High Court ruling explains principles of place of supply under GST to determine the type of tax applicable

GST is based on the basic principle that it should effectively tax the consumption of supplies at the destination or at the point of consumption. So, the place of supply requirement determines the place, which is the taxable jurisdiction receiving the tax.

The place of supply governs whether a transaction is intra-state or inter-state. Moreover, it controls the taxability of a transaction where the place of supply is outside India, like exports are regarded as zero-rated supply in case the supplier is located in India. In the case of export of services, merely the place of supply being outside India doesn't make it an export supply. There are other conditions as well to satisfy if it is an export of service.

Recently, the Kerala High Court, in the case of Lalitha Muraleedharan Vs. Range Forest Officer, Marayoor, and Others^[i], has held that the transaction between the parties is a zero-rated supply of goods, and the taxpayer was directed to comply with the conditions except for the deposit of IGST and communicate the same to the other parties with a request for delivery of goods.

In this case, the taxpayer is engaged in the manufacturing of natural and essential oils, food supplements, aromatic chemicals, etc. from an industrial unit located in the Madras Export Processing Zone. The said industrial unit is a notified Special Economic Zone (SEZ), i.e., 100% export-oriented unit.

The taxpayer had participated in the e-auction of sandalwood conducted by the Government Sandal Depot, Marayoor (Kerala). Upon successful bidding, the taxpayer was asked to comply with the conditions of sale and pay the sale consideration, forest development tax, and IGST. The taxpayer filed a letter with the Forest Officer to obtain clarification regarding payment of IGST on the sale consideration. In response, the Forest Officer highlighted the relevant provisions of the IGST Act, 2017, and asked for payment of IGST on the goods purchased by the taxpayer.

The taxpayer, being aggrieved by the IGST demand, filed a writ petition before the Kerala High Court. After considering the various provisions/rule of GST law, the High Court observed as under:

• GST is payable based on the location where goods or services or both are being consumed. Basis the provisions of Sections 7(1), 8(1), and 10 of the IGST Act, the Court stated that a transaction could not be treated as an intra-state transaction in case such transaction either originates or terminates in SEZ.
• Section 10(1) provides that the place of supply of goods shall be the location where the movement of such goods terminates for delivery to the recipient in case of supply involving the movement of goods.
• Basis the provisions of Section 2(23) r.w.s. 16, the Court observed that it is for the parties to the transaction falling under Section 16 to follow the optional tax treatment.
• Under the GST law, the supplies to SEZ unit are treated at par with physical exports. Denial of zero-rated tax benefit to the taxpayer or asking it to pay IGST and then claim a refund is contrary to the GST law.

Based on the above, the Court directed the taxpayer to comply with the conditions/obligations concerning the movement of goods without IGST to ensure that there is no diversion in the movement of goods resulting in evasion of tax.

The decision is welcome, explaining the principles of the place of supply in case of the movement of goods being one of the conditions for determining the applicability of GST.

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^[i] [2020 (1) TMI 928]