It has been around six months; the GST law is being introduced. During the six months, many changes were being made by the GST Council.
Mainly such changes relates to either procedural issue or the rate of taxation.
However, there will be very rare instances in which the Council will change the place of supply, value of supply etc. which are the core fields of GST Law.
In continuing the series of articles on GST, we are presenting this article which is mainly focusing on the cautions to be taken at the time of Branch Transfers by Companies doing the branch transfer and the warehouse owners.
Let us understand each component in detail:
1. Branch Transfer Across / In the States
First of all, let us understand the meaning of Branch Transfer.
Branch transfer refers to the transfer of materials / finished goods from one unit / location to another unit / location belonging to the same business entity. It is also known as Stock Transfers. Branch transfers are done for various reasons, such as:
- Transfer of semi-finished goods from the manufacturing unit to another unit for further processing
- Transfer of goods to godowns/warehouse for further supply
- Trader may transfer goods to another branch due to demand
- From the perspective of compliance- to enable the customers (B2B) to avail input tax credit, branch transfers are done and then the sale is affected.
The following Branch transfers are taxable:
- Intrastate stock transfer: Taxable only when the entity has more than one registration in one state. These entities will be considered as ‘distinct persons’.
- Interstate stock transfer: Transfer between two branches/units located in different states under the same PAN will be taxable.
So, the branch transfer situation would be like as below:
Factory of XYZ Pvt. Ltd. At Delhi (Value of Goods Rs.100)
Godown of XYZ Pvt. Ltd. At Ahmedabad (Received at Rs. 100 Only)
Consumer ABC Pvt. Ltd. At Surat (Sales is made at Rs. 110)
Now, the most important question is that how are these transfers treated for the purpose of statutory compliance? Are they taxable?
And if taxable, what is the value to be considered for the purpose of tax levy?
There will be two taxable events viz. 1) Transfer of Stock by XYZ Pvt. Ltd., Delhi and 2) Sales of goods made by XYZ Pvt. Ltd., Ahmedabad.
The second is very much a taxable event, no doubt in that.
It is too be noted that the first one is also a taxable event and someone thinks like that as there is no value addition in the supply by Delhi to Ahmedabad unit or Ahmedabad Unit is just storing the goods then he is completely wrong and will be caught under the GST trap.
Let us consider the provisions which make this branch transfer as the taxable event:
The taxable event under the GST regime is the Supply as defined u/s 7 of the CGST Act, 2017. It has nothing to do with the value addition or anything. The taxable event is purely ‘supply’ only.
And the provision which makes the branch transfer as taxable is the Section 7(1)(c) of the CGST Act, 2017.
We have reproduced the same here for your ready reference:
Section 7(1): For the purposes of this Act, the expression “supply” includes –
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
Now, we have to look into the Schedule I which is as below:
Schedule I: Activities to be treated as supply even if made without consideration
2 Supply of Goods or services or both between related persons or between distinct person as specified in Section 25, when made in the course or furtherance of business.
The distinct person has been defined as under:
Section 25(4): A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
Therefore, it can be said that as per Schedule I – Branch Transfer even if without consideration to be treated as supply if Supply of goods or services between distinct persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business.
So, by going with this, if the supply from Godown of XYZ Pvt. Ltd, Ahmedabad is more than Rs. 20 Lacs p.a. then XYZ Pvt. Ltd. is required to obtain registration in the state of Gujarat mandatory as the supply by XYZ Pvt. Ltd., Dehi to Ahmedabad is for the purpose of furtherance of business only.
And therefore, any supply between XYZ Pvt. Ltd., Delhi and XYZ Pvt. Ltd, Ahmedabad will be a taxable supply even if made without consideration or without any value addition. .
The above point is fine but XYZ Pvt. Ltd. only stores the goods at Ahmedabad then why it is required to do so:
The answer is given by Section 2(85) of the Act, which is reproduced as below:
2(85) “PLACE OF BUSINESS” includes ––
- place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both;
Therefore, the warehouse or the godown is specifically covered under the definition and there will be registration for each warehouse and godown by the person who is making supplies from that warehouse, godown or by the person who stores his own goods.
