1. A Show Cause Notice bearing reference no. XXXXXXXX dated XX September 2023 (“SCN dated 24 September 2023”) was issued to the Noticee by the Ld. Sales Tax Officer Class XXXXXX (“Ld. Proper Officer”) proposing GST demand of Rs. XXXX/- (CGST and SGST each) along with interest amounting to Rs. XXXX/- (CGST and SGST each) under section 50 of the CGST Act,2017 (“the Act”) and penalty as applicable under Section 73 of the Act on the sole allegation that while scrutinizing the annual return and financial statements filed by the Noticee for the period 20XX-20XX, it has been alleged by the Ld. Proper Officer that The Noticee has income classified as ‘duty scrips,' which is exempt from tax.
2. In response to the allegation as set out in the SCN dated XX September 2023, the Noticee submits that the findings of the concerned authority are not in line with the legal matrix and factual positioning of the case.
NOTICEE’S SUBMISSIONS
At the outset, the Noticee submits that the allegation made in SCN dated XX September 2023 is incorrect and unsustainable based on the following grounds and submissions which are independent and without prejudice to each other.
1. Duty Credit Scrip is an export promotion benefit, offered by Government of India under the Foreign trade policy, which can be used for the payment of Customs Duty. These scrips, which are issued to both the exporters of goods as well to exporters of services under the various schemes mentioned in the Foreign Trade Policy, can be transferred to others if they cannot be utilised by the taxpayer for various reasons.
The relevant extract from chapter 3 of Foreign Trade Policy (FTP), 2015-2020 is produced below:
3.02 Nature of Rewards
‘Duty Credit Scrips’ shall be granted as rewards under MEIS and SEIS. The Duty Credit Scrips and goods imported / domestically procured against them shall be freely transferable. The Duty Credit Scrips can be used for:
(i) Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3 (1), 3 (3) and 3 (5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, as per DoR Notification, except items listed in Appendix 3A.
(ii) Payment of Central excise duties on domestic procurement of inputs or goods,
(iii) Deleted
(iv) Payment of Basic Customs Duty and Additional Customs Duty specified under Sections 3 (1), 3 (3) and 3 (5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy
Transfer of these ‘Duty Credit Scrips’, for a consideration, becomes a supply under the provisions of CGST/TGST Act’2017.
2. Further, the government has provided exemption to duty scrips vide Notification no. 02/2017- Central Tax (Rate) dated 28.06.2017 which provided list of goods which were exempted from payment of GST which was amended vide Notification No. 35/2017- Central Tax (Rate) dated 13.10.2017 to include a new entry of ‘Duty Credit Scrips’ under the HSN ‘4907’ at Serial No. 122A. Thus the ‘Duty credit scrips’, which are classified under the category of goods, are exempted from payment of Goods and Service tax vide the notification No. 35/2017- Central Tax (Rate) dated 13.10.2017.
Notification No. 35/2017-Central Tax (Rate) dated 13/07/2017
G.S.R.(E).-In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No.2/2017-Central Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 674(E), dated the 28th June, 2017, namely:-In the said notification,- (A)in the Schedule,-(i) after S. No. 122 and the entries relating thereto, the following serial number and the entries shall be inserted, namely:
Therefore, GST is not leviable on sale of duty credit scrips.
3. Further, as per Section 17(2) of CGST Act, ITC is restricted to taxable supplies only and any proportional ITC attributable to exempt supplies shall not be allowed. The relevant extract of section 17 (2) are as follows:
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
4. Now, as per clause (d) of explanation 1 of Rule 43 of CGST Act 2017 inserted vide Notification no. 14/2022 duty scrips are excluded from the value of exempt supply for ITC reversal calculation. The relevant extract are as follows:
For the explanation 1 of rule 43, it is hereby clarified that the aggregate value of exempt supplies shall exclude:
(d) the value of supply of Duty Credit Scrips specified in the notification of the Government of India, Ministry of Finance, Department of Revenue No. 35/2017-Central Tax (Rate), dated the 13th October, 2017
5. Based on the aforementioned points, “Duty Scrips” are excluded form exempt supply while calculating exempt turnover for ITC reversal under Rule 42.
Conclusion
6. Therefore, Noticee is not liable to reverse ITC on common input under rule 42 on account of sale of duty credit scrips.
7. Accordingly, demand amounting to Rs. Rs. XXXX/-/- proposed vide Notice dated XX September 2023 upon the Noticee on this issue should be set aside as the same is not tenable in eyes of law.
