GST: Place of supply in course of export or import

1: Meaning of Export of Goods:

Export of goods has been defined in Section 2(5) of the IGST Act, as,

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

From the definition, it is clear that export means taking goods out of India to a place outside India. Thus, only those goods can be exported which are in India. Existence of goods in India is necessary requirement for any export of goods to take place. It the goods are not in India, it cannot be taken out of India. Goods must be “taken out” of India. The expression contemplates physical act of taking out of goods, from India to a place outside India.

2: India- Meaning under GST Provisions:

India has been defined in Section 2(56) of the CGST Act, which reads as,

“(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.”

The sovereignty of India extends and has always extended to the territorial waters of India (hereinafter referred to as the territorial waters) and to the seabed and subsoil underlying, and the airspace over, such waters. The limit of the territorial waters is the line every point of which is at a distance of twelve nautical miles[1] from the nearest point of the appropriate baseline[2]. Under GST laws, territorial waters are treated as part of the adjacent state. Where the location of the supplier is in the territorial waters, the location of such supplier; or where the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located[3].

The continental shelf of India (hereinafter referred to as the continental shelf) comprises the seabed and subsoil 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 the continental margin or to a distance of two hundred nautical miles from the baseline, where the outer edge of the continental margin does not extend up to that distance. India has, and always had, full and exclusive sovereign rights in respect of its continental shelf. Union of India has in the continental shelf, - (a) sovereign rights for the purposes of exploration, exploitation, conservation and management of all resources; (b) exclusive rights and jurisdiction for the construction, maintenance or operation of artificial islands, off-shore terminals, installations and other structures and devices necessary for the exploration and exploitation of the resources of the continental shelf or for the convenience of shipping or for any other purpose; (c) exclusive jurisdiction to authorize, regulate and control scientific research; and (d) exclusive jurisdiction to preserve and protect the marine environment and to prevent and control marine pollution[4].

The exclusive economic zone of India (hereinafter referred to as the exclusive economic zone) is an area beyond and adjacent to the territorial waters, and the limit of such zone is two hundred nautical miles from the baseline. In the exclusive economic zone, the Union has, - (a) sovereign rights for the purpose of exploration, exploitation, conservation and management of the natural resources, both living and non-living as well as for producing energy from tides, winds and currents; (b) exclusive rights and jurisdiction for the construction, maintenance or operation of artificial islands, off-shore terminals, installations and other structures and devices necessary for the exploration and exploitation of the resources of the zone or for the convenience of shipping or for any other purpose; (c) exclusive jurisdiction to authorize, regulate and control scientific research; (d) exclusive jurisdiction to preserve and protect the marine environment and to prevent and control marine pollution; and (e) such other rights as are recognized by International Law[5].

Beyond two hundred nautical miles, the area is “high seas”, where all countries have equal rights. Oceans, seas, and waters outside of national jurisdiction are also referred to as the high seas or, mare liberum (meaning free sea). The Convention on the High Seas, signed in 1958, defined "high seas" to mean "all parts of the sea that are not included in the territorial sea or in the internal waters of a State" and where "no State may validly purport to subject any part of them to its sovereignty." The Convention on the High Seas was replaced by United Nations Convention on the Law of the Sea, signed in 1982, which recognized Exclusive Economic Zones extending 200 nautical miles from the baseline, where coastal States have sovereign rights to the water column and sea floor as well as the natural resources found there.

Thus, an export within the meaning of section 2(5) of the IGST Act can be said to take place only when the goods are taken out of India, i.e. taken out of Exclusive Economic Zone, i.e. 200 nautical miles from an appropriate baseline.

Same definition of export is there in the Custom Act. “Export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India[6]. However, the Customs Act defines[7], that “India” includes the territorial waters of India. Custom Act has been extended to the designated areas in the Continental Shelf and the Exclusive Economic Zone of India[8]. Central Excise[9] and Service Tax law[10] has also been extended to the designated areas in the Continental Shelf and the Exclusive Economic Zone of India.

The Central Government extended[11] the Income-tax Act, 1961, to the Continental Shelf of India and the exclusive economic zone of India with effect from the first day of April, 1983. The Tribunal was right in holding that the continental shelf and exclusive economic zone were not part of India prior to the notification of the Government of India G.S.R. No.304 (E), File No.5147/F. No.133(79)/82 TPL, dated March 31, 1983, in view of the provisions of section 6 (6) and section 7 (7) of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, and consequently, the salary income earned by the assessee prior to April 1, 1983, was not chargeable to tax under the Income-tax Act, 1961, in the assessment year 1983-84[12].

