JANUARY 24, 2020

By K Srinivasan

AN Advance ruling was needed in the case of Shewratan Company Private Limited - 2019-TIOL-450-AAR-GST, to determine whether Ship stores supplied to foreign going vessels while at anchorage and not actually foreign bound yet, would be liable to tax, or whether such supplies can be still be treated as Exports/ zero-rated supplies.

In the subject case, supplies to foreign going vessels, in the form of stores like paint, rope, spare parts, Electronic-equipment were involved.

Let's acquaint ourselves briefly with relevant provisions of various connected Laws bearing upon the subject matter of discussion.

Customs frontier of India, as defined under section 2(4) of the IGST Act, means the limits of a customs area as defined in section 2 of the Customs Act, 1962 (hereinafter the 1962 Act).

But for our discussion more specifically Customs station would be relevant which as per Section 2(13) of the CA, 1962 would be more aptly applicable to cover port area where goods are warehoused before customs clearance.

Foreign-going vessel as per Section 2(21) of the CA Act defines it as any vessel, for the time being engaged in the carriage of goods or passengers between any port in India and any port outside India, whether touching any intermediate port in India or not, and includes -

(i) any naval vessel of a foreign Government taking part in any naval exercises;

(ii) any vessel engaged in fishing or any other operations outside the territorial waters of India;

(iii) any vessel proceeding to a place outside India for any purpose whatsoever;

Section 88(a) of the Customs Act, 1962 provides that any warehoused goods may be taken on board any foreign going vessel as stores without payment of import duty if a shipping bill or a bill of export has been presented in respect of such goods in the prescribed form, the export duty etc. has been paid and the proper officer has passed an order for clearance of such goods for exportation.

Significantly, Section 89 of the 1962 Act provides that the goods manufactured in India and required as stores on any foreign going vessel may be exported free of duty.

The above provisions of the IGST Act and the 1962 Act if read together, confirm that supply of stores to a foreign going vessel is to be regarded as export and a zero-rated supply in terms of section 16 of the IGST Act.

In terms of the Central Sales Tax Act, 1956, it is argued that a sale in the course of export takes place when the goods cross the limits of the customs area, but not so under the new dispensation of GST under the IGST Act.

The position of Law with regard to Sales Tax was so since there was a bar/restriction placed on the State, from imposition of any tax on the sale or purchase of goods, when such sale or purchase took place in the course of export of goods out of, the territory of India vide Article 286 of the Constitution.

It is worthwhile to take note here that despite introduction of GST through the 101st Constitution Amendment Act, 2016, the above said position of Article 286 had not undergone any big material change as it stands today, except the substitution of the words goods and services or both in place of the word goods alone, occurring earlier in the said Article 286, prior to GST.

Export of goods under section 2(5) of the IGST Act is worded in line with section 2(19) of the 1962 Act, to mean taking the goods from India to a place outside India, and not in line with the wordings of Article 286, in the wisdom of the Government. However, the mandate of the Constitution can't be exceeded, is another fact.

The place of supply, in terms of section 11(b) of the IGST Act, shall be the location outside India. Export under the IGST Act (and the 1962 Act), therefore, has a much narrower meaning, because it is a conscious decision not to replicate the wordings of the Constitution.

Be that as it may,

++ A foreign going vessel anchored in the territorial waters of India, whether or not to be considered a place outside India?

++ And taking the stores from local sources of supply from India, on board such a vessel whether or not bound for a foreign destination would amount to supply to a location outside India?

are the two questions that need to be resolved here, in the light of the new Laws of IGST and the Customs Act, 1962 governing such supplies.

Section 69 of the 1962 Act incidentally does not cover within its ambit of export, the case of the warehoused goods within the meaning of 88(a), when taken on board a foreign going vessel.

A special provision is, therefore, to be made to extend the facility of exemption from import duty to such imported stores. Further, section 69/88(a) of the 1962 Act has little relevance here unless the stores being supplied are already warehoused goods.

The claim of the AAR, West Bengal that exemption to supplies of stores to the foreign going vessels from Customs duty and in turn IGST, are restricted to warehoused goods, is quite right.

The supply of stores imported or otherwise, to foreign going vessels cannot be construed as export unless it is marked specifically for a location outside India, is only partly right with regard to imported stores but not otherwise.

Ship stores being supplied to a vessel from the domestic market, while in outer anchorage i.e. outside the customs Station, is still considered a supply made within the territorial waters of India, is one argument among many.

Accordingly, its supply on board the vessel while on anchorage is said to be within the territorial waters and can't therefore enjoy the immunity under Section 69/88(a) of the 1962. Act.

And supply in the course of Export of goods, taken out of the territory of India to qualify as a zero-rated supply, in not the subject matter dealt under Section 69/88(a) ibid. is another argument.

Supply of warehoused goods to any person before clearance for home consumption is an activity or transaction included recently by the GST (Amendment) Act, 2018, in paragraph 8(a) of Schedule III under section 7(2)(a) of the GST Act, and hence neither a supply of goods nor services and not taxable under GST.

