Sandeep Patil vs Union Of India And Ors on 7 October, 2019

Outcome**

The Bombay High Court:
* Allowed Writ Petition No. 1511 of 2019, quashing and setting aside the impugned order dated 10th January 2019 (denying Input Tax Credit (ITC) refund) and the related show cause notices issued by the Deputy Commissioner of Sales Tax.
* Refrained from issuing a declaration in Writ Petition No. 1535 of 2019, holding that the Petitioner is entitled to claim ITC on services provided to Duty Free Shops (DFSs) by Mumbai International Airport Ltd. (MIAL) and subsequently claim a refund.
* Dismissed Criminal Application No. 8 of 2019 as infructuous.
* Refused the Respondent-State's request for a stay on the judgment and order.

2. Core Issue

The core issue was whether Duty Free Shops (DFSs) located in the international arrival and departure areas of Mumbai International Airport are liable to Goods and Services Tax (GST), specifically regarding:
1. The eligibility for refund of Input Tax Credit (ITC) on sales of duty-free goods (primarily imported/warehoused goods) to departing international passengers.
2. The GST liability on sales of duty-free goods to arriving international passengers.
3. The GST liability on concession fees paid to MIAL for the grant of rights and use of licensed premises for DFSs.
The issue revolved around the interpretation of "customs frontiers," "export," "import," and "supply" under GST laws in light of Article 286 of the Constitution of India and existing Supreme Court precedents concerning DFSs.

3. Key Facts

• Petitioner: Flemingo Travel Retail Limited, operating Duty Free Shops (DFSs) at Mumbai International Airport (MIAL).
• Location: DFSs are situated in the international arrival and departure areas, beyond immigration, and beyond the customs frontiers of India, within a 'customs station' and 'customs area'.
• Goods: Primarily imported/warehoused goods (e.g., chocolates, perfumes, alcohol) or occasionally procured from SEZ units. Approximately 98% of sales are of imported/warehoused goods.
• Procurement: Goods are imported without payment of duty by filing a bill of entry for warehousing under Section 46 of the Customs Act, 1962, and stored in a special customs bonded warehouse (Section 58A Customs Act).
• Movement of Goods: Goods move from the special warehouse to the DFSs under customs supervision, remaining within the customs area. They are not cleared for home consumption before sale.
• Sales to Departing Passengers:
  • Invoices include a declaration stating the passenger carries goods "on behalf of Flemingo Travel Retail Limited (Mumbai Duty Free) out of India" and will not use/consume them until landing at the final destination outside India, where ownership transfers.
  • Sales are supervised by customs to ensure goods leave India; if a passenger fails to board, the sale is void, and goods are returned.
  • Since July 1, 2019, no tax-paid indigenous goods are supplied to outbound passengers.
• Input Services: DFSs receive various input services (e.g., rent, maintenance, professional services) from service providers, on which GST is paid, accumulating ITC.
• Impugned Action: The Deputy Commissioner of Sales Tax issued an order denying refund of ITC for sales from the departure area DFS and issued show cause notices alleging GST liability on goods imported into the special warehouse and non-payment of SGST on sales to international passengers.
• MIAL Charges: MIAL collects GST on minimum guaranteed fees/concession fees from the Petitioner.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Flemingo Travel Retail Limited - Inferred and Supported by Court's Reasoning):
* Sales from DFSs (both arrival and departure) occur before goods cross the 'customs frontiers of India' for home consumption, thus falling outside the taxable territory for state taxes, as per Article 286 of the Constitution.
* These sales constitute "exports" or occur "in the course of import/export" and are therefore immune from GST, drawing support from Supreme Court judgments in ITDC (Hotel Ashoka) and J.V. Gokal & Co.
* Sales to departing passengers are "zero-rated supplies" (exports) under the IGST Act, making the DFS eligible for 100% ITC refund on input services. The property in goods passes only at the foreign destination.
* Sales to arriving passengers (pre-Feb 1, 2019) are also treated as "export" by the DFS, with the passenger becoming the importer (supported by Aarish Altaf Tinwala affirmed by SC). Post-Feb 1, 2019, these are "neither supply of goods nor services" under Schedule III of the CGST Act, entitling ITC.
* Denial of ITC refund makes Indian DFSs uncompetitive globally, adversely affecting foreign trade, contrary to the intent of Article 286.
* Other DFSs across India are receiving similar ITC refunds, indicating discriminatory treatment.

