Duty Free Shops Win: Court Allows GST Refunds on Export Sales to International Passengers

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Case Name

Cial Duty Free and Retail Services Ltd. & Ors. Vs Union of India

Case No.: WP(C).No.12274 of 2020 (and consolidated cases: WP(C).6850/2018, WP(C).12278/2020, WP(C).12279/2020, WP(C).12280/2020, WP(C).12317/2020, WP(C).13237/2020)

Court Name: High Court of Kerala at Ernakulam

Date of Judgment: 22nd September 2020

Judge: The Honourable Mr. Justice Amit Rawal

Key Takeaways

1. Export Treatment for DFS Sales: The court established that sales by duty free shops to departing international passengers constitute “export of goods” under the IGST Act, 2017, making them zero-rated supplies.

2. 100% ITC Eligibility: Duty free shops are entitled to claim 100% Input Tax Credit on goods and services supplied to them, and can claim full refund of unutilized ITC effective from 01.07.2020 onwards.

3. Customs Act Definitions Apply: The expressions “import” and “export” as defined under the Customs Act, 1962 are identically defined in the IGST Act, 2017, so the Customs Act treatment of DFS sales as exports applies equally under GST law.

4. Non-Discrimination Principle: The court found it discriminatory that identical refund applications from DFS operators in Karnataka, Punjab, Tamil Nadu, Goa, West Bengal, and Gujarat were allowed, while Kerala operators were denied.

5. Customs Frontier Concept: Duty free shops located within customs airports form part of the customs area, and goods sold from these shops are not sold for domestic purposes—they’re sold before goods cross customs frontiers.

6. Government’s Own Position: The Central Government’s decision not to file an SLP (Special Leave Petition) against the Bombay High Court’s similar judgment in Sandeep Patil case was treated as tacit acceptance of the position that DFS sales are exports.

Issue

Are duty free shops operating at international airports entitled to claim 100% Input Tax Credit (ITC) and its refund on goods and services supplied to them, when they sell goods to departing international passengers, treating such sales as “export of goods” under the IGST Act, 2017?

Or more specifically: Can sales by duty free shops to outgoing international passengers be treated as “export” under GST law, similar to their treatment under the Customs Act, 1962?

Facts

The Parties Involved:

• Petitioners: Multiple duty free shop operators, primarily CIAL Duty Free and Retail Services Ltd. (CDRSL) at Cochin International Airport and Flemingo Duty Free Shop at Calicut International Airport
• Respondents: Union of India, Central Tax authorities, State of Kerala, and Airport Authority of India

What the Dispute Was About:

These duty free shops had been claiming Input Tax Credit (ITC) on the goods and services they purchased to run their operations. ITC is basically a credit for taxes they paid on inputs, which they could use to offset their tax liability or claim as refund if they had no tax liability (which they didn’t, since they were making zero-rated supplies).

The Timeline:

The refund claims covered various periods:

• WP(C) No.12274 of 2020: July 2017 to January 2018
• WP(C) No.12278 of 2020: February 2018 to April 2018
• WP(C) No.12280 of 2020: December 2018 to June 2019
• WP(C) No.12279 of 2020: July 2019 to December 2019
• WP(C) No.12317 of 2020: May 2018 to November 2018

What Happened:

Initially, the tax authorities had granted these ITC refunds. But then they changed their mind and issued orders rejecting the refund claims. The petitioners challenged these rejection orders in court.

The Business Model:

These duty free shops sell goods like cigarettes, alcohol, perfumes, chocolates, and cosmetics to international passengers—both those departing India and those arriving in India. When passengers buy from these shops, they sign invoices with a condition that they won’t consume the goods until they land at their final destination outside India. Essentially, the passenger becomes the owner of the goods only upon reaching their final destination.

Key Operational Detail:

All goods sold at these DFS are either imported or purchased from the Indian market and stored in customs bonded warehouses. They’re removed from these warehouses only under the supervision of the Jurisdictional Commissioner. So technically, these goods are not sold for domestic purposes—they’re sold before the goods even cross customs frontiers.

