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Customs Circular No. 46/2017 needs immediate burial

DECEMBER 20,2017

By K K Sharma, Member, Central Board of Excise & Customs (Retd.)

ANY goods imported into India are chargeable to duties of Customs u/s 12 of the Customs Act, 1962 (CA) at rates specified in the Customs Tariff Act, 1975 (CTA). For clearance of imported goods from a place of importation like a port or airport, an importer files with the Customs, u/s 46 of CA,either (i) a bill of entryfor homeconsumption, or (ii)an into-bond bill of entry for warehousing.Imported goods can be cleared for home consumption only after an importer has paid the said duties and complied with relevant import policy requirements subject to which import is permitted. In case of clearance for warehousing, however, the importer is required u/s 59 of CA to execute a bond backed by prescribed security, following which the duty payment is deferred, pending clearance for home consumption, and the goods are permitted to be deposited in a warehouse u/s 60 of CA.

2. S.59(5) ibid permits the importer to transfer/sell warehoused goods to another person subject to the transferee/buyer executing a similar bond and furnishing similar security. Such goods can later be clearedfrom the warehouse, if the new owner of such warehoused goods files, in terms of S.68 of the CA, a bill of entry for home consumption and pays, before such clearance is ordered, the deferred import duty, interest etc.,if any, payable on such goods. Although he is not the actual importer, i.e. the person who imported the warehoused goods, the law deems him to be the importer. An "Importer", according to S.2(26) of CA, in relation to any goods between their importation and the time when they are cleared for home consumption, includes any owner, beneficial owner or any person holding himself out to be the importer." That precisely explains why, in the bill of entry for ex-bond clearance (Customs Series Form No. 24) of goods, the new owner is required to write his own name and IEC code as an importer. He thus becomes a deemed importer.

3. When an actual importer, who deposited the imported goods in a warehouse, files a bill of entry for ex-bond clearance of warehoused goods u/s 68, the applicable duties of Customs on such goods are payable:

(i) at the rate, as contemplated in S.15(1)(b) of the CA, applicable on the date on which a bill of entry for home consumption in respect of such goods is presented to the proper officer of Customs; and

(ii) on the value, as provided in para19.3 of Chapter 9 (Warehousing) of the CBEC's Customs Manual of Instructions, as assessed on the into-bond bill of entry at the time of warehousing of goods. In other words, the value of warehoused goods entered for home consumption is the same as determined under S. 14 of the CA.

Does Customs law treatthe value of same goods similarly when these are cleared for home consumption by the deemed exporter, i.e. transferee? Weshall seethat a few moments later.

4. During the pre-GST period, any goods imported into India were subject tobasic customs duty (BCD) and additional duty of customs equal to central excise duty,leviable u/s 2 and 3(1) respectively of the CTA.Besides, an additional duty at rate,not exceeding 4% u/s 3(5) ibid, was leviableto counter-balance the sales tax, value added tax and other local taxesleviable on like goods sold in India. In the GST regime, however, all suchindirect levies have been merged into and replaced by the GST.Import of goods is now regarded, under S. 7(2) of the iGST Act, as inter-State supply and, therefore, such imports are charged to iGST u/s 5 of the said Act. Proviso to S.5(1)ibid though makes it clear that "the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962." The duties of Customs, which now includeiGSTas well u/s 3(7) ibid, are thus levied and collected at the time of clearance of such imported goods for home consumption, either from the place of importation itself or from bonded warehouse.

5. Where the goodsimported into India and deposited in a bonded warehouse by an actual importer are transferred/soldto another person, in accordance with the provisions of S.59(5), anothertransaction of supplytakes place. This transaction involving imported though warehoused goods and taking place within the territory of India itself, raises two logical questions: -

(i) is it a supply of goods transacted within India and, depending on nature of supply,subject to iGSTin terms of S.7(1) or to cGST plus sGST as perS.8(1) of iGST Act? Or is it a continuation of the import transaction taxable only under S.7(2) of iGST Act?

(ii) how is the value of such a supply to be determined and duties of Customs, which include iGSTas well u/s 3 of CTA, levied?

