Export, Deemed Export, SEZ, Operations in Territorial Waters and High Seas Including Refund Provisions

Introduction

Across the globe, value added tax by whatever name called,
applies to international trade on destination principle, exports are free of
VAT and imports are taxed on the same basis and at the same rate as local
production. This destination principle is sanctioned by World Trade
Organization (WTO) Rules.What is free of VAT is termed as zero-rated where tax
on costs and overheads can be recovered.The principle of neutrality takes
centre stage in the context of international trade. GST thus being based on destination
principle, exports from a country of origin go out at zero-rated tax, after
exempting or refunding the input taxes that may be given to the resources used
in its manufacturing. Zero-rating of exports ensures neutrality of VAT in
international trade through unequivocal application of the destination
principle. The OECD guidelines on neutrality of VAT in international trade lay
this down as the first guideline. Thus, exports must leave the country
completely free of tax whereas tax on imported goods should be the same as the
tax levied on domestically produced goods.

Exports: Goods

Following the above principle and as also under the laws
relating to central excise, VAT laws of States and service tax, exports
continue to remain zero-rated and a similar benefit continues to be given to
Special Economic Zones (SEZs) under GST law effective from July 01, 2017. While
this benefit is extended to processing zones of the SEZ, sales from SEZ to
Domestic Tariff Area (DTA) continue to remain taxed under GST system.

As per section 2(5) of IGST Act, 2017 IGST Act) “Export of
goods” with its grammatical variations and cognate expressions, means taking
goods out of India to a place outside India”.

As per section 2(52) of CGST Act, ‘goods’ means every kind
of movable property other than money and securities but includes actionable
claim, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before supply or under a contract of supply”.

Thus, it appears that both tangible as well as intangible
goods are covered by the above expression. Now as per section 7(1)(d) of the
CGST Act, certain activities are treated as supply of services as listed in
Schedule II. This list inter alia includes the following transactions as
service transactions at para 5:

“(c) Temporary transfer or permitting the use
or enjoyment of any intellectual property.

(d)Development, design, programming,
customization, adaptation,upgradation,enhancement, implementation ofinformation
technology software”.

Thus, these activities have to be considered as services
under the GST law. Currently, when software is exported on a tangible medium,
it is considered as export of goods. The Karnataka High Court in Sasken
Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes,
Bangalore 2011-TIOL-707-HC-KAR-ST held “Intellect is not property by itself.
Through intellect you can create intellectual property.” It is that
intellectual property that will become goods “once put on a medium for sale”.
Intellectual property does not exist in the mind of the technician. What exists
in his mind is the intellect. Using that Intellect, a technician creates or
develops ‘goods’. It is that goods which is called intellectual property when
put on a medium for sale.” In view of this, no service tax was chargeable
on the said transaction of sale. Further, the above service description
appearing in respect of software service and intellectual property in Schedule
II is the same as under service tax law in section 66E. Therefore, software
when provided on a tangible medium and if also capable of replicating should be
considered sale of goods. From the description above viz. “temporary transfer”
of intellectual property or permitting use thereof only is to be treated as ‘service’.
It implies thus that permanent transfers of IPR or providing software on a
tangible medium would be treated as ‘goods’. However, considering the given
law, the issue of classification may remain open. In case of an export
transaction, there may not be direct tax implication as whether goods or
service, it will be a zero-rated supply. Nevertheless, there may be implication
when the Government announces/notifies any incentive either for export of goods
or services.

Export: Services

As per Rule 2(6) of IGST Act, “Export of services” means the
supply of any service when,––

(i)  the supplier of service is located in
India;

(ii)  the recipient of service is located outside
India;

(iii) the place of supply of service is outside
India;

(iv) the
payment for such service has been received by the supplier of service in
convertible foreign exchange; and

(v)  the supplier of service and the recipient
of service are not merely establishments of a distinct person in accordance
with Explanation 1 in section 8”.

In order that a supply of any service is considered exported,
conditions provided in section 2(6) of IGST Act are to be complied with as
discussed below. Further, as against export of goods, where only physical
movement is relevant, in case of services, the location of the supplier and
that of the recipient are relevant. For this, the provisions to determine the
place of supply are required to be looked at.

