This is to apprise you regarding recent ruling of the Authority for Advance Ruling (‘AAR’), Telangana in case of Penna Cement Industries Limited, 2020-VIL-129-AAR. The relevant facts of the case, decision of AAR and our comments, is outlined hereunder:

Brief facts:

• The Applicant was engaged in manufacture of cement and making ex-works sales thereof. For such ex-works sales, supply got terminated at the Applicant’s factory gate. The recipient’s transporter undertook further movement of goods till billing location (different State).

• The Applicant sought ruling on the nature of tax to be levied on abovementioned transaction i.e. CGST and SGST or IGST.

AAR’s decision:

• The AAR noted that Section 10(1)(a) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’). As per this provision, place of supply of goods where supply involves movement of goods is location where movement of goods terminates for delivery to the recipient.

• The AAR appreciated that the expression ‘supply involves movement of goods’ indicates that the provision only cover cases only where transportation is part of supply itself. The AAR also noted that the provision also states that the movement may be undertaken ‘by the supplier or the recipient or by any other person’.

• Basis above, the AAR concluded that place of supply will be location where movement of goods terminates i.e. State of recipient of goods. Hence, IGST will apply on such supply.

NITYA Comments:

A strict interpretation of Section 10(1)(a) of the IGST Act provides that place of supply in case of ex-work sales should be location of supplier as supply does not involve movement of goods. On the other hand, keeping in mind the nature of GST (being destination based tax) and intent of legislature to allow seamless flow of ITC, purposive interpretation indicates that place of supply in case of ex-works sales is location of recipient. Further, the ruling rightly pointed out inherent contradiction in the provision. To that extent, the ruling is correct.

In order to avoid this controversy, taxpayers can consider changing their terms of supply from ex-works to ex-works + freight / FOR. In these terms of supply, IGST will clearly apply without any ambiguity. 

This issue was raised long back before GST Council (refer news report), however, it has not yet been resolved. It is high time that GST Council make corrective amendment in Section 10(1)(a) of the IGST Act to avoid such disputes in future.