Arguments

Petitioners’ Arguments (Duty Free Shops):

1. Export Treatment Under Customs Act: Under the Customs Act, 1962, sales by duty free shops are treated as “exports,” and the bills issued are treated as shipping bills. The same treatment should apply under GST law since the IGST Act uses identical definitions of “import” and “export.”

2. Location Outside Customs Frontier: The duty free shops are located outside the customs frontier (in the customs area but beyond immigration counters). Therefore, the place of supply is outside the territory of India, making it a non-taxable territory. Under Sections 13 and 13(4) of the IGST Act, services supplied in non-taxable territory should not be taxable.

3. Reliance on Sandeep Patil Judgment: The petitioners heavily relied on the Bombay High Court’s judgment in Sandeep Patil and others Vs. Union of India and others 2019 (31) GSTL 398, which had already decided this exact issue in favor of similar duty free shop operators.

4. Discrimination and Inconsistency: Identical refund applications from DFS operators in Karnataka, Punjab, Tamil Nadu, Goa, West Bengal, and Gujarat had been allowed, but Kerala operators were being denied. This was arbitrary and discriminatory.

5. Government’s Tacit Acceptance: The Central Government had decided not to file an SLP against the Bombay High Court judgment, which showed they accepted the position that DFS sales are exports.

6. Circular No.106/245/2019-GST: The petitioners cited the Central Board of Indirect Taxes and Customs circular dated 29th June 2019, which clarified that since procurement of imported/warehoused goods is governed by the Customs Act, the same procedures and rules apply under GST.

7. Aarish Altaf Tinwala Order: The Central Government’s own order dated 31st August 2018 held that supply of goods from arrival DFS is treated as export, and this was affirmed by the Supreme Court.

Respondents’ Arguments (Tax Authorities & Government):

1. Rule 95-A of CGST Rules, 2017: The respondents argued that Rule 95-A (introduced w.e.f. 01.07.2019) renders retail outlets in departure areas of international airports as tax-free supplies to outgoing international tourists. Therefore, no GST is applicable, and consequently, no ITC can be claimed or refunded.

2. DFS Located Within India: Even though it’s called a “duty free” shop, it’s still physically located within India (in Kerala). The international airport itself is in India. Therefore, the operations are in taxable territory as defined in Section 2(109) of the CGST Act, not in non-taxable territory.

3. Customs Act Doesn’t Apply to GST: While the Customs Act treats DFS sales as exports, this cannot be automatically applied (mutatis mutandis) under GST laws. These are different tax regimes with different purposes.

4. Ownership Transfer Within India: Under Section 19 of the Sale of Goods Act, 1930, the outgoing passengers immediately become owners of goods purchased from DFS while still in India. The mere nomenclature of “Duty Free Shop” doesn’t exempt them from indirect tax burden under every law.

5. ITC Limited to Goods, Not Services: Input tax credit is limited to tax only on the value of goods supplied. GST paid on services cannot be allowed as input tax credit entitling refund.

6. Incoming Passengers Also Buy: The supply of goods is applicable to both outgoing and incoming passengers. Retail outlets supplying goods to incoming passengers cannot be entitled for refund under Rule 95-A.

7. Alternative Remedy Available: The petitioners had alternative remedies (appeals and revisions) available against the refund rejection orders, so writ petitions were not maintainable.

Key Legal Precedents

1. Sandeep Patil and others Vs. Union of India and others, 2019 (31) GSTL 398 (Bombay High Court)

This was the most crucial precedent cited throughout the judgment. In this case, the Bombay High Court had already decided a similar controversy regarding refund of ITC for duty free shops at departure areas of airports. The court had held that:

• Sales to departing passengers amount to export of goods
• DFS is an “exporter” under GST law
• The petitioner was entitled to 100% ITC and its refund
• The procedure would be to first pay GST on services provided to DFS, take ITC of the entire tax amount, and then claim refund following Rule 89 of the CGST Rules, 2017

The Kerala High Court essentially followed this precedent and extended the same benefit to the petitioners before it.

