In a general sale transaction, goods are exchanged between seller and purchaser. Often the buyer comes to sellers’ place and buys the goods. When the transaction goes to the next level, the seller delivers the goods at the place of the buyer. Further enhancing the transaction is where the seller delivers the goods to a place other than buyers’ place in the direction of the buyer. In day to day business, several instances where goods are being delivered at buyers place or other places in the direction of the buyer.
In the case of regular export/import, the seller who is an indifferent country of that of his buyer delivers goods to the country of his buyer. However, the situations are such that the person who needs to deliver goods to a buyer in a country has to buy those goods from another country. Hence, the process now includes two steps, importing the goods from a country and exporting the same goods to another country. To reduce the procedure and avoid doubling of transactions, the seller requests his vendor to deliver the goods directly to his buyer who is situated in a different country. Such types of transactions are called ‘Merchant trade transactions’.
Merchant trade transaction in Indian Scenario
The characteristics of Merchant trade transaction in Indian Scenario:
- The supplier of goods will be resident in one foreign country
- The buyer of goods will be resident in another foreign country
- The merchant will be resident in India.
In simple terms, a merchant trade transaction is one such transaction in which the goods are moved from one country to another county where a merchant from India is involved.RBI has issued few circulars for regulating Merchant Trade Transactions.
Discussion of various Provisions applicable under GST
Under GST, the levy is on supply. Hence to be taxed under GST, the thumb rule is to determine whether the transaction is a supply. Once the transaction is recognized as supply, the levy gets attracted, Supply is defined under section-7 of Central Goods and Service Tax Act, 2017, which reads as under:
“(1) For this Act, the expression “supply” includes
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;”
Supply is an inclusive definition, where it includes the transactions which are made in different modes for business, within its ambit. Sale in general trade parlance, the seller transfers goods to the buyer for a price. In the Merchant Trade Transaction, though the seller moves the goods from his vendor, the rights in the goods are transferred by the seller to his buyer. Hence, the transaction squarely comes within the ambit of Sale. Hence, it is a Supply.
Intra-state and Interstate Supplies
Once the transaction is categorized as Supply. We determine which type of Supply. There are two types of Supplies under GST, intra-state and interstate. To categorize a Supply as inter-state or Intrastate, the basis is on two factors:
- location of supplier and
- Place of supply,
When both are in two different states, it is classified as Inter-state Supply and when both are in the same state, it’s an Intrastate Supply. Section -7 and Section- 8 of IGST Act, 2017, which define Inter-state and intrastate supply respectively, reads as under:
“7. (1) Subject to the provisions of section 10, the supply of goods, where the location of the supplier and the place of supply are in–
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory shall be treated as a supply of goods in the course of inter-State trade or commerce.
(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(5)Supply of goods or services or both,–
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
8.(1) Subject to the provisions of section 10, the supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply:
Provided that the following supply of goods shall not be treated as intra-State supply, namely:––
(i) supply of goods to or by a Special Economic Zone developer or a Special
Economic Zone unit;
(ii) goods imported into the territory of India till they cross the customs frontier of India; or
(iii) supplies made to a tourist referred to in section 15.
(2) Subject to the provisions of section 12, the supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:
Explanation 1.––For this Act, where a person has,––
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment
outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
Explanation 2.––A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.
Both the definitions are close-ended and enumerate different situations wherein supply is treated as Intrastate transaction or Inter-state transaction. When a definition is a closed definition, anything other than the situations mentioned therein, shall not be grouped under those definitions.
Hence, from the above when the place of supply and location of the supplier are in two different states, the same is treated as Inter-state supply. Further, the inter-state transaction covers both Exports and Imports. The transactions in which goods are moved out of India to a place outside India, are Exports and goods moved into India from a place outside India is treated as Import. Section-2(5) and Section-2 (10) of IGST Act, 2017 which defines Exports and Imports respectively, reads as below:
“2(5) “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;
2(10) ‘‘import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India;”
The definitions of Export and Import are also closed definitions, wherein the goods which are taken out of India to a place are classified as an Export and goods when brought into India from a place outside India is an Import. Anything other than these cannot be classified either as an Export or as an Import.
Having discussed the Inter-state and Intrastate supplies, we have to understand the two factors which are required to determine the type of supply,
- Location of Supplier and
- Place of Supply.
Location of Supplier
IGST Act, 2017, has defined the location supplier, which contain 4limbs, wherein the last limb is the residuary limb meaning in cases where the location of supplier cannot be determined from first 3 limbs, then can be considered under the 4th limb, Section 2(15) of IGST Act, 2017 reads as follows:
“(15) “location of the supplier of services” means,––
(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business
for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether
the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
(d) in the absence of such places, the location of the usual place of residence of the supplier;”
Determination of Place of Supply
In the case of goods, the place of supply is the place where the movement of goods terminates. Section-10 (1)(a) of IGST Act, 2017 which sets out the place of supply involving the movement of goods, reads as follows:
“10. (1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,––
- 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.
