MARCH 13, 2020

By K Srinivasan

WHAT are the implications of Job-worked/ repaired / reprocessed goods returned to foreign principal as re-export, with reference to Customs Duty and GST?

Notification 32/1997 Custom dated 01.04.1997,  permitted import of goods without payment of customs duties, for carrying out job works and re-export of the same.

The above customs duty exemption was sought to be extended, including IGST exemptions, on such imports as per GST council meet of 3rd  June 2017.

So the question is whether return of such goods to foreign principal can be treated as export?

Relevant Sections -  Sec. 2(68) of  CGST Act 2017, Sec. 13 of IGST Act 2017 and Section 2 (5) of IGST Act 2017

First of all we need to understand what is Job Work under GST?

Job work is very widely defined under the GST Act.  As per Section 2(68) of the CGST Act, 2017 Job Work means "any treatment or process undertaken by a person on goods belonging to another registered person".  

The one who does the said job would be termed as 'job worker'. The ownership of the goods does not get transferred to the job worker but it rests with the principal. The job worker is required to carry out the process specified by the principal, on the goods.

Now, we need to understand what is export under GST? 

As per Section 2(5) of IGST Act, "export of goods means taking goods out of India to a place of outside India" and receipt of consideration is not a pre-condition to consider the transaction as export of goods.

Thus the return of imported goods to the foreign principal after job work is "export of goods", which is declared as a "zero rated supply" as per Section 16(1) of the IGST Act. 

What about GST liability on job Work charges claimed from foreign principal, is the next question?

With regard to GST liability, Sec.13 of IGST Act, 2017 reads as under:-

"13. (1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services  except  the services specified in sub-sections (3)  to (13) shall be the location of the recipient of services:  Provided  that where the location  of  the recipient of services is not available in the ordinary course  of  business, the place of supply shall be the location of the supplier of services.

(3) The place of supply of the following services shall be the location where the services are actually performed, namely:

(a) Services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services:

Provided  that when such services are provided from a remote location by  way of electronic  means, the place of supply shall be the location where  goods are  situated at the time of  supply of services: 

Provided  further that nothing contained in this clause shall  apply in  the case of services supplied in respect of goods which are temporarily imported into India  for   repairs  and are exported after repairs without being put to any other use in India, than that which is required for such repairs:

(b) Services supplied to an individual"

As per the above, it is clear that the said transaction is squarely falling under first limb of clause (a) of Sub-section 3 to Sec.13 of IGST Act, 2017 and, accordingly, the place of supply of service provided by the Job worker (importer) would be the location, where such services are actually performed, i.e. the Job worker's (importer) location, which would be in taxable territory.

Hence, the transaction would not amount to export of service as one of the conditions prescribed under Section 2 (6) of the IGST Act is not satisfied.

Hence, the Job worker would be liable to charge GST on the job charges claimed from the foreign principal, despite payment being received in convertible foreign exchange.

In the meantime an interesting AAR ruling of AP came, which is excerpted below to have an overview as to how the AAR went about resolving the questions raised by the Applicant-

In re: Synthite Industries (GST AAR Andhra Pradesh - 2018-TIOL-255-AAR-GST - Order dated 20th August 2018 )

The applicant filed an application seeking advance ruling on the process of job work i.e., importing the goods i.e., Green Tea/ black tea powders from his Principal from Germany and under taking process of "super critical fluid extraction".

The material is being supplied by his Principal-foreign customer at free of cost and the processed output will be exported to them.

The goods contain caffeine which is being removed by the applicant-job worker through extraction process. The de-caffeinated goods will be exported to the Principal as per their requirement and instructions.

Applicant sought and got the following clarifications -

Except, the answer to point no. 3, the rest of the resolutions by the AAR would look highly debatable in light of the discussion held above.

It is pertinent to note here that even while clarifying in a different context, with respect to amendments to Customs and Central Excise notifications for EOUs, vide Circular No. 50/2018-Customs dated 06.12.2018, it has been stated categorically that imported goods could be temporarily cleared without payment of all Customs duties, IGST and Compensation Cess, at the time of their import.

However, there is a disclaimer all the same about the applicability of GST on supply of such goods in turn that such supplies shall be independently governed by GST laws. [clause 2(a) of the Circular refers]

To set at rest the disparity that prevailed above, in the taxation of job-work on imported goods meant for re-work and return, a change in Sec 13(3) of IGST Act, with reference to the POS was made making a preference to a factual position against the legal fiction that gave rise to the anomaly, dealt with in the current study.

Place of Supply for temporarily imported Goods for Repair/other treatment & re-export to be the location of the recipient of service under IGST (Amendment) Act, 2018.

Amendments were carried out to  IGST Act, 2017   with effect from 01.02.2019, by which the second proviso to Section 13(3)(a) has been substituted as below -

Provided further that nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or process and are exported after such repairs or treatment or process without being put to any use in India, other than that which is required for such repairs or treatment or process.

Accordingly, the place of supply of such job work services would be the location of the recipient of supply (foreign principal's location), as per Section 13(2), which is outside the taxable territory.

Hence, with effect from 01.02.2019, Job worker-Importer is not liable to pay GST on the labor charges received from the foreign principal, as the same would be covered squarely under the ambit of definition of Export as per Section 2(6) of the IGST Act and would be Zero-rated.

It is equally possible that in the process of doing any job work, there may be local procurement of goods for consumption in the job work, which in turn may have to be claimed as export benefits of Input stage taxes incurred in the course of supply for such Exports as permitted under Section 16(2)/(3) of the IGST Act.

It is good that the anxious wait of the international trade, carrying out job-work on Imports and re-exporting the same to the self-same foreign principals, met with signal success and are all praise to the Government for its understanding and support of ease of doing business.

(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.)