Inter-State supply

Section 7 — Inter-State supply

BLOCK 2 — PRE-GST COUNTERPART / PARALLEL PROVISIONS / OPERATIVE RULES

BLOCK 3 — COMMENTARY

1. Statutory Architecture

2. Historical Context

Pre-GST, the determination of inter-State sale was governed by s. 3 of the Central Sales Tax Act, 1956. The classical test was whether the contract of sale 'occasioned the movement of goods from one State to another'. The K. Gopinathan Nair / Steel Authority / 20th Century Finance jurisprudence built around this test had become enormously complex, with sub-doctrines on 'sale in the course of inter-State movement', 'sale by transfer of documents of title', 'sale-in-transit (E1-E2)', and 'continuous movement / split-delivery'.

Section 7 IGST replaces this complex jurisprudence with a clean location-based test: if the location of supplier and the place of supply are in different States or UTs, the supply is inter-State. The complexity has not disappeared — it has been relocated to the POS rules in ss. 10-14 IGST. But the basic classification under s. 7 is mechanical, not jurisprudential.

Inter-State trade in services had no statutory equivalent of CST. Service-tax under the Finance Act 1994 was a Union levy with India-wide application; revenue was not allocated between States. The POPS Rules 2012 determined where services were 'provided' for taxability, not for inter-State classification. IGST s. 7(3) is therefore a structural innovation — it explicitly classifies services as inter-State when supplier and POS are in different States/UTs.

Section 7(2) and (4) treat imports of goods and services as inter-State supplies. This is the constitutional bridge that allows IGST to be charged on imports — Article 269A(1) provides that 'supply of goods or services, or both, in the course of import into the territory of India shall be deemed to be supply in the course of inter-State trade or commerce'. Section 7(2)/(4) operationalises this constitutional deeming.

Section 7(5)(a) treats supplies where supplier is in India and POS is outside India as inter-State. This is the constitutional and statutory anchor for the zero-rated export framework under s. 16 IGST. Without the inter-State classification, exports would not have a home in IGST and would have to be treated under CGST/SGST — defeating the unified export-treatment objective.

Section 7(5)(b) treats supplies to / by SEZ as inter-State. SEZ is constitutionally part of India but commercially treated as deemed foreign territory under SEZ Act 2005 s. 53. The IGST s. 7(5)(b) classification + s. 8(1) proviso (intra-State exclusion for SEZ) work together to channel SEZ supplies into the inter-State / zero-rated framework.

Section 7(5)(c) is a residual catch-all — supplies in the taxable territory that are neither intra-State nor covered elsewhere are inter-State. Critical for novel supply types (eg high-seas sales, deemed-supplies under Schedule I, special transactions) where the standard location-vs-POS test does not cleanly apply.

3. Judicial Evolution

Union of India v Mohit Minerals Pvt Ltd — (2022) 10 SCC 700 [Supreme Court — 3-Judge Bench (Constitution Bench questions)]

Brief Facts: Importers of coal on CIF basis were held liable under Notification Nos. 8/2017-Integrated Tax (Rate) and 10/2017-Integrated Tax (Rate) to pay IGST on ocean freight component under reverse charge under s. 5(3)/(4) of the IGST Act. Importers challenged the levy as ultra vires the charging section and contended that IGST had already been paid on CIF value (which included freight) at the time of import under s. 3(7) of the Customs Tariff Act.

Issue: Whether IGST could be levied separately on the ocean freight component of CIF imports when the entire CIF value (inclusive of freight) had suffered IGST under s. 3(7) of the Customs Tariff Act; and whether GST Council recommendations are binding on the Union and States.

HELD: Levy struck down. The Court held that the impugned notification offended the principle of 'composite supply' under s. 8 of the CGST Act because ocean freight in CIF imports is part of the composite supply of imported goods and cannot be artificially severed. Further, the GST Council's recommendations are recommendatory, not binding, on the Union and States — both Parliament and State legislatures have simultaneous legislative power under Article 246A.

"The recommendations of the GST Council are not binding on the Union and the States. The recommendations only have a persuasive value. To regard them as binding would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST."

