GST UPDATE ON HIGHLIGHTED RULING ON MERCHANT TRADE TRANSACTION BY GUJARAT AAR 76/2020-21

GST UPDATE ON HIGHLIGHTED RULING ON MERCHANT TRADE TRANSACTION BY GUJARAT AAR
Currently, two subjects are matter of discussion among the tax professionals; GST registered taxpayers and varied educated class of persons i.e. Corona and AAR rulings in GST regime. The effects of Corona has been eye witnessed by everyone and likewise AAR rulings are also highlighting the front page of the newspapers, websites etc.
In a recent advance ruling in case of M/s. Sterlite Technologies Ltd, Gujrat AAR
GST is payable on goods sold to customer located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises.
The applicant is engaged in the development and supply of software with respect to the telecommunication qua wi-fi service management platform. OSS/BSS alongside packet core with the flexibility of modular and pre-integrated offerings etc. and trading in hardware.

They procure requisite hardware from the vendor located within India or outside India on payment of applicable duties/taxes. Such hardware is sold as per the requirement of the customer on payment of GST, except in case of export.

The applicant proposed to undertake transaction and supply of hardware, commercially known as ‘Merchant Trade Transaction’, wherein the applicant will receive an order from the customer located outside India, and as per their instruction, Vendor would directly ship the goods to a customer located outside India.

The vendor would issue an invoice on applicant against which payment would be made in foreign currency and the applicant would raise invoice on customer and would receive consideration in foreign currency.

In the above transaction, goods would not physically come into India but would move from place outside India to another place outside India.

The applicant has in their application dated 24.5.2018 raised the following issues for determination before the Authority:

i) Whether GST is payable on goods procured from a vendor located outside India in a context where the goods so purchased are not brought into India?

ii) Whether GST is payable on goods sold to customers located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises?

The AAR referred to provisions under CGST Act and observed that the term ‘export of goods’ has been defined under sub section 5 of Section 2 of IGST Act, 2017 which reads as under: Export of goods would mean—‘With its grammatical variations and cognate expressions, means taking goods out of India to a place outside India’.

The above definition indicates that the act of taking goods out of India to a place outside India qualifies as export. In the instant case, the goods have not crossed the Indian customs frontier and as such it is clear that the goods are not physically available in the Indian Territory.

When the goods are not available in the Indian Territory, the question of taking goods out of India does not arise. Thus, the subject transaction does not qualify as export of goods.

In the instant case, the applicant is selling goods for a consideration in the course or furtherance of business and as such the transaction tantamount to ‘supply’ in terms of the definition of ‘supply’. In the event that the supplier is located in India and the place of supply is outside India, such supplies shall be treated as Inter-stated supplies.
In view of the above, it appears that the transaction is covered under the ambit of Inter-state supply and is neither exempted nor covered under the export of services. Thus, the theory of elimination takes us to the conclusion that such supplies will be subject to the levy of IGST.

Thus, AAR affirmed that (i) GST is not payable on goods procured from a vendor located outside India, where the goods so purchased are not brought into India.

ii) Applicable GST is payable on goods sold to a customer located outside India, where goods are shipped directly from the vendor’s premises (located outside India) to the customer’s premises.
From the decisions cited above, the point of discussion arises in case of second question answered by the authority.
The Authority refers to Section 7 of the CGST Act, 2017 which defines the term ‘Supply”. But it refers to only sub-section (1) of Section 7 and omits to refer or to see sub-section (2) of Section 7 which begins with a non obstante clause and, thus, has an overriding effect over sub-section (1). It provides that activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. The above discussed ruling seems to be incorrect since it does not considers all the provisions of the amended law in GST Act. Paragraph 7 to the Schedule-III to the CGST Act 2017; amended by CGST (Amendment) Act 2018, is reproduced states that
“Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India”.
It can be seen that the above case of Sterlite Technologies Ltd clearly falls under the para 7 as mentioned above. Therefore, it should not be treated as supply under the provisions of the law. While ruling was pronounced, this para to Schedule III is ignored completely. The assessee should move its file to Court for immediate relief from the ruling imposed on the transaction which is out of GST purview.
In our opinion, since the applicant has filed application for determining the liability by AAR before the introduction of CGST Amendment Act, 2018, there is high probability that this provision was not taken into consideration. The ruling must have been determined in respect of transactions undertaken before prospective amendment was made in Para 7 of Schedule III. However, since this ruling has not specified about the period of applicability; the government should come into role and provide some clarifications to re build the trust of AAR rulings among the taxpayers.
This is solely for educational purpose.
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GST UPDATE ON HIGHLIGHTED RULING ON MERCHANT TRADE TRANSACTION BY GUJARAT AAR 76/2020-21

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