Applicability of GST on out and out sale – i.e. purchase from X country and direct sale to Y country

Applicability of GST on out and out sale – i.e. purchase from X country and direct sale to Y country

After one year of GST implementation in India, one can observe that law of GST is based on law of central excise and service tax whereas GST compliance is based on law of sales tax. In spite of this, there are some transactions where related legal provisions are not clear and therefore, call for interpretations. One of the transactions is out and out sale.

It is observed that in many cases, the company located in India places an order on the supplier located in X country to directly deliver the goods to customer located in Y country without bringing such goods in India. Now, let’s discuss applicability of GST on sale invoice raised by the Indian company on its customer located in Y country where the physical movement of goods is from X country to Y country.

As per Section 7(1) of the IGST Act, 2017, where the location of the supplier and the place of supply are in two different states or in two different union territories or in a state and a union territory, it shall be treated as supply in the course of interstate trade or commerce. Further, as per the provisions of Section 7(5)(a) of the IGST Act, 2017, where the supplier is located in India and the place of supply is outside India, such transaction shall be treated as interstate trade or commerce. Text of Section 7(5)(a) of the IGST Act, 2017 is reproduced below for your ready reference:

Supply of goods or services or both, –

(a) when the supplier is located in India and the place of supply is outside India;

(b)_______

(c) _______

shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. 

Considering the legal provision mentioned above, it is important to understand the term “supplier” which is defined under Section 2(105) of the CGST Act, 2017 which is reproduced below for your ready reference:

“supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied;

It can be seen from the above definition that there is no pre-condition of physical movement of goods. Further, Section 7 of the CGST Act, 2017 has defined the term “supply”. Nowhere in this Section 7 provides any pre-condition of physical movement of goods. Therefore, a person can be treated as “supplier” even though such person is not causing the physical movements of goods. Thus, seller located in India is to be treated as “supplier” of the goods for the purpose of GST.

Now let’s discuss whether the place of supply in the present case is within India or outside India. In this connection, I need to refer provisions of Section 10 (1) (a) and (c) of the IGST Act, 2017;

The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under, ––

(a) where the supply involves movement of goods, whether by the supplier or 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 the recipient;

(b) ________________

(c) where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient; 

In the present case there is a movement of goods from the supplier located in X country to the customer located in Y country and therefore, as per the provisions of Section 10(1)(a), place of supply shall be Y country where movement of goods terminates. Further, I need to refer provisions of section 10(1)(c) assuming that the Indian company is not causing any movement of goods from India to Y country, the place of supply shall be the location of such goods at the time of the delivery, which is Y country. Thus, in terms of section 7(5)(a) of the IGST Act,2017 the present transaction between the Indian and its customer located in Y country is to be treated as supply of goods in the course of interstate trade or commerce.

Another question is can we treated sale to customer located in Y country as “export”…? The term “export” is defined under Section 2(5) of the IGST Act, 2017 which is reproduced below for your ready reference:

“export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India; 

By going through the above legal definition, in case of export of goods, exporter is required to export the goods physically out of India / territory of India. In the present case, the Indian company will never physically export the goods to its customer located in Y country and therefore, the supply of goods from the Indian company to its customer located in Y country cannot be treated as “export” in terms of provisions of Section 2(5) of the IGST Act, 2017. Accordingly, IGST is applicable in terms of provisions of Section 7(5)(a) of the IGST Act, 2017.

However, I also need to refer provision of Section 1 (1) of the IGST Act, 2017 which provides its applicability. This basic provision clarifies that GST is not applicable to the transaction that completely takes place outside India. Text of Section 1(1) is reproduced below for your ready reference:

It shall extend to the whole of India except the State of Jammu and Kashmir.

Further, I refer Circular No. 33/2017-Customs dated 1^st August 2017 issued with regard to GST applicability in case of high sea sale transaction. Clarification issued by the CBEC is as under:

In respect of imported goods, all duties, taxes, cesses etc. shall be collected at the time of importation i.e. when the import declarations are filed before the customs authorities for the customs clearance purposes. Thus, in case of high sea sale transaction, IGST is to be levied only once at the time of filing Bill of Entry. Accordingly, the importer (last buyer in the chain) would be required to furnish the entire chain of documents, such as original Invoice, high-seas-sales-contract, details of service charges/commission paid etc. to establish a link between the first contracted price of the goods and the last transaction.

Based on the above cited Circular, the Authority of Advance Ruling, Kerala vide Order No. CT/2275/18-C3 dated 26^th March 2018 has delivered the ruling which is summarized as under:

Second Issue – On the sale of goods to the company in USA, where goods sold are shipped directly from China to USA without entering India, is GST payable by them?

The Authority of Advance Ruling, Kerala, after referring to the above referred Circular, pronounced its ruling which is as under:

12. The clarification given by the CBEC in the above Circular regarding the leviability of IGST and the point of collection thereof in respect of high sea sales of imported goods is, mutatis mutandis, applicable in the case of the applicant.

Ruling

The applicant is neither liable to GST on the sale of goods procured from China and directly supplied to USA nor on the sale of goods stored in the warehouse on Netherlands, after being procured from China, to customers, in and Netherlands, as the goods are not imported into India at any point.  

As discussed above, the legal provisions related to the present issue is not clear and thus, there is a wide scope of interpretation. Further, as discussed above, one school of thought says that GST is applicable whereas second school of thought says that GST is not applicable. Thus, in the present case, two interpretations are possible and as per the settled position of interpretation of law, interpretation which is favourable to the assessee is to be adopted. In this connection, reliance can be placed in the case of Sun Export Corporation v/s Collector of Customs, Bombay reported in 1997 (93) ELT 641 (S.C.) wherein the Hon’ble Supreme Court has held as under:

Interpretation of taxing statute – Classification of goods – Assuming that there are two views possible, it is well settled that one favourable to the assessee in matters of taxation has to be preferred. 

A WORD OF CAUTION – Section 17(2) of the CGST Act, 2017 provides that where the goods or services are used partly for effecting taxable supplies (including zero rated) and partly for exempt / non-business use then the amount of credit as attributable to exempt supplies or non-business use shall be reversed as per Rule 42/43 of the CGST Rules, 2017. Thus, the Indian company is required to reverse proportionate input credit of common services which are used for both taxable sale as well as non-taxable sale.

Conclusion

1. Sale of goods directly from the supplier located in X country to the customer located in Y country without bringing the goods in India cannot be treated as “supply” and therefore, GST shall not be applicable; and

2. The Indian company shall need to reverse input tax credit on common services used for both taxable as well as non-taxable sale.

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