Purchases from Composition Dealer
Query
Composition dealer registered under GST in Uttar Pradesh purchases goods from another composition dealer what will be tax liability on the sales. Whether he will have to pay any tax on purchases incurred from another composition dealer?
Reply: There is no restriction for purchases from composition dealer. The composition scheme is given in section 10 of the CGST Act. The said section is reproduced below:
“10. (1) Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding, ––
(a) one per cent of the turnover in State or turnover in Union territory in case of a manufacturer,
(b) two and a half per cent of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and
(c) half per cent of the turnover in State or turnover in Union Territory in case of other suppliers, subject to such conditions and restrictions as may be prescribed:
Provided that the Government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding one crore rupees, as may be recommended by the Council.
(2) The registered person shall be eligible to opt under sub-section (1), if:—
(a) he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II;
(b) he is not engaged in making any supply of goods which are not leviable to tax under this Act;
(c) he is not engaged in making any inter-State outward supplies of goods;
(d) he is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52; and
(e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council
Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.
(3) The option availed of by a registered person under sub-section (1) shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1).
(4) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.”
(The amendments in this section about limits etc., are not covered as this section is reproduced for the purpose of reference for above query).
It can be seen that there is no restriction on inward supply. Therefore, purchasing from composition dealer is also valid and there is no adverse effect on the composition scheme.
Sale in course of import from bonded warehouse
Query
Under CST Act, as per second limb of section 5(2), the sales made by transfer of documents of title to goods before the goods cross the customs frontiers of India are exempt from levy of tax. Whether sales effected from the bonded warehouse are eligible to exemption under above provision?
Reply: It is true that the sales effected by transfer of documents of title to goods before the goods cross the customs frontiers of India are exempt. However, there is litigation about scope of crossing the customs frontiers.
In case of State Trading Corporation of India Ltd. (129 STC 294), the Madras High Court has held that the sale effected from bonded warehouse is still sale before crossing Customs Frontiers of India and hence duly entitled to exemption. In this case Madras High Court has relied upon judgment in case of Kiran Spinning Mills v. Collector of Customs (113 ELT 753)(SC). In this judgment the issue before Supreme Court was about payment of Custom duty. Supreme Court held that the duty is payable at prevailing rate when goods are cleared from bonded warehouse. It is observed by Supreme Court that the Custom Frontier ends when the imported goods mingle with common mass and that takes place only upon payment of duty. Based on above ratio, the Hon. Madras High Court has ruled that such sale from
bonded warehouse is exempt u/s. 5(2) of CST Act, 1956.
At this juncture reference can also be made to judgment of Bombay High Court in case of Narang Hotels and Resorts Pvt. Ltd. (135 STC 289)(Bom).
In this case the Hon. Bombay High Court, while dealing with case of sale in course of export, observed as under on page 331.
“92. According to Mr. Bharucha, learned counsel for the respondents, so long as the goods do not cross the area of any customs port, and here, the Sahar Airport, the transfer of title to goods will always be regarded as a local sale. According to Mr. Bharucha, merely storage of the goods in the customs area for delivery on delivery van or supply unit will not amount to crossing the limits of customs station. According to him, it is necessary that the goods must go out of the customs station by crossing the area of customs station. According to him, mere bringing of goods into the customs station or on tarmac after customs and quarantine clearance will not amount to crossing the limits of customs area unless those goods have crossed the limits of customs station. Mere parking of the supply unit with goods even after completing the customs formalities will not amount to crossing of the customs frontiers of India.
93. In order to explain concept of crossing of the customs frontiers of India, Mr. Bharucha, relied upon the decision of the Supreme Court in Kiran Spinning Mills v. Collector of Customs (1999) 113 ELT 753. As held by the Supreme Court in the case of Kiran Spinning Mills v. Collector of Customs (1999) 113 ELT 753, which arose under the Additional Duty of Excise (Textiles and Textile Articles) Ordinance, 1978 the taxable event is the crossing of the customs barrier, and not the date when the goods had landed in India, or had entered the territorial waters. When goods are imported into India even after the goods are unloaded from the ship, and even after the goods are assessed to duty subsequent to the filing of a bill of entry, the goods cannot be regarded as having crossed the customs barrier until the duty is paid and the goods are brought out of the limits of the customs station. In the case of Kiran Spinning Mills. v. Collector of Customs (1999) 113 ELT 753 (SC), the Apex Court has observed thus:
‘In other words, the taxable event occurs when the customs barrier is crossed. In the case of goods which are in the warehouse, the customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country.’