When it was sought to tax income arising in the previous year relevant to the assessment year from which the Income-tax Act was made applicable, an express provision had to be made to cover income accruing in the previous year. In the absence of such an express provision, income accruing in an accounting year in which the Income-tax Act was not applicable, could not be brought to tax simply because from the relevant assessment year, the Income-tax Act was made applicable. The relevant assessment year for the period was April 1, 1983, to March 31, 1984, when the Income-tax Act was applicable. But, income-tax is actually levied on income which accrued during the previous accounting year which is April 1, 1982, to March 31, 1983. As the territory in which income arose was beyond 12 nautical miles, the Income-tax Act was not applicable to such income which accrued during the period when the territory in which it accrued was not governed by the Income-tax Act, 1961[13].

A combined reading of Sections 3, 6 and 7 of the Maritime Zones Act, 1976 shows that territorial waters, the seabed and subsoil underlying therein and the air space over such territorial waters form part of the territory of India. Sovereignty of India extends over the territorial waters but the position is different in the case of continental shelf and exclusive economic zone of India. The continental shelf of India comprises of the seabed beyond the territorial waters to a distance of 200 nautical miles. The exclusive economic zone represents the sea or waters over that continental shelf. From the reading of Sections 6 and 7 of the Maritime Zones Act, 1976, it is clear that in respect of the continental shelf and exclusive economic zone, India has been given only certain limited sovereign rights and such limited sovereign rights conferred on India in respect of continental and exclusive economic zone cannot be equated to extending the sovereignty of India over the continental shelf and exclusive economic zone as in the case of territorial waters. Sub-section (6) of section 6 and sub-section (7) of Section 7 of the Maritime Zones Act, 1976 empower the Central Government by notification to extend any enactment in force in India with such restrictions and modifications which it thinks fit to the continental shelf and the exclusive economic zone and further provides that an enactment so extended shall have effect as if the continental shelf or the exclusive economic zone to which the enactment has been extended is a part of the territory of India. Thus, sub-section (6) of Section 6 and sub-section (7) of Section 7 create a fiction by which the continental shelf and the exclusive economic zone deemed to be a part of India for the purposes of such enactments which are extended to those areas by the Central Government by issuing a notification[14].

Under GST laws, India has been defined widely, and provision of GST laws is applicable in territorial waters, continental shelf and in exclusive economic zones. These areas as part of India itself, and if any person is situated in any of these place, location of supplier shall be taken in India. Further, if any goods are supplied to any place in these areas, the place of supply shall be taken to be India and it shall not amount to export of goods.

If the area of the exclusive economic zone or Continental Shelf, where the rigs are stationed (of course outside territorial waters) is deemed to be a part of the territory of India under the Central Government notifications issued pursuant to the provisions of the Territorial Waters Act, then the supply of imported spares or goods or equipment to the rigs by a ship will attract import duty and the ship employed for transshipment of the goods for that purpose would not be a foreign going vessel under Section 2(21) of the Act since the area of discharge or unloading/loading is within India by virtue of the deeming provisions of Sections 6 and 7 and consequent explanations of the Maritime Zones Act[15]. Oil rigs proceeding to designated areas or operating therein are not foreign going vessels as such areas would be deemed to be part of Indian territory and, therefore, benefit of Sections 53 and 54 read with Sections 86 and 87 of the Customs Act would not be available[16].

It is clarified that if the research vessels are operating outside the territorial waters of India, then they will be eligible for duty free supply of fuel as it can be held that export of fuel has taken place. On the other hand, if the vessels are engaged in the exploration or extraction of mineral oil, within EEZ or Continental Shelf, then no export has taken place and duty-free supply of fuel cannot be permitted[17].

If mineral oil is extracted or produced in the exclusive economic zone or continental shelf and is brought to the main land, it will not be treated as import and, therefore, no customs duty would be leviable. Likewise, goods supplied to a place in the exclusive economic zone or continental shelf will not be treated as export under the Customs Act and no export benefit can be availed on such supply. Any mineral oil produced in the exclusive economic zone or continental shelf will be chargeable to Central Excise Duty, as goods produced in India. When rigs were brought from outside India, and was used for operations within the territorial waters of India, the rig would meet the requirement and satisfy the condition that it was an imported goods meant for home consumption[18].

