GST IMPLICATION ON MERCHANT TRADE TRANSACTIONS IN LIGHT OF M/S STERLITE TECHNOLOGIES LTD. (GUJ. AAR - 2020)

[Pratik Trivedi]

The Gujarat AAR has recently taken up a case of IN RE: M/S. STERLITE TECHNOLOGIES LTD. [2020 (6) TMI 485 - AUTHORITY FOR ADVANCE RULING, GUJARAT], wherein there were two questions put forward before the AAR.

The first question was whether GST is payable on goods procured from vendor located outside India in a context where the goods purchased are not brought into India.

The second question was whether GST i payable on goods sold to customers located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises.

As regards the first matter in question is concerned the AAR clarified that GST is not payable on goods procured from vendor located outside India, where the goods purchased are not brought into India.

However as regards the second matter in question it held that IGST will be payable on goods sold to an overseas customer shipped directly from an overseas vendor, while the location of supplier continues to be in India. It was observed by the AAR that the transaction is covered under the ambit of Inter-state supply and is neither exempted nor covered under export of goods. Thus, the theory of elimination takes them to the conclusion that such supplies will be subject to levy of IGST.

On perusal of above AAR the people across the trade are in great worry and shock since the view as propounded in subject AAR holds true then it will have catastrophic impact across the trades and businesses.

In order to apprehend the subject AAR and the under lying provisions of the legislation it is imperative to understand the scheme of taxation and levy of GST on Inter-State supply under the IGST Act, 2017 because the moot question that has given rise after the subject AAR is that whether the supply of goods by a person situated in India from place outside India to a place outside India without goods physically entering into India would be termed as Inter-state supply of goods and leviable to IGST or not ?

First of all to understand the same one needs to apprehend the legislative sovereignty of India. The fountain source of law in India is the Constitution which, in turn, gives due recognition to statutes, case law and customary law consistent with its dispensations. Statutes are enacted by Parliament, State Legislatures and Union Territory Legislatures. Constitution of India have sovereignty over India so naturally there cannot be any legislation which can dictate the taxation of transactions incurring beyond Indian jurisdiction.

Section 1 of IGST Act, 2017 – Short Title, Extent and Commencement also re-iterates the same and re-confirms the same view via Section 1(2) of IGST Act, 2017 which reads as under;

“Section 1(2) It shall extend to the whole of India. The Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance, 2017.”

India is defined under the Section 2(56) of CGST Act, 2017 which reads as under;

“Section 2(56) “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters;

Under the IGST Act, 2017 the Section 5 is a charging section which provides for levy of IGST on inter-state supplies of goods or services or both relevant abstract of Section 5 of the Integrated Goods and Services Act, 2017 (IGST Act) - Levy and Collection is reproduced hereunder for the ease of reference;

“Section 5(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962. ……………………………………”

If we dissect the each element of the above charging section then it could be apprehended that for any transaction that could be subject to the tax under IGST Act, 2017 must satisfy all of the below conditions cumulatively and the same should be tested on the following chronological order ;

 

(A) There must a Supply

(B) Supply must be of any Goods or Services or both other than alcoholic liquor for human consumption

(C) Transaction must be of Inter-state

It is needless to mention that if the transaction which fails to stand on any of the part of above three dimensions would fail the levy. The transactions which do not fall within the ambit of supply itself may be a transactions in goods or services or both and may also be transaction of inter-state but still the levy would not succeed if it falls beyond the scope of supply i.e. the first variable of charging section.

Section 7 of CGST Act, 2017 defines the “Scope of Supply” which had been made applicable to IGST Act, 2017 as well via Section 20 of IGST Act, 2017 and have same applicability and adaptation under the IGST Act, 2017, the same is reproduced hereunder for the ease of reference;

Section 7 – Scope of Supply of CGST Act, 2017 reads as under;

(1) ²³ 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 ⁴

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;* ⁵

⁶(1A) where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.⁷

(2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1), (1A)⁸ and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-

(a) a supply of goods and not as a supply of services; or⁹

(b) a supply of services and not as a supply of goods.

Abstract of relevant clause to the present context from Schedule – III - Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services………………..

(7) 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.

[Amended vide GST Amendment Act, 2018 and came into force w.e.f. 01.02.2019]

The Section 7(2) of CGST Act, 2017 specifically list out the certain specific transactions, activities, supply of which would be excluded from the purview of the scope of supply itself and one of such transaction is – “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” and hence even in case of such transactions where the other two dimensions i.e.;

1. Transaction is of Goods
2. Transaction is of Inter-state,

the same would not be leviable to IGST under Section 5 of IGST Act, 2017 for the very reason that it fails to satisfy the very first dimension / condition for levying IGST i.e. the transaction / activity does not fall within the ambit of supply itself.

Now the other view may spurt that the subject entry of Schedule – III is in the context of the situation where the supplier is not located in India but where the supplier is located in India the same may not applicable.