–   Location of supplier in India

     When a supply is made by a service provider
from his business place or an establishment located in India, the first
condition of the above Rule 2(6) stands fulfilled i.e. the supplier of service
is located in India. The expression “location of the supplier of services” is
defined in section 2(15) of IGST Act. This is for determination of the exact
location i.e. place of business or a fixed establishment or any other
establishment, from where the supply of a service is made.

–   Location of recipient outside India:

     The service supplied by a person in India
should be received outside India. For this purpose, ‘recipient’ is defined in
section 2(93) of CGST Act and “location of recipient of services” is defined in
section 2(14) of IGST Act. The meaning of recipient is provided based on
whether consideration is payable or otherwise and would include an agent on
behalf of the recipient to mean that the supply is made to the principal even
when the agent has received a service.

–   The place of supply of service

     When a service is supplied by a person
located in India to a recipient located outside India, the place of supply
should be determined as “outside India”. This is to be determined in accordance
with section 13 of the IGST Act. (This is discussed and analysed in detail in
this July 2017 issue of BCAJ in the article “Place of supply of services“ and
hence not touched upon here). Under the service tax law, Place of Provision of
Service Rules, 2012 and prior to July 2012, Export of Services Rules 2005 were
prescribed for the purpose.

–   Receipt of payment in convertible foreign
exchange

     On the lines of service tax provisions, GST
law also contains the condition of receipt of consideration or the payment for
the service to be in convertible foreign exchange to consider a service as
exported. This condition does not exist for export of goods. The service
supplier is required to produce evidence of such receipts in convertible
foreign exchange such as Foreign Inward Remittance Certificate (FIRC) issued by
banks in this regard. In the case of Sun-Area Real Estate Pvt. Ltd. 2015
(39) STR 897 (Tri.-MUM) “foreign exchange” was interpreted in detail.
Referring to Notification No. FEMA 9/2000-RB of 03/05/2000, the rupee payment
appearing in FIRC was held as receipt in “convertible foreign exchange”.
Further, referring to the Supreme Court’s judgement in J B. Boda And Company
Private Limited vs. CBDT (SC) 223 ITR 271 (SC), it was observed as follows:

     “The Hon’ble Supreme Court has held that
the said amount of brokerage retained by the Indian insurance broker from the
total amount due to the foreign insurer shall be treated as foreign exchange.
In view of the above judgments, I am of the view that when a foreign bank is
maintaining Indian rupees in their account obviously such Indian rupees were
obtained in lieu of foreign exchange. For example, if any payment is made from
India to any foreign country it is to be made in foreign exchange and thus
there is an outflow of foreign exchange but if the payment is made in Indian
rupees, there is a saving of foreign exchange and if the said Indian rupees is
received in India, the same is in lieu of foreign exchange which was saved at
the time of repatriation of Indian rupees to foreign country. On this logic
under the Foreign Exchange Management Act also it provided that if the payment
in Indian rupees is received in India through banking channel it is deemed to
be convertible foreign exchange.”

–   Supplier and recipient of service are not
merely establishments of distinct person:

Under GST law, two establishments of a person in two
different States or a Union territory and establishment of a person in India
and an establishment outside India are treated as establishments of distinct
persons in terms of Explanation-I to section 8 of GST Act. Thus a service
provided by a company located in Mumbai, India to their branch office in
Mauritius is not considered as an export of service as they are establishments
of distinct persons or they are not two separate legal entities.

Export of goods and services are zero-rated under GST law and
therefore exports can be made without payment of any tax. However, for all
zero-rated supplies, input tax credit is available even when exempt supplies
are exported.

