NOVEMBER 27, 2017

By Hans Raj Garg

1) THE Central Board of Excise & Customs has circulated its decision regarding applicability of IGST on transfer of ownership of warehoused goods before clearance of the goods for home consumption or for export. As per Circular No 46/2017 – Customs dated 24th November, 2017, such transfer or sale transaction is to be considered as supply of goods in the course of inter-State trade and commerce and IGST is payable on the transaction value. Further, when such goods are ex-bonded and cleared for home consumption by the buyer, BCD and IGST are to be paid at the value assessed at the time of warehousing the goods.

2) 'Warehoused goods' means imported goods deposited in a warehouse [section 2(44) of the Customs Act 1962]. 'Warehouse' means a public warehouse, private warehouse or a special warehouse licensed under section 57, 58 or 58A, respectively, of the Customs Act 1962. The goods on import are deposited in such warehouses if not cleared for home consumption. Payment of customs duty on the warehoused goods is deferred till these are ex-bonded. We are therefore not talking about the goods deposited in any warehouse.

3) Under the Customs Act, there is no bar on transfer of the warehoused goods by the importer to any other person. In fact section 59(5) facilitates such transfer and provides for execution of bond with or without security by the transferee. Section 68 relating to 'Clearance of Warehoused Goods for Home Consumption' also refers to the 'owner', and not the importer, of the goods while talking about relinquishment of title to the goods. If such transfer takes place, then the goods shall be ex-bonded by the transferee and the customs duty & other charges shall be paid by the transferee who is the present owner.

4) Such bond to bond transfers are a common business practice. Sometimes it becomes unavoidable when liquid cargo is required to be imported in bulk and one importer does not need the entire quantity to be imported in a bulk carrier. Therefore, more than one importer join to achieve economy of scale by investing money though the goods are imported in the name of one of the entity part of the group. On import, the goods are warehoused and are shared by the entities who had joined together and had invested money by way of transfer while the goods are in the warehouse.

5) The issue of chargeability of GST on the above transfer of goods while in warehouse is not totally new. It was raised and litigated under the Sales Tax and then State VAT system of taxation where broadly sale of goods was the subject matter. It was argued by the tax collectors that such transfers were nothing but sale and were not transaction in the course of import & export and were therefore chargeable to Sales Tax/State VAT.

6) However, Hon'ble Supreme Court, in the case of Hotel Ashoka (Indian Tourism Development Corporation Ltd) - [2012-TIOL-08-SC-VAT] relating to sale in duty free shop has held vide judgement dated 3 rd February 2012:

a) That when the goods are kept the bonded warehouse, it cannot be said that the said goods had crossed the customs frontier; that the goods are not cleared from the customs till they are brought in India by crossing the customs frontiers; and that when the goods are lying in the bonded warehouse, they are deemed to have been kept outside the customs frontiers of the country (Paragraph 18 of the judgement refers).

b) That when any transaction takes place outside the customs frontiers of India, the transaction would be said to have taken place outside India; that thought he transaction might take place within India but technically, looking to the provisions of section 2(11) of the Customs Act and Article 286 of the Constitution, the said transaction would be said to have taken place outside India; that in other words, it cannot be said that the goods are imported into the territory of India till the goods are brought into India; that admittedly in the instant case, the goods had not been brought into the customs frontiers of India before the transaction of sales had taken place; that, therefore, in our opinion, the transaction had taken place beyond or outside the customs frontiers of India.

7. Now such warehouses have been formally declared as 'customs area' vide the Taxation Laws (Amendment) Act 2017 effective from 04.05.2017 amending section 2(11) of the Customs Act 1962. It means that till the goods are in the warehouse i.e. in the customs area and have not been cleared for home consumption, it cannot be said that the goods have crossed customs frontier.

8. The buyer shall file ex-bond bill of entry and pay the appropriate customs duty i.e. BCD and IGST. The IGST is required to be paid under reverse charge in terms of Section 3 of the Customs Tariff Act 1975 read with the Proviso to section 5(1) of the Integrated Goods and Services Tax Act 2017 since import of goods into India is considered as supply of goods in the course of inter-State trade or commerce.

9. Therefore, if the transfer of the goods while in warehouse is considered as supply of goods in the course of inter-State trade or commerce and IGST is charged, the same entity will be paying the IGST twice i.e. once when purchasing while the goods are in warehouse and then again when ex-bonding under reverse charge on imports. The IGST paid at the time of import can of course be taken as Input Tax Credit but it cannot be used for payment of IGST at the time of ex-bonding since the latter is paid under reverse charge which has to be paid in cash. The ITC will therefore go on accumulating till refund mechanism gets activated resulting in increase in cost of transaction in the form of cost of the funds.

10. In support of the above levy of IGST twice on the same goods in the hands of the same entity, provisions of section 7(2) of the Integrated Goods and Services Tax Act 2017 are quoted. For the ease of reference, the provision is quoted below:

"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".

However, it appears that the law makers wanted to say/mean that supply of goods imported into India shall be considered as supply of goods in the course of inter-State trade or commerce like they have said in section 7(4) ibid for import of services. The issue has been created by the use of the words ' till they cross the customs frontiers of India'.

11. If that be the case, then the words 'till they cross the customs frontiers of India', may be removed from the language of section 7(2) ibid and the Circular No 46/2017–Customs dated 24th November, 2017 may be withdrawn. The Circular appears to go against the very genesis of GST inasmuch as it promotes taxation of the same goods twice in the hands of the same person which is otherwise revenue neutral but creates mischief for trading community because of limited scope for value addition & use of the accumulated ITC.

(The author is retired Additional Director, DRI and the views expressed are strictly personal.)