6. The CBEC's recent circular No. 46/2017-Customs dated 24.11.2017 seeks to answer boththese questions. According to this circular, "the transaction of sale / transfer etc. of the warehoused goods between the importer and any other person may be at a price higher than the assessable value of such goods. Such a transaction squarely falls within the definition of ‘supply' as per section 7 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as, ‘CGST Act') and shall be taxable in terms of section 9 of the CGST Act read with section 20 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as, ‘IGST Act'). It may be noted 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. Thus, such a transaction of sale/transferwillbe subject to IGST under the IGST Act. Thevalue of such supply shall be determined in terms of section 15 of the CGST Act read with section 20 of the IGST Act and the rules made thereunder, without prejudice to the fact that customs duty (which includes BCD and applicable IGST payable under the Customs Tariff Act) will be levied and collected at the ex-bond stage." (emphasis provided)

7. In my humble view, however, the circular fails to cogently answer those questions. In fact, it not only contradicts itself but also misinterprets the GST law inasmuch as: -

(i) while hinting that transfer of warehoused goods is a supply by way of import covered u/s 7(2) of iGST Act, it goes on to hold such transfers "taxable in terms of section 9 of cGST Act read with section 20 of the Integrated Goods and Services Act".The circular fails to recognize that all transactions of inter-State supply, whether domestic falling u/s 7(1) or import falling u/s 7(2) of iGST Act, are subject to levy u/s 5 of iGST Act itself. Also, as the proviso to S. 5(1) ibid implies, iGST on imported goods is to be collected in terms of S.3(7) CTA at the time when duties of Customs are collected u/s 12 CA. The S.9 of cGST Act, whichprovides for levy of tax exclusively on intra-State supplies, has nothing to do with supplies by way of import.That precisely is the reason why it is one of those few provisions of cGSTAct which have not been made applicable to iGST Act u/s 20 thereof.

(ii) if transfer of warehoused goodsis an inter-State supply by way of import covered u/s 7(2) of iGST Act, as the circular itself acknowledges, then its value is determinable, as implied in proviso to S.5(1) of iGST Act, only u/s 3(8) of CTA. It can't be assessed u/s 15 of cGST, a provision applicable only to domestic supplies. However, the circularrecommendsjust that and stresses that the value be determined u/s 15 of cGST Actread with S.20 of iGST Act.

8. These legal incongruities apart, tax implications of the circular are simply debilitating for the buyers of such goods. For instance:

(i) the tax invoice of sale of warehoused goods, whether regarded as import or domestic supply, will not make the buyer eligible for ITC u/s 16(2)(c) without receipt of the goods which would still be lying in the warehouse. Even if explanation to S.16(2) of cGST Act read with S.20 of iGST Act is pressed into service to claim it, the credit of iGST paid again u/s 3(7) of CTA at the time of clearance for home consumption can't be claimed by the same owner again on the same goods.

(ii) duties of Customs including iGSTon inward supplies are payable by an importer only in cash, since ITC available in the credit ledger can be used for payment only of output tax, as provided in S.49(4) of cGST Act read with S.20 of iGST Act. If sale of warehoused goods and their subsequent clearance for home consumption are treated as two separate inter-State supplies u/s 7(2) iGST Act, both would attract IGST payable in cash. As a result, iGST payable on subsequent supply can't be paid using credit of iGST paid on earlier supply. That would inevitably strain the working capital of importers andwould without doubt undermineease of doing business.

(iii) sale as well as stock transfer of warehoused goods to special warehouses licensed u/s 58A of CA like duty free shops, ship storesetc will result in similar anomaly. They would pass on the entire tax burden to the buyersof such goods. And in case such buyers import those goods into India, they may have to pay iGSTon the goods that have already suffered its full incidence.

(iv) bond to bond sales of warehoused goods by or to 100% EOUs, EHTPs, STPs and units working under similar other schemes would have similar tax implications, compelling their operators to pay iGST on each of such transfers, without benefit of ITC, even when the imported goods are yet to be cleared for home consumption.

9. It is thus all too obvious that thecircular has completely overlooked the provisions of S.5 of iGSTAct whichindeed address this issue very succinctly. Consequently, instead of clarifying, it misconstruesand twists the GST law. How does S.5 of iGST Act, together with other provisions of GST and Customs law, resolve this dilemma without causing any distress to the buyers? Let us understand this issue by splitting it into following questions and try to find answers:-

A. Do the goods imported into India and deposited in a warehouse continue or cease to be imported goods, after they are ordered by the Customs authorities at the place of importation to be deposited in a warehouse?

B. What is the nature of supply involved in the sale of warehoused goods? Is it a transaction in the course of domestic trade or import trade?

C. How is the value of such supply to be determined --- under S. 15 of the iGST Act as the circular suggests, or under S.3(8) of the CTA as mandated in proviso to S.5(1) of iGST Act?

D. Is the iGST on this sale payable u/s 5(1) of iGST Act or in terms of proviso to the said S.5(1)? Or is it to be levied twice under both, as clarified by the circular?