3: Sale within territorial waters:- Intra-state or inter-state:

In some cases, a view was taken that any sale within territorial waters [upto 12 nautical miles] is a local sale, a sale within the state[19]. If any supply takes place within territorial waters, it shall be deemed to be a supply in a coastal state[20].

In some cases, contrary view was taken. Supreme Court of United States took the view that territorial waters belong to the Union and not to the coastal states[21]. The said judgment was referred by Dr. B. Ambedkar in the Constitution Assembly debate where he said that we therefore want to state expressly in the constitution that when any Maritime State joins Indian Union, the territorial waters of that Maritime State will go to the Central Government. This kind of question shall never be subject to any kind of dispute or adjudication. That is the reason why we want to make this provision in article 271A[22]. Thus, it cannot be disputed that the territorial waters vest with the Union alone and no State can assert its right or ownership over the same. This question has been elaborately answered by Dr. B. R Ambedkar in the constituent assembly debates referred to above.

Article 366(30) of the Constitution of India defines a "Union territory" (as introduced by Seventh Constitution Amendment Act, 1956) as follows: "Union territory' means any Union territory specified in the First Schedule and includes any other territory comprised within the territory of India but not specified in that Schedule." Article 297 of the Constitution of India prescribes,

“297. Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union -

(1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union.

(2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union.

(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament."

Thus, a combined reading of all the above provisions makes it clear that the territory of the State will extend only up to the low water mark of its boundaries as specified in the First Schedule to the Constitution of India, and nothing more[23].

An area outside territorial waters of India, is not an area within any state[24]. If, however, a supply takes place outside territorial waters, but within exclusive zone, it should be treated as supply within a union territory where UTGST Act shall apply.

4: Sale in Course of Export or Import:

In erstwhile Sales Tax laws, there was always a confusion as to what is a sale in course of export or import. Section 5 of the Central Sales Tax Act stated,

“5. When is a sale or purchase of goods said to take place in the course of import or export.—

(1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

 (2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

(3) Notwithstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.

(4) The provisions of sub-section (3) shall not apply to any sale or purchase of goods unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the exporter to whom the goods are sold in a prescribed form obtained from the prescribed authority.

(5) Notwithstanding anything contained in sub-section (1), if any designated Indian carrier purchases Aviation Turbine Fuel for the purposess of its international flight, such purchase shall be deemed to take place in the course of the export of goods out of the territory of India.

Explanation — For the purposes of this sub-section, "designated Indian carrier" means any carrier which the Central Government may, by notification in the Official Gazette, specify in this behalf.”

The clause was subject to interpretation in numerous judicial pronouncements.

A view was taken in  Burmah-Shell and Madras Marine[25], that in the case of stores, viz., aviation spirit, coal, for the crew and other items meant for use by the vessel itself in the normal course of its running cannot fall within the first limb of section 5 and the assessee cannot claim such transactions to be in the course of export in the sense that the sale in such transactions occasioned the export, because there is “no destination” for such items meant for consumption as stores by the aircraft itself.

While all exports involve a taking out of the country, all goods taken out of the country cannot be said to be exported. The test is that the goods must have a foreign destination where they can be said to be imported. It matters not that there is no valuable consideration from the receiver at the destination end. If the goods are exported and there is sale or purchase in the course of that export and the sale or purchase occasions the export to a foreign destination, the exemption is earned. Purchases made by philanthropists of goods in the course of export to foreign countries to alleviate distress there, may still be exempted, even though the sending of the goods was not a commercial venture but a charitable one. The crucial fact is the sending of the goods to a foreign destination where they would be received as imports.

In the case of State of Kerala v. Cochin Coal Company Ltd.[26], the apex Court held that the concept of export in article 286(1)(b) of the Constitution postulates the existence of two termini as those between which the goods are intended to move or between which they are intended to be transported, and not a mere movement of goods out of the country without any intention of their being landed in specie in some foreign port.

 In the Coffee Board[27], the Coffee Board framed rules for sale of coffee to registered exporters. The Coffee Board contended that the auctions were in the course of export, because the sales themselves occasioned the export of coffee. The revenue contended that the sales were not bound up with the export. The Apex Court held that the phrase “sale in the course of export” authorised not only a sale and an actual export but that the sale must be a part and parcel of the export. The word “occasion” in the context of sale or purchase was held to mean to cause export or to be the immediate cause of export. In this case, the phrase “sale in the course of export” was held to comprise of three essentials. First, there must be a sale. Second, the goods must actually be exported. Third, the sale must be a part and parcel of the export. To establish export a person exporting and a person importing are necessary elements as the course of export is between them. In this case, the apex Court discussed all its earlier decisions, some of which were on the meaning of phrase “in the course of export” occurring in article 286(1)(b). In this case it is said that the same meaning must obviously be given to the phrase “in the course of export” or to the phrase “occasions the export”.