Place of Supply:
Place of supply will determine the place from where the supply is being made and that will in turn determine the state in which registration is required to be done and the CGST, SGST, UTGST or IGST is to be charged.
The necessary provision has been contained in Section 10 of the IGST Act, 2017 which is produced below for the ready reference of viewers:
Section 10(1) of the IGST Act. 2017 states that
Where the supply involves moment of goods, whether by the supplier or by 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 recipient.
In our example, the moment of goods will start from Delhi and will terminate at Ahmedabad, and thereby it is an interstate taxable event for Delhi Unit.
When the goods will be sold by the warehouse / branch it will be treated as another supply and it will start from Ahmedabad godown and will terminate at the place at which the moment of goods for delivery terminates. And it will be another taxable event and if the goods terminate for delivery in Gujarat then CGST and SGST will be charged and if outside Gujarat then IGST will be charged.
Reverse Charge Mechanism:
Section 9(3) of the CGST Act, 2017 specify the categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of the goods or services or both.
In above example, the goods will be delivered from Ahmedabad to the Baroda by a GTA and thereby GTA will raise the invoice to Ahmedabad Godown and as the GTA service is under RCM, the recipient (Ahmedabad Godown) is required to take immediate registration and pay the RCM of GTA.
Therefore, from all the above it is very clear that intra state branch transfer having vertical GSTIN and all interstate supplies are taxable and thereby the every branch / godown / warehouse by each person who is storing his own goods is required to take the registration and thereby levy the tax.
Now Let us understand the second component in detail:
2. Warehouse Owners and the Transporters
Generally a company engaged in the transportation and warehousing services will give the following services to its clients located at its warehouse:
- Warehouse service
- Transportation Service
The major service provided by the Warehouse and the Transporter are the Warehouse services and the manpower services.
And this is the real test for them.
Warehouse services means a particular big space is taken on lease / owned by a person and thereby allots the various slots of space to different companies or to a single company.
The taxability provision for the same is produced below for your ready reference:
Section 13(4) of the IGST Act, 2017 states that
“the place of supply of services supplied directly in relation to an immovable property shall be the place where the immovable property is located.”
Section 2(15) of the IGST Act, 2017 states that the location of supplier of service
“where a supply is made from a place of business for which registration has been obtained, the location of such place of business”
So, consider an example that PQR Pvt. Ltd. Has a space at Ahmedabad and given on rent to XYZ Ltd. Ahmedabad Godown. By going with the definition, the place of supply is the place where the immovable property is situated. And as PQR Pvt. Ltd. Has taken registration, so there will be intra state supply and thereby CGST and SGST are required to be charged.
Now let’s twist the matter and mix the first and second component.
PQR Pvt. Ltd. Has godown / principal place of business at Delhi and also at Ahmedabad. PQR Pvt. Ltd. Has GST Registration in both the states.
Now what PQR Pvt. Ltd. Should charge for the space taken by XYZ Pvt. Ltd. Ahmedabad which has head office at Delhi.
- Will it be like PQR Pvt. Ltd., Delhi can charge IGST to XYZ Pvt. Ltd, Ahmedabad?
- Will it be like PQR Pvt. Ltd., Ahmedabad can charge CGST + SGST to XYZ Pvt. Ltd, Ahmedabad?
- Will it be like PQR Pvt. Ltd., Ahmedabad can charge IGST to XYZ Pvt. Ltd, Delhi?
- Will it be like PQR Pvt. Ltd., Delhi can charge IGST to XYZ Pvt. Ltd, Delhi?
Let us find the answer by the above mentioned provisions.
As per Section 13(4) of the IGST Act, 2017, place of supply for immovable property will be at the place where the immovable property is situated. So, in our case it will be Ahmedabad only irrespective of above four situations.
As per Section 2(15) of the IGST Act, 2017, location of the supplier will be the place of business for which supplier has obtained the registration. Considering PQR Pvt. Ltd. Has taken registration at Gujarat then the location of the PQR Pvt. Ltd. will be of Gujarat State.
The place of supply is at Ahmedabad and location of supplier is also at Ahmedabad, therefore CGST + SGST will be charged and situation no. 2 will be the correct answer.
