Imported goods found defective and this, no consideration payable to the foreign seller

[SHIVANSH MEHRA]

Goods were imported from China and supplied to a customer in India who in turn supplied it to a government department. But later such goods were found defective and rejected by the department and returned to the ultimate importer. Custom duties & IGST was duly paid.

Upon discussion with the Chinese supplier, they agreed with the defects and waived the consideration without return of such goods. Now, goods are lying with the importer which will be sold as scrap later.

Now, my question is whether consideration not paid/payable to the Chinese supplier will result in any kind of legal default or comolication under GST, FEMA, Customs, etc.?

[YAGAY andSUN]

Please check the terms and condition of your agreement in this regard. Since your supplier has accepted that goods were of inferior quality and having certain defects, therefore, waived the foreign remittance against such supply. On GST front, we don't foresee any issues, since goods were rejected by the ultimate user as No ITC will be available. On FEMA front, you would have to inform your Banker (AD) about such rejection of goods and waiver of payments by the foreign supplier to get its impact on IDPMS. On customs front, thought not necessary, you may send an intimation letter to show your bona fide about the whole gamut along with documentary evidences/complete chain of documents that defected goods are destroyed or sold as scrap.

[SHIVANSH MEHRA]

Thank you for the reply. In my opinion, there might be issues in availing IGST on imports as we might have to write off the Credit balance of the Chinese supplier which will in turn attract Section 17(5) of the CGST Act. Though proviso to Section 16(2) of the CGST Act s not applicable.

[YAGAY andSUN]

We are in agreement with you on your undertaking and submission.

AI Summary

Input tax credit reversal may arise where imported defective goods are waived by a foreign seller and no payment is made. Imported goods were found defective and returned to the importer; the foreign supplier waived payment while customs duty and IGST were paid. This raises GST issues because the waiver and any write-off may cause blocked input tax credit consequences, and requires informing the authorised dealer under FEMA; a customs intimation with documentary proof may be submitted to evidence disposal or scrapping of the goods.