LEGISLATIVE FRAMEWORK – GST VIS-À-VIS CUSTOMS
The levy of GST finds its genesis under
Articles 246A and 269A of the Constitution of India. Article 246A confers
powers on both Parliament and the State Legislature to make laws with respect
to goods and services tax imposed by the Union or such State. Two points to be
noted here are:
(a) Vide the proviso to
Article 246A, Parliament has been given the exclusive power to make laws with
respect to goods and services tax where the supply of goods or services or both
is in the course of interstate trade or commerce. The mechanism for levy,
collection and sharing of tax on such supplies is provided under Article 269A.
Explanation 1 to Article 269A further provides that the supply of goods or
services in the course of import into the territory of India shall be deemed to
be a supply in the course of interstate trade or commerce.
(b) Article 286 restricts the states from
levying tax on sale or purchase of goods or services or both if such supply
takes place outside the state or in the course of import into or export out of
the territory of India.
It is by virtue of the above framework that
Parliament has enacted the Integrated Goods & Services Tax (IGST) Act, 2017
and the Central Goods & Services Tax (CGST) Act, 2017 for levy and
collection of tax on interstate supplies and intrastate supplies, respectively.
Similarly, the states have enacted the State Goods & Services Tax (SGST)
Act, 2017 for levying tax on intrastate supplies. The determination whether or
not a supply is in the course of interstate trade or commerce is dealt with
under sections 7 and 8 of the IGST Act, 2017. Section 7 thereof provides that
supply of goods imported into the territory of India till they cross the
customs frontiers of India shall be treated as supply of goods in the course of
interstate trade or commerce.
There is an apparent dual levy on import of
goods under the Constitution in view of Article 269A treating import of goods
as interstate supply of goods or commerce and Article 246 empowering the levy
of customs duties. It is for this reason that the charging section for levy of
IGST u/s 5 specifically excludes the levy and collection of integrated tax on
goods imported into India from its purview and provides that the same shall be
levied and collected in accordance with the provisions of section 3 of the CTA,
1975 on the value determined under the said Act at the point when the duty of
customs is levied on the said goods u/s 12 of the Customs Act, 1962.
Therefore, when dealing with a cross-border
transaction involving goods, there is a close interplay between the provisions
of GST and Customs requiring determination of the statute under which the duty
/ tax has to be discharged. It therefore becomes important to understand the
meaning of the terms ‘imported goods’, ‘importer’ and the process to be
followed in the case of importation of goods.
‘IMPORTED GOODS’ AND ‘IMPORTER’
‘Imported goods’ is defined u/s 2(25) of the
Customs Act, 1962 to mean any goods brought into India from a place outside
India but does not include goods which have been cleared for home consumption. Similarly,
section 2(26) defines the term ‘importer’ in relation to any goods at any
time between their importation and the time when they are cleared for home
consumption, includes [any owner, beneficial owner] or any person holding
himself out to be the importer.
When goods are imported into India, there
are generally two sets of transactions which are undertaken, one being the
filing of Bill of Entry for Home Consumption, in which case the importer has to
pay duty as applicable on the said goods and get the goods cleared from the
Customs Authorities. Once this is done, the goods are no longer imported goods
and therefore, on all subsequent transfers the tax will be levied and collected
under the GST mechanism by classifying the transaction either as intrastate or
interstate. The second option is to file Bill of Entry for Warehousing, in
which case the goods shall be stored either at a public or a private warehouse
by executing a bond. In the second option, the goods continue to be classified
as imported goods and the payment of duty on such goods gets deferred till the
time the goods are kept in the bonded warehouse and the same shall be assessed
to tax when a bill of entry for home consumption in respect of such warehoused
goods is presented.
In other words, till the time the goods are
cleared for home consumption, i.e., an order permitting clearance of such goods
for home consumption is passed, the goods would be treated as imported goods
and will be subjected to levy and collection of tax u/s 12 of the Customs Act,
1962.
TAX
TREATMENT OF HIGH SEAS SALES
In the case of high seas sales, the sale
takes place before the goods are cleared for home consumption, i.e., a bill of
entry for home consumption is filed and an order permitting the clearance of
such goods is issued by the proper officer. This position has also been
accepted by the Board vide Circular 33/2017 – Customs dated 1st
August, 2017 wherein they have clarified that in case of high seas sales
transactions (single or multiple), IGST shall be levied and collected only at
the time of importation, i.e., when declarations are filed before the Customs
Authorities for clearance purposes after considering the value addition on
account of such high seas transactions. Even the Authority for Advance Ruling
has held so in BASF India Private Limited [2018 (14) GSTL 396 (AAR –
GST)].
