Any ruling by the Authority for Advance Ruling is binding only (i) on the applicant who had sought it in respect of a matter, and (ii) on the concerned officer or jurisdictional officer of the applicant as provided in Section 103(1) of the CGST Act. However, it has been noticed that these days a lot of importance is being given to the rulings of AAR’s may be because the Professionals, as a result of the lockdown due to Covid 19, have enough time at their disposal.
In the very recent past, a few Rulings – one relating to Parota, another relating to sale of developed plots and most recent one by the Gujarat Authority in the case of Sterlite Technologies Ltd. have raised eyebrows, particularly, in the professional circles. For the present, I propose to discuss the Ruling in the case of Sterlite Technologies Ltd and would respond to the other Rulings some other time. The AAR has, inter alia, given its ruling that “GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises”.
In doing so the Authority has missed out the most important and relevant provision of law to which reference shall be made shortly and has also relied upon provisions which were not relevant for this ruling or misinterpreted, but let us first see the basis and reasoning of the Authority for arriving at the conclusion at which it has arrived.
Facts: The facts, in brief, on the basis of which ruling was sought were that : the applicant proposed to undertake “Merchant Trade Transaction” wherein they would receive an order from customer located outside India; back to back order would be placed by them to supplier located outside India; goods would be directly shipped by vendor outside India to customer located outside India; payment would be made in foreign currency to vendor and applicant would receive foreign currency from customer.
Issues on which Ruling was sought: On the basis of these facts, the applicant sought ruling on the following issues:
i) Whether GST is payable on goods procured from vendor located outside India in a context where the goods so purchased are not brought into India?
ii) Whether GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises?
After referring to Section 2(10) of the IGST Act defining “import of goods”, sub-section (2) of Section 7 of IGST Act , sub-section (1) of Section 5 of IGST Act, sub-sections (7) (8) and (12) of Section 3 of the Customs Tariff Act, 1975, Section 12 and 15 of the Customs Act, 1962, the Authority concluded that “it is evident that the integrated tax on goods imported into India shall be levied and collected at the point when duties of customs are levied on the said goods under Section 12 of the Customs Act, 1962 i.e.-on the date determined as per provisions of Section 15 of the Customs Act, 1962.”
The Authority also referred to the Advance Ruling of Kerala Authority which vide ORDER No. CT 12275/18-C3 DATED 26/03/2018 in the case of M/s Synthite Industries Ltd., Ernakulam, Kerala had held that “the goods are liable to IGST when they are imported into India and the IGST is payable at the time of importation of goods into India; 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 in Netherlands, after being procured from China, to customers, in and around Netherlands as the goods are not imported into India at any point.’’
Finally, after referring to Circular No. 33/2017 Customs dated August 1, 2017 relating to ‘High Sea Sales’, the Authority held that the above circular is applicable in the present case. Similarly, “we find that, where Bill of Entry/import declarations are not being filed with respect to the goods so procured, GST would not be leviable.”
On the first issue the Ruling of the authority was that:
i) GST is not payable on goods procured from vendor located outside India, where the goods so purchased are not brought into India?
In spite of the faulty reasoning and reference to irrelevant provisions such as reference to High Sea Sales which are effected by transfer of documents of title to the goods i.e. Bill of Lading, Airway Bill etc. before the goods cross the custom frontiers of India; incomplete and half reference to Section 5 of the IGST Act; reference to sub-section (2) of section 7 of the IGST Act; reference to sub-sections (7), (8) & (12) of Section 3 of the Custom Tariff Act; Section 12 of the Custom Act, 1962 when the procurement and supply was being made outside India and, therefore, the question of import did not arise, the final conclusion and ruling being right, discussion on this aspect can be skipped as once the conclusion is right no body including the assessee wants to go into the reasoning.