However in order to understand and answer the same analogy one must remember the jurisprudence which has been time and again re-iterated by various judicial fora that words in the legislation are never otiose. Legislature never waste its words and every word that is used by the legislature must be given its due import and significance. Further it’s deemed that nothing said is in vain and a construction which attributes redundancy to the legislature would not be accepted. Now in spirit of the same jurisprudence the Entry No. 7 at Schedule III of CGST Act, 2017 should be read.

As discussed hereinabove the IGST Act, 2017 have sovereignty across the India and hence the implication of the IGST Act, 2017 does not travel beyond the territory of India. In other way it could be said that the transactions which occurs beyond the territory of India would not fall within its ambit and needless to say that same would not be taxable under IGST Act, 2017. Further it’s also lead to an amenable conclusion that something which is beyond the power to tax under the IGST Act, 2017 cannot be exempted as well. If we look at the transaction occurring beyond the territory of India for instance a transactions wherein a person situated in London supplying goods to a person situated in USA would not be within the jurisdiction of Indian Legislature to tax and naturally when it’s not taxable in the first place how come the question of the exemption or exclusion could arise? In the present context of IGST Act, 2017 such transactions would not be falling within its jurisdiction and hence would not be taxable and that’s why there is no necessity under the subject legislation to make any room for exemption for such kind of transactions.

Now If the view that the Entry 7 in Third Schedule i.e. “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” is purported to be interpreted in the context of only such situation where the supplier is not located in India and 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, would be like an attempt to exempt or exclude the above discussed transaction in example which doesn’t seem to make any sense.

The construction of said Entry 7 in Third Schedule should be read in conjunction with the Section 1(2) of IGST Act, 2017 and the interpretation to the same should be accorded in line with the one which doesn’t make the subject entry redundant and justify the logical conclusion behind the same and legitimize the fundamental objective of GST legislation of destination based taxation. In light of the same the possible interpretation of said Entry 7 in Third Schedule read with Section 7(2) of CGST Act, 2017 would read as – “Supply of goods by a supplier located in India wherein supply of goods are initiated from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India would not fall within the scope of supply”.

Furthermore the interesting fact to be noted that in subject AAR the Board Circular No. 33/2017-Cus. Dated 1^st August, 2017 was discussed which deals with clarification regarding the leviability of Integrated Goods and Services Tax (IGST) on High Sea Sales of imported goods and point of collection thereof. In said circular it was opinioned that high sea sales of imported goods are akin to inter-state transactions and it was clarified that high sea sales of imported goods would not be chargeable to IGST twice i.e. at the time of Custom clearance under sub section (7) of Section 3 of Custom Tariff Act, 1975 and under Section 5 of IGST Act, 2017. In said circular it is mentioned that the council has decided that IGST on high sea sale (s) transactions of imported goods, whether one or multiple, shall be levied and collected only at the time of importation i.e. when the import declarations are filed before the Customs authorities for the customs clearance purposes for the first time. Now if we dissect the High Sea sale transactions then we would appreciate that it would be giving birth to following two different aspects which had necessitated the clarification vide subject circular;

1. Transaction of sale of goods by a supplier located in India or otherwise to a person located in India or otherwise occurring in between the sea before the goods enter the Indian custom territorial water (i.e. India speaking in context of IGST Act, 2017).

2. Transaction of purchase of goods by a person located in India or otherwise from a supplier located in India or otherwise occurring in between the sea before the goods enter the Indian custom territorial water (i.e. India speaking in context of IGST Act, 2017).

The First aspect of Transaction of sale giving rise to a situation wherein the sale of goods by a supplier located in India to a person located in India or otherwise occurring in between the sea before the goods enter the Indian custom territorial water was put into test of leviablility or otherwise in light of Section 5 of IGST Act, 2017. In response to which the GST Council has ruled that such transactions would not be taxable under Section 5 of IGST Act which seems to be reasoned in light of the law and fact that IGST Act, 2017 have sovereignty across the India and the subject transactions which occurs beyond the territory of India would not fall within its ambit and needless to say that same would not be taxable under IGST Act, 2017.

It is worth appreciating that above circular was issued way before the amendment to Schedule III to CGST Act, 2017 vide GST Amendment Act, 2018 wherein the Entry No. 7 i.e. “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” was added. The subject entry in schedule III reassures and reconfirms the very same analogy.

In the subject matter as well the transaction of goods sold to customers located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises is akin to the very first aspect of the transaction of High-sea sale as discussed hereinabove and it’s needless to say that Circular No. 33/2017-Cus. Dated 1^st August, 2017 as discussed hereinabove would have identical applicability in the present context as well.

It’s surprising to learn that neither the aspect of the above discussed circular purporting not to levy IGST under Section 5 of IGST Act, 2017 nor the Entry No. 7 of Schedule III to CGST Act, 2017 were discussed in subject AAR by either of the party.

Though I have highest regard and respect for the offices of AAR and the Judiciaries, however according to me and to the best of my understanding and knowledge and in light of the discussions made hereinabove the subject ruling needs reconsideration.

Discussions to this article

[YAGAY andSUN]

In our view, it is an appealable Ruling/Order, and must be litigated further for the sake of clarity and justice.

[SANJAY MALHOTRA]

A new area of litigation surfaces with this AAR Ruling.