Background: Through earlier articles/seminars, I've clearly stated that customs bonded warehouse sales cannot be leviable to tax since this is sale in course of imports just as high seas sales. There is no legal validity of circular no. 46/2017 issued by CBEC in this regard. Law i.e. Customs law/IGST law as on date does have any valuation provision to tax margin on bonded warehouse sales (since 'valuation provision' as contained in section 3 of Customs Tariff Act basis which IGST is levied on import of goods does not contain such provision. IGST on import of goods can be levied till 'place of importation' as per section 3 read with section 14 of Customs Act. Place of importation has already been reached once goods are being removed 'for' deposit in a warehouse. Bonded warehouse sales happen thereafter). This is the reason that section 3 is about to get amended once finance bill, 2018 and once the same gets enacted, tax on such margin needs to be paid at the time of filling Ex-bond bill of entry (in short 'BOE').
Even though law does not have any provision, goods need to be cleared from 'Customs authorities'. These authorities including CBEC are considers themselves as law. These authorities will not allow goods to be cleared until and unless tax is paid on such sales. So, let us look at the provisions to claim Input Tax Credit (in short 'ITC') on such sales since many of the industries are paying taxes so as to clear goods.
'XYZ India' (in short 'XYZ') is importing goods (GST rate 18%) into India of value Rs.100 (Import leg of transaction). Goods are deposited in Customs Bonded Warehouse by filing into bond bill of entry. While goods are kept in bonded warehouse, goods are sold to a third party i.e. 'customer' at margin of Rs.50 i.e. Total price of Rs.150. XYZ is charging Rs.27 (i.e. 18%*150) on such sale (Trade leg of transaction). Goods are then cleared by customer by paying BCD and IGST (Rs.18) (deferred duty and tax) while clearing goods from warehouse by filing Ex-bond BOE.
Analysis and Conclusion:
Whether customer shall be eligible to get ITC of trade leg of transaction?
1. Conditions for eligibility of ITC are given in section 16(2) of CGST Act. Equally applicable to IGST Act as per section 20:
a. Possession of invoice, debit note or any other duty paying document as may be prescribed:
In this particular case, XYZ would be issuing tax invoice to customer and accordingly this condition is satisfied.
b. Receipt of goods. Further, proviso states goods shall be deemed to have been received if goods are delivered to any person on the direction of the registered person through the transfer of documents of title either before or during movement of goods:
In this particular case, XYZ would be issuing tax invoice (i.e. transfer of document of title) before the movement of goods to customer. Therefore, goods are deemed to have been received and this condition is satisfied.
c. Tax charged should have actually paid:
XYZ would be paying taxes after collecting from customers and accordingly this condition is also satisfied.
d. Furnished return under section 39:
Customer would file GSTR-3B/GSTR-3 and accordingly this condition is also satisfied.
Therefore, all the conditions which are required for becoming eligible for ITC are satisfied. Further, circular no. 46/2017 also states that ITC in respect of trade leg of transaction can be availed by customer as per section 16(2)(b) of CGST Act (refer Box-C, illustrative chart – A of circular).
2. Even though all the conditions are satisfied so as to be eligible for ITC, it needs to be seen that customer shall also be claiming ITC in respect of import leg of transaction of same goods. Therefore, the moot question is whether customer can claim ITC of IGST twice in respect of same goods which are levied once under import leg and another under trade leg.
Section 16(2) does not provide for any restriction to claim ITC in respect of same goods twice also considering the fact that these are two different supplies and for each supply conditions shall be checked separately.
Keeping this mind, we need to check whether all conditions so as to be eligible for ITC in respect of import leg of transaction are satisfied. All the above conditions are satisfied basis same explanations as given above, except for a different explanation for first condition since customer would claim ITC basis Ex- bond BOE duty paying document. Further support can also be derived from (refer Box-D, illustrative chart – A of circular).
Line 3 to 5, Para 4 of circular states that 'such a transaction.....taxable in terms of section 9 of CGST Act......'
Line 6 to 8, Para 4 of circular states that '....as per sub-section (2) of section 7 of the IGST Act, any supply of imported goods which takes place before they cross the customs frontiers of India, shall be treated as an inter-State supply'.
These two lines are contradictory, since goods which are kept in customs bonded warehouse forms part of customs frontier (Refer section 2(4) of IGST Act). Accordingly, till then any supply is inter-state supply as per section 7(2) of IGST act shall apply and accordingly section 9 of CGST act which states of intra-state supply shall not apply.
Reason for discussion this issue is that, XYZ shall always charge IGST for such trade leg of transaction by issuing tax invoice and credit shall be available to customer (Refer Box-C, refer illustration chart – A of circular).
4. Concluding on a summary note that, ITC shall be available of trade leg of transaction. Department is bound by such circular and there is no reason to deny availability of ITC. Further, XYZ shall always charge IGST.
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