Relevance: Foundational authority on the IGST charging section, the limits of reverse-charge notifications under s. 5(3)/(4), and the constitutional architecture of the GST Council. Repeatedly cited in RCM, place-of-supply, and composite-supply disputes.

Union of India v Bharti Airtel Ltd — (2022) 4 SCC 328 [Supreme Court — 2-Judge Bench]

Brief Facts: Bharti Airtel claimed it had under-reported ITC in GSTR-3B for July-Sept 2017 (the early GST months when GSTR-2A was not operational) and sought rectification of GSTR-3B for those months to correct the under-claim. Delhi HC permitted rectification; Revenue appealed to SC.

Issue: Whether GSTR-3B for past periods can be rectified to correct an under-claim of ITC where the registered person's books would support the correction but GSTN does not allow retrospective edit.

HELD: Rectification not permitted. The Court held that the GST return-filing regime is self-assessed; the registered person is duty-bound to verify entitlements at the time of filing and cannot, after the fact, claim that GSTR-2A was not available. ITC is a statutory entitlement that must be claimed within the period prescribed under s. 16(4) and not through retrospective rectification.

"GST is a self-assessment regime. The registered person bears the burden of correctly computing and reporting tax liability at the time of filing the return. The unavailability of GSTR-2A does not absolve the assessee of this duty."

Relevance: Substance-over-form authority on self-assessment, the finality of GSTR-3B, and limits on retrospective rectification — critical for place-of-supply disputes where mis-classification may be alleged years later.

GVK Industries Ltd v Income Tax Officer — (2011) 4 SCC 36 [Supreme Court — 5-Judge Constitution Bench]

Brief Facts: Question was the extent of Parliament's legislative competence to tax extraterritorial events. GVK had paid fees to a Swiss consultant for services rendered abroad in connection with raising finance for an Indian power project. Question was whether such fees could be taxed under the Income-tax Act when the service was entirely rendered abroad.

Issue: Constitutional limits of extraterritorial legislation under Article 245 — whether Parliament can tax events occurring wholly outside India if there is a 'real and substantial' nexus with India.

HELD: Parliament has competence to legislate with extraterritorial operation provided there is a real and substantial nexus with India — not merely an illusory or fanciful connection. A nexus that is rationally connected to the welfare of India is sufficient. Pure extraterritoriality without nexus is impermissible.

"Parliament's competence to legislate with extraterritorial operation is conditioned on the existence of a real and substantial — and not merely fanciful — nexus with India. The nexus must be rational and connected to India's legitimate concerns."

Relevance: Constitutional anchor for cross-border place-of-supply provisions under s. 13 of the IGST Act (services where supplier or recipient is outside India) — establishes the nexus doctrine that underpins extraterritorial GST on imports of services.

All India Federation of Tax Practitioners v Union of India — (2007) 7 SCC 527 [Supreme Court — 3-Judge Bench]

Brief Facts: The constitutional validity of the service-tax levy on chartered accountants, cost accountants, and architects was challenged on the ground that these professions had been historically regulated by State legislation and were therefore outside Union legislative competence.

Issue: Constitutional foundation of the service-tax levy — whether 'service' can be taxed by the Union under the residuary entry (Entry 97 List I) and what is the doctrinal nature of a service-tax levy.

HELD: Service-tax upheld. The Court held that service-tax is a value-added tax on the value of services rendered, traceable to Entry 97 of List I until Entry 92C was inserted by the Constitution (88th Amendment). The economic concept of value addition through services is the doctrinal basis on which service-tax — and now GST on services — rests.

"Service-tax is a value-added tax on the commercial activity of providing services. The taxable event is the rendition of service and the levy attaches to the value addition at the point of service delivery."

Relevance: Constitutional anchor for taxation of services under GST — pre-101st-Amendment doctrinal framework that informs the place-of-supply concept under s. 12 and s. 13 of the IGST Act.

Tata Sky Ltd v State of Madhya Pradesh — (2013) 4 SCC 656 [Supreme Court — 2-Judge Bench]

Brief Facts: Tata Sky's DTH service was sought to be taxed by State entertainment-tax and the question arose whether broadcasting / DTH is taxable as 'service' (Union service-tax) or as 'entertainment' (State entertainment-tax) — ie a classification dispute spanning constitutional entries.

