FTWZ unit transfers to DTA customers exempt from GST under Schedule III para 8(a) but requires ITC reversal post-2023 amendment

AAR Tamil Nadu ruled that transfer of title of goods stored in FTWZ unit by applicant to DTA customers or multiple transfers within FTWZ followed by removal constitutes bonded warehouse transaction covered under para 8(a) of Schedule III of CGST Act. Since FTWZ is deemed foreign territory outside customs territory, such transfers are exempt from GST. However, following 2023 amendment to Section 17(3) of CGST Act, applicant must make proportionate reversal of input tax credit on common inputs/capital goods/services for activities under Schedule III para 8(a).

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Issues Involved:
1. Whether the transfer of title of goods stored in FTWZ Unit by the applicant to its customers in Domestic Tariff Area (DTA) or multiple transfers within the FTWZ followed by a subsequent removal from FTWZ Unit would result in bonded warehouse transaction covered under para 8(a) of Schedule III of the CGST Act or Tamil Nadu GST and Service Tax Act, 2017.
2. Whether Integrated Goods and Services Tax (IGST) is payable by the applicant on goods stored in FTWZ unit and supplied to its customers in DTA unit, in addition to the customs duty payable by the customer in DTA on removal of goods from the FTWZ unit.
3. Whether any reversal of input tax credit of common inputs/input services/capital goods is required at the hands of the applicant in terms of the amended Section 17(3) of the CGST Act.

Detailed Analysis:

Issue 1:
The applicant queried whether the transfer of title of goods stored in FTWZ Unit to customers in DTA or multiple transfers within the FTWZ followed by a subsequent removal would be covered under para 8(a) of Schedule III of the CGST Act. The applicant argued that FTWZ is not a warehouse licensed under sections 57, 58, or 58A of the Customs Act and is instead governed by the SEZ Act, making it a SEZ unit rather than a warehouse. The applicant also cited various legal provisions and case laws to support their contention that the goods stored in FTWZ do not qualify as "warehoused goods" under the Customs Act.

The ruling clarified that FTWZ is part of SEZ and is considered a Customs bonded warehouse. The SEZ Act deems SEZs, including FTWZ, as territories outside the customs territory of India for trade operations and duties. The ruling concluded that the transfer of title of goods stored in FTWZ Unit by the applicant to its customers in DTA or multiple transfers within the FTWZ falls under para 8(a) of Schedule III of the CGST Act, 2017.

Issue 2:
The applicant questioned whether IGST is payable by them on goods stored in FTWZ and supplied to DTA customers, in addition to the customs duty payable by the DTA customer upon removal from FTWZ. The applicant argued that removal of goods from FTWZ is akin to import and should be subject to customs duty, including IGST, at the time of clearance for home consumption by the DTA customer.

The ruling stated that since the transfer of title of goods stored in FTWZ is covered under para 8(a) of Schedule III of the CGST Act, the applicant is not liable to pay IGST as long as the goods remain warehoused. The DTA customer is responsible for paying applicable customs duties, including IGST, upon removal of goods from FTWZ. Therefore, the query was not answered as the answer to Issue 1 was affirmative.

Issue 3:
The applicant sought clarification on whether any reversal of input tax credit (ITC) of common inputs/input services/capital goods is required in terms of the amended Section 17(3) of the CGST Act, irrespective of whether the supply of goods lying in FTWZ to DTA customers is covered under Schedule III of the CGST Act or not.

The ruling explained that prior to the amendment, the explanation to Section 17(3) did not include activities listed in Schedule III as "exempt supply." Post-amendment, para 8(a) of Schedule III is included as an exception to Section 17(3), necessitating the proportionate reversal of ITC of common inputs/capital goods/services availed by the applicant. The ruling concluded that the applicant is liable to reverse the proportionate ITC in terms of the amended Section 17(3) of the CGST Act, 2017.

Ruling:
1. The transfer of title of goods stored in FTWZ Unit by the applicant to its customers in DTA or multiple transfers within the FTWZ is covered under para 8(a) of Schedule III of the CGST/TNGST Acts, 2017.
2. The query regarding IGST payable by the applicant is not answerable since the first query was answered affirmatively.
3. The applicant is liable to reverse the proportionate ITC of common inputs/capital goods/services availed, if any, in terms of the amended Section 17(3) of the CGST Act, 2017.

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