In the case of Mod. Serajuddin v. State of Orissa[28], the apex Court was concerned with the interpretation of words “in the course of export” as found in section 5(1) of the CST Act. While interpreting the said phraseology the Constitution Bench also construed identical phraseology found in section 5(2) dealing with “in the course of import”. The majority of the Constitution Bench speaking through Ray, C.J. upheld the decision of the High Court against the assessee and held that section 5(1) of the CST Act a legislative meaning to the expressions “in the course of export” and “in the course of import”. The expression “in the course” implies not only a period of time during which the movement is in progress but postulates a connected relation. Sale in the course of export out of the territory of India means sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities. While considering the question whether the sale is in the course of export, the Constitution Bench ruled that the sale which is to be regarded as exempt is a sale which causes the export to take place or is the immediate cause of the export. To establish export a person exporting and a person importing are necessary elements and the course of export is between them. The Constitution Bench also observed that sale or purchase in the course of import as envisaged by section 5(2) of the CST Act which is a pari materia provision and is almost a mirror image of the provision of section 5(1) dealing with converse type of cases and heavily relied upon another Constitution Bench judgment in the case of Binani Bros (P.) Ltd. v. Union of India[29].

In view of Article 286(1)(b), the words, “in the course of………import………or export” occurring in article 286(1)(b) have given rise to considerable litigation. In State of Travancore-Cochin v. Shanmugha Vilas Cashew-nut Factory[30], Patanjali Shastri, C.J. Observed that a purchase for the purpose of export like production or manufacture for export, is only an act preparatory to export and cannot be regarded as an act done ‘in the course of the export of the goods out of the territory of India.

5: Sale from a Custom Bonded Warehouse:

When a sale happened from a custom bonded warehouse, the Supreme Court observed that the short question, therefore, that arises in all these matters is whether sale of the goods in question took place within the territory of Tamil Nadu. In these cases sale took place by appropriation of goods. Such appropriation took place in the bonded warehouse. Such bonded warehouses were within the territory of State of Tamil Nadu. Therefore, under sub-section (2), sub-clauses (a) and (b) of Section 4 of the Central Sales Tax Act, 1956, the sale of goods in question shall be deemed to have taken place inside the State because the contract of sale of ascertained goods was made within the territory of Tamil Nadu and furthermore in case of unascertained goods appropriation had taken place in that State in terms of clause (b) of sub-section (2) of Section 4 of the Central Sales Tax Act, 1956[31].

6: Provisions in GST Laws:

GST Law has made various Constitutional amendments. Article 286 of the Constitution has been amended and the word “sale” has been replaced by the term “supply”. These contentious issues have been answered legislatively by the GST Laws. As per GST law, following principle shall apply;

(a) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce[32].

(b) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce[33].

(c) Territorial water is part of the adjacent coastal state. A supply in the territorial water is a supply within the coastal state[34].

(d) A supply outside territorial water, but in exclusive economic zone is a supply in a union territory.

Article 269A has been inserted in the Constitution of India which reads as,

“269A. Levy and collection of goods and services tax in course of inter-State trade or commerce:

(1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.

(3) Where an amount collected as tax levied under clause (1) has been used for payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.

(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.

(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’’

Thus, the Parliament has exclusive power to formulate the principles for determining the place of supply. Section 7 of the IGST Act provides for principles for determination of place of supply in course of export or import of goods or services.

The place of supply of goods exported from India shall be the location outside India[35]. Place of supply in course of supply of service are determined under Section 12 and 13 of the IGST Act. Supply of goods or services or both when the supplier is located in India and the place of supply is outside India or to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce[36].

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[37]. 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[38].

Residual transactions: Supply of goods or services or both in the taxable territory, not being an intra-State supply and not covered elsewhere in this section 7 shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce[39].

With these provisions, the confusion regarding determination of place of supply in course of foreign trade is likely to be reduced substantially.

(The author is Managing Partner of "Rajesh Kumar and Associates")

• [1] 1 Nautical Mile is equal to 1.1515 Miles or 1.853 Kilometers.