Issue: Service-versus-entertainment classification for broadcasting / DTH — which level of government has competence and what is the dominant character of the supply.

HELD: DTH involves both transmission service (Union) and entertainment (State). The Court upheld State entertainment-tax on the entertainment value while preserving Union service-tax on the transmission service — an aspects-of-supply / multiple-aspects doctrine.

"The same transaction may have different aspects falling within different legislative entries. Service-tax and entertainment-tax can co-exist on a DTH transaction provided each is levied on its respective aspect."

Relevance: Cross-border / multi-jurisdiction classification authority. Important for IGST place-of-supply where the same supply may have transmission, content, and subscription elements with potentially different places of supply.

Imagic Creative Pvt Ltd v Commercial Taxes Officer — (2008) 2 SCC 614 [Supreme Court — 2-Judge Bench]

Brief Facts: Advertising agency designed concepts for clients and supplied printed brochures/visiting cards. Question was whether the value of services (creative design) embedded in the printed material could be subjected to VAT as part of the sale value of the printed material.

Issue: Whether VAT and service-tax are mutually exclusive in a composite transaction; whether the service component of a composite supply can be carved out for service-tax purposes free of VAT.

HELD: Service-tax and VAT are mutually exclusive on the same transaction value. In a composite transaction, the service value must be excluded for VAT purposes (and vice versa), provided the contract clearly identifies the consideration for each. Aspects-of-supply doctrine applied.

"Service-tax and sales-tax operate in distinct constitutional fields and cannot both be levied on the same value. In a composite supply, the value attributable to services is to be excluded for VAT and vice versa."

Relevance: Pre-GST framework for composite-supply taxation. Now subsumed under s. 8 CGST Act and the place-of-supply architecture under ss. 12/13 IGST Act — the underlying principle of severing service value from goods value survives in the principal-supply analysis.

4. Circulars and Notifications

Circular No. 184/16/2022-GST dated 27.12.2022 — Place of supply for transportation of goods — bill-to / ship-to clarifications

Clarification on inter-State / intra-State characterisation in three-party transportation transactions. Transporter A engaged by C, sub-contracts to B on principal-to-principal — A is not intermediary for C-A leg. Inter-State / intra-State characterisation flows from POS rules in s. 10(1)(b) (bill-to/ship-to for goods) and s. 12 (services). Reinforces Circular 159/2021 framework on principal-to-principal carve-out.

Circular No. 161/17/2021-GST dated 20.09.2021 — Export of services classification — distinct-person rule

Indian subsidiary supplying to foreign parent is NOT 'mere establishment of distinct person'; supply qualifies as export of services under s. 2(6) and falls within s. 7(5)(a) inter-State catch-all for zero-rated treatment under s. 16.

Circular No. 209/3/2024-GST dated 26.06.2024 — Place of supply for various activities — comprehensive clarification

Comprehensive clarification on POS for various transactions including data hosting, advertisement, intermediary-vs-principal classification, and inter-State / intra-State boundary cases. Critical updated reference for s. 7 + s. 13 disputes.

Notification No. 18/2017-Integrated Tax (Rate) dated 05.07.2017 — SEZ supplies exemption operationalising s. 7(5)(b) classification

Exempts inter-State supplies to SEZ developer / unit by registered suppliers for authorised operations. Alternative to LUT route under s. 16(3)(a). Operationalises the s. 7(5)(b) inter-State classification.

Circular No. 41/15/2018-GST dated 13.04.2018 — Procedure for interception of conveyances and detention

Operative procedure for State and Central officers in inter-State supply interception. Officer at the receiving State can intercept inter-State conveyance; detention under s. 129 CGST applied via s. 20 IGST.

