Introduction
The complexities of cross-border trade often present unique challenges under the Goods and Services Tax (GST) regime, particularly when the physical movement of goods does not align with the flow of invoicing and payments. A common business model involves an Indian entity acting as an intermediary or principal, sourcing goods from a foreign country and supplying them directly to another destination abroad, without the goods ever crossing Indian customs frontiers.
While general industry understanding often categorizes such transactions under Schedule III (activities neither treated as supply of goods nor services), a recent pronouncement by the Authority for Advance Ruling (AAR), Tamil Nadu, has taken a strict interpretative stance. In the case of In re Snag & Bag Retail Private Limited, the Authority examined whether a transaction between two Indian entities involving goods located and delivered outside India attracts GST.
This article provides a comprehensive legal analysis of the ruling, exploring the boundaries of Advance Rulings under Section 97 of the CGST Act, 2017, the interpretation of Schedule II versus Schedule III, and the implications for Indian businesses engaged in global drop-shipping or merchant trading models.
Factual Matrix of the Case
The applicant, a registered assessee under the GST Act, approached the Authority to seek clarity on a specific business model. The assessee operates as a retail, wholesale, and service provider. The core of the application revolved around a tripartite arrangement involving:
- The Assessee: Located in India.
- **The Client (Let us call them M/s Desi Traders)😗* Located in India.
- **The Vendor (Let us call them M/s Global Source Inc)😗* Located outside India (e.g., Spain, China).
The Transaction Flow
The assessee presented the following operational structure:
- Sourcing: The assessee purchases goods (such as kitchen appliances, travel gear, and electronics) from M/s Global Source Inc.
- Invoicing: The assessee raises an invoice on M/s Desi Traders (the Indian client) for these goods.
- Payment Flow: M/s Desi Traders pays the assessee in Indian Rupees (INR). The assessee, in turn, pays M/s Global Source Inc in foreign currency (USD).
- Movement of Goods: The goods are shipped directly from the foreign vendor to a warehouse outside India (e.g., in the USA). From there, they are delivered to ultimate customers abroad.
- Crucial Fact: The goods never enter the Indian territory, and there is no realization of foreign currency into India regarding the goods transaction.
The assessee sought to understand the taxability of this model, specifically asking if it qualified as an export, a zero-rated supply, or a merchant trade transaction, and whether GST registration was mandatory if the activity fell under the so-called "negative list."