2019 (4) TMI 1542 - AAAR - GST

Appellate Authority rules no GST on Duty Free Import Authorisations (DFIA) equivalent to Duty Credit Scrips

The Appellate Authority held that no GST is applicable on the sale or purchase of Duty Free Import Authorisations (DFIA), as they are equivalent to Duty ... Levy of GST - Sales and /or purchase of DFIA (Duty Free Import Authorisations) - applicability of serial no. 122a of the Notification No. 2/2017 - C.T. (Rate) inserted vide Notification No. 35/2017-C.T. (Rate) dated 13/10/2017 - Whether DFIA (Duty Free Import Authorisations) is duty credit scrips or otherwise? - HELD THAT:- Once it is established that the duty credit scrips issued under SEIS and MEIS, and DFIA are construed as same in the trade parlance dealing with these licenses or scrips and widely called as duty paying scrips or licenses or duty credit scrips due to their common functionality and nature, it is imperative that their classification would be the same despite the differences in the technicalities of their issuance in that duty credit scrips are issued under the MEIS & SEIS envisaged in chapter 3, while the DFIA are issued under Chapter 4. The intention of the law maker was crystal clear in that they wanted to give immediate relief to the exporters, who were facing great deal of difficulties due to the existing GST policies along with other technical glitches in the implementation of the GST provisions, by incentivizing their export related activities. It is under this vision and objective that the GST, on the treading of the duty credit scrips, was reduced from 5% to 0% for the promotion of the export, thus restoring the incentives held by the duty credit scrips and adding potential to the marketability of such scrips. All these proposals and recommendations made in the 22nd GST council meeting is comprehensibly and rightfully applicable in the case of DFIA for the reason that the DFIA is also issued by the DGFT for the benefit of the exporters by awarding them incentives on the exports done by them. The DFIA, also popularly known as duty paying scrips in the trade parlance is equivalent to the duty credit scrips, as far as the tax treatment thereon, are concerned and accordingly, there will be nil rate of GST on the sale or purchase of DFIA as provided in Sr. 122A of the Notification 02/2017-C.T. (Rate) dated 28.06.2017 as amended by the Notification No. 35/2017-C.T. (Rate) dated 13.10.2017. Issues Involved:1. Applicability of GST on sales and/or purchase of Duty Free Import Authorisations (DFIA).2. Interpretation of Duty Credit Scrips under Notification No. 2/2017-C.T. (Rate) as amended by Notification No. 35/2017-C.T. (Rate).3. Comparison and classification of DFIA and Duty Credit Scrips (DCS) under the Foreign Trade Policy (FTP).4. Relevance of trade parlance and functional test for classification.5. Consideration of GST Council minutes and CBEC circulars for determining tax applicability.Issue-wise Detailed Analysis:1. Applicability of GST on sales and/or purchase of DFIA:The primary issue is whether GST is applicable on the sale or purchase of DFIA. The Appellant sought an advance ruling under Section 97 of the CGST Act, 2017. The advance ruling authority initially ruled that DFIA is liable to GST, differentiating it from Duty Credit Scrips (DCS) based on their issuance under different chapters of the Foreign Trade Policy (FTP).2. Interpretation of Duty Credit Scrips under Notification No. 2/2017-C.T. (Rate) as amended by Notification No. 35/2017-C.T. (Rate):The exemption notification does not define Duty Credit Scrips under GST law. Therefore, the interpretation relies on the FTP, which describes Duty Credit Scrips as instruments to award incentives to exporters by allowing them to set off basic customs duty. The Appellate Authority considered the functional purpose of these scrips, which is to promote exports by offsetting customs duty.3. Comparison and classification of DFIA and Duty Credit Scrips under the Foreign Trade Policy (FTP):DFIA, as per Chapter 4 of FTP, allows duty-free import of inputs and is governed by the Standard Input Output Norms (SION). Despite being issued under different chapters, both DFIA and Duty Credit Scrips serve the same basic function of setting off basic customs duty on imported goods. The Appellate Authority concluded that the fundamental nature and functionality of both instruments are the same.4. Relevance of trade parlance and functional test for classification:The Appellant cited a Supreme Court ruling (Atul Glass Industries Ltd., 1986) emphasizing the functional test for classification. The ruling stated that the identity of an article is associated with its primary function and how it is understood in trade parlance. The Appellate Authority found that in trade, DFIA is considered equivalent to Duty Credit Scrips due to their common functionality and purpose.5. Consideration of GST Council minutes and CBEC circulars for determining tax applicability:The minutes of the 22nd GST Council Meeting indicated that the intention was to exempt Duty Credit Scrips from GST to restore their market value and incentivize exports. The Appellate Authority noted that this intention applies equally to DFIA, as both serve to incentivize exporters. Furthermore, CBEC circulars clarified that duty-paying scrips, including DFIA, attract nil GST under the relevant notification.Conclusion:The Appellate Authority concluded that DFIA, known as duty-paying scrips in trade parlance, is equivalent to Duty Credit Scrips for tax treatment purposes. Therefore, the sale or purchase of DFIA attracts a nil rate of GST as provided in Sr. 122A of Notification No. 2/2017-C.T. (Rate) as amended by Notification No. 35/2017-C.T. (Rate).Order:The ruling pronounced by the AAR was set aside, and it was held that no GST is applicable on the sale or purchase of DFIA, as provided in Sr. 122A of the Notification No. 2/2017-C.T. (Rate) dated 28.06.2017 as amended by Notification No. 35/2017-C.T. (Rate) dated 13.10.2017.