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The Bombay High Court recently held that duty free shops (DFS) at the Chhatrapati Shivaji International Airport in Mumbai cannot be charged Goods and Services Tax (GST) on goods sold to outbound passengers.
The judgment passed by the Division Bench of Justices Ranjit More and Bharati Dangre sums up the law regarding taxation for Duty Free Shops thus,
“The customs duty and IGST is leviable only on removal of warehoused goods from the customs area, which happens when the arriving passengers leave the custom area. Since, the goods sold by DFS to arriving passengers do not leave the customs area, DFS is neither liable to pay customs duty, nor IGST.”
The Court was also prompted to observe that burdening duty-free shops with taxes would also hamper and prejudicially affect augmentation and conservation of foreign trade.
“If the duty free shop, which caters to the outgoing or incoming international passengers, is subjected to local taxes by the State, the tax burden will increase and the price of the goods, which are supposed to be free of taxes and duties, will go up, and the same would prevent the duty free shops in India from competing with DFSs at international airports elsewhere in the world.”
The judgment was passed in a challenge made to a January 2019 order of the Sales Tax Department. By this order, the Sales Tax Department had denied the petitioner a refund of Input Tax Credit pursuant to the sale of duty-free goods from the duty-free shops (DFS) at the departure area of the Mumbai International Airport. The challenge was brought by Flemingo Travel Retail Limited.
The High Court, in turn, found that the said order was against the intent of Article 286 of the Constitution of India, which restricts the state from taxing import and export of sale/service transactions into or outside the country.
Inter alia, the Court noted that the petitioner had been issued a special warehouse license under Section 58A of the Customs Act. This meant that both Felmingo’s DFS and its special warehouse fell within the ‘Customs area’ as per Section 2 (11) of the Customs Act. The shops are situated at the international arrival and international departure area, after crossing immigration. As noted in the judgment,
“Under Section 2(4) of IGST Act, “the customs frontier” means the limits of customs area as defined in Section 2 of the Customs Act, 1962. The DFS located in the customs airports and special warehouse will thus form part of the customs area as defined under section 2(11) of the Customs Act.“
The Court proceeded to note that it is well established that the “supply of goods from the arrival DFSs is treated as an export by DFSs, and the passenger who buys from DFS and thereafter crosses the customs barrier, files import declaration and becomes importer.” As noted above, Article 286 of the Constitution exempts export and import of goods and services from being liable to taxation.
In this regard, reliance was placed on an August 31, 2019 Government Order i.e. Aarish Altaf Tinwala (F.No. 371/142/B/2018-RA/ 1391) as well as the Supreme Court’s judgment in Aarish Altaf Tinwala v Union of India and Sandeep Patil vs. Union of India & Ors.
While this is the case, the Court disagreed with the contention put forward by the State that the DFS would nevertheless be liable to to taxation under the prevailing GST regime. The authorities had argued that the duty-free shop was liable to be taxed since it was located in taxable territory (i.e. within the state limits of Maharashtra and in an Indian airport).
However, the Court rejected this stance, more so since there was a Central Government circular which specifically clarified that such establishments would be exempt from GST laws.
“There is no merit in the submission of the Respondents that although the Customs Act treats the sale at DFS as export, the same cannot be ipso facto applicable under the GST Laws. Paragraph 4 of Circular No. 106/245/2019-GST dated 29th June 2019 issued by the Central Board of Indirect Taxes and Customs…………………. GST Policy Wing of ministry of Finance, Government of India clearly shows that since the procedure for procurement of imported/warehoused goods is governed by the Customs Act, the procedure and applicable rules as specified under the Customs Act are required to be followed for procurement and supply of such goods.”
Substantial reliance was also place on the Supreme Court’s 2012 judgment in India Tourist Development Corpn. Ltd. Through Hotel Ashoka v CCT, in which case the Court had ruled in favour of exempting DFSs at the International Airport at Bangalore from being liable to tax. In that case, the Supreme Court had observed,
“..it is very clear that no tax on the sale or purchase of goods can be imposed by any State when the transaction of sale or purchase takes place in the course of import of the goods into or export of the goods out of the territory of India. Thus, if any transaction of sale or purchase takes place when the goods are being imported in India or they are being exported from India, no State can impose any tax there on…
…in our opinion, looking to the provisions of Article 286 of the Constitution, the State of Karnataka has no right to tax any such transaction which takes place at the duty-free shops owned by the appellant which are not within the customs frontiers of India.”
The High Court also expressly rejected the State’s opposition to relying on these precedents. The State had registered their objection to following these case laws on the ground that they were not pronounced in the context of the present GST laws. However, the High Court observed,
“In our view, such approach of the Respondents appears to be ex-facie erroneous, moreso when the judgments on which the Respondents seek to rely, are neither of the GST regime, nor passed in the matters of duty free shops situated at the arrival or departure area of international airports.”
Additionally, the Court also took critical note of the petitioners’ submission that DFSs in other states were not being taxed, as sought by the Government in Maharashtra. As observed in the judgment,
“It was pointed out on behalf of the Petitioner having DFSs, that the same Petitioner is getting refund of ITC pursuant to sales from their other DFSs in the departure area of other international airports within India. The said contention was not disputed by the Respondents. The GST regime is based on “One nation, one tax theory”. The authorities in the State of Maharashtra cannot give a discriminatory treatment, particularly when the refund has been and is being granted in several other States.“
In view of these observations, the High Court proceeded to rule in favour of the DFS owner, Flemingo (petitioner), holding,
“In the backdrop of above, we are of the view that impugned order and the impugned show-cause notice dated 10th January 2019 are manifestly arbitrary and in the teeth of the purpose and intent of Article 286 of the Constitution of India and the provisions of the GST law read with the Customs Act, 1962.”
Senior Counsel Vikram Nankani appeared for the petitioner, along with advocates Ashish Kamat, Abhay Jadeja, Varun Satiya and Arun Unnikrishnan instructed by Crawford Bayely & Co.
Special Counsel VA Sonpal and advocates Jitendra Brijbhushan Mishra, Himanshu Takke, Jyoti Chavan, Vijay Jain and Sriram Sridharan appeared for respondent authorities and the Mumbai International Airport Limited.
[Read Judgement dated October 7, 2019]