On the second issue, it will be useful to reproduce what the Authority has said:
“14. With regards to the second query regarding leviability of GST on outward supply from place of vendor to customer, it is to mention that the thumb-rule for determining the taxability of any transaction is to ascertain whether the transaction tantamount to ‘supply’ in terms of the provisions of law. The term ‘supply’ has been defined at Sec. 7 of the CGST Act, 2017 which reads as under:
(7) For the purposes of this Act, the expression “supply” includes
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b )import of services for a consideration whether or not in the course or furtherance of business; and
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
In the instant case, the applicant is selling goods for a consideration in the course or furtherance of business and as such the transaction tantamount to ‘supply’ in terms of the definition of ‘supply’.
14.1 Once the test of supply is met with, the next step is to determine whether the same is an Intra-state supply or inter-state supply. In this regard it is pertinent to examine the provisions of Section 7 of the IGST Act, 2017 which reads as under:
7. (1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in––
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce.
(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in––
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
(5) Supply of goods or services or both,–
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
14.2 The above statute indicates that in the event that the supplier is located in India and the place of supply is outside India, such supplies shall be treated as Inter-state supplies. The place of supply in the instant case would be governed by the provisions of Sec. 10 of the IGST Act, 2017 of which the relevant text reads as under:
10. (1) 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
In the instant case, it is an undisputed fact that the supply involves movement of goods and therefore the place of supply would be the termination for delivery to the recipient. The goods under consideration are supplied to overseas buyers as declared by the applicant and as such the place of supply will be a place outside India. Further, the supplier is the applicant who has declared the principal place of business within India and issues the invoices for sale of such goods.
14.3 The above indicates that the supplier is located in India and the place of supply is outside India and as such the same would be Inter-state supply in terms of the provisions of Sec. 7(5) of IGST Act, 2017. Thus, it is very clear that the transaction undertaken by the applicant tantamount to supply and is an Inter-state supply. Having travelled thus far, it is obvious that IGST will be leviable unless the goods are exempted or are zero-rated supplies which have been defined as export of goods or services in terms of the provisions of Sec. 16 of the IGST Act, 2017. In the instant case the applicant has not stated the nature of goods and has not declared that such goods are exempted under any notification issued under the powers of Sec. 11 of the CGST Act, 2017 and the corresponding State Act or Section 6 of the IGST Act. Thus, the only possibility of goods not subject to levy of IGST would be the circumstances where the goods are exported.
14.4 The term ‘export of goods’ has been defined under sub section 5 of Section 2 of IGST Act, 2017 which reads as under:
Export of goods would mean- ‘With its grammatical variations and cognate expressions, means taking goods out of India to a place outside India’.
The above definition indicates that the act of taking goods out of India to a place outside India qualifies as export. In the instant case, the goods have not crossed the Indian customs frontier and as such it is clear that the goods are not physically available in the Indian territory. When the goods are not available in the Indian territory, the question of taking goods out of India does not arise. Thus, the subject transaction does not qualify as export of goods.
14.5 In view of the above, it appears that the transaction is covered under the ambit of Inter-state supply and is neither exempted nor covered under export of services. Thus, the theory of elimination takes us to the conclusion that such supplies will be subject to levy of IGST.”
15. In view of the above discussions, we rule as under;
ii) Applicable GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises.
Infirmities in the order:
Para 14: In para 14 the authority refers to the so called thumb rule for determining the taxability of a transaction by ascertaining whether the transaction amounts to ‘supply’ in terms of the provisions of law without appreciating that the mandate of article 265 of the Constitution is that “No tax shall be levied or collected except by the authority of law”. No tax can be levied on the basis of thumb rule. A transaction in order to be liable to tax should first be covered by the charging section – in this case section 5 of the IGST Act. Under section 5 which is the charging section, supply is the taxable event and goods or services or both are the subject-matter of taxation.