2. J.V. Gokal and Co. § Ltd. Vs. The Assistant Collector of Sales Tax (Inspection) and others, AIR 1960 SC 595 (Supreme Court - Constitutional Bench)

This is a unanimous decision of the Constitutional Bench of the Supreme Court. While the judgment doesn’t provide the exact holding in the context provided, it was cited in the Sandeep Patil case to establish that owners are not liable to pay customs duty or IGST on concession agreements related to duty free operations.

3. Hotel Ashoka (Indian Tourism Development Corpn. Ltd.) Vs. Assistant Commissioner of Commercial Tax and others, AIR 2012 SC 982 (Supreme Court)

This Supreme Court judgment was cited to establish principles regarding taxation of duty free operations. The Sandeep Patil case had referred to this judgment while discussing Article 286 of the Constitution of India, which imposes restrictions on tax on sale and purchase of goods in the course of import or export.

4. Aarish Altaf Tinwala (F.No.371/142/B/2018-RA/1391) - Central Government Order dated 31st August 2018

The Central Government, in this order, held that:

• Supply of goods from arrival DFS is treated as export by DFS
• The passenger who buys from DFS and crosses the customs barrier becomes the importer
• This position was affirmed by the Supreme Court when it rejected the writ petition filed against this order (Writ Petition © No.564 of 2019 titled Aarish Altaf Tinwala Vs. Union of India, order dated 10th May 2019)

5. Circular No.106/245/2019-GST: MANU/GSCU/0033/2019 dated 29th June 2019

This circular issued by the Central Board of Indirect Taxes and Customs, GST Policy Wing of Ministry of Finance, Government of India, clarified that:

• Since the procedure for procurement of imported/warehoused goods is governed by the Customs Act, the procedures and applicable rules specified under the Customs Act are required to be followed for procurement and supply of such goods under GST
• Under Section 2(4) of IGST Act, “customs frontier” means the limits of customs area as defined in Section 2 of the Customs Act, 1962
• DFS located in customs airports and special warehouses form part of the customs area as defined under Section 2(11) of the Customs Act

How These Precedents Were Applied:

The Kerala High Court used these precedents to establish that:

1. The Bombay High Court had already settled the law on this issue in favor of DFS operators

2. The Central Government’s own orders and circulars supported the position that DFS sales are exports

3. The Supreme Court had affirmed this position by not interfering with the Aarish Altaf Tinwala order

4. The Central Government’s decision not to file an SLP against the Bombay High Court judgment showed tacit acceptance of the law as settled

Therefore, the Kerala High Court concluded it was appropriate to extend the same benefit to the petitioners before it, especially since they were similarly situated to the DFS operators in other states whose refund claims had been allowed.

Judgement

Decision: ALL WRIT PETITIONS ALLOWED

The High Court of Kerala allowed all seven consolidated writ petitions and set aside the orders rejecting the ITC refund claims.

Detailed Reasoning:

1. Export Treatment Confirmed:

The court held that sales by duty free shops to departing international passengers constitute “export of goods” under the IGST Act, 2017, making them zero-rated supplies. The expressions “import” and “export” are identically defined in both the Customs Act, 1962 and the IGST Act, 2017.

2. Customs Frontier Analysis:

The court found that duty free shops are located within the customs area (beyond immigration counters at international airports). Goods sold from these shops are not sold for domestic purposes—they’re sold before goods cross customs frontiers. All goods are either imported or purchased from the Indian market and stored in customs bonded warehouses, removed only under supervision of the Jurisdictional Commissioner.

