OCTOBER 01, 2024

By Kumar Parekh, Chartered Accountant

RECENTLY, Andhra Pradesh Authority of Advance Ruling (‘AAR')in the case of MCM Pacific PTE Ltd. [2024-TIOL-16-AAR-GST] (for sake of brevity, ‘Applicant' or ‘MCM') had an occasion to deal with the question whether sale of goods to foreign buyer on ex-works basis would be liable to GST or same would qualify as zero-rated supply under Section 16 of IGST Act. The facts in brief are reproduced as under.

- The Applicant is Singapore based company and is in the business of power generation & distribution. They do not have any place of business in India

- As per terms of the process document and letter of intent, the Applicant is required to pay the entire sale consideration and is required to bear all applicable taxes and duties as may be applicable. The sale certificate will be issued upon payment of such sums.

- Further, upon issuance of the sale certificate, the ownership, risk and title to the Assets would be transferred to MCM. The sale process will stand concluded at the existing Plant location of supplier in Vijayawada, Andhra Pradesh, India upon the issuance of the sale certificate.

- It is essential to note that the process document clarifies that after issuance of Sale Certificate, the Applicant will be responsible for dismantling, transporting and exporting the assets to Myanmar. Moreover, it is abundantly clear that the intention of the Applicant is to take the assets out of India to a place outside India post sale / supply from supplier.

In view of above facts, AAR upheld that the supply covered under this application is not treated as zero rated supplies.

The Author believes that the above ruling lacks appropriate appreciation of legal provisions, leading to this aberrant outcome. Though, AAR cannot pronounce ruling on place of supply considering Section 97 of CGST Act, the ruling has contemplated that transaction involves movement of goods and would be subject to Section 10 of IGST. In such scenario, it is paramount to look at relevant portion of Section 10 & Section 11 of IGST Act, which is reproduced hereunder.

“10. Place of supply of goods other than supply of goods imported into, or exported from India.

(1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,-

(a) where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient;

…

11. Place of supply of goods imported into or exported from India.

The place of supply of goods,-

…

(b) exported from India shall be the location outside India."

The moot question that would arise seeing above provisions would be whether the movement in the case on hand would qualify as export of goods or inter-state supply liable to GST.

The definition of export of goods as per IGST Act is defined to mean taking goods out of India to a place outside India. Here, the arrangement is on ex-works basis and supplier himself is not sending goods outside India. Accordingly, the question may arise whether the supply in present case can qualify as supply in the course of export of goods out of the territory of India. Though there are no judicial precedents for supply in the course of export in GST regime, one can take a look at decisions on sale in the course of export, pronounced in erstwhile regime.

Hon'ble Supreme Court in the case of Ben Gorm Nilgiri Plantations v. Sales Tax Officer [(1964) 7 SCR 706] observed that to constitute a sale in the course of export of goods out of the territory of India, common intention of the parties to the transaction to export the goods followed by actual export of the goods,to a foreign destination is necessary. A sale to qualify as exports involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to a common carrier or transport out of the country by land or sea. In present case, the agreement is with foreign buyer and the supplier is aware / agreed of the fact that on occasion of sale, the buyer would transport the goods to place outside India. The activities of sale & export are integrated to each other and same cannot be separated from each other.

In Bengal Immunity Co. Ltd. v. State of Bihar [(1955) 2 SCR 603] , the Hon'ble Supreme Court observed that the truth is what is an inter-State sale or purchase continues to be so irrespective of the State where the sale is to be located. The situs of a sale or purchase is wholly irrelevant as regards its inter-State character. Extrapolating this observation to supply in the course of export, it can be safely concluded that it does not matter where the sale occurs as far as goods are moved out of India by foreign buyer post sale. Merely because the responsibility to transport goods is not taken up by supplier due to ex-works sale contract, the contention of export of goods cannot be challenged.

Moreover, assuming this transaction to be domestic transaction having similar arrangement, where the buyer from Maharashtra purchases goods from supplier in the State of Gujarat on ex-works basis and transports the goods back to the State of Maharashtra by himself. In this case, the arrangement would qualify as supply in the course of inter-state trade in view of Section 10(1)(a) of IGST Act.This view has been supported by Telangana Advance Ruling Authority in the case of Penna Cement Industries Limited [2020-TIOL-112-AAR-GST]. Though there are divergent views from Kerala High Court & Karnataka AAR in GST regime, the author believes that the ruling of Telangana AAR stands on better footing in terms of harmonious and legal objective oriented interpretation of law.

Besides, CBIC vide FAQ dated 15th December 2018 has also clarified that the place of supply in above arrangements would be the place where the movement of goods get terminated for delivery to recipient. Also, GST Council in their 37th Council meeting has taken up this issue for discussion and draft Circular on this clarifying that the arrangement to be inter-state trade, was ready& placed before Council for discussion. However, due to lack of consensus amongst the States, the Circular / clarification never saw the light of day.

In light of above discussion, it is high time that GST Council provides clarification for GST implication on ex-works sale arrangement for domestic & international trade. Fundamentally, GST Law has made paradigm shift in two aspects – one from origin-based taxation to consumption-based taxation & second, the Legislation no more exercises control over how a business should be carried out. Suffice to say, businesses don't have to look at GST law to structure their transactions and irrespective of contractual terms, the businesses would be neutral from GST perspective.

(The views expressed are strictly personal.)