GST ON ‘MERCHANT TRADE TRANSACTION’

[Mr. M. GOVINDARAJAN]

Merchant Trade Transaction

Merchant   Trade transaction is a transaction which involves shipment of goods from one foreign country to another foreign country involving an Indian Trader. Such transactions are basically procurement and/or supply under ‘Bill to-Ship-to’ arrangement.   A ‘person/ consignor’ in India, without physically importing the goods into India, procures goods from a supplier outside India and supplies the same goods to another ‘person/consignee’ outside India.  The commencement of merchanting trade would be the date of shipment/export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment / export leg receipt or import leg payment, whichever is the last.

GST on merchant trade transaction

In this article the applicability of GST on merchant trade transaction is going to be discussed with reference to decided case law by the Appellate Authority for Advance Ruling.

IN RE: M/S. STERLITE TECHNOLOGIES LIMITED – [2021 (10) TMI 146 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT] the appellant is engaged in the trading of Information Technology Hardware.   The appellant procures requisite Hardware from the vendors, located within India or outside India on payment of applicable duties/ taxes.

The appellant has proposed to undertake transaction of supply of hardware in the following manner, which is commercially known as ‘Merchant Trade Transaction’ –

• The appellant will receive an order from the customer located outside India.
• Back to back order would be placed by the appellant to a supplier located outside India.
• As per the instruction of the appellant, Vendor (located outside India) will directly ship the goods to the customer (located outside India).
• The Vendor will issue invoice on the appellant against which payment will be made by him in the foreign currency.
• The appellant will raise invoice on the customer and will receive the consideration in foreign currency.

The appellant approached the Authority for Advance Ruling, Gujarat for seeking advance ruling on the following questions-

• Whether GST is payable on goods procured from vendor located outside India in a context where the goods so purchased are not brought into India?
• Whether 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 Authority for Advance Ruling ruled that-

• GST is not payable on goods procured from vendor located outside India, where the goods so purchased are not brought into India.
• Applicable 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.

Being aggrieved against the order of the Authority for Advance Ruling the appellant filed the present appeal before the Appellate Authority for Advance Ruling.  The appellant submitted the following before the Appellate Authority for Advance Ruling-

• The scope of the IGST Act, 2017 is limited to the territorial jurisdiction to which it extends.
•  The IGST levy can be introduced only to supplies within the territorial jurisdiction of the IGST Act, 2017
• In case of Merchant Trade Transaction, the supply could be construed to take place outside the territorial jurisdiction of the IGST Act, 2017, hence the levy in the said case, in terms of section 5 read with section 7(5)(a) of the IGST Act, 2017 would mean travelling beyond the jurisdictional powers to levy GST.
• Therefore the levy of GST on said transaction would be ultra vires the IGST Act, 2017.
• The order of the Authority for Advance Ruling to treat the said transaction as interstate supply is travelling beyond the IGST Act, 2017.
• Article 269A of the Constitution of India provides that the Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or services, or both takes place in the course of inter-state trade or commerce.
• As per Explanation to clause (1) of Article 269A of the Constitution of India, import is considered to be transaction ‘in the course of interstate trade or commerce’ despite of the fact that only one State is involved in such transaction. Any other transaction, involving only one State, could not be termed as ‘inter-state’ and for such transaction, the Constitution has not given power to the Government to formulate the principle as contemplated by Article 269A (5).
•  The provisions of section 7(5)(a) of the IGST Act, 2017 is to be read so as to cover the transaction where the movement of the goods initiates from India, whereby this provision would not include the transaction where the movement of goods initiates from a place outside India and such goods are destined to place outside India.
• Section 8 and section 16 of IGST Act should not be interpreted to mean that all supplies falling within the purview of section 7(5)(a) of the IGST Act, 2017 but not covered under section 16 of the IGST Act, 2017 would be considered as liable to IGST.
• Though the term ‘export’ covers the cases of taking goods out of India, principally, even goods being supplied to customer located in India but delivered at a location which is outside India, should get covered under the purview of term ‘export’.
• Interpreting the term ‘export’ to only cover supplies where goods are taken out of India would be restrictive and would disregard the principle of consumption based tax, so ‘export of goods’ should be interpreted in a broader way to cover such cross-border transaction where goods are delivered outside India even if not taken from India.
• Assuming without accepting that such supplies would not qualify as ‘zero rated supply’ the same should at least be treated as not liable to GST since the concept of ‘export’ could be deemed to be covering a case where the goods are consumed / used outside India.
• The Authority for Advance Ruling has strictly interpreted the definition of ‘export’, without understanding the intention of the law makers and held that the transaction would be treated as such only when there is movement of goods from India to a place outside India.
• The place of supply of service specifically covers case where recipient is located outside India, unlike place of supply of goods whereas in case of goods, there is no such provision which states that even where goods are situated / used / consumed outside India and the location of the supplier and the recipient is in India, the place of supply shall be outside India.
• The Circular No.33/2017-Customs, dated 01.08.2017 clearly mentions that the tax is leviable only at the time of importation of goods in India and not when the goods are sold while they are in High Seas.
• The Circular No. 46/2017-Customs, dated 24.11.2017 provides that in case the goods are sold while the same are lying in bonded warehouse, the same shall be chargeable to GST.
•  Even if the transaction is made taxable in GST, the place of supply in accordance with section 10(1)(a) of the IGST Act, 2017 is outside India and there is no mechanism in the GST returns to report the transaction in GSTR-1 mentioning the place of supply to be a place outside India while levying IGST on the same. 
• In absence of ambiguity around collection mechanism and revenue sharing of such GST, it appears that intention of legislatures was never to levy and collect GST on such type of transaction.
• The transaction was not taxable under erstwhile Indirect Tax Laws and hence, the same should not be liable to GST.
• The transaction is not liable to tax from 01.02.2019 i.e. the date of amendment made in Schedule III of the CGST Act, 2017.
• The transaction would involve movement of goods from foreign country to India i.e. bringing goods into India and  would be treated as supply in the course of import of goods as defined under section 2(10) of the IGST Act, 2017, to mean to bring goods into India from a place outside India.
• Both the conditions stated in section 7(5)(a) of the IGST Act, 2017 are fulfilled and thus this will be treated as an inter-state supply.
• While the goods would be supplied to recipient located outside India, it becomes pertinent to refer to the definition of ‘export of goods’ as provided under section 2(5) to mean ‘taking goods out of India to a place outside India’.

