GST update No 188 on conditional exemption to merchant exporter

The Government has granted various incentives to the exporters in order to promote exports as they bring foreign exchange in the Country. One of such incentive was introducing the concept of merchant exporter who contribute almost a third of India’s exports in terms of value vide Notification No. 41/2017 dated 23.10.2017. However, time and again the confusion regarding the applicability of the said notification prevail in the minds of assessee for which advance rulings are filed. One such issue regarding applicability of exemption to merchant exporter was raised before Karnataka AAAR in the case of TIME TECHNOPLAST LTD. The decision imparted in this respect is subject matter of our present update. The applicant is engaged in manufacture of packaging material including HDPE Drums, Jeerycans etc. The goods are supplied to the exporter holding IEC code. The goods are billed to the aforesaid party and shipped to the premises of chemical manufacturer who manufactures ethyl alcohol and packs the same in HDPE drums. Advance ruling was sought by the appellant on the applicability of Notification No. 41/2017 dated 23.10.2017 i.e. of Merchant Exporter since goods are supplied on bill to ship to model. The AAR passed unfavourable ruling and therefore, it is further challenged before Karnataka AAAR. The appellant contended that the AAR adopted a narrow interpretation of the condition of the notification that the recipient has to move goods ‘directly’ to the port or to the warehouse. It was argued that the word supply as mentioned in the notification has a wider meaning as defined u/s 7 of CGST Act, 2017. Furthermore, Section 10 of IGST Act, 2017, recognises the said supply as inter state supply of goods as per the scenario of the present case. It was argued that strict interpretation of the Notification would render it dysfunctional since as per AAR the said supply amounts to intra state supply since the place of supply and location of supply are in the same state i.e. the premises of the supplier and therefore, the said notification does not apply. The appellant contended that as per CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??5 the scheme of Notification, the main point of discussion is whether the goods received by recipient are exported within a period of 90 days. It was submitted that the goods are delivered to the manufacturer of chemicals only for the purpose of filing chemicals and are thereafter, exported directly to the port. During the said process, the drums do not undergo any change and are clearly identifiable which establishes the fact that the drums are actually supplied and exported in the same condition. It was further argued that the GST Law recognises the fact the registered person is deemed to have received the goods where the goods are delivered by supplier to recipient or any other person on the directions of the recipient. Furthermore, supplying of goods was a commercial necessity since recipient cannot received the drums and chemical from the concerned suppliers in the factory, aggregate the both and then export the goods. This practice is prevalent in the industry and in various parts of the country. Therefore, it was submitted that the rationale behind Condition No (vii) is substantially met. It was further contended that the term ‘registered warehouse’ is nowhere defined in GST Law. Therefore, the term ‘place of business’ includes a warehouse since the term ‘registered warehouse’ is nowhere defined under GST Act. It was argued that in case of conditional beneficial exemption notification, beneficial purpose must be given effect to. Reliance was made on the decision of Apex Court in the case of Mother Superior Adoration Convent (2021-TIOL-156-Supreme Court) wherein it was held that objective behind the statute must be looked into. Since the basic objective behind introduction of the aforesaid Notification is to encourage exports and removal of bottleneck of working capital on account of taxes. Reference was also made to the Supreme Court’s decision in the case of C.Ex. Shillong V/s North Eastern Tobacco (2002 (146) ELT 490), Mangalore Chemicals & Fertilizers V.s Deputy Commissioner, Commissioner of Customs (Preventive), Amritsar V/s Malwa Industries wherein it was held that exemption should not be denied merely because of some small procedural lapses. Therefore, the benefit of the exemption must be granted. The AAAR held that in the GST regime notification stands applicable subject to fulfilment of prescribed conditions. It was further stated that the term warehouse cannot be used parallel to the term place of business. The same CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??6 was further supported by the definition of warehouse as mentioned under the Customs Act, 1962. It was held that since the sugar factory of production and warehouse are separate premises having distinct objectives, the goods stored in the factory belongs to factory and not the warehouse because of which, the condition prescribed under the Notification is not fulfilled. It was further opined that it is settled principle that the benefit of conditional exemptions cannot be extended even on non-fulfilment of the conditions prescribed therein. It is only in the ambiguous situation that liberal meaning is to be derived. Therefore, it was held that since the term warehouse cannot be referred to include the word factory premises, it is concluded that the applicant failed to fulfil the conditions as prescribed in the notification. Therefore, the decision of the AAR was upheld. The above referred ruling is unfavourable to the situations wherein merchant exporter undertakes ‘bill to ship to’ model as the meaning of “warehouse” has been strictly interpreted by the AAR. The courts have held that conditional exemption notifications must be strictly interpreted but in our view, exemption notifications implemented for exporters should be liberally interpreted as they contribute to enhancement of foreign reserves of the Country.

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GST update No 188 on conditional exemption to merchant exporter

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