A. Nature of goods

10. S.2(25) of the CA defines "imported goods" to mean "any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption". Thus, the goods which have already been cleared for home consumption can no longer be treated as imported goods. However, the goods deposited in a warehouse u/s 60(2) ibid are yet to be cleared for home consumption. They can be so cleared only after a bill of entry for home consumption is presented to the proper officer of Customs; applicable duties, interest etc, if any, are paid; and an order for their clearancefor home consumption is made by the proper officer in accordance with the provisions of S.68 ibid.Clearly, therefore, until that happens the goods deposited in a warehousecontinue to be imported goods.

B. Nature of Supply

11. The next question that confronts us is as to what is the nature of supply involved in a sale of what essentially are imported goods. According to S.7(2) of iGST Act, "Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce." The "customs frontiers of India", in turn has been defined in S.2(4) of iGST Act as to mean "the limits of customs area as defined in section 2 of the Customs Act, 1962." S.2(11) of the CA defines "customs area" to mean the "area of a customs station or a warehouse and includes any area in which imported goods or export goods are ordinarily kept before clearance by the Customs Authorities." A "warehouse", as per S.2(43) of the CA "means a public warehouse licensed under section 57 or a private warehouse licensed under section 58 or a special warehouse licensed under section 58A ." Further, as per S.2(44) of CA, "warehoused goods' means goods deposited in a warehouse".From thesedefinitions of relevant terms, it is clear that:

(i) thegoods that are sold by the actual importer to a deemed importer in terms of S.59(5) of CA arestill warehoused goods;

(ii) the warehouse where these have been deposited is within the limits of a customs area and so long as the goods are lying in such a warehouse they can't be said to have crossed the customs frontiers of India. They would be deemed to have crossed the Customs frontiers of India only after they cease to be imported goods, i.e. they are cleared for home consumption by the buyer (deemed importer) from the warehouse u/s 68 of the CA.

12. In other words, the process of importation which begins when the goods enter India, which, as provided in S.2(27), includes India's territorial waters, comes to an end only when such goods are cleared for home consumption. In Garden Silk Mills Vs Union of India {1999 (113) ELT 0358 (SC)} the Hon'ble Supreme Court had observed that "the import of goods into India would commence when the same cross into territorial waters but continues and is completed when the goods become part of mass of goods within the country." Clearly, therefore, the goods deposited in a warehouse u/s 60(2) of the CA continue to be "imported goods". Further, still lying as they do, within the "customs frontiers of India", supply of such goods is to be treated, as contemplated in S.7(2) of iGST Act, a supply of goods in the course of inter-State trade or commerce by way of import. This supply can't, therefore, be regarded as a domestic supply within the confines of S.7(1) or S.8(1) of the iGST Act.

C. Valuation of the goods

13. Once it is agreed that the goods deposited in a warehouse, even after their sale by the actual importer to the deemed importer, continue to be imported goods, the next logical step is to ascertain the manner to determine their value for the purposes of levy of :

(i) duties of Customs, leviable u/s 12 of the CA, in accordance with the provisions of S. 14 of the CA:

(ii) iGST,leviableunder proviso to S.5(1) of iGST Act read with S. 3(7) of the CTA, in accordance with the provisions of S. 3(8) of the CTA.

14. The value of imported goods, for levy of duties of Customs u/s S. 12,is determinable u/s 14 CA. Relevant provisions of this section are extracted below:

SECTION 14.Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods … shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, …. , where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf :

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid , any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties andlicencefees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf:

-----------" (emphasis supplied)

15 . The schemeof valuation enunciated in S.14 thus provides for a thumb rule and a supplementary rule to arrive at the assessable or transaction value of the imported goods. The supplementary rule is to be applied only when and if the thumb rule leaves out any essential components of the transaction value. In such a situation, the value of missed out components must be added to the value calculated using the thumb rule.While the thumb rule is outlined in S.14(1), the supplementary rule finds its place in the proviso thereto.

16. According to the thumb rule, the transaction value of the imported goods shall be the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation…. In other words,the total cost of import transaction up to the point when the goods sold for export (i.e. by sellers located outside India) are delivered (landed) at the time and place of importation. This value is commonly described as the CIF plus landing charges. Let us call it the thumb rule price. Then comes the applicability (or inapplicability) of the supplementary rule. It calls for an addition, to the thumb rule price, of any amount paid or payable for the costs and services specified thereinif they are not already included in the thumb rule price. Notably, the supplementary rule does not distinguish between the value of costs and services paid or payable, before or after the importation of goods. According to this rule, the norms that would govern such addition, if any, are to be prescribed in the rules made in this behalf, i.e. Customs Valuation (Determination of value of imported goods) Rules, 2007 , commonly called the Customs Valuation Rules (CVRs). Pertinent parts of relevant Rule 10 of the CVRs are extracted below:

"Customs Valuation (Determination of value of imported goods) Rules, 2007

10. Cost and services: -

(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, -

(a) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods , namely:-

(i) commissions and brokerage, except buying commissions;

(ii) -------

(iii)-------

(b) ------------

(i) --------

(ii)---------

(iii)------

(iv) ---------

(c)------------

(d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller ;

(e) -----------------"

17. Thus, whether any amount over and above the thumb rule price is to be considered for inclusion in the transaction value of imported goods would depend on whether:

(i) any amount was paid or payable by the buyer (importer) for the costs and services specified in relation to the imported goods; and

(ii) the said amount is already included in the thumb rule price or not.