3. Rejection of “Different Tax Regimes” Argument:

The court rejected the respondents’ argument that Customs Act treatment cannot be applied to GST law. The court noted that the Central Board of Indirect Taxes and Customs’ own circular (Circular No.106/245/2019-GST dated 29th June 2019) clearly shows that since procurement of imported/warehoused goods is governed by the Customs Act, the procedures and rules specified under the Customs Act are required to be followed under GST as well.

4. Reliance on Sandeep Patil Judgment:

The court extensively relied on the Bombay High Court’s judgment in Sandeep Patil and others Vs. Union of India and others 2019 (31) GSTL 398, which had already decided this exact issue in favor of DFS operators. The court noted that:

• The Central Government had decided not to file an SLP against this judgment
• This showed tacit acceptance of the position that DFS sales are exports
• It was a fit case to extend the same benefit to similarly situated DFS operators in Kerala

5. Non-Discrimination Principle:

The court found it significant that identical refund applications from DFS operators in Karnataka, Maharashtra, Punjab, Tamil Nadu, Goa, West Bengal, and Gujarat had been allowed, while Kerala operators were being denied. This was arbitrary and discriminatory.

6. Rejection of Rule 95-A Argument:

While the respondents cited Rule 95-A of CGST Rules, 2017 (introduced w.e.f. 01.07.2019), the court found this did not change the fundamental character of DFS sales as exports. The circular dated 29.06.2020 (which the Revenue had argued about) had already been discussed in the Sandeep Patil judgment, and there was no dichotomy regarding its contents.

Specific Orders:

For WP(C) Nos.12278, 12279, 12280, 12274 & 12317 of 2020:

The impugned orders rejecting refund of ITC were set aside and the writ petitions were allowed. The petitioners are entitled to claim 100% ITC and its refund for the respective periods mentioned.

For WP(C) No.6850 of 2018:

The court refrained from giving a declaration regarding applicability of GST at Calicut International Airport. However, since the court had granted a stay during the pendency of the writ petition, no GST was payable by the Airport Authority on concession fees till 30.06.2020.

Going forward, effective from 01.07.2020 onwards, the petitioner is entitled to claim 100% ITC and refund thereof. The petitioner shall:

1. Pay GST on input services including Concession Fee to the Airport Authority

2. Claim ITC of the entire tax amount

3. Thereafter claim refund of the same following the procedure in Rule 89 of the CGST Rules, 2017

For WP(C) No.13237 of 2020:

The orders rejecting the refund already ordered were set aside and the writ petition was allowed.

Legal Reasoning Summary:

The court’s core reasoning was:

1. DFS sales to departing passengers are exports under both Customs Act and IGST Act

2. The Government’s own circulars and orders support this position

3. The Supreme Court has implicitly affirmed this by not interfering with the Aarish Altaf Tinwala order

4. The Bombay High Court has already decided this issue in favor of DFS operators

5. The Central Government’s decision not to file SLP shows tacit acceptance

6. It would be discriminatory to deny the same benefit to similarly situated operators in Kerala

6. Therefore, DFS operators are entitled to 100% ITC and its refund

FAQs

Q1: What exactly is a Duty Free Shop (DFS)?

A: A Duty Free Shop is a retail outlet located at international airports (typically in the departure or arrival areas) where goods like cigarettes, alcohol, perfumes, chocolates, and cosmetics are sold to international passengers. These shops are called “duty free” because the goods are not subject to customs duty when sold to passengers who are crossing international borders.

Q2: Why did the tax authorities initially reject the refund claims?

A: The tax authorities argued that even though DFS sales are treated as “exports” under the Customs Act, they shouldn’t be treated the same way under GST law. They contended that the DFS is physically located in India, so the transactions are taxable under GST. They also cited Rule 95-A of CGST Rules, 2017, which they said made these supplies tax-free.

Q3: What is Input Tax Credit (ITC)?