5. Worked Examples

6. Practitioner Planning

• For every supply, run the s. 7 classification first — inter-State vs intra-State determines the entire downstream compliance (IGST vs CGST+SGST, ITC chain, return reporting).
• For goods, POS under ss. 10-11 controls; for services, POS under ss. 12-14 controls. Run s. 7 only after POS is determined.
• For SEZ supplies, recall s. 7(5)(b) trumps intra-State even if supplier and SEZ in same State — preserves zero-rated treatment.
• For exports of services, run the s. 2(6) five-limb test before invoking s. 7(5)(a); failure on any limb defeats inter-State / zero-rated classification.
• For inter-State branch transfers, apply distinct-person fiction under s. 25(4)/(5) CGST + value under Rule 28 + inter-State characterisation under s. 7(1).
• For high-seas sales, document the high-seas sale agreement; rely on Circular 33/2018-Customs for s. 7(2) treatment.
• For imports of services, the s. 7(4) inter-State characterisation triggers RCM on the importer under s. 5(3); document import documentation.
• For supplies via aggregators (Uber, accommodation), recall s. 7 classification still applies — the s. 5(5) deemed-supplier mechanism does not change the inter-State characterisation, only who pays.
• For inter-State e-commerce supplies, ensure GSTR-1 reporting in correct POS-wise tables; mis-reporting can trigger ASMT-10 scrutiny.
• For services with POS straddling States (eg pan-India hosting), apportion based on actual location-of-recipient on a transaction-by-transaction basis.
• For deemed supplies under Schedule I (free supplies to related persons), apply s. 7(1)/(3) classification + Rule 28 valuation; inter-State if cross-State recipient.
• For installation / assembly contracts under s. 10(1)(d), POS = installation location; inter-State if installation in different State than supplier.
• For composite supplies with mixed-State elements, apply principal-supply rule + POS for principal supply.
• For warehouse-to-warehouse transfers within multi-State enterprises, audit s. 7(1) characterisation — distinct-person inter-State supply attracts IGST.
• Maintain master log of POS-classification decisions per customer / transaction type for return reconciliation.

7. Litigation Defence

• Inter-State vs intra-State classification defence — for SCN alleging mis-classification, build defence based on POS-determination chain + s. 7 classification logic.
• Mohit Minerals defence — for any allegation that imports / inter-State supplies attract additional IGST beyond charging-section scope, invoke composite-supply principle.
• Bharti Airtel finality defence — for retrospective inter-State / intra-State reclassification, invoke self-assessment finality.
• Vatika Township prospectivity — for amendment of inter-State classification rules, invoke prospective-operation presumption.
• Distinct-person fiction defence — for inter-State branch transfer disputes, exhibit s. 25(4)/(5) CGST + Schedule I para 2.
• Section 19 wrongly-paid-tax defence — for cases where intra-State was wrongly paid as inter-State (or vice versa), invoke s. 19 IGST refund + re-payment route without time-limit penalty.
• Composite-supply defence under Imagic / L&T — for artificial vivisection of bundled supplies for s. 7 mis-classification, invoke principal-supply test.
• GVK Industries extraterritorial defence — for s. 7(4) import-of-services characterisation where India nexus is weak, invoke real-and-substantial nexus.
• TATA Sky aspects-doctrine defence — for multi-aspect supplies straddling inter-State and intra-State elements, invoke aspects-of-supply doctrine.
• AIFTP constitutional anchor — for any challenge to inter-State classification on entry-of-list grounds, invoke Article 246A(2) post-101st Amendment.
• Maneka Gandhi audi alteram partem — for adverse reclassification without prior hearing, invoke procedural fairness.
• SEZ-supply-cannot-be-intra-State defence — for any attempt to characterise SEZ supplies as intra-State, exhibit s. 7(5)(b) + s. 8(1) proviso.
• Customs-frontiers-anchor defence — for high-seas sales challenges, exhibit s. 7(2) + s. 2(4) customs frontiers definition + Circular 33/2018-Customs.
• Export-of-services five-limb defence — for s. 7(5)(a) export classification, exhibit each of the five limbs satisfied + Circular 161/2021 for subsidiary-parent case.
• Residual-catch-all defence under s. 7(5)(c) — for any novel supply type not cleanly fitting standard rules, invoke the catch-all to preserve inter-State characterisation.
• Bill-to-ship-to defence — for s. 10(1)(b) bill-to-ship-to disputes, exhibit Circular 184/16/2022-GST framework.

8. Procedural Map — Inter-State Classification Audit

Step 1. Identify supply type

Goods, services, composite, mixed under s. 7 CGST applied via s. 20 IGST.

Step 2. Determine location of supplier

Under s. 2(15) — four-limb cascade.

