IGST not applicable on high seas sales to known customers before customs clearance but input tax credit must be reversed

In Re : BASF India Limited

In Re : BASF India Limited - 2018 (14) G. S. T. L. 396 (A. A. R. - GST) Issues Involved:
1. Levy of IGST on sale of goods in transit before customs clearance in India.
2. Reversal of input tax credit for inputs, input services, and common input services used in the transaction if IGST is not levied.

Issue-wise Detailed Analysis:

1. Levy of IGST on Sale of Goods in Transit:
The applicant, a subsidiary of an overseas company, engages in the trading of chemicals and allied products. They purchase goods from an overseas related party based on orders from customers in India. These goods are sold to the customers while still in transit, before customs clearance in India. The applicant sought clarity on whether IGST would be leviable on such sales.

The judgment clarified that:
- As per Section 7(2) of the IGST Act, the supply of goods imported into India until they cross the customs frontiers is considered an inter-state supply.
- The proviso to Section 5(1) of the IGST Act states that IGST on imported goods is levied and collected in accordance with Section 3 of the Customs Tariff Act, 1975, at the point when customs duties are levied under Section 12 of the Customs Act, 1962.
- The sale of goods on a high sea sales basis, where the goods have not yet crossed the customs frontier, is classified as an inter-state supply but is not subjected to IGST until customs clearance.
- The Circular No. 33/2017-Cus dated 1.08.2017 issued by the Central Board of Excise & Customs clarified that IGST on high sea sales transactions is levied only at the time of importation when customs declarations are filed.

Therefore, the judgment concluded that IGST would not be leviable on the sale of goods by the applicant to its customers while the goods are in transit and before customs clearance in India.

2. Reversal of Input Tax Credit:
The applicant also sought clarity on whether input tax credit (ITC) would need to be reversed if the transaction is considered an exempt supply due to the non-levy of IGST.

The judgment clarified that:
- As per Section 17(2) of the CGST Act, input tax credit is restricted to the extent attributable to taxable supplies, including zero-rated supplies.
- Section 2(47) of the CGST Act defines "exempt supply" as any supply attracting nil rate of tax or wholly exempt from tax under Section 11 of the CGST Act or Section 6 of the IGST Act, and includes non-taxable supply.
- Section 2(78) of the CGST Act defines "non-taxable supply" as a supply not leviable to tax under the CGST Act or the IGST Act.
- Since the goods sold on a high sea sales basis are non-taxable until customs clearance, they are considered an exempt supply under Section 2(47) of the CGST Act.

Therefore, the judgment concluded that the applicant would be required to reverse the input tax credit to the extent of inputs, input services, and common input services used in connection with the high sea sales transaction, treating it as an exempt supply.

Conclusion:
- IGST is not leviable on the sale of goods by the applicant to its customers while the goods are in transit and before customs clearance in India.
- The applicant must reverse the input tax credit for inputs, input services, and common input services used in the high sea sales transaction, as it is treated as an exempt supply.

Order:
The questions posed by the applicant were answered as follows:
1. IGST will not be leviable on the sale of goods by the applicant to its customers before customs clearance in India.
2. Input tax credit will have to be reversed to the extent of inputs, input services, and common input services used in the transaction, treating it as an exempt supply under Section 17 of the CGST Act.