If such an amount was indeed paid or payable but notincluded in the thumb rule price, it must be added to the said price, to arrive at the transaction value of imported goods.

18. Now, in respect of the goods, sold while deposited in the warehouse, let us assume, as done in the said circular, that the seller (actual importer) sold the goods to the buyer (deemed importer) at a price which was higher than the value (thumb rule price) recorded in the into-bond bill of entry. In that case, it can't be denied that:

(i) the difference between the two prices was the value of the proceeds of resale of imported goods made by the seller (actual importer) to the buyer (deemed importer);

(ii) this difference (profit margin of seller) was indeed a cost incurred by the buyer; and

(iii) thisvalue (amount) of profit margin indeed accrued to the seller.

As this amount was obviously not included in the transaction value recorded in the into-bond bill of entry, it would, going by the above-noted provision of Rule 10(1)(d) of the CVRs,indeed be liable for addition to the thumb rule price to arrive at the transaction value of the said goods in the hands of the buyer or deemed importer.

19. Accordingly, the transaction value of thewarehoused goods would be the price paid or payable by the deemed importer to the actual importer, subject to fulfilment of other essentials of S.14 CA. Accordingly, duties of Customs leviable u/s 12 CA and payable by the deemed importer at the time of ex-bond clearance would have to be assessed on this value.Besides, for the purposes of levy of iGST, under proviso to S.5(1) of iGSTAct, the assessable value would have to be calculated in accordance with the provisions of S.3(8) CTA.

20. Thus, contrary to the "clarification" dished out by the circular, S.15 of cGST Act has no application to the valuation of warehoused goods. It is also evident that the value mentioned in the into-bond bill of entry would no longer reflect the correct transaction value of such goods if sold while still stored in the warehouse. Their value would need to be reassessed in the manner detailed above in para 19. As a matter of fact, this is how the value of such goods is currently being calculated by the Customs at the time of their clearance for home consumption.

D. Dutiability/taxability of goods sold while still in warehouse

21. Once it is settled that the warehoused goods retain their identity, even after resale, as imported goods and duties of Customs leviable thereon are required to be assessed with reference to their transaction value, it becomes clear that:

(i) sale or supply of the said goods by way of importis a single import transaction, envisaged u/s 7(2) of iGST act, up until they are clearedfor home consumption. It can't lawfully be split into pre-warehousing and post-warehousing transactions;

(ii) the entire transaction is taxable only once under proviso to S.5(1);

(iii) if such goods are sold while still in warehouse,or for that matter at the port of importation itself, the sale transaction does not amount to a separate taxable supply. It continues to be a part of import transaction and is taxable, like high sea sales, only once at the time when the goods are cleared for home consumption and duties of Customs are collected; and

(iv) such sale/supply in bond can't, therefore, be taxed under S.9 of cGST Act, as suggested in the said circular, for this provision applies only to domestic intra-State supplies as defined in S.8(1) of iGST Act.

22. Given the above noted provisions of both the GST and Customs law, it is evident thatsale/transfer of warehoused goods is legally and practically no different from a high sea sale. There may be multiple sales involving same goods under importation,ranging from those made in high seas to the ones at the port of importation orin a bonded warehouse. However, so long as the goods have not crossed the "customs frontiers of India", i.e. they have yet not been cleared for home consumption, they continue to be "imported good". That being an undeniable fact, no GST can be levied thereon except in terms of proviso to S.5(1) of iGST Act at the time of their clearance for home consumption. In other words, they can be subjected to iGST only once u/s 3(7) CTA on a value determined u/s 3(8) ibid.

23. The circular thus warrants an immediate burial before it creates more chaos.

(The author is based at Chandigarh and is associated with GSTaxperts as Chief Patron. The views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

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Sub: Customs Circular No 46 of 2017

The energy and flow of your authentic output of the Indirect Tax Laws are breath taking.The last word has been well said by you in this second article of yours but where to find the last nail is always the question.
KS

Posted by Sonal Arora
 
Sub: Customs Circular No 46

Sir

Very good article

Posted by Jaiprakash Ruia