GUEST COLUMN

GST - Understanding the Recipient!!

CA Yash Parmar

GST is a paradigm shift in the Indirect Tax structure of India. The underlying activities which trigger the implications of Indirect Tax are significantly changing in the GST regime. Below are the activities that trigger indirect tax charge in the current scenario:

The activities mentioned above are getting replaced in the GST regime by one activity,Supply.

In the current scenario, the activity of removal of goods does not require a recipient and therefore whenever a manufacturer removes goods from his factory he is liable to pay Excise Duty. However, in case of sale of goods, it is mandatory to have two parties i.e. a buyer and a seller for a transaction. Similarly, in case of Service Tax the charging section itself specifies that a service has to be provided by one person to another.

What will the scenario be under the GST regime?

Let us understand by analyzing the meaning of the word 'supply'. Section 3 of the Model GST Law defines the charging activity - supply, however, unlike in the Service Tax law it does not specify whether two parties are necessarily required or not in order to constitute a supply. However, the dictionary meaning of the word supply is 'to make (something needed or wanted) available to someone; provide'. This implies that a person cannot make a supply to himself and in order to constitute a supply, two parties are required to be involved in the transaction. Also, in common business parlance, whenever the term supply is used, it is implied that goods or services are been supplied from one person to another.

In a plain vanilla situation where only two parties are involved in a transaction i.e. a supplier and a receiver, there is no concern. But in complex situations, where there are three parties involved in a transaction i.e. Tripartite Agreements, the challenge lies in identifying the recipient of supply. Because in such cases what actually happens, is that a supply is made to one entity but provided to another entity.

Let us take a classic example of Grandma's flowers to understand the intricacies involved in tripartite transactions.

The facts of the transaction are as under:

Mr. A, a grandson instructs a florist, Mr. B, to deliver flowers on his behalf to his Grandma at her house. Cost of the flowers is paid by Mr. A to Mr. B.

Now, in this example, who is the recipient of supply of flowers, Grandma, who has received the flowers or Mr. A, who had instructed Mr. B to deliver flowers and also had paid for it? If we merely look at leg 2 of the transaction, it appears that Mr. B has supplied flowers to Grandma and therefore the recipient of supply is Grandma. But in that case, why can't Mr. A be said to be recipient of supply because he has paid to the florist for the flowers and has entered into contractual relationship with Mr. B.

The above transaction was analyzed by the Commissioner of GST, Australia in his GST Ruling wherein he has rightly pointed out that the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply. Examining the agreement or other reciprocal legal relationships is the starting point in analyzing an arrangement to determine who is making a supply to whom. In the above example, there is no contractual relationship between A and his Grandma. Also, there is no contractual relationship between B and Grandma. B simply provides flowers to Grandma on A?s behalf. If we take a contractual approach in analysing the arrangement in Grandma's flowers, then the only contractual relationship is between A and B. As per the contract, Mr. B makes supply to Mr. A, consideration for which is paid by A to B and further, supply is provided by B to C.

In short, A is the receiver of supply whereas Grandma is the beneficiary of the supply.

This concept of Service Receiver Vs. Service Beneficiary has time and again been analyzed by various courts under the service tax law.

In a landmark decision of Paul Merchants Ltd. 2012-VIL-09-CESTAT-DEL-ST the concept of Service Receiver Vs. Service Beneficiary were analysed. The facts of the case are as under:

Paul Merchants Ltd. (PML) entered into an agreement with M/s. Western Union Network Ltd., Ireland, a company engaged in money transfer from persons located in one country to persons located in another country, to execute part of these activities in the territories assigned to it in India

In this business, the person located abroad approaches any of the offices of Western Union or its agents and give money to be remitted to a person in India


The office abroad charges this person commission for remitting money to India. They convert the foreign exchange into Indian rupees and pay the recipient in India after verifying their identity. No charges are levied to the recipient of money in India. PML gets their remuneration from Western Union by sharing the commission collected from the person abroad.

The question at hand is whether the 'recipient' of the service provided by PML India is Western Union, Ireland or the person in India who receives the money.

The Tribunal observed that as Western Union received services for its customers provided by PML, and used it in relation to its business of money transfer, it was the consumer of service. Further, person receiving money in India was not the consumer as he did not pay for the service, even though he got some benefit from it. As the person on whose instructions impugned services had been provided by PML in India, and was liable to make payment, was located abroad, destination of services was abroad. In this judgment, Tribunal has clearly demarcated the difference between a Service Receiver (Western Union) Vs. Service Beneficiary (Person collecting money in India).

In one more classic case law of Vodafone India Ltd. 2014-VIL-393-CESTAT-MUM-ST, the facts before the tribunal were as under:

Vodafone India entered into a contract with foreign telecom operators to provide telecom services in India to International in-bound roamers registered with such foreign telecom operators.

Now, the question before the court was whether receiver of service from Vodafone India were the in-bound roamers or the foreign telecom operators.

It was observed by the court that Vodafone agreed to provide telecom services to customers of foreign telecom operators while they were in India. The contract of supply of service was between the foreign telecom operators and Vodafone. The international in-bound roamers had no contract with the taxpayer. The consideration of the service was also paid by the foreign telecom operators to the Vodafone. On this basis it was decided that foreign telecom operators were receiver of service and in-bound roamers were merely beneficiary of service.

Understanding the importance of recipient of supply will be critical in the GST regime. The receiver of supply will determine the place of supply, because, in most cases, the place of supply is the location of the recipient. Therefore, whether a transaction is inter-state or intra state will be determined by the location of the recipient of supply which makes it important to understand the recipient.

[The author is Senior Manager at S B Gabhawalla & Co., Chartered Accountants. Views expressed are strictly personal]