Deemed Exports

“Deemed Exports” is a unique concept operating as a part of
Foreign Trade Policy (FTP) of India. Essentially, deemed exports mean those
transactions in which the goods supplied do not leave the country and the
supplier in India receives the payment for goods either in Indian rupees or in
free foreign exchange. The purpose for ‘deeming’ is to extend certain benefits
and relaxations in so categorised transactions even though they are not export
in nature but are viewed crucial and therefore deemed as exports. Section 2(39)
of CGST Act defines deemed export as such supplies of goods as may be notified u/s.
147. Thus, the notification in this regard is yet to be issued when this is
written. Under FTP, supply of goods under advance authorisation, supply of
goods to Export Oriented Units (EOU) software technology Park (STP), Electronic
Hardware Technology Park (EHTP), Bio-Technology Park Scheme (BTP) etc.,
supply of capital goods to EPCA authorisation holders, supply of maritime
freight containers by 100% EOU when these containers are exported out of India
within 6 months or such further period as permitted by Customs, supply to
projects funded by U. N. agencies etc. are considered eligible supplies
to be ‘deemed’ as exports. The said concept may continue on the onset of GST
with or without modification.

SPECIAL ECONOMiC ZONE (SEZ)

Both, Special Economic Zone (SEZ) and Special Economic Zone
Developer (SEZ developer) are defined in the IGST Act in sub-sections (19) and
(20) respectively in section 2. These terms derive their meanings as per
definitionsunder the Special Economic Act, 2005 (SEZ Act). The SEZ Act 2005
contains special provision regarding procurement of goods and service without
payment of taxes. In line with existing laws of central excise, service tax etc.,
GST law also provides for refund of taxes paid by the supplier supplying goods
or services to a developer or a unit holder. There has been a significant
amount of litigation on the interpretation of provisions of SEZ Act, a few of
which cited here may help under GST as well although these have been ruled in
the context of service tax or customs duty. In case of Essar Steel Ltd. vs.
UOI 2010 (249) ELT 3 (Guj), Essar located in SEZ at Hazira, Surat received
iron ore pellet from their non Vizage Pellet unit in SEZ. Customs department
demanded export duty considering that SEZ is outside the territory of India.
The High Court set-aside the demand observing that section 53 of the SEZ Act
provides that the Zone would be deemed a territory outside the customs
territory of India for the purpose of authorised operations. However, the
customs territory cannot be equated with the territory of India and such
interpretation would render SEZ Act redundant. The Zone cannot be considered
outside Indian Territory under service tax law. Notification No.9/2009-ST
provided exemption from payment of service tax for services provided to
developer or units in SEZ. In Reliance Ports and Terminals Ltd. 2015 (40)
STR 200 (Tri.-Ahmd.), the revenue’s case was that during the relevant
period March 2005 and 20/05/2009, the exemption did not exist. Therefore,
service tax should be paid by service provider and appellant would claim refund
thereof. The Tribunal interalia observed that section 51 of SEZ Act had
overriding effect if there is anything inconsistent with the provisions in any
other law and therefore exemption was available to SEZ unit under section
26(1)(e) of SEZ Act. In Norsia Container Lines 2011 (23) STR (Tri.-Del),
containers were used by unit for authorised operations in SEZ and also
sometimes outside SEZ. The Tribunal observed that as long as the containers
were used for export of goods, the exemption was available.

As per section 7(5)(b)of IGST Act, supply of goods and
services or both to or by a SEZ developer or SEZ unit would be treated to be
supply in the course of interstate trade or commerce. In accordance therewith,
for example, even if a person in Mumbai provides any service to a unit in SEZ
in Maharashtra, it will be treated as interstate supply and IGST is chargeable
primarily, notwithstanding that refund would be available since the supply is
zero-rated as in the case of exports, however subject to conditions and
safeguards and procedure prescribed for granting refund as briefly discussed
below.

Operation in territorial waters

Section 9 of IGST Act, a non-obstante clause provides that
notwithstanding anything contained in this Act, where location of the supplier
is in territorial waters, the location of such supplier or where the place of
supply is in the territorial waters, the place of supply would be considered to
be in the coastal state or union territory where the nearest point of the
appropriate baseline is located. This provision primarily seems to be aimed at
avoiding litigation in relation to supply to or from any location in
territorial waters.

