Whether Merchant trade transaction' involving goods movement in non-taxable territory liable to IGST

The Hon'ble Gujarat Appellate Authority for Advance Ruling("the Gujarat AAAR") in the matter of M/s. Sterlite Technologies Limited [Advance Ruling (Appeal No. GUJ/GAAAR/APPEAL/2021/13 dated March 08, 2021] held that Merchant trade transaction ("MTT") involving movement of goods in non-taxable territory is liable to Integrated Goods and Services Tax, 2017 ("the IGST Act") which are done before February 01, 2019 and not leviable after this date as Schedule III of the Central Goods and Services Tax Act, 2017 ("CGST Act") (i.e., activities or transactions which shall be treated neither as a supply of goods nor a supply of services) was amended w.e.f.February 01, 2019 to include MTT.

Factually, the M/s. Sterlite Technologies Limited ("the Appellant") is engaged MTT in which the Appellant will receive an order from the customer located outside India and back to back order would be placed by the Appellant to a supplier located outside India. As per the instruction of the Appellant, the vendor located outside India will directly ship the goods to the customer located outside India and the Vendor will issue invoice on the Appellant against which payment will be made by him in the foreign currency. The Appellant will raise invoice on the customer and will receive the consideration in foreign currency.

The Appellant submitted an application before the Hon'ble Gujarat Authority for Advance Ruling ("GAAR") and raised the following questions for advance ruling in which the first issue pertains to whether GST is payable on goods procured from vendor located outside India in a context where the goods so purchased are not brought into India. The second issue pertains to whether GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor's premises located outside India to the customer's premises.

The GAAR held that GST is not payable on goods procured from vendor located outside India where the goods so purchased are not brought into India. Pertaining to the second issue the GAAR held that the Applicable GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor's premises located outside India to the customer's premises as this transaction is covered under the ambit of inter-state supply and is neither exempted nor covered under export of services that as per the theory of elimination such supplies would be subject to levy of IGST. Resultantly, aggrieved by the aforesaid ruling dated March 17, 2020 given by GAAR, the Appellant has filed the present appeal dated June 30, 2020.

The Hon'ble Gujarat AAAR observed that Paragraph 7 has been inserted in Schedule-III of the CGST Act vide Section 32 of the Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018), which came into force with effect from February 01, 2019 vide Notification No. 2/2019-Central Tax dated January 29, 2019. It is further observed by the Gujarat AAAR that as per Section 7(2) of the CGST Act activities or transactions specified in Schedule III of the CGST Act shall be treated neither as a supply of goods nor a supply of services.

Held, as the transactions of the Appellant is wherein the goods are supplied from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India, are covered under Paragraph 7 of Schedule III of the CGST Acts it is evident that the said transactions shall be treated neither as a supply of goods nor a supply of services with effect from February 01, 2019. As such IGST is not leviable on such transactions with effect from February 01, 2019and the IGST was payable from July 01, 2017 to January 31, 2019.

Our comments

It is to be noted that in our opinion, even prior to February 01,2019 MTT were not taxable as Integrated Goods and Services Tax Act, 2017 ("IGST Act") is only applicable in India as per Section 1(2) of the IGST Act and India is defined under Section 2(56) of the CGST Act applicable to IGST Act vide Section 20 of the IGST Act as under:

"(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 (80 of 1976), and the air space above its territory and territorial waters;"

Thus, IGST can only be levied on the inter-state transactions (see Section 5(1) of the IGST Act) taking place inside the Indian territory. Since, MTT is taking place outside India IGST may not be leviable.

Further, in Circular No. 3/1/2018-IGST dated May 25, 2018 wherein it has been categorically stated that high seas sale transaction or bond sale transaction are not supply and no GST is leviable.

Furthermore, in 28th GST council meeting held on June 28, 2018 it was said that MTT is categorized as "No Supply", but the reference drawn by the Gujarat AAAR in the above-mentioned case is that the amendment vide Notification No. 2/2019-Central Tax dated January 29, 2019 is effective from February 01, 2019 hence, prior to that IGST leviable is totally incorrect. Also, above-mentioned amendment is clarificatory in nature and thus, applicable with retrospective effect.

Moreover, divergent rulings are coming from different states AAR and the same is creating conflict and not providing any clarity like Maharashtra AAR in M/s BASF India Ltd. [2018 (14) G. S. T. L. 396 (A. A. R. - GST)] wherein it was ruled that no IGST is leviable on such transaction.