Understanding of Bill To/Ship To in Car Leasing- Place of Supply

PLACE OF SUPPLY – GST

GST is a destination based tax, for example: the goods or services will be taxed at the place where they are consumed and not at the origin. So, the state where they are consumed will have the right to collect GST. This, in turn, makes the concept of place of supply crucial under GST as all the provisions of GST revolves around it.

Place of supply of goods under GST defines whether the transaction will be counted as intra-state or inter-state, and accordingly levy of SGST, CGST & IGST will be determined.

In the normal course of business, when the car dealer receives the order from his customers he will ship and bill the goods from his place directly. There can be cases where in the order has come from a Lessor for the shipment to end consumer who is called Lessee. In such cases Lessor will procure the goods from the car dealer and then deliver/supply to his customer or asks the third party to ship the goods directly to the customer. In such cases, what are the tax implications under GST like place of supply

Bill to Ship to Transactions: Section 10(1)(b) states “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”

When goods are delivered to a party on the direction of a third person the place of supply will be the location of such third person and not where the delivery terminates.

Example 1- XYZ Motors, a dealer in Automobile, located in Maharashtra, receives an order from ABC Leasing, also located in Maharashtra. The order is for the supply of 1 Car, with an instruction to ship the Car to Mr. Mehta, located in Tamil Nadu. Mr. Mehta is a customer of ABC Leasing.

There are two parts to this transaction:

  • First part of the transaction – between XYZ Motors and ABC Leasing: XYZ Motors is the supplier of Car, and ABC Leasing is the buyer. Accordingly, XYZ Motors bills the transaction to ABC Leasing, and as per the instruction, ships the goods to Mr. Mehta in Tamil Nadu.
  • The second part of the transaction – between ABC Leasing and Mr. Mehta: ABC Leasing is the supplier, and Mr. Mehta is the buyer/end user. ABC Leasing bills the transaction to Mr. Mehta, and endorses in favour of Mr. Mehta. In such arrangement the contract between Mr. Mehta and ABC Leasing shall enable Mr. Mehta to take the delivery of the goods.

Over here, on the instruction from ABC Leasing, XYZ Motors ships the car to Mr. Mehta located in Tamil Nadu.

Here, ABC Leasing 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, XYZ Motors charges CGST and SGST on billing to ABC Leasing. The second part of the transaction between ABC Leasing and Mr. Mehta will be interstate, and IGST will be charged.

Here ABC Leasing is called Lessor and Mr. Mehta is the Lessee/Co-Lessee which is the end user of the goods supplied.

Example 2– XYZ Motors, a dealer in Automobile, located in Maharashtra, receives an order from ABC Leasing, located in Gujrat. The order is for the supply of 1 Car, with an instruction to ship the Car to Mr. Mehta, located in Maharashtra. Mr. Mehta is a customer of ABC Leasing.

There are two parts to this transaction:

  • First part of the transaction – between XYZ Motors and ABC Leasing: XYZ Motors is the supplier of Car, and ABC Leasing is the buyer. Accordingly, XYZ Motors bills the transaction to ABC Leasing, and as per the instruction, ships the goods to Mr. Mehta in Maharashtra.
  • The second part of the transaction – between ABC Leasing and Mr. Mehta: ABC Leasing is the supplier, and Mr. Mehta is the buyer/end user. ABC Leasing bills the transaction to Mr. Mehta, and endorses in favour of Mr. Mehta. In such arrangement the contract between Mr. Mehta and ABC Leasing shall enable Mr. Mehta to take the delivery of the goods.

Over here, on the instruction from ABC Leasing, XYZ Motors ships the car to Mr. Mehta located in Maharashtra.

Here, ABC Leasing is deemed as the third person. Therefore, the place of supply will be the principal place of business of the third person, i.e., Gujarat. Accordingly, XYZ Motors charges IGST on billing to ABC Leasing. The second part of the transaction between ABC Leasing and Mr. Mehta will be interstate, and IGST will be charged.

Here also ABC Leasing is called Lessor and Mr. Mehta is the Lessee/Co-Lessee which is the end user of the goods supplied.

Tax Invoice

In the complete Bill to / Ship to mechanism, two different taxes invoice has to be issued. This is to ensure that the relation between ABC Leasing and XYZ Motors is that of a principal and agent, based on the instructions of ABC Leasing, XYZ Motors ships the goods to Mr. Mehta, it will be treated as supply and tax invoice has to be issued with Bill to as ABC Leasing and Ship to as Mr. Mehta. This is to enable the movement of goods. The second transaction of goods sale to Mr. Mehta on monthly lease rental basic comes into picture, therefore monthly tax invoice will be issued to Mr. Mehta to complete the commercial transaction.

Input Tax

As per the provisions of GST input tax credit is available seamlessly across the supply chain cycle. In case of Bill to and Ship to cases who are eligible to take input tax credit and on the basis of which tax invoice the input tax can be claimed? This is the most common question which many are having in their minds. As per provisions of Section 16, sub-section 2 of the CGST Act 2017, Input Tax Credit will be eligible to be claimed only when (a) The firm is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying documents as may be prescribed; (b) The firm has received the goods or services or both.

Explanation – For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise; The above two are the basic provisions for the availing input tax credit apart from the other provisions. As we have two tax Invoices in case of Bill to Ship to transactions, now the question will be who will claim the Input Tax Credit based on two different invoices.

Therefore, it is clear that in above case ABC Leasing shall receive the Input tax credit The first tax invoice is issued by ABC Leasing to Mr. Mehta for the supply of car on lease basis will pass on the ITC to him but it is subject to availability of ITC by him.  

 

Hariwansh Kumawat

CFO at OTO Capital

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