply only in case of a sale transaction or can it also
apply in a situation where C is only a branch of B? If this is case, there
would not be a second transaction of sale between B and C. How then
would the state of C get its revenue? If this is the situation, does it become
necessary that an invoice is raised by B to C to transfer the credit? Or is it a
good idea for C to make a payment to A even if the order is placed by
headquarter B specifically mentioning that the goods are to be delivered to
C and payment will be released by branch C. This scenario poses the
question: Should we change the way transactions are done till now, if it can
reduce the possibilities of disputes in the future?

2. Would this provision apply in case one of the parties is not in India - Say,
B is in the US and orders its subsidiary A in India to supply goods to C in
India? Though the section commences with the words ‘the place of supply
of goods, other than supply of goods imported into or exported from India,
shall be as under…’ there is no export transaction in this case as export
requires physical movement of goods out of India (Section 2(5) of IGST
Act). Here the question, is can we apply this provision in such case and if
we can, how do we apply CGST+SGST and IGST in various situations?

3. Can this provision be invoked when an importer in Delhi imports goods

in Mumbai and requires goods directly to be shipped from Mumbai port to
a customer in Maharashtra, while he/she raises a commercial invoice from
his/her Delhi office for his Mumbai Customer?
All of these situations, bring us to the conclusion that the law cannot make
provisions for all possibilities of transactions in real life. It is a skill to fit all
such transactions into the five situations mentioned in the ’Place of Supply’
provisions for goods under Section 10. Law therefore becomes intriguing
and interesting at the same time. It definitely has the potential to keep
industry, consultants and courts busy in the times to come.

- By Dr Waman Parkhi, Partner, Indirect Tax, KPMG in India. The views and opinions
expressed herein are those of the author and do not reflect the views and opinions of KPMG
in India.