SEZ unit's sandalwood purchase through e-auction deemed inter-state supply qualifying for zero-rated treatment under IGST

Kerala HC held that SEZ unit's purchase of sandalwood through e-auction constituted inter-state supply, not intra-state transaction. Court determined that delivery acknowledgment at Marayoor Forest Department was not conclusive for place of supply determination, as goods continued movement to SEZ in Tamil Nadu. Transaction qualified as zero-rated supply under IGST provisions treating SEZ supplies equivalent to physical exports. Respondents' demand for 18% IGST payment was contrary to statutory scheme. Petitioner granted four weeks to comply with conditions excluding IGST deposit requirement.

---

---

Issues Involved:
1. Whether the supply of goods pursuant to confirmation of sale on 13.07.2018 in favor of the petitioner is an inter-State supply or intra-State supply.
2. Whether respondents 1 and 2 are legally justified in levying and demanding 18% IGST on the sale price from the petitioner for completing the sale.

Issue-wise Detailed Analysis:

1. Nature of Supply: Inter-State or Intra-State

- The petitioner, operating in a Special Economic Zone (SEZ), contends that the purchase of goods from Kerala for delivery in Tamil Nadu constitutes an inter-State supply under the Integrated Goods and Services Tax Act, 2017 (IGST Act). The petitioner argues that the place of supply should be determined by the final destination of the goods, which is the SEZ in Tamil Nadu, thereby making it an inter-State transaction.

- Respondents 1 and 2 argue that the sale is completed within the State of Kerala as the delivery of goods occurs at Marayoor Depot. They assert that the transaction is intra-State since the supply is completed within Kerala, and hence, IGST at 18% is applicable.

- The court examined the provisions of the IGST Act, specifically Sections 7 and 8, which define inter-State and intra-State supplies. Section 7(5)(b) explicitly states that the supply of goods to an SEZ unit is considered an inter-State supply. Section 10(1)(a) further clarifies that the place of supply is where the movement of goods terminates, which in this case is the SEZ in Tamil Nadu.

- The court concluded that the transaction should be treated as an inter-State supply since the final destination and termination of movement is the SEZ in Tamil Nadu. Therefore, the contention of respondents 1 and 2 that the supply is completed in Kerala is unsustainable.

2. Legality of Demanding 18% IGST

- The petitioner contends that being located in an SEZ, the transaction should be zero-rated under Section 16 of the IGST Act, which exempts supplies to SEZ units from IGST. The petitioner argues that the demand for 18% IGST is illegal and unauthorized.

- Respondents 1 and 2 argue that the petitioner should pay the 18% IGST and then claim a refund, as per the provisions of the IGST Act. They assert that the sale conditions, which were agreed upon by the petitioner, mandate the payment of applicable taxes, including IGST.

- The court analyzed Section 16 of the IGST Act, which defines zero-rated supplies, including supplies to SEZ units. It also examined Section 16(3), which provides options for claiming a refund of IGST paid on zero-rated supplies. The court noted that the statutory provisions allow for the movement of goods to an SEZ without the burden of tax, supporting the petitioner's contention.

- The court held that the demand for 18% IGST by respondents 1 and 2 is contrary to the statutory scheme of the IGST Act. It emphasized that the petitioner, being an SEZ unit, is entitled to zero-rated tax benefits, and the respondents' insistence on IGST payment and subsequent refund claim is not aligned with the law.

Conclusion:

- The court ruled in favor of the petitioner, holding that the subject transaction is an inter-State supply and should be treated as zero-rated. The court directed respondents 1 and 2 to deliver the goods to the petitioner without demanding 18% IGST. The petitioner was given four weeks to comply with the conditions of sale, excluding the deposit of IGST, and to communicate this to the respondents for the delivery of the goods. The court emphasized the importance of adhering to the statutory provisions of the IGST Act, ensuring that SEZ units receive the intended tax benefits.

---