Accordingly, the AAR held that supplies to the foreign going vessels shall be treated neither as a supply of goods nor services in terms of paragraph 8(a) of Schedule III under section 7(2)(a) of the GST Act, if only such stores are warehoused goods within the meaning of Section 69/88(a) of the 1962 Act when supplied to the recipient before clearance for home consumption.

But, supplies to the foreign going vessels while on anchorage within the territorial waters of India, whether shall not be treated as a supply of goods to the extent not covered under the above condition introduced under Schedule III of the CGST Act, 2017, is still remaining a question to be answered.

Such supplies are liable to a tax under the GST Act or the IGST Act, as the case may be, on its supplies as stores to the foreign going vessels unless it is marked specifically for a location/ destination outside India, is the conclusion in the Shewratan case by the AAR.

The AAR Ruling of Andhra Pradesh, in M/s Fairmacs Shipstores private limited - 2018-TIOL-247-AAR-GST - Authority for advance ruling, Andhra Pradesh, referred was considered misplaced, since the supplier there was supplying warehoused goods as stores to the merchant ships on the foreign run where the goods are not to be consumed until the vessel crosses the territorial waters of India.

In other words, the foreign going vessel is merely transporting the stores until it reaches a location outside India. Facts of the case are, therefore, not considered similar or specific.

Foreign going vessels obtain stores and spare parts while staying anchored at a port in India. There is no reason why the part of such stores that the recipient sources from inland and consumes or uses for repairing or servicing of the vessel while in India should be treated as export and thence extended Zero rated facility, is the question asked while disposing the application.

The example quoted does not appear to correspond to the issue on hand for the simple reason it relates to a solitary case of spares supplied for repairs on Vessels carried out while being dry docked. This has already been clarified as taxable and not amounting to Exports even under the erstwhile Service Tax regime.

The material portion of the spares supplied was rightly excluded under a Notification No.12/2003-ST and the service portion being performed within the Port area was to be squarely covered under Port Service, and the sale of spares to be charged to State Vat, over which there can be hardly a quarrel.

It is noteworthy to mention here that Ship stores meant for consumption of crew while a vessel is in outer anchorage is not the same as supplies made of spares to a vessel which is dry docked for carrying out repairs. Hence there is dissimilarity between the supplies in question.

Further, goods supplied to the Merchant Vessels on foreign run were exempt from Sales tax even prior to the introduction of concurrent jurisdiction of taxation of goods and services and such sale was rightly regarded by the State as falling within the Purview of Export.

In compliance of the bar on imposition of any tax by the state in terms of Article 286, on purchase or sale of goods that took place in the course of export of gods out of India to a place outside India, such supplies of Ship sores remained outside the scope of sales tax and its only right that the same rationale is followed even now, as the surrounding laws of Customs Act, 1962 remain unaltered and the same.

In view of the foregoing, the AAR ruled that supply of stores to foreign going vessels, as defined under section 2(21) of the Customs Act, 1962 Act, is not export or zero-rated supply, unless it is marked specifically for a location outside India and held liable to pay tax on such supplies under the GST Act or the IGST Act, as the case may be.

In a ruling by the MP High court in the case of Vasu Clothing, - 2018-TIOL-2931-HC-MP-GST it was held that the transactions were liable to GST as supply to a duty-free shop by an Indian supplier is not to "a place outside India" and therefore such supplies do not qualify as exports under GST. The above decision can be drawn here as a parallel to reinforce the misconception that ruled over what's to be considered a place outside India, like in the above case on hand.

Moreover, the Authority for Advance Ruling (AAR) had held that supply of such goods to passengers going abroad from duty-free shops at Delhi International Airport was liable to GST.

What was funny was that Alcohol, which is the most popular item at duty-free shops, is outside the ambit of GST!

Applicability of GST on duty-free shops has been a perennial issue under the erstwhile VAT regime with multiple diverse rulings. The situation has not improved at the beginning even under GST on account of diverse rulings by MP and Karnataka high courts.

Though multiple court rulings on payment of goods and services tax (GST) at duty-free shops were making life confusing for those buying perfumes and chocolates from these stores, the Allahabad high court judgment, however brought the much needed relief.

The Allahabad High Court ruled that there shall be no tax levied in case of purchases made at duty free stores at the arrival or departure terminals. The court held that tax will not be levied as the goods never cross customs border and passengers carry the items as their personal belonging.

The new ruling seemed to have rightly interpreted the provisions under the GST law as well as baggage rules to arrive at the right conclusion which appeared to be rational and in line with the legislative intent.

Similar ruling amidst conflicting views, is much awaited even in the case of Ship stores supplied to vessels on foreign run, that though supplied at outer anchorage, is still outside the customs hold and to be considered as goods taken out of India to a place outside India, declaring it as Export and eligible for the Zero rated benefit, subject to Section 2 and Section 89 of the Customs Act, 1962 read with Section 2(4), 2(5) and Section 16 of the IGST Act.