Further, Schedule III has been amended
w.e.f. 1st February, 2019 vide the insertion of Entry 8(b) to
provide that supply of goods by the consignee to any other person, by
endorsement of documents of title to the goods, after the goods have been
dispatched from the port of origin located outside India but before clearance for
home consumption, shall be treated as neither being supply of goods nor supply
of services.
TAX
TREATMENT OF WAREHOUSED GOODS
A similar treatment will be accorded to
goods where a bill of entry for warehousing is filed, i.e., goods are kept at a
bonded warehouse which falls within the purview of customs area defined u/s
2(11) of the Customs Act, 1962 as any area of a customs station or a warehouse.
This is because when a bill of entry is filed for warehousing, the goods are
not cleared for home consumption and therefore such goods continue to be
classified as imported goods and subject to levy and collection of tax under
the Customs Act, 1962. This view has been followed by the AAR in Sadesa
Commercial Offshore De Macau Ltd. [2019 (21) GSTL 265 (AAR – GST)] and Bank
of Nova Scotia [2019 (21) GSTL 238 (AAR – GST)]. In fact, in Sadesa
Commercial the AAR has also held that if they are engaged exclusively
in undertaking such supplies, i.e., sale of warehoused goods, they would not be
liable to obtain registration under GST.
Prior to the amendment referred to above,
the Board had issued Circular 46/2017-Cus. dated 24th November, 2017
wherein it was clarified that tax will be levied on multiple occasions, one at
the time when the warehoused goods are sold before clearance for home
consumption, and secondly when the bill of entry for home consumption of such
warehoused goods is presented for clearance. However, vide a later
Circular 3/1/2018 dated 25th May, 2018, it was clarified that
integrated tax shall be levied and collected at the time of final clearance of
the warehoused goods for home consumption only.
In addition, Circular 46/2017-Cus. was
withdrawn to align with the amendment to Schedule III of the CGST Act, 2017
which deemed supply of warehoused goods to any person before clearance for home
consumption as neither a supply of goods nor supply of services w.e.f. 1st
April, 2018.
IMPORTS BY
SEZ DEVELOPERS / UNITS
A similar analogy will apply for the purpose
of goods imported into a Special Economic Zone as well. Section 53(1) of the
SEZ Act, 2005 provides that SEZs shall be deemed to be a territory outside the
Customs territory of India for undertaking the authorised operations. However,
this does not imply that the provisions of the Customs Act, 1962 shall not
apply to SEZs as held by the Gujarat High Court in the case of Diamond
& Gem Development Corporation vs. Union of India [2011 (268) ELT 3 (Guj.)].
It is for this reason that when goods are imported into an SEZ, a bill of entry
for re-warehousing has to be filed. Of course, in view of section 26 of the SEZ
Act, 2005 which provides exemption from duties of customs on goods imported
into India to carry on the authorised operations, no duty of customs –
including IGST – is leviable on such imports.
However, a challenge arises when the said
goods are cleared for use in DTA. The goods imported into an SEZ are under a
Bill of Entry for re-warehousing. However, since an SEZ is deemed to be outside
the customs territory of India, section 30 of the SEZ Act, 2005 provides that
any goods removed from an SEZ to the DTA shall be chargeable to duties of
customs, including anti-dumping, countervailing and safeguard duties under the
CTA, 1975 (51 of 1975), where applicable, as leviable on such goods when
imported. In other words, if goods imported into an SEZ are cleared into DTA, a
fresh Bill of Entry for Home Consumption would have to be filed in view of the
fact that the same would be treated as import of goods from a territory outside
India. The Bill of Entry can be filed either by the SEZ unit or by the buyer of
the goods.
TAX TREATMENT OF DUTY FREE SHOPS
The levy of tax on goods sold by Duty Free
Shops (DFS) has always been a subject matter of scrutiny, first under the
pre-GST regime and now under the GST regime. DFS are shops which are set up at
airports / sea ports within the customs territory, i.e., after a person goes
through customs formality if he is commencing an international travel, or
before a person goes through customs formality if he is returning from an
international travel.