However, there requires better clarity as discussed hereafter.
The limit of territorial waters is of 12 nautical miles from the nearest point
of the appropriate baseline as per section 3(2) of the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976.
The continental shelf of India comprises the seabed and sub-soil of the
submarine areas that extend beyond the limit of its territorial waters
throughout the natural prolongation of its land territory to the outer edge of
continental margin or to a distance of 200 nautical miles from the baseline
referred above. India has and always had full and exclusive sovereign rights in
respect of its continental shelf (sections 6CD(1) and (2) of the said Act of
1976).

The exclusive economic zone of India is an area beyond and adjacent
to the territorial waters and the limit of such zone is 200 nautical miles from
the baseline referred above. ‘India’ as per section 2(56) is defined to
includethe land mass of the country, its territorial waters, seabed and sub
soil underlying such waters, continental shelf, exclusive economic zone or
other maritime zone and the airspace above its territory and territorial
waters. Therefore the issue that requires examination is for example, when a
supply of repairs and maintenance services including supply of spare parts is
made to offshore oil and gas industry operation at Mumbai High by a Mumbai
vendor on offshore oilfield located in Arabian Sea around 160 km. West of the
Mumbai Coast, whether it would be considered supplies made in the State of Maharashtra
only as the power to levy GST is delegated to States as the said section 9 has
an overriding effect. The question is whether the expression “territorial
waters” used in section 9 would be construed as area upto 12 nautical miles
only. In any case, supplies in the area beyond 12 nautical miles and upto 200
nautical miles can neither beconsideredexport nor an interstate movement as
this area does not form part of any State of the country. Therefore by default
also, whether the supply would be construed as made in Maharashtra is an issue.
Conversely, if oil recovered at Bombay High is transferred to a refinery in
Mangalore, Karnataka, the supply would be considered interstate supply and IGST
would be recoverable.

The issue whether materials supplied on the vessel located in
the territorials waters was a sale within the state of Maharashtra in the
context of Maharashtra VAT provisions was considered by the Bombay High Court
in the case of Raj Shipping vs. State of Maharashtra [2015] 62 taxmann.com
309 (Bombay), wherein the Bombay High Court noted that since the agreement
to sell was entered in the state of Maharashtra, the refinery was very much
within the state of Maharashtra and the assessee’s place of business was in
Mumbai and the contract was carried out from Mumbai the sale was held to be
within the State of Maharashtra (The matter lies in the Supreme Court for
finality). Another interesting decision of the Apex Court is also relevant here
i.e. In UOI vs.Rajendra Dyeing and Printing Mills Ltd. (2004) 10 SCC 187,
it was held that when there is movement of goods outside territorial waters of
India, it is then an export may be said to have taken place. In the instant
case, the cargo was destroyed when the vessel sank within territorial waters of
India. Therefore, there was no export of cargo and no duty drawback was
available in respect of the cargo. Considering theserulings, litigation as
regards supply to or from territorial waters cannot be ruled out.

High Sea sale

What is known in common parlance as High Sea sale is a sale
taking place by transfer of documents of title to goods before the goods have
crossed the customs frontiers of India, thus is a sale in the course of import.
Such transactions are known as deemed imports. There is no bar on the same
goods being sold more than once while the goods are on high sea. The delivery
from customs is therefore on account of last high sea sale purchaser. Bill of
Entry is also filed in the name of the last purchaser. These transactions are
exempt under Central Sales Tax Act, 1956.