Based on the above judgment Mr. Bharucha contended and, in our opinion, rightly that in case of import the customs frontiers of India are not crossed until the goods find their free access into the country by crossing the outer limits of the area of customs station which is possible only at the time of clearance by the customs authorities. According to him, under section 5(2) read with the section 2(ab) of the CST Act and the relevant definitions in the Customs Act, the expression ‘before goods have crossed the customs frontiers of India’ means before the goods have crossed the limits of customs station, namely, a customs port, or in other words, before the goods have crossed entire area of customs station including its outer boundary so that the goods can find their free access into the country beyond the customs station upon clearance by the customs authorities.”
The above observations also support the reason adopted by Hon. Madras High Court in above case of State Trading Corporation of India Ltd. (129 STC 294).
Similarly in case of State of Tamil Nadu v. Rajan Universal Export (MFRS) Pvt. Ltd. & Another (29 VST 279), Hon’ble Madras High Court reiterated the above legal position and allowed the exemption for sale from bonded warehouse.
Based on Madras High Court judgment the Maharashtra Sales Tax Tribunal in case of Radha Sons International (S.A. 1358 & 1359 of 9-10-2007) has allowed sale from bonded warehouse as exempted sale under section 5(2) of CST Act, 1956.
However, the Government of Maharashtra made reference against above judgment to Hon. Bombay High Court. Now Hon. Bombay High Court has decided the above Reference vide judgment in case of Commissioner of Sales Tax vs. Radhasons International (Sales Tax Reference No. 52 of 2009 dated 8-2-2019).
In this judgment Hon. Bombay High Court has taken different view. Hon. High Court has held that sales from bonded warehouse are not eligible as sale by transfer of documents of title to goods before crossing Customs Frontiers of India. After elaborate judgment, Hon. Bombay High Court has concluded as under in paras 74 & 75:
“74. The High Court of Judicature of Andhra Pradesh at Hyderabad was dealing with a similar case (Minerals and Metals Trading Corporation of India Ltd. vs. The State of Andhra Pradesh) where the argument that the imported goods were transferred by endorsement of bill of lading in favour of the local buyers before the customs clearance of goods was turned down. The MMTC approached the High Court of Andhra Pradesh at Hyderabad and this argument was dealt with by the Division Bench as under:
“14. In order to get over the judgment of the Supreme Court the amendment in Section 2(ab) is made. On the basis of the report submitted by the Law Commission recommending amendment to Section 2 of CST to get over the difficulty to actually ascertain the point of time when a ship crosses the territorial waters of India.
We have already referred to Section 5(2) read with Section 2(ab). The goods will cross the limit of the area of the customs station only on clearance by the customs authorities.
Clearance by the customs authorities will be after filing the bill of entry and after the assessment of duty under Section 38 of the Act. Before the assessment of the duty the goods kept in the customs port cannot cross the limits of the customs port. Therefore irrespective of the fact whether duty is paid or not, when once the bill of entry is filed and the imported duty is assessed, then only the goods can cross the limits of the customs port, therefore, any transfer of documents of title before the clearance of the goods by the customs authorities on making the assessment of goods would amount to a sale in the course of import, as after the assessment is made and on filing of the bill of entry the goods get mingled with the general mass of goods and merchandise of the country. The goods get the eligibility to be declared as local goods after clearance, even though they are not physically removed from the harbour premises. They attain the character of local goods and cease to be foreign goods. Therefore, the relevant point of time for determining as to whether the sale of goods is in the course of import by a transfer of title deeds is the transfer by title deeds before filing the bill of entry and the assessment of duty irrespective of the fact whether the goods are physically cleared from the harbour or not and whether duty is paid or not. As pointed out in the earlier paras after the filing of the bill of entry the assessment of the duty the import stream dries up and ceases to flow after the customs department levies the duty declaring the eligibility of the goods to be cleared and mingles with the general mass of goods and merchandise in the country. Once the duty is levied the import is at an end and the national customs barrier is supposed to have been crossed. The reason being it is difficult to ascertain the point of time or the place at which the goods have entered the limits of the customs port. Therefore, the assessing authorities under the APGST Act does not get jurisdiction to assess the goods if the transfer of title deeds is effected before the clearance of goods by filing the bill of entry under the Customs Act and after making the assessment of the import duty payable under Section 28 of the Customs Act, 1962.”
75. We do not think that our view is in any way different. We have noticed all the sections of the Customs Act, 1962 which are relevant to the issue, including Chapter VI and particularly sections 15 and 18 thereof. Hence, we are of the firm view that it is not necessary to refer to all the judgments relied upon by Mr. Sonpal.”
Thus in Maharashtra the sales from bonded warehouse will not be exempt unless the facts are distinguished or any judgment from higher forum is available.