The DFS are treated as warehouses licensed
u/s 58A of the Customs Act, 1962. Once the goods reach the DFS, there are two
possibilities –the goods may be bought by an outbound passenger or the goods
may be bought by an inbound passenger. But the fact remains that the goods have
been sold by the DFS before a Bill of Entry for home consumption was filed.
Thus the question that remains is whether or not such sales would be liable to
GST, irrespective of whether the same is from the departure area or the arrival
area. In this context, it would be imperative to refer to the following
decisions of the Supreme Court:
(A) In the case of J.V. Gokal &
Co. (Pvt.) Ltd. vs. Assistant Collector of Sales Tax [1990 (110) ELT 106 (SC)],
the Court explained the phrase ‘in the course of import of goods into the
territory of India’ to mean
(1) The course of import of goods starts at
a point when the goods cross the customs barrier of the foreign country and
ends at a point in the importing country after the goods cross the customs
barrier,
(2) The sale which occasions the import is a
sale in the course of import,
(3) A purchase by an importer of goods when
they are on the high seas by payment against shipping documents of title (Bill
of Lading) is also a purchase in the course of import, and
(4) A sale by an importer of goods, after
the property in the goods passed to him either after the receipt of the
documents of title against payment or otherwise, to a third party by a similar
process is also a sale in the course of import.
(B) In the case of Hotel Ashoka vs.
Assistant Commissioner of Commercial Taxes [2012 (276) ELT 433 (SC)],
specifically in the context of DFS, the Court had held that the sale of goods
from DFS was from outside India and therefore, they were not liable to sales
tax. The Court further held that the sale of goods was before they were cleared
for home consumption, i.e., it was a sale of goods in the course of import into
India and for this reason the state did not have the power to levy tax on such
transactions.
Even in the context of GST, reference to the
decision of the Bombay High Court in the case of Sandip Patil vs. Union
of India [2019 (31) GSTL 398 (Bom.)] is important. In this case, not
only did the Court agree with the above contention, it also held that supply of
goods to outbound passengers would be treated as export of goods and in case of
supply of goods to inbound passengers such inbound passengers would be treated
as importers and they would also not be liable to pay any duty in view of
Notification 43/2017-Cus. dated 30th June, 2017 and 2/2017-IT (Rate)
dated 28th June, 2017 r.w. duty-free allowance under the Baggage
Rules. The High Court further held that the DFS would be entitled to claim
refund of accumulated ITC on account of export of goods u/r 89 of the CGST
Rules, 2017. A similar view has also been taken in the case of A1
Hospitality Services Private Limited vs. Union of India [2019 (22) GSTL 326
(Bom.)] as well as Atin Krishna vs. Union of India [2019 (25)
GSTL 0390 (All.)].
One should, however, note that the AAR has,
in the case of Rod Retail Private Limited [2018 (12) GSTL 206 (AAR –
GST)] on the contrary held that the supply of goods from DFS would be
liable to GST. However, this AAR, while referring to the decision of the
Supreme Court in the case of Ashoka Hotel referred above, has
held it to be not applicable since ‘under GST law, scenario has changed and
therefore decision of Apex Court not applicable’. Instead, it refers to the
decision in the case of Collector vs. Sun Industries [1988 (35) ELT 241
(SC)] which was completely on a different footing. It is imperative to
note that the High Court had in the case of Sandeep Patil
distinguished this ruling on the grounds that the facts in the case of Rod
Retail were different since the same was a ‘Duty Paid Shop’ and not a
‘Duty free shop’ as clarified by the Board vide Circular dated 29th
May, 2018 and therefore the dispensation allowed to DFS would not be affected
in any manner.
Reference is also invited to the recent
decision of the Supreme Court in the case of Nirmal Kumar Parsan vs.
Commissioner of Commercial Taxes [SCA No. 7863 of 2009] wherein in the
case of warehoused goods the Court upheld the liability to pay VAT on goods
sold as stores to foreign-going vessels. However, in this case, the Court made
a peculiar observation that the appellant had not shown anything to demonstrate
that the subject bonded warehouse came within the customs port / customs land
station area and, more so, the state sales occasioned the import of goods
within the territory of India.