Can XYZ Pvt. Ltd, Dehli make a request to XYZ Pvt. Ltd. to raise invoice at its Delhi address so that the Delhi Unit can take the credit for the same?
It is to be noted that the registration of XYZ Pvt. Ltd. has not relevance in this case and in no case IGST is to be charged for its Delhi Unit.
Transportation service being provided by the Goods Transport Agency (GTA) is taxed under the Reverse Charge Mechanism (RCM) unless the transporter has opted for the Forward Charge Mechanism.
In the industry generally it is seen that, the GTA will choose the option of RCM instead of FCM as they are operating with very low margin and will not choose to fall into the GST Compliance.
So, from the view point of compliance purposes, transportation service is not a headache for the transporters.
Let’s again make a twist in this case.
Suppose the transporter PQR Pvt. Ltd. Is transporting the goods of XYZ Pvt. Ltd. from Delhi to Ahmedabad and then again supplying the same to the customers of XYZ Pvt. Ltd. Ahmedabad. So in this case, how the freight will be charged?
Can it be like that entire freight will be charged to XYZ Pvt. Ltd. Delhi.
Of course it will not be. The first delivery ends at XYZ Pvt. Ltd., Ahmedabad godwon. So for that the invoice can be issued to XYZ Pvt. Ltd., Delhi.
However, the transportation service provided from Ahmedabad Godown to the customers of XYZ Pvt. Ltd., Ahmedabad is an independent service and not the continuation service of Delhi to Ahmedabad.
Therefore, it will be treated as the GTA service provided to XYZ Pvt. Ltd., Ahmedabad Unit only and XYZ Pvt. Ltd., Ahmedabad will need to pay the GST for the same under RCM and if it’s not registered then it is required to take the registration and pay the tax.
Here, also in no case for the transportation service provided from Ahmedabad Godown to the customers of XYZ Pvt. Ltd., Ahmedabad, an invoice can be raised to XYZ Pvt. Ltd., Delhi. It has to be compulsorily XYZ Pvt. Ltd, Ahmedabad only.
The place of supply of services by way of transportation of goods, including by mail or courier to –
- a registered person, shall be the location of such person.
- A person other than a registered person, shall be the location at which such goods are handed over their transportation.
:CONSEQUENCES OF NON FOLLOWING PROPER PRACTICE AND PROCEDURE:
Suppose, if XYZ Pvt. Ltd. Delhi is making supply of goods at the warehouse space owned by PQR Pvt. Ltd, Ahmedabad and storing the goods there and then making supply to the customers. The transportation service is being provided by PQR Pvt. Ltd. for making supplies from the Ahmedabad Godown.
In this situation will it be valid if XYZ Pvt. Ltd. directly issues the invoice to the end consumers by the goods supplied from Ahmedabad warehouse and at the same time PQR Pvt. Ltd. is issuing invoice for warehouse rent and transportation service to XYZ Pvt. Ltd. Delhi.
As discussed above, of course both the treatment will be wrong.
The following treatment is to be done:
- XYZ Pvt. Ltd., Delhi is required to charge IGST for the branch transfer done to its Ahmedabad Godwon
- XYZ Pvt. Ltd., Ahmedabad will issue invoice to its customers by charging CGST + SGST or IGST in the case of intrastate and interstate supplies respectively made from Ahmedabad Godown.
- PQR Pvt. Ltd., Ahmedabad is required to issue Tax Invoice to XYZ Pvt. Ltd., Ahmedabad for the warehouse rent.
- PQR Pvt. Ltd., Ahmedabad is required to issue invoice to XYZ Pvt. Ltd., Ahmedabad for the transportation charges and XYZ Pvt. Ltd, Ahmedabad is required to pay tax on Reverse Charge Mechanism.
If the above mentioned practice is not followed by any party then again it is required to be paid by them under the correct head with interest.
Also the earlier tax paid will not be allowed as credit due to following provision:
Section 49(9) of the CGST Act, 2017 states that,
Every person who has paid the tax on goods or services or both under the act shall, unless the contrary is provide by him, be deemed to have passed on the full incidence of such tax to the recipient of such goods and services or both.
And if the incidence of tax is passed then such tax cannot be claimed as refund.