- 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 principal place of business of such person;
The subsection determining the place of supply of goods excludes the supply which is classified as Exports or Imports. Hence, for the transactions which are classified as Exports or Imports, though the supply involves the movement of goods, the place of supply cannot be determined by the application of Section 10(1) of IGST Act, 2017.
Transactions in which the goods are delivered at a place other than the buyer’s location by the direction given by the buyer. Such types of transactions are termed as “bill to ship to transactions”. Section-10(1)(b) of IGST Act, 2017 imbibes a deeming fiction through which place of supply in case of “bill to ship to transactions” is the location of the person who gives the directions for the delivery, place of supply shall be the location of the person giving the direction of delivery.
Application of above analysis to Merchant trade transactions
As per the advance ruling
|When we speak about Advance rulings, the rulings are strictly applicable to the party who has sought the ruling and to the officer. The ruling cannot be applied to other entities. The applicability of advance ruling is given under Section 103 of the CGST Act, 2017, which reads as follows:|
“103. (1) The advance ruling pronounced by the Authority or the Appellate Authority under this Chapter shall be binding only—
(a) on the applicant who had sought it in respect of any matter referred to in sub-section (2) of section 97 for advance ruling;
(b) on the concerned officer or the jurisdictional officer in respect of the applicant.”
Merchant trade transaction is a type of sale, involving the movement of goods. Once the transaction is a sale, it is under the ambit of supply.
Now, we have to determine the category of supply under which the Charge is on, either as Intrastate or Inter-state. The first factor i.e., Location Supplier, as the supplier doesn’t have a registered place of business in India or have a fixed establishment in India which is registered, hence the location of the supplier has to be determined using the last limb of the definition ibid. The Location of the Supplier in his usual place of residence, which is outside India.
In case of supply involving the movement of goods, the place supply is determined under Section 10 or Section 11 of IGST Act, 2017, under section 10 the transactions which are neither imports nor exports are covered. In the case of Merchant Trade Transactions, goods are neither moved out of India nor moved into India, hence the transaction is neither import nor export.
However, in Merchant Trade Transactions wherein goods are delivered at the place as directed by the Merchant, the Place of Supply is the location of such person who gives the direction, it gets covered under Section 10(1) (b) and the place of supply is where the person giving the directions is located.
The deeming fiction embedded in Section 10(1)(b) of IGST Act, 2017 ibid, which determines the place of supply to be the location where the person giving directions is located. Goods being delivered at the direction of Merchant who gives the direction of delivery, hence the place of supply is the location of the Merchant i.e., India.
The two factors, the location of the supplier in other countries and the Place of Supply being in India, the supply is treated as Inter-state supply.
The above view is confirmed by the advance ruling authority through its ruling sought by M/s. Sterlite Technologies Ltd, Gujrat, relevant wordings of the ruling are reproduced below:
“Given the above, it appears that the transaction is covered under the ambit of Inter-state supply and is neither exempted nor covered under export of services. Thus, the theory of elimination takes us to the conclusion that such supplies will be subject to the levy of IGST.”
The factors to be considered for the determination of the type of supply, place of supply and location of the supplier, for supply to fall under interstate supply as decided in the ruling, the factors should be located in:
- Different states
- Different territories
- A state and a territory
|(103) “State” includes a Union territory with Legislature;|
(114) “Union territory” means the territory of—
(a) the Andaman and Nicobar Islands;
(c) Dadra and Nagar Haveli;
(d) Daman and Diu;
(e) Chandigarh; and
(f) another territory.
Explanation.––For this Act, each of the territories specified in sub-clauses (a) to (f) shall be considered to be a separate Union territory;”
As per the General Clauses Act, 1897:
3 [(58) “State”—
(a) as respects, any period before the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean a Part A-State, a Part B State or a Part C State; and
(b) as respects, any period after such commencement shall mean a State specified in the First Schedule to the Constitution and shall include a Union territory;]
States and Union Territories are part of India, State, and Union territory is defined under the CGST Act, 2017. From the definition of the state, we can assume that the location should be within India.
Further as per the definition of State as per Section 3 (58) of General Clauses Act, 1897. State means a state as per the first schedule to Constitution. Hence, we can presume that the territory should be within India.
Hence, when the location of the supplier is in another country and transaction is not Export or Import, the definition of Inter-State is the closed definition and we cannot intend to add something that is not written in the law. Hence, the transaction cannot be covered under the definition of Inter-state supply. We cannot deem anything which is not said in the Act.
Unfortunately, Advance Ruling has not considered this point. When supply is treated as interstate supply, it should be squarely covered under the definition. The scenario under Merchant Trade Transaction it is not covered under the definition of Interstate supply.
When it’s not under the definition of Interstate. This cannot be treated as supply under GST. Hence, there cannot be any Charge of GST on such supplies.
The transactions which are treated as Merchant Trade Transactions, based on the position of law prevailing today, cannot be brought under the levy. Hence, the Merchant Trade Transactions cannot be taxed under GST.
V.Lakshmi Channakesava is a Chartered Accountant. Views are personal