INPUT TAX CREDIT IMPLICATIONS
In view of the amendment to section 17(3),
it is further provided that the supply of goods covered under Schedule III
would not be treated as exempted supply and therefore there is no requirement
to reverse Input Tax Credit on account of the same.
RCM ON OCEAN FREIGHT
Generally, when a contract for sale of goods
is executed, the parties need to agree when the risk and rewards associated
with the goods would get transferred. There are two commonly used terms,
namely, CIF – i.e., cost, insurance and freight included; and FOB – i.e., Free
on Board, meaning once the goods reach the port at the foreign country, the
risks and rewards associated with such goods are transferred to the buyer in
which case he shall make arrangements to bring the goods from the foreign port
to a port in India by entering into a separate contract for such services.
For customs, depending on the agreed terms,
the assessable value is generally adjusted, either for actual freight incurred
or on notional basis. For example, if freight cost is not available, the same
is assumed at 20% of the FOB value and the same is added to the transaction
value for determining the assessable value. [Refer Rule 10 of the Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007]. This implies
that the customs duty along with IGST is paid not only on the transaction value
but also on the actual various or notional value of expenses incurred during
the import of such goods. This would also mean that tax is charged indirectly
on the transportation cost in the CIF contracts as well, though the service
provider (shipping line) and the service receiver (foreign seller) may not be
in India.
Despite the transaction being indirectly
taxed, Entry 10 of Notification 10/2017-IT (Rate) dated 28th June,
2017 imposes a liability on the importer, as defined in section 2(26) to pay
tax on ‘services supplied by a person located in non-taxable territory by
way of transportation of goods by a vessel from a place outside India up to the
customs station of clearance in India’. The Notification further provides
that where the value of taxable service provided by a person located in
non-taxable territory to a person located in non-taxable territory by way of
transportation of goods by a vessel from a place outside India up to the
customs station of clearance in India is not available with the person liable
for paying integrated tax, the same shall be deemed to be 10% of the CIF value
(sum of cost, insurance, and freight) of imported goods.
Therefore, it is apparent that there is a
dual taxation of the freight component, once at the time of clearance of goods
with the customs authorities where the value of freight is included in the
assessable value, and secondly, the tax liability created through the
Notification 10/2017-IT (Rate). Similar provisions existed under the Service
Tax Regime as well where the Gujarat High Court had struck down the entry
imposing liability to pay tax under reverse charge in the case of Sal
Steel Limited vs. Union of India [R/SCA No. 20785 of 2018]. The levy
was struck down primarily because section 94 did not permit the Central
Government to make rules for recovering service tax from a third party who is
neither the service provider nor the service receiver. The Court further held
that there was no machinery provision to demand the tax from the importer.
Under GST, the AAR has on multiple occasions
such as India Potash Limited [2020 (32) GSTL 53 [AAR – AP)]; M.K.
Agrotech Limited [2020 (32) GSTL 148 (AAR – KA)]; E-DP Marketing Private
Limited [2019 (26) GSTL 436 (AAR – MP)] held that there is a liability
to pay GST under RCM on such transactions. However, the Gujarat High Court has
in the case of Mohit Minerals Private Limited vs. UoI
[2020-TIOL-164-HC-AHM-GST] struck down Entry 10 as ultra vires
for the following reasons:
(a) The importer is not the service
recipient since the GST law defines the service recipient as the person liable
to pay consideration,
(b) The place of supply provisions apply
only in case where either the location of supplier or the recipient of services
is outside India. In this case, both the location of supplier as well as
recipient are outside India,
(c) The point of taxation would never get
triggered since neither the payment to the supplier would be reflected in the
books of accounts of the importer, nor the invoice of the shipping line would
be in the name of the importer.
While the levy has been struck down, one
should note that the Revenue is likely to file an appeal before the Supreme
Court and therefore reliance on this decision should be placed keeping in mind
other aspects as well. For instance, in case the decision is overturned by the
Court and the liability to pay tax is confirmed, the same would be along with
consequential interest and probably no Input Tax Credits. Penalty can be
contested on bona fide belief, but it would be a long way away,
especially considering the fact that the payment of tax might in many cases be
a revenue-neutral exercise.