The Authority refers to Section 7 of the CGST Act, 2017 which defines the term ‘Supply”. But it refers to only sub-section (1) of Section 7. It omits to refer or to see sub-section (2) of Section 7 which begins with a non obstante clause and, thus, has an overriding effect over sub-section (1). It provides that activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. In Schedule III, Item 7 says “Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India” shall be treated neither as a supply of goods nor a supply of services.
Once such a transaction is to be treated neither as supply of goods nor a supply of services, the Authority should have referred to Item 7 of Schedule III and ended its ruling there. It is surprising that the counsel appearing before the Authority did not draw the attention of the Authority to this provision or may be that the counsel drew the attention of the Authority to this provision, but, as is common, the authority deciding this issue found it convenient not to record the submission of the counsel.
Item 7 was inserted in Schedule III w.e.f. 1.2.2019 vide GST Notification No.02/2019 dt. 29.01.2019 before the ruling in this case. This amendment was clarificatory in nature. But even assuming that this Item was not there, the question is could the Authority still legally say that such a transaction in which the goods never entered India and were supplied from a foreign land to another foreign land would be taxable. The subject matter of taxation being goods, when the subject matter of taxation itself was outside the taxable territory, could it be subjected to tax. The answer is a big NO. Such a transaction would be a supply outside the country like a sale outside the State as defined in Section 4 of the Central Sales Tax Act, 1956. Any attempt to tax such a transaction would be constitutionally bad being extra-territorial.
Para 14.1 Reference to Section 7 of the CGST Act: In para 14.1, the Authority refers to Section 7 of the IGST Act which was wholly irrelevant. Section 7 of the IGST Act is relevant for determining whether the supply is an inter-State supply, while section 8 of the Act is helpful in determining intra-State supply. Both the sections pre-suppose that the goods are in India and would not apply to a case where the goods were located outside India and never entered into the territory of India.
Para 14.2 Reference to Section 10(1) of the CGST Act: The Authority then makes a reference to Section 10(1)(a) and holds that since the goods involve movement of goods, the place of supply would be the termination for delivery to the recipient and as the goods under consideration are to be supplied to overseas buyer, as such the place of supply would be outside India. The Authority conveniently or out of ignorance forgets the rule of construction that a statute is to be read as a whole and, thereafter, section by section. Now, if Section 10 is read it is evident that the goods are moving from the location of the supplier but because GST is a destination based tax, that is why the place of supply in the case of movement of goods is to be considered as the location where the movement terminates. But the starting point has to be the location of the supplier. This is made clear by clause (c) of sub-section (1) of Section 10 of the IGST Act. The heading of section 10 itself suggests that section 10 is dealing with place of supply of goods in India and not outside India.
Para 14.4 – Reference to the definition of ‘export of goods’: After referring to the definition of ‘export of goods’ in clause (5) of section 2 of IGST Act, the Authority concludes that “In the instant case, the goods have not crossed the Indian customs frontier and as such it is clear that the goods are not physically available in the Indian territory. When the goods are not available in the Indian territory, the question of taking goods out of India does not arise. Thus, the subject transaction does not qualify as export of goods.” This finding of the Authority clinches the issue in favour of the assessee and against the conclusion of the Authority itself.
Para 14.5: In this para the Authority says that “it appears that the transaction is covered under the ambit of inter-State supply….”. The word “appears” shows that the conclusion of the Authority is based on guess work which is not permissible in law. The Authority also brings the theory of elimination in this para which is wholly foreign to the issue in this case.
Conclusion of the Authority – bad being extra-territorial: Article 245 of the Constitution provides that the Parliament can make laws for the whole or any part of the territory of India. Parliament cannot enact a law beyond the territorial limits of India. But the Authority in this case has done that by ruling that a supply of goods which takes place outside India would still be liable to IGST.
Such decisions, in my opinion, do more harm than good as they shake the confidence and faith of the public in the law or those who administer the law with the result that the assesses are hesitant to approach the AAR’s. Such decisions also add to unnecessary litigation.