2025 (12) TMI 895 - AAR - Customs

IGST exemption allowed on leased equipment from FTWZ to DTA under Notification 50/2017-Cus, Sr. No. 557B

The AAR held that IGST exemption under Notification No. 50/2017-Cus, Sr. No. 557B, is available on equipment supplied on lease by a Free Trade Warehousing ... Exemption from IGST - Applicability of Notification No. 50/2017-Customs dated 30.06.2017 Sr. No. 557B on supply of equipment on lease for use in manufacture of rig, from SEZ to DTA - HELD THAT:- The benefit of IGST exemption is available to a DTA Unit on importing of goods under lease transactions from an SEZ unit subject to Condition 102 i.e. on execution of a bond regarding retention, re-export/return, and payment upon breach and eventual re- export or return to the lessor (SEZ unit). In the instant matter, the applicant itself is not an SEZ Unit, but the Applicant has entered into an understanding with the FTWZ Unit for availing warehousing services and the goods are currently stored in the FTWZ unit - The definition given in SEZ Act, 2005 terms a FTWZ as a SEZ for specific purpose related to trading and warehousing and other related activities. Further, vide Instruction No. 60 dated 06.07.2010 and Instruction No. 49 dated 12.03.2010, it has been further clarified that FTWZ units can hold goods on behalf of DTA suppliers and effect FTWZ-DTA transactions. Although the Applicant itself is not an SEZ unit, however, the goods are physically stored within an FTWZ (a sub-category of SEZ as per Section 2(n) of the SEZ Act). Further, since the goods would be transferred from an FTWZ (Free Trade Warehousing Zone) unit to DTA, under lease transaction, the exemption under Sr. No. 557B of the Notification No. 50/2017-Customs dated 30.06.2017 is available to the applicant. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether goods stored in a Free Trade and Warehousing Zone and supplied on lease to a unit in the Domestic Tariff Area qualify for exemption from Integrated Goods and Services Tax under Serial No. 557B of Notification No. 50/2017-Customs. 1.2 Whether a lease transaction involving transfer of right to use goods without transfer of title, from an FTWZ/SEZ to DTA, is covered by items 1(b) or 5(f) of Schedule II to the Central Goods and Services Tax Act, 2017 for the purposes of Serial No. 557B. 1.3 Whether, in such SEZ/FTWZ-to-DTA lease transactions, the requirement in clause (i) of Condition No. 102 to execute a bond undertaking to pay IGST on the supply of service is applicable, where GST on the service is discharged by the lessor located in the taxable territory. 1.4 Consequence on IGST liability in case the benefit under Serial No. 557B is not available (considered only to the extent necessary, but rendered academic in view of the ruling on issues 1.1-1.3). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Applicability of Serial No. 557B of Notification No. 50/2017-Customs to lease of goods from FTWZ/SEZ to DTA, and coverage under Schedule II items 1(b) and 5(f) of the CGST Act Legal framework 2.1 Under Section 30 of the SEZ Act, 2005, removal of goods from a Special Economic Zone (including an FTWZ) into the Domestic Tariff Area is deemed to be an import into India, attracting duties as if the goods are imported from outside India. Rules 47 and 48 of the SEZ Rules, 2006 require filing of a Bill of Entry for home consumption and assessment under the Customs Act. 2.2 Section 2(n) of the SEZ Act defines a 'Free Trade and Warehousing Zone' as a Special Economic Zone wherein mainly trading and warehousing and related activities are carried on. Instructions No. 49 dated 12.03.2010 and No. 60 dated 06.07.2010 clarify that FTWZ units can hold goods on behalf of DTA suppliers/buyers and may undertake FTWZ-DTA transactions. 2.3 Serial No. 557B of Notification No. 50/2017-Customs grants Nil IGST on import of 'all goods, vessels, ships other than motor vehicles' 'imported under a transaction covered by item 1(b) or 5(f) of Schedule II' of the CGST Act, subject to Condition No. 102. 2.4 Items 1(b) and 5(f) of Schedule II to the CGST Act, 2017 classify as services: (a) transfer of right in goods or undivided share in goods without transfer of title; and (b) transfer of the right to use any goods for any purpose for consideration. 2.5 Condition No. 102 requires, inter alia, execution of a bond by the importer, undertaking to pay IGST on the supply of service, not to sell/part with the goods without permission, to re-export (or return, in SEZ cases) within a prescribed period, and to pay IGST on breach. A specific proviso and Explanation apply to goods supplied by an SEZ Unit to DTA. Interpretation and reasoning 2.6 The Tribunal noted that in the present case goods are imported into an FTWZ, stored there, and are then proposed to be cleared from FTWZ to DTA on lease to a DTA lessee. The lease transfers the right to use the goods for consideration without transfer of ownership. 2.7 On a plain reading of items 1(b) and 5(f) of Schedule II, the Tribunal held that a lease of goods, where title remains with the lessor but the right to use is transferred for consideration, is squarely covered as a 'supply of services' of the type contemplated by these provisions. The lease transaction from FTWZ/SEZ to DTA therefore falls within the class of transactions envisaged in Serial No. 557B. 2.8 The Tribunal recognised that, by virtue of Section 30 of the SEZ Act and the SEZ Rules, removal of goods from an FTWZ to DTA is treated as an import into India and is to be assessed under the Customs Act, including by availing exemption notifications where applicable. 