INTERNATIONAL JOB WORK
Section 2(68) of the CGST Act, 2017 defines
the term ‘job work’ as ‘any treatment or process undertaken by a person on
goods belonging to another person’. This activity is deemed to be a supply
of service under GST in view of Entry 3 of Schedule II of the CGST Act, 2017.
The modus operandi in this kind of
transaction is that the owner of goods (generally known as principal) desirous
of getting some work done on his goods, sends the said goods to his job-worker
without any consideration. The said job-worker shall work on the said goods and
return the goods to the principal and recover the charges for carrying out the
said activities from the principal.
Therefore, there are three different events
involved in a transaction of job work, namely, receipt of goods, working on the
said goods (treatment / process) and lastly, return of the said goods. When
both the parties, i.e., principal and job-worker are in the same territory,
there are no tax implications at the time of receipt of goods and sending back
the goods. However, when in the same transaction one of the parties is outside
India, customs duty comes into the picture because there is either an import of
goods, i.e., goods coming into India from a territory outside India in case of
inbound job work or export of goods, i.e., goods being taken out of India in
case of outbound job work.
Under the Customs Act, 1962 the import of
goods for job work is dealt with by Notification 32/1997-Cus. dated 1st
April, 1997. This Notification exempts goods imported for jobbing from payment
of customs duty leviable under the First Schedule and additional duty leviable
u/s 3 of the CTA, 1975 subject to satisfaction of the condition prescribed.
However, it is imperative to note that vide Notification 26/2017-Cus.
dated 29th June, 2017 in the context of additional duties u/s 3 of
the CTA, 1975, the exemption is restricted only to the extent of additional
duties leviable under sub-sections (1), (3) and (5) thereof. This would imply
that the integrated tax on import of goods, which is leviable u/s 3(7) of the
CTA, 1975 would be liable to IGST in case of goods imported for job work
purposes, though no consideration is payable by the importer job worker on such
import of goods. The same applies in case of outbound job work, where goods are
re-imported. Notification 45/2017-Cus. dated 30th June, 2017 exempts
additional duties leviable u/s 3 in the case of re-import.
The first question that would need
consideration is whether the job-worker importing the goods would be liable to
claim credit of integrated tax paid on such imports? For the same, one would
need to refer to section 16 of the CGST Act, 2017 to ensure that the conditions
prescribed therein are satisfied or not. The primary conditions to be satisfied
in this set of transactions are that the goods should have been received in the
course or furtherance of business, the recipient should be in possession of
such tax-paying document as may be prescribed, the recipient should have actually
received the goods, and lastly, he should have furnished the return u/s 39. It
is beyond doubt that the above conditions are getting satisfied and therefore,
the claim of integrated tax paid on receipt of goods for job work by the
job-worker as importer should be allowed. This view has also been accepted by
the AAR in Chowgule & Co. Pvt. Ltd. [2019 (27) GSTL 405 (AAR)].
The next question that would need
consideration is in two parts, taxability of services provided by the job
worker, and secondly whether sending back of goods would amount to exports or
not? As discussed above, the commercial transaction in the current case is
undertaking activity on goods owned by the principal for which the job worker
recovers charges from the said principal. Since this is deemed to be a supply
of service, section 13 of the IGST Act, 2017 shall come into play which deals
with determination of place of supply in case where either the location of the
supplier of service or the location of the recipient of service is outside India,
which applies to the current transaction. Accordingly, one needs to refer to
the various scenarios laid down u/s 13 thereof to identify the applicable rule
for determining the place of supply.
The most directly concerned rule for this
kind of service appears to be section 13(3)(a) which provides that the place of
supply of service in case where the services supplied in respect of goods which
are required to be made physically available by the recipient of services to
the supplier of services, or to a person acting on behalf of the supplier of
services in order to provide the services, shall be the location where such
services are actually performed. In this sense, it would have implied that the
goods on which job work services are being performed being located in India,
the place of supply u/s 13(3) shall be India and accordingly the same would be
liable to tax and not treated as export of services. Similarly, in case of an
outbound job work transaction, the situation would be reverse and job work charges
paid to the foreign job worker would not be liable to GST under import of
services since place of supply would be outside India.