Revenue (Union of India and State):
* Writ petitions should be dismissed due to the availability of an alternate remedy.
* Supreme Court precedents like ITDC (Hotel Ashoka), decided under VAT and CST laws, are not applicable to the GST regime, which is a self-contained code.
* DFSs are located within the geographical and "taxable territory" of India/Maharashtra, subjecting their operations to GST.
* The definition of "export" under the Customs Act does not automatically apply to GST laws.
* Under Section 19 of the Sale of Goods Act, the outbound passenger immediately becomes the owner, meaning the DFS does not "export" the goods. Export is undertaken by the passenger, not the DFS.
* The Authority for Advance Ruling in Rod Retail Pvt. Ltd. held that supplies to international passengers from DFSs are intra-State supplies, not exports.
* GST laws do not exempt supplies in areas beyond customs frontiers from GST. Section 7(2) of the IGST Act treats such supplies as inter-State.
* The "Duty-Free Shop" nomenclature does not grant immunity from all indirect taxes.
* ITC should be restricted to tax borne on the value of goods and not on other GST paid on services.
* While import of goods for DFS may not attract customs duty (not cleared for home consumption), they remain liable to GST.
* Sales to incoming passengers should not be entitled to refund, regardless of the Central Government order regarding customs duty.
* Concerns about price increases and international competitiveness are irrelevant to tax liability.

5. Court’s Reasoning

1. Jurisdiction & Alternate Remedy: The Court entertained the writ petitions due to the clear legal position and significant merit in the Petitioner's arguments, despite the availability of an alternate remedy.
2. Constitutional Mandate (Article 286): Article 286(1)(b) prohibits State laws from imposing tax on supplies occurring "in the course of import" into or "export" out of India. This aims to prevent double taxation and protect foreign trade.
3. Binding Precedents: The Court relied heavily on the Constitution Bench judgment in J.V. Gokal & Co. vs CST and the Supreme Court's decision in India Tourist Development Corpn. Ltd. v. CCT (Hotel Ashoka). These cases established that sales from DFSs situated at international airports, before goods cross the customs frontiers, are deemed to occur "outside India" for tax purposes and are immune from State taxes.
4. Definition of Customs Frontiers & Taxable Event:
   • DFSs and special warehouses are part of the "customs area" as defined in Section 2(11) of the Customs Act, read with Section 2(4) of the IGST Act.
   • Goods within this customs area are considered not to have crossed the "customs frontiers of India."
   • The taxable event for customs duty and Integrated GST (IGST) on imports occurs only when goods are cleared for home consumption by filing a bill of entry under Section 68 of the Customs Act, which does not happen at the DFS stage.
5. Sales to Departing Passengers (Export/Zero-Rated Supply):
   • The invoice declaration and Sections 5(2) and 19(1) of the Sale of Goods Act confirm that the property in goods passes only when the outbound passenger reaches the final foreign destination. The passenger acts as a carrier for the DFS.
   • This transaction constitutes "export" by the DFS as per Section 2(5) of the IGST Act ("taking goods out of India to a place outside India").
   • Therefore, sales to departing passengers are "zero-rated supplies" under Section 16(1) of the IGST Act, making the DFS eligible for a full refund of ITC on input services.
   • This view was consistent with prior judgments by the Bombay High Court (Sandeep Patil, A-1 Cuisines) and the Allahabad High Court (Atin Krishna).
6. Sales to Arriving Passengers (Import/Exempt/No Supply):
   • For the period July 1, 2017, to January 31, 2019: Based on the Central Government order in Aarish Altaf Tinwala (affirmed by the Supreme Court), sales from arrival DFSs were treated as "export" by the DFS, with the passenger becoming the importer. By legal fiction, these were zero-rated supplies, eligible for ITC refund.
   • Effective February 1, 2019: The CGST (Amendment) Act, 2018, inserted Entry 8(a) into Schedule III of the CGST/SGST Act, classifying the supply of warehoused goods before clearance for home consumption as "neither a supply of goods nor a supply of services." This means reversal of ITC under Section 17(2) of the CGST Act is not required, making the DFS eligible for ITC.
   • Furthermore, arriving passengers' baggage is exempt from customs duty and IGST up to permissible limits (Customs Notification No. 43/2017 & IGST Notification No. 2/2017), meaning no IGST is leviable by DFS or on import by passengers.
7. Rejection of Revenue Arguments:
   • The Court distinguished Revenue's cited precedents as they did not pertain to DFSs, sales for export, or bonded warehouses.
   • The Authority for Advance Ruling decision in Rod Retail Private Limited was deemed inapplicable, as it pertained to a duty-paid shop, and CBIC clarified it does not affect DFSs.
   • The Court affirmed that Customs Act procedures for procurement of imported/warehoused goods are relevant for DFS operations under GST, as clarified by CBIC Circular No. 106/245/2019-GST.
   • The economic impact of taxing DFSs, leading to increased prices and reduced competitiveness, was considered contrary to the intent of Article 286.
   • The discriminatory treatment compared to other DFSs in India receiving refunds was also noted.