As per section 7(2) of the IGST Act, 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 interstate trade or
commerce. Whereas as per proviso to section 5(1) of the IGST Act, IGST shall be
levied on goods imported into India and will be collected as per section 3 of
the Customs Tariff Act, 1975 on the value determined under the said Act at the
point when duties of customs are levied on the said goods u/s. 12 of the
Customs Act, 1962. Thus, reading of section 7(2) indicates that sale in the
course of import before crossing the customs frontier would be chargeable to
IGST. However, harmonious reading of both section 7(2) and charging section
5(1) indicates that the supply made prior to the goods reaching customs
frontiers should not be liable for IGST. Thus, whether the provision of section
7(2) leading to charging IGST on a high sea sale is unintended or otherwise,
cannot be concluded with certainty. The question that still remains is whether
jurisdiction of the GST law as per the definition of India discussed above
remains upto 200 nautical miles from the baseline and therefore, whether
“international transfer or supply of goods” made beyond 200 nautical miles
would be outside the scope of GST law. However, to prove that ‘supply’ was made
prior to the vessel or aircraft entering the ‘limit’ of jurisdiction of the law
also appears a challenging task. In view hereof, the route of high sea sale
would lose its relevance if in terms of section 7(2), the sale made prior to
goods reaching customs is subject to IGST.

Refund provisions: Zero-rated supplier

Section 16 of IGST Act defines zero-rated supply as follows:

16. (1)
“zero rated supply” means any of the following     supplies
of goods or servicesor both, namely:––

(a) export of goods or services or both; or

(b)
supply of goods or services or both to a Special Economic Zone developeror a
Special Economic Zone unit.

Sub-section (3) of the said section 16 reads as follows:

(3) A registered person making zero rated supply shall be
eligible to claim refund under either of the following options, namely:––

(a) he may supply goods or services or both under
bond or Letter of Undertaking, subject to such conditions, safeguards and
procedure as may be prescribed, without payment of integrated tax and claim
refund of unutilised input tax credit; or 

(b) he may supply goods or services or both,
subject to such conditions, safeguards and procedure as may be prescribed, on
payment of integrated tax and claim refund of such tax paid on goods or
services or both supplied,

     in accordance with the provisions of
section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

Thus the export of goods and services and supply of goods and
services to SEZ developer or units in SEZ are zero-rated supplies. As
distinguished from service tax law, supply of services/or the goods can be made
without payment of IGST only under bond or letter of undertaking or else the
payment of integrated tax to be made (from input tax credit account) and then
claim refund thereof.In turn, the refund in respect of all zero-rated supplies
is governed by section 54 of the CGST Act along with refund in other cases. In
terms of these provisions as well as the already prescribed Refund Rules,
important requirement or conditions are listed below:

–   Only registered persons would be eligible to
claim refund. Thus in order to be eligible for claiming refund, registration is
a prerequisite.

–   An application is required to be made in the
prescribed form from the relevant date within 2 years. Relevant date for
exported goods would be the date of vessel or aircraft leaving India or the
date of dispatch by the post office as the case may be. In case of deemed
exports, the date of furnishing the relevant returns. In case of exported
services, the relevant date is the date of receipt of foreign exchange when
services are completed prior to the receipt of such payment and when advance is
received prior to supply of services, the date of issue of invoice.

–   Refund can be claimed by a registered person
at the end of any tax period for unutilised input tax credit.

–   No refund of unutilised input tax credit is
available where exported goods are subject to export duty.

–   Also when drawback is availed in respect of
central tax or integrated tax by supplier of goods or services, refund would
not be allowed.

–   All applications would have to be accompanied
by adequate documentary evidence as prescribed to establish that refund is due
to the applicant.

–   90% of the total amount claimed (excluding
the amount of input credit provisionally accepted) will be refunded within 7
days and thereafter within 60 days a final order will be made in respect of
applications complete in all respects after due verification of documents in
terms of prescribed procedure subject to the conditions that the claimant of
refund is not prosecuted during the preceding 5 year period or under the
existing law where the amount evaded was above Rs.2.5 crore.

–   No refund can be withheld or deducted in
certain circumstances such as non-filing of any return or in case of pendency
of any tax interest or penalty dues.

–   When the goods or services are exported
without payment of tax under bond or letter of undertaking, refund will be
granted as per the following formula:

     Refund amount = (turnover of zero-rated
supply of goods + turnover of zero rated supply of services x net ITC +
adjusted turnover.

     In the above, refund means the maximum
admissible fund, net ITC means credit availed on inputs and input services
during relevant period. Turnover means the turnover in a State or Union
Territory excluding the value of exempt supplies other than zero-rated supplies
during the relevant period

Conclusion