The trouble with the GST law is that under the levying Section 7, it is worded in a way to commence levy, strictly the moment the goods entered the territory of India which embraced the continental shelf and literally even beyond the 12 nautical miles i.e covering the distance between 12 and 200 nautical miles.

This gave rise to the controversial levy of high seas sales and eventually its levy of IGST was held to coincide only with the time of the operative event of customs clearance as governed by Section 12 of the CA, 1962 and customs valuation as per Section 3 of the CTA, 1975 read with the First Proviso of Section 5 of the IGST Act.

On the same lines as above, even the supply of Ship stores to a foreign run vessel as a Vessel of Indian Navy or Coast Guard, as well provided under the CA 1962, must be allowed to enjoy the simple privilege of those supplies being treated as Export at least, if not duty free, as in the case of latter.

The relevant provisions of the CA, 1962 and the IGST Act are reproduced hereunder to get a sense of the issue discussed first-hand;

Definition of 'Export of goods': As per Section 2(5) of  IGST Act, 2017, "export of goods" with its grammatical variations and cognate expressions, means taking goods out of India to place outside India;

Definition of 'Customs frontier of India' - As per Section 2(4) "customs frontiers of India" means the limits of a customs area as defined in section 2 of the Customs Act, 1962.

Section 87 of  Indian Customs Act, 1962; Imported stores may  be  consumed on board a  foreign-going  vessel or aircraft. Any imported stores on board a vessel or  aircraft (other  than stores to  which  section 90 applies) may, without payment of duty, be consumed thereon as stores during the period such vessel or aircraft is a foreign-going  vessel  or  aircraft.

Section 88(a) of  Indian Customs  Act, 1962: for  the words "exported to any place  outside India"  or  the  word "exported", wherever  they occur, the  words "taken on board any  foreign-going  vessel  or  aircraft as stores" shall  be substituted

Section  90  of Indian Customs  Act, 1962 - Concessions  in respect  of imported  stores  for  the Indian Navy.

(1) Imported  stores  specified  in sub-section (3)  may  without  payment of duty be consumed on board a ship of the  Indian  Navy.

(2) The provisions of section 69 and Chapter  X  shall apply to stores specified  in sub-section  (3), as  they apply to other  goods,  subject to the modifications that;

(a) for the words  "exported to  any place outside India" or  the word "exported"  wherever  they  occur, the word "taken on board  a  ship of  the Indian  Navy" shall  be substituted;

Further, as per the circular F. No 21/31/63, dated 17.08.1966, the Government of India, decided to treat Indian Naval vessels, as 'foreign going vessels' for the purposes of section 87 of the Customs Act, 1962.

Section 89 of Customs Act, 1962 - Stores to be free of export duty-Goods produced or manufactured in India and required as stores on any foreign-going vessel or aircraft may be exported free of duty in such quantities as the proper officer may determine, having regard to the size of the vessel or aircraft, the number of passengers and crew and the length of the voyage or journey on which the vessel or aircraft is about to depart. 

The goods supplied to Merchant Ships on foreign run will thus be treated as Export without payment of Export duty. When its read harmoniously with Section 16 of the IGST Act, 2017, the same will be treated as Zero rated.

Such supplies as Ship sores to Merchant Vessels regardless of the fact whether its supplied on board the vessel while still on anchorage, in the Sea in India but once out of customs frontier, though not foreign bound, must be accorded the facility of Export.

The view of the AAR that at the time of supply, both the supplier (the Applicant) and the recipient (the foreign going vessel) are located in India, would appear a wrong reference to determine the location of supply of goods.

The reference to Section 12 of the IGST Act, made by the AAR is meant for determining the place of Supply of services and not goods.

Whereas the relevant provision applicable to the case on hand would be Section 11(b) ibid, and thus the reasoning of the AAR is totally misplaced.

The conclusion of the AAR that supply of stores imported or otherwise, to foreign going vessels cannot, therefore be construed as export unless it is marked specifically for a location outside India is a self-construed requirement and not the one required under Section 89 of the CA, 1962.

And hence the decision that supply not zero-rated, would visibly appear to suffer from construction of a wrong premise on Section 12 ibid and as also lacks of appreciation of the import of Section 89 of the CA, 1962.

From the above it can be easily inferred that so long as the vessel is designated as Foreign going, it would suffice to enjoy the Export benefit during the period of its designation as such, is the meaning of the definition of the said Section 89 ibid.

Even as it would suffice to be a Vessel belonging to the Indian Navy and Coast Guard to enjoy the free exemption of the Ship stores, when supplied on board without having to be either foreign-bound or marked specifically for a location outside India, the Merchant ship also need not be foreign–bound or marked specifically to a destination, to enjoy the benefit of export of such ship stores supplied on board the vessel.

Export benefits of ship stores supplied to a Merchant Vessel from India and while the vessel is still in Indian waters though not yet foreign bound strictly, appears to be available, if not total exemption from Tax as in the case of warehoused goods supplied as ship stores, is the strongly felt view of the Trade, shared equally by the Author.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)