This situation would apply till 31st
January, 2019 post which the proviso to section 13(3) has come into
force. The proviso provides that section 13(3)(a) shall not apply to
cases where goods are temporarily imported into India for repairs or for any
other treatment or process and are exported after such repairs or treatment or
process without being put to any use in India, other than that which is
required for such repairs or treatment or process. Therefore, w.e.f. 1st
February, 2019, in case of inbound job works, the place of supply shall be the
location of the recipient of service, i.e., outside India and subject to the
satisfaction of conditions u/s 2(6) of the IGST Act, 2017 shall be treated as
export of service. That being the case, such job-worker may be entitled to
claim refund of accumulated ITC or tax paid on supply of such Zero-Rated
Services. However, in case of an outbound job work transaction, the Indian
principal would now be liable to pay tax under import of services.
It is important to note that this proviso
does not impose any time limit within which the goods have to be exported after
the repairs / process and therefore, no such time limit can be enforced for
return of such goods. One may refer to the recent decision of the Supreme Court
in Bombay Machinery Works [2020–VIL16–SC] which was on a similar
aspect, though in the context of section 6(2) of the Central Sales Tax Act,
1956.
Notification 32/1997-Cus. dated 1st
April, 1997 requires that the goods should be re-exported within six months
from the date of clearance of such goods or within such extended time period as
the Assistant Commissioner of Customs may allow. It may be noted that the
definition of exports, under GST as well as Customs, is similar and means taking
out of India to a place outside India. Therefore, the sending back of goods
would qualify as export for the purpose of Customs as well as GST.
One important issue which was taken up in
the AAR case of Chowgule & Co. Pvt. Ltd. was that of
eligibility of refund claim. In the said case, the applicant was engaged in
undertaking job work on iron ore which attracts nil rate of duty. In this case,
the AAR held that since the goods being exported are liable for export duty,
the refund of accumulated ITC would not be available in view of the second proviso
to section 54. However, this appears to be on a wrong footing because the
supply undertaken by the applicant was that of supply of services to which the
restriction does not apply.
TAXATION OF INTANGIBLES
Section 2(22) of the Customs Act, 1962
defines the term ‘goods’ to include, among other things, any other kind of
movable property. The Supreme Court has, in the case of TCS vs. State of
Andhra Pradesh [2004 (178) ELT 2 (SC)] dealt with what shall constitute
goods. While dealing with this subject, the Constitution Bench held that goods
may be tangible or intangible property. A property becomes goods provided it
has the attributes having regard to utility, capability of being bought and
sold and capability of being transferred, transmitted, delivered, stored and
possessed.
There can be
different types of intangibles, such as patents, designs, copyrights,
trademarks, etc. Each of these is governed by specific statutes. Such rights
can be transferred either by way of license or assignment. License is a
temporary transfer of rights without any change in the ownership, which would
amount to rendition of service in view of Entry 5(c) of Schedule II of the CGST
Act, 2017, while assignment would mean a change in ownership of the rights and
therefore would be treated as supply of goods in view of Entry 1(a) of Schedule
II. This distinction has been explained in the case of CST vs. Dukes
& Sons Private Limited [1988 (SCC) Online Bom 448].
However, an issue that arises is with
respect to the situs in case of assignment of intangibles. What shall be
the situs of such transfer, i.e., whether the location where the
intangible is registered shall be the situs, or the location of the
owner of such intangible shall be considered the situs? In this regard,
one may refer to the decision of the Bombay High Court in the case of Mahyco
Monsanto Biotech India Private Limited vs. Union of India [2016 (44) STR 161
(Bom).] where the Court has followed the principle of mobilia
sequuntur personam, i.e., location of owner of intangible asset would be
closest approximation of situs of his intangible asset and the location
where agreement is entered would not be relevant.
Given this background, it may be argued that
in case the rights owned by a person outside India are assigned, the same would
be treated as import of goods and therefore no tax can be levied on the same
u/s 5 of the IGST Act, 2017. However, the bigger issue would be whether or not
such imports would be liable to tax u/s 12 of the Customs Act, 1962, especially
when the document of title evidencing assignment of rights is received
electronically? In case the document of title is brought into India, either as
a courier or baggage, there may be customs duty implications on such imports,
but on what value would the same be payable would be a subject matter of
dispute.
A similar challenge would be seen in case of
export transactions, i.e., assignment of rights from India to a person outside
India. Whether such person would be liable to treat such assignment as export
of goods without there being a corresponding shipping bill and, accordingly,
the consequential impact on adjudication of refund claims?