Step 3. Determine POS

ss. 10-11 IGST for goods; ss. 12-14 for services.

Step 4. Compare location of supplier with POS

Different States/UTs → inter-State under s. 7(1)/(3); same State/UT → intra-State under s. 8 (subject to provisos).

Step 5. For imports, apply s. 7(2)/(4) inter-State characterisation

Imports always inter-State.

Step 6. For exports, apply s. 7(5)(a) and confirm s. 2(5)/(6)

POS outside India + supplier in India = inter-State + zero-rated.

Step 7. For SEZ supplies, apply s. 7(5)(b) and exclude s. 8(1) proviso

SEZ always inter-State irrespective of location.

Step 8. For residual supplies, apply s. 7(5)(c) catch-all

Non-intra-State, non-elsewhere-covered = inter-State.

Step 9. Apply charge under s. 5 (inter-State) or s. 9 CGST + s. 9 SGST (intra-State)

Issue invoice accordingly.

Step 10. Report in GSTR-1 — Table 5A (B2B inter-State), Table 7A (B2C inter-State)

POS-wise reporting required for inter-State.

Step 11. Report in GSTR-3B — Table 3.1(a) for taxable, 3.1(b) for zero-rated, 3.2 for inter-State to unregistered

Critical for inter-State revenue allocation under s. 17 IGST.

Step 12. For mis-classification discovered later, apply s. 19 IGST refund + re-payment

No time-limit penalty for honest mis-classification corrected via s. 19.

Step 13. For inter-State branch transfers, apply Rule 28 valuation

Open market value / 90% recipient sale value / cost+10%.

Step 14. For SCN disputes, build defence package

POS-determination chain + s. 7 classification + Circular references + case law as relevant.

Step 15. Periodic review of POS / classification changes

Subscribe to CBIC circulars; Circular 209/2024 is the most recent comprehensive POS clarification.

CROSS-REFERENCES

• s. 1 IGST Act — Commencement.
• s. 2 IGST Act — Definitions (location of supplier/recipient, customs frontiers, India, taxable territory).
• s. 5 IGST Act — Inter-State charge follows s. 7 classification.
• s. 6 IGST Act — Inter-State exemptions.
• s. 8 IGST Act — Intra-State supply (mirror provision); s. 7 + s. 8 are mutually exclusive.
• s. 9 IGST Act — Territorial waters; coastal-State characterisation.
• s. 10 IGST Act — POS for goods (subject to which s. 7(1) applies).
• s. 11 IGST Act — POS for imports/exports.
• s. 12 IGST Act — POS for services in India (subject to which s. 7(3) applies).
• s. 13 IGST Act — POS for cross-border services.
• s. 14 IGST Act — OIDAR special provision.
• s. 16 IGST Act — Zero-rated supply (operates on s. 7(5)(a)/(b) classifications).
• s. 17 IGST Act — Apportionment of IGST collected.
• s. 19 IGST Act — Tax wrongly paid as inter-State / intra-State refund route.
• s. 20 IGST Act — Application of CGST provisions.
• s. 7 CGST Act — Definition of supply (incorporated).
• s. 8 CGST Act — Composite and mixed supply.
• s. 9 CGST Act — Intra-State charge.
• s. 25(4)/(5) CGST Act — Distinct-person fiction.
• s. 31 CGST Act — Tax invoice including POS.
• Schedule I CGST Act — Deemed supplies (incorporated into s. 7 chain).
• Rule 28 CGST Rules — Distinct-person valuation.
• Rule 46 CGST Rules — Invoice particulars.
• Customs Act 1962, s. 2(11) — customs area / frontiers definition.
• Customs Tariff Act 1975, s. 3(7) — IGST on imports.
• SEZ Act 2005, s. 53 — SEZ deemed foreign territory.
• Constitution Article 246A — concurrent GST competence.
• Constitution Article 269A — IGST apportionment.
• Notification No. 18/2017-Integrated Tax (Rate) — SEZ supplies exemption.
• Circular No. 184/16/2022-GST — Bill-to-ship-to clarifications.
• Circular No. 161/17/2021-GST — Distinct-person export.
• Circular No. 209/3/2024-GST — POS comprehensive clarifications.
• Circular No. 33/2018-Customs — High-seas sales.