NOVEMBER 27, 2017

By B S V Murthy, Former Member (CESTAT)

1. TILL the introduction of GST on 1st July, 2017, many of the companies had established Customs Bonded Warehouses and supplies of imported goods were made to the industry as and when needed. The recipient used to file bill of entry and if the recipient was an EOU, there was no need to pay any Customs duty and in case of others, supply was made by the supplier either after clearance on own account or the buyer could file bill of entry as importer. After the introduction of GST, while exemption from basic customs duty (BCD) continues for EOUs, there was no exemption from GST or IGST till 18th October, 2017. It had to be paid and refund had to be claimed as per the procedure after exports are made. Some taxpayers took a stand that IGST has to be charged on the invoice value when goods are sold to the customer from Customs Bonded warehouse and who will file bill of entry for clearance for home consumption. Needless to say, when bill of entry is assessed IGST is charged. While IGST paid after filing bill of entry is admissible as input tax credit, IGST charged by the Customs bonded warehouse owner to the buyer cannot be claimed as input tax credit. In the result, the suppliers cannot keep goods in Customs Bonded Warehouses at all to supply and the cost goes up for recipients since entire tax has to be borne till the sales takes place and the total tax itself comes to 24%. This affects the exports of the country and profitability of exporters.

4. In the Circular 46/2017-Customs dated 24/11/2017, the CBEC has confirmed that IGST has to be paid twice.

4. Unfortunately, the stand taken that the bonded warehouses have to discharge IGST at the time of sale to the customer who files bill of entry appears to be wrong. The requirement of payment of IGST by warehouse is based on the provisions of sub section 2 of section 7 of IGST Act and its interpretation is as under:

"(2) 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."

When goods are in the Customs bonded warehouse, they have already crossed the customs frontiers of India and, therefore, supply to a recipient who files a bill of entry is a supply in the course of inter-state trade or commerce and hence IGST has to be discharged.

5. The correct legal position appears to be as per following discussion.

Charging section for levy of IGST is section 5. The relevant provision is sub-section 1 which provides -

"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."

IGST has to be levied and collected at the point of levy of customs duties in respect of imported goods. According to section 2(25) of Customs Act, 1962, "imported goods" means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption (emphasis added). Honourable Supreme Court in the case of Garden Silk Mills Vs. Union of India - 2002-TIOL-19-SC-CUS-LB held that import of goods into India commences when the goods enter the territorial waters of India, but continue and complete only when the goods become part of mass of goods within the country. The taxable event occurs only when the goods reach customs barrier and the bill of entry for home consumption is filed. In the case of Traditional Craft Vs. Commissioner of Customs 2000 (125) ELT513 (Tri) the CESTAT held that the person who has not caused the import but clears the goods from warehouse would be an importer within the meaning of the section 2(26) which defines importer. Therefore, goods which are in the customs bonded warehouse remain imported goods and IGST can be levied at the time of payment of Customs duties only.

5.2. The view that goods which are in the customs bonded warehouse have crossed the customs frontier and, therefore, the sale to the recipient who files bill of entry attracts IGST is also not legally correct.

According to sub section 4 of section 2 IGST act, "customs frontiers of India" means the limits of a customs area as defined in section 2 of the Customs Act, 1962. According to sub section 11 of section 2 of Customs Act, 1962,   "customs area" means the area of a customs station or a warehouse and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities. Once a warehouse is customs area, goods in the warehouse remain imported goods and have not become part of landmass of India and IGST cannot be levied on them till liability to pay Customs duties arises which is when the bill of entry is filed.

5.3. Interpretation of sub section 2 of section 7 of IGST Act mentioned above is reproduced below again for analysis.

"(2) 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."

When goods are in the Customs bonded warehouse, they have already crossed the customs frontiers of India and, therefore, supply to a recipient who files a bill of entry is a supply in the course of inter-state trade or commerce and hence IGST has to be discharged.

If sub section 2 was not there, there would have been no definition to support the view that import is an inter-state transaction and hence attracts IGST. According to this section, till the goods cross the customs area which they can do after bill of entry is filed and out of charge is given, the transaction remains inter-state transaction and liable to IGST. This sub section read with charging section relating to import of goods facilitate collection of IGST at the time of collection of import duties.

The step taken by the Government to amend the definition of ‘Customs Area' to include the warehouse is apparently to ensure that levy of IGST on imported goods should not arise so long as the goods remain in the Customs Area. It makes the intention and the provisions of the law very clear that IGST on imported goods will be payable only when bill of entry is filed for clearance of goods for home consumption.

The circular issued by the Board does not appear to have taken into consideration different legal provisions in Customs Act and the IGST Act which was necessary since IGST on imported goods is collected at the time of import and as can be seen from the above discussion, necessary amendment in the Customs Act to include warehouses in the definition of Customs Area was made and in the IGST Act, Customs frontier was defined.

Even if it was found leviable by the Board, proper approach was to issue an exemption notification since it will create an additional burden on purchaser from a bonded warehouse. In the budget, retrospective effect should be given to the notification. This is because when GST was introduced, there was no intention to collect additional taxes on the goods and the intention was to ensure that the tax burden remained at approximately at the same level. In this case the burden of IGST simply doubles. One can only hope that CBEC will ensure that what the Finance Minister has said many times that tax rates will be kept approximately at the same level does not turn out to be false.

(The views expressed are strictly personal.)