IMPORTS VIS-À-VIS TRANSFER OF RIGHT TO USE
GOODS
Another aspect to be noted is that of cases
where there is a transfer of right to use goods and in pursuance of which goods
are imported into India. Entry 5(f) of Schedule II of the CGST Act, 2017 treats
activities of transfer of right to use goods for any purpose as supply of
services. Therefore, when such service of transfer of right to use such goods
is provided by a foreign party, which would trigger bringing goods from outside
India to India, there will be a dual challenge, one being the levy of IGST on
the rental payments under import of service, and the second being the levy of
IGST u/s 12 of the Customs Act, 1962 which would be on the value of goods and
therefore highly disproportionate to the transaction being undertaken.
To avoid this dual levy of tax, Notification
72/2017-Cus. dated 16th August, 2017 provides exemption from the
levy of basic customs duty and integrated tax. While 100% exemption is not
provided for under basic customs duty, integrated tax u/s 3(7) of CTA, 1975 is
granted, provided the importer gives an undertaking that he shall discharge the
tax on the said services as import of services.
GOODS SENT FOR EXHIBITIONS
Various exhibitions are held all over India
where people participate and display their goods. There can be a scenario where
an exhibition is being held in India and a person from outside India showcases
his product, in which case he shall bring the goods from outside India to
India; and secondly, a case where a person in India intends to showcase his
products at an exhibition being held outside India.
The procedure for import of goods for
exhibition purposes is dealt with under Notification 8/2016-Cus. dated 5th
February, 2016. The said Notification provides for exemption from payment of
customs duty and additional customs duty subject to conditions, such as
execution of bond, re-export of goods within the prescribed period of six
months, etc. At times it so happens that the goods are sold at such exhibitions
and therefore, instead of re-exporting the said goods, the same have to be
cleared for home consumption by paying the appropriate customs duty.
However, in such cases such person will have
to apply for registration as a non-resident taxable person and discharge the
applicable tax on the sale value after claiming Input Tax Credit only of the
tax paid on goods imported by him u/s 16. Such non-resident taxable person
shall not be allowed credit of any other inward supplies, except for tax paid
on goods imported by him. Similarly, in case of goods sent for exhibition
abroad, Notification 45/2017-Cus. dated 30th June, 2017 provides
that no tax shall be payable on re-importation of such goods. This has also
been clarified by the Board Circular 21/2019-Cus. dated 24th July,
2019.
BRANCH TRANSFER
Branch transfer is a common terminology used
when a branch sends goods to another branch. Under GST, Entry 2 of Schedule I
of the CGST Act, 2017 deems supply of goods or services or both between related
persons or between distinct persons as specified in section 25 when made in the
course or furtherance of business as supply, even though made without
consideration which would require the transaction to be valued at arm’s length
and tax discharged.
The application of this entry in the context
of international branch transfer needs to be analysed. The term ‘distinct
persons’ is dealt with u/s 25(4) which provides that a person who has
obtained or is required to obtain more than one registration, whether in one
State or Union territory or more than one State or Union territory shall, in
respect of each such registration, be treated as distinct persons for the
purposes of this Act.
In other words, it is only the domestic
branches of an entity which come within the purview of distinct persons.
Similarly, a domestic H.O. and foreign branch, or vice versa would not
come within the purview of related persons, since the same would have entailed
existence of more than one person, which is not so in the case of branch transfers.
It is for this reason that in case of domestic transactions the concept of
‘distinct person’ has been introduced.
In this background, one would need to
analyse the tax implications when international branch transfer is undertaken,
i.e., goods are sent to foreign branch / H.O. or vice versa, goods are
received from foreign branch / H.O.
In an outward branch transfer case, it would
be a transaction of export of goods – both under customs as well as GST since
goods are actually going out of India. The supplying branch would have an
option to export the goods under LUT / Bond or on payment of duty.
However, in case of inward branch transfer,
the importer would be required to pay the applicable duty – customs as well as
integrated tax on such imports, subject to specific exemptions or cases where
the import of goods fall under specific scenarios.
CONCLUSION
While both the
Customs and the GST laws operate in different domains with different objectives
in mind, in view of the disconnect in certain cases, one finds instances of
overlap and interplay between these two laws.
