HDPE Drums Supply to Chemical Manufacturer: Karnataka High Court Rules Against Concessional GST Benefit Under Notification No. 41/2017-IT(Rate)

Case Overview

Case: Time Technoplast Ltd Vs Union of India
Court: Karnataka High Court
Ruling Reference: Order No. KAR/AAAR/02/2022
Appellate Authority Ruling Date: 04.03.2022
Coram: Justice S.G. Pandit and Justice K.V. Aravind

Background and Facts of the Case

Time Technoplast Ltd, a registered manufacturer of packaging materials such as HDPE drums, Jerrycans, and Intermediate Bulk Containers (falling under HSN 3923), approached the Karnataka High Court after both the Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR) denied it the benefit of the concessional GST rate of 0.1% under Notification No. 41/2017-IT(Rate) dated 23.10.2017.

The sequence of commercial transactions was as follows:

  1. A registered merchant exporter placed purchase orders on Time Technoplast Ltd for the supply of HDPE drums.
  2. Invoices were raised by the assessee in the name of the merchant exporter.
  3. Physical delivery of the HDPE drums was made, however, not to the merchant exporter but to the premises of a chemical manufacturer engaged in the production of ethyl alcohol.
  4. The chemical manufacturer used the drums to pack the ethyl alcohol.
  5. The merchant exporter then exported the ethyl alcohol packed in those drums.

The assessee argued that since the purchase order originated from the registered merchant exporter and the goods ultimately facilitated an export transaction, all conditions of Notification No. 41/2017-IT(Rate) were duly fulfilled, and the concessional rate of 0.1% should apply.

Statutory and Regulatory Framework

Notification No. 41/2017-IT(Rate)

Notification No. 41/2017-IT(Rate) dated 23.10.2017 was issued under Section 6(1) of the Integrated Goods and Services Tax Act, 2017 (IGST Act). Its primary objective was to address the issue of working capital blockage faced by exporters under the GST regime, particularly merchant exporters who had previously enjoyed duty-free procurement benefits in the pre-GST era.

The 22nd GST Council Meeting held on 06.10.2017 resolved to recommend the following for merchant exporters:

"(ii) For Merchant Exporters (ME)— a. Supplies of goods to a ME (registered with EPC/Commodity Boards) shall be on payment of nominal 1% GST. b. Adequate safeguards such as requiring export goods to be aggregated in export warehouses etc. to prevent misuse."

Pursuant to this recommendation, Notification No. 41/2017-IT(Rate) was issued, making inter-State supplies of taxable goods by a registered supplier to a registered recipient eligible for a concessional GST rate of 0.1%, subject to strict compliance with prescribed conditions.

Key Conditions Under the Notification

The conditions stipulated under the Notification, particularly Condition Nos. (v), (vi), and (vii), are central to this dispute:

"(v) the registered recipient shall place an order on registered supplier for procuring goods at concessional rate and a copy of the same shall also be provided to the jurisdictional tax officer of the registered supplier;"

"(vi) the registered recipient shall move the said goods from place of registered supplier — (a) directly to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported; or (b) directly to a registered warehouse from where the said goods shall be move to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported;"

"(vii) if the registered recipient intends to aggregate supplies from multiple registered suppliers and then export, the goods from each registered supplier shall move to a registered warehouse and after aggregation, the registered recipient shall move goods to the Port, Inland Container Deport, Airport or Land Customs Station from where they shall be exported;"

Additionally, Paragraph 2 of the Notification provides a disqualification clause — if the registered recipient fails to export the goods within 90 days from the date of the tax invoice, the registered supplier forfeits eligibility for the concessional rate.