The Appellate Authority for Advance Rulings considered the submissions put forth by the appellant.  The main issue involved in this case is whether Goods and Services Tax is leviable on the supply of Hardware by the appellant in the manner commercially known as ‘Merchant Trade Transaction’, wherein the goods are supplied from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.  The Appellate Authority for Advance Ruling analyzed the provisions of sections 2(24), 5, 10(1)(a) of IGST Act, and sections 2(31), 2(105), 7 of CGST Act.

The term ‘supplier’ has been defined in Section 2(105) of the CGST Act, 2017, the natural meaning of the phrase ‘location of supplier’ can be the place where the supplier is located or where the principal place of business of such supplier is located. As such, there is no reason to consider the ‘place from where goods are being moved from’ as the location of supplier, as suggested by the appellant.   As the supplier is located in India and the place of supply is outside India, the transaction of supply of goods to buyer in case of ‘Merchant Trade Transaction’ would be treated as supply of goods in the course of inter-State trade or commerce.   As IGST is levied on all inter-State supplies of goods or services or both, (unless exempted or provided otherwise in any other provision of law) as per Section 5 of the IGST Act, 2017, the supply of goods by the appellant to the buyer located outside India is covered under the ambit of the said provision of the IGST Act, 2017.

The Appellate Authority for Advance Ruling observed that Paragraph 7 has been inserted in Schedule-III of the CGST Act, 2017 vide section 32 of the Central Goods and Services Tax (Amendment) Act, 2018, which came into force with effect from 01.02.2019 vide Notification No. 2/2019-Central Tax dated 29.01.2019.  Para 7 provides 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’ shall be treated neither as a supply of goods nor a supply of services and therefore Goods and Services Tax is not leviable on such transactions with effect from 01.02.2019.  This amendment could not be considered as having retrospective effect. 

The Appellate Authority for Advance Ruling modified the order passed by the Authority for Advance Ruling.  It was held that the Integrated Goods and Services Tax was payable from 01.07.2017 to 31.01.2019 and is not payable with effect from 01.02.2019 on supply of goods directly from the vendor’s premises located outside India in the non – taxable territory to the customer’s premises located at another place outside India in the non-taxable territory, without such goods entering into India.

Conclusion

GST was leviable on merchant trade transaction on the applicable rate of the concerned goods up to 31.01.2019 and GST is not applicable on merchant trade transactions with effect from 01.02.2019.