2.9 With reference to the SEZ Act, Section 2(n), and the cited instructions, the Tribunal treated FTWZs as a species of SEZ, authorised specifically for trading/warehousing and to hold goods for DTA entities and effect FTWZ-DTA movements. 2.10 Although the applicant itself is not an SEZ Unit, the Tribunal emphasised that the goods are physically situated within an FTWZ (which is a Special Economic Zone), and the movement to DTA is from that FTWZ unit under a lease transaction. 2.11 Having regard to the purpose and structure of the FTWZ framework and its recognition as an SEZ, the Tribunal concluded that goods cleared from an FTWZ to DTA under such a lease satisfy the requirement of being 'goods imported under a transaction covered by item 1(b) or 5(f) of Schedule II' for the purposes of Serial No. 557B, provided the conditions of Condition 102 are met. Conclusions 2.12 Goods stored in an FTWZ and supplied on lease to a DTA lessee involve a transfer of right to use goods without transfer of title, and thus fall under items 1(b) or 5(f) of Schedule II to the CGST Act. 2.13 Removal of such goods from FTWZ to DTA is treated as import into India under Section 30 of the SEZ Act and Rules 47-48 of the SEZ Rules. 2.14 Accordingly, the benefit of Serial No. 557B of Notification No. 50/2017-Customs is available to the applicant in respect of these FTWZ-to-DTA lease imports, subject to satisfaction of the applicable parts of Condition No. 102. Issue 3: Applicability of clause (i) of Condition No. 102 where GST on lease is discharged by the lessor in taxable territory Legal framework 3.1 Clause (i) of Condition No. 102 requires the importer, by execution of bond, to bind himself 'to pay Integrated tax leviable under section 5(1) of the IGST Act, 2017 on supply of service covered by item 1(b) or 5(f) of Schedule II of the CGST Act, 2017.' 3.2 A further proviso to Condition No. 102 states that for goods supplied by an SEZ Unit to DTA under such transactions, where the SEZ Unit is liable to pay IGST on the transaction under the IGST Act, the lessee is required to bind himself only with conditions (ii), (iii), and (iv), and not clause (i). The Explanation clarifies that, in such SEZ cases, 're-export' means returning the goods to the SEZ lessor. Interpretation and reasoning 3.3 The Tribunal observed that the policy intent of Serial No. 557B read with Condition No. 102 is to avoid double taxation: IGST on import of goods is exempted where IGST/GST is already payable on the underlying lease service, subject to safeguards through the bond conditions. 3.4 In general cross-border lease imports, the service supplier is in a non-taxable territory and the importer in India is made liable to pay IGST on the service under reverse charge; clause (i) ensures such payment through the bond undertaking. 3.5 In the present case, however, the lessor is located in the taxable territory (India) and is liable to pay GST on lease rentals on forward charge basis. The lessee is not the person liable to discharge GST on the service. 3.6 Referring to the specific relaxation in Condition No. 102 for SEZ-to-DTA supplies, the Tribunal treated the FTWZ/SEZ context similarly in that the SEZ-side supplier is liable for GST on the lease transaction, and the DTA importer's bond need not extend to clause (i) when that tax is already discharged by the supplier. 3.7 On this basis, the Tribunal held that, in the circumstances where the supplier of the lease service is in the taxable territory and pays GST, requiring the importer/lessee to execute a bond under clause (i) would not serve the purpose of preventing double taxation and is therefore not necessary. Conclusions 3.8 For FTWZ/SEZ-to-DTA lease transactions covered by items 1(b) or 5(f) of Schedule II, where the lessor in India is liable to and does discharge GST on lease services on forward charge basis, clause (i) of Condition No. 102 is not applicable. 3.9 In such cases, the benefit of Serial No. 557B is available provided the importer/lessee complies with Conditions (ii), (iii), and (iv) of Condition No. 102, including (a) not selling or parting with the goods without permission; (b) re-export/return within the stipulated period (in SEZ/FTWZ cases, return to lessor); and (c) payment of IGST on breach. Issue 4: IGST rate if benefit under Serial No. 557B is not available Interpretation and reasoning 4.1 The Tribunal considered this question only conditionally, as a fallback in the event the exemption was held inapplicable. 4.2 Having concluded that the transaction qualifies under Serial No. 557B and that the exemption is admissible subject to compliance with Conditions (ii), (iii), and (iv) of Condition No. 102, the Tribunal treated the enquiry into the applicable IGST rate in the absence of exemption as infructuous. Conclusions 4.3 Since the exemption under Serial No. 557B of Notification No. 50/2017-Customs is held admissible to the applicant's FTWZ-to-DTA lease imports, the question of the IGST rate payable in the absence of such benefit does not arise and is not determined.