6. Statutory References

• Constitution of India: Article 286, Article 32, Article 14, Article 19, Article 21, Article 300A, Article 246A, Article 279A
• Central Goods and Services Tax Act, 2017 (CGST Act): Section 1(2), Section 16(1), Section 17(2), Section 55, Section 103, Schedule III (Entry 8(a))
• Integrated Goods and Services Tax Act, 2017 (IGST Act): Section 2(4), Section 2(5), Section 2(10), Section 5 (proviso), Section 7(2) (proviso), Section 16(1)
• Customs Act, 1962: Section 2(11), Section 2(13), Section 12, Section 46, Section 58A, Section 59, Section 60, Section 68, Section 77
• Customs Tariff Act, 1975: Section 3 (specifically 3(12))
• Sale of Goods Act, 1930: Section 5(2), Section 19(1), Section 19(2)
• Bombay Sales Tax Act, 1953: Section 46
• Maharashtra Goods and Services Tax Act (MGST Act): Section 1(2)
• CGST (Amendment) Act, 2018
• Customs Notification No. 43/2017-Cus dated 30th June 2017
• IGST Notification No. 2/2017 IGST (rate) dated 28th June 2017
• Circular No. 106/245/2019-GST dated 29th June 2019 (CBIC)
• Public Notice No. 154/2004 dated 22nd July 2004 (Customs Procedures for Operation of DFS)
• Rule 89 (of GST Rules, implied for refund procedure)

7. Precedents Cited

1. Indian Tourist Development Corp. Ltd. v. CCT [(2012) 3 SCC 204] (Hotel Ashoka) (Supreme Court)
2. J. V. Gokal & Co. vs CST, [AIR 1960 SC 595] (Constitution Bench, Supreme Court)
3. Sandeep Patil vs. Union of India & Ors. (Criminal Public Interest Litigation No.14 of 2019) (Bombay High Court, earlier decision in same case)
4. Atin Krishna vs. Union of India & ors. (P.I.L. CIVIL NO. 12929 of 2019) (Allahabad High Court)
5. A-1 Cuisines Private Limited Vs. Union of India (Writ Petition No. 8034 of 2018, dated 28.11.2018) (Bombay High Court)
6. Aarish Altaf Tinwala (F.No. 371/142/B/2018-RA/1391) (Central Government Order, affirmed by Supreme Court in Writ Petition (C) No. 564 of 2019 dated 10th May 2019)
7. Kiran Spg. Mills v. Collector of Customs-AIR 2000 SC 3448 (Supreme Court)
8. Garden Silks Mills Ltd. Vs. Union Of India [1999 (113) ELT 0358 (SC)] (Supreme Court)
9. State of Travancore-Cochin v. Bombay Co. Ltd.-AIR 1952 SC 366 (Supreme Court)
10. State of Travancore-Cochin v. Shanmugha Vilas Cashewnut Factory - AIR 1953 SC 533 (Supreme Court)
11. Burmah Shell Oil Storage and distributing Co. of India Ltd. vs. CTO [(1961) 1 SCR 902] (Supreme Court)
12. Madras Marine & Co. vs. State of Madras [(1986) 63 STC 0169 (SC)] (Supreme Court)
13. Narang Hotels and Resorts Pvt. Ltd. vs. State of Maharashtra [(2004) 135 STC 289 (Bom)] (Bombay High Court)
14. Commissioner of Sales Tax vs. M/s. Pure Helium (India) limited [(2012) 49 VST 17]
15. Commissioner of Sales Tax Maharashtra State vs. Radhasons International (Reference Application No. 46 of 2008) (Bombay High Court)
16. K. Gopinath Nair vs State of Kerala 1992(4) SCC701
17. Authority for Advance Rulings in the matter of Rod Retail Private Limited dated 27th March 2018 vide AR No. 01/DAAR/2018 in Application No. 01/DAAR/2017
18. Roe Kim Seing v. Maung Ba Chit, AIR 1935 PC 182
19. IN RE: The Bill to amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excise Act, 1944 [(1964) 3 SCR 787 at page 823] Sea Customs Case