A: ITC is a mechanism in GST where a business can claim credit for the taxes it has paid on inputs (goods and services it purchases). If a business makes zero-rated supplies (like exports), it can claim refund of the ITC it has accumulated, since it has no tax liability to offset the credit against.

Q4: Why is the Sandeep Patil judgment so important?

A: The Bombay High Court had already decided an identical issue in the Sandeep Patil case, holding that DFS sales to departing passengers are exports and DFS operators are entitled to 100% ITC refund. The Central Government chose not to challenge this judgment by filing an SLP, which showed tacit acceptance. The Kerala High Court simply extended the same benefit to similarly situated operators in Kerala.

Q5: What does “export” mean in this context?

A: In this context, “export” means the sale of goods to a person who is leaving India (departing passenger). Under the Customs Act, when a passenger buys goods from a DFS and leaves India, it’s treated as if the goods are being exported from India. The IGST Act uses the same definition of “export,” so the same treatment applies under GST law.

Q6: What is the “customs frontier”?

A: The customs frontier is the boundary of the customs area. Under the Customs Act, 1962, goods within the customs area (like those in DFS at airports) are not considered to have crossed into India yet. So when goods are sold from a DFS, they’re sold before crossing the customs frontier, making them exports.

Q7: What does “zero-rated supply” mean?

A: A zero-rated supply is a supply on which GST is charged at 0% rate. Exports are typically zero-rated supplies. This means no GST is charged on the supply itself, but the supplier can claim refund of all ITC accumulated on inputs used to make that supply.

Q8: Why did the court find the tax authorities’ action discriminatory?

A: The court noted that identical refund applications from DFS operators in Karnataka, Maharashtra, Punjab, Tamil Nadu, Goa, West Bengal, and Gujarat had been allowed by the tax authorities. But when DFS operators in Kerala filed similar applications, they were rejected. This inconsistent treatment was found to be arbitrary and discriminatory.

Q9: What is Rule 89 of CGST Rules, 2017?

A: Rule 89 contains the procedure for claiming refund of unutilized ITC. The court directed that the petitioners should follow this procedure to claim their refund—first paying GST on services, taking ITC, and then claiming refund of the accumulated ITC.

Q10: What is Rule 95-A of CGST Rules, 2017?

A: Rule 95-A (introduced w.e.f. 01.07.2019) provides that retail outlets established in the departure area of an international airport beyond immigration counters are tax-free supplies to outgoing international tourists. However, the court found this didn’t change the fundamental character of DFS sales as exports.

Q11: What does “mutatis mutandis” mean?

A: This Latin phrase means “with the necessary changes being made” or “with appropriate modifications.” The respondents argued that Customs Act treatment cannot be applied mutatis mutandis (automatically) to GST law. The court rejected this argument.

Q12: What is the significance of the Central Government not filing an SLP?

A: An SLP (Special Leave Petition) is a petition filed in the Supreme Court to challenge a High Court judgment. The fact that the Central Government decided not to file an SLP against the Bombay High Court’s Sandeep Patil judgment showed that the Government accepted the court’s decision that DFS sales are exports. This was treated as tacit acceptance of the law as settled.

Q13: What happens now? Do the petitioners get their refunds?

A: Yes, the petitioners are entitled to claim 100% ITC refund. For the period till 30.06.2020, they don’t have to pay GST on concession fees (due to the stay granted by the court). From 01.07.2020 onwards, they need to pay GST on input services (including concession fees), claim ITC of the entire amount, and then claim refund following Rule 89 of CGST Rules, 2017.

Q14: Does this judgment apply only to Kerala?

A: While this judgment is from the Kerala High Court, it applies to the petitioners before it (DFS operators in Kerala). However, the reasoning is based on the Bombay High Court’s Sandeep Patil judgment, which would apply to all DFS operators across India. The court noted that operators in other states had already been granted similar refunds.

Q15: What about incoming passengers? Can they also buy from DFS?

A: Yes, incoming passengers can also buy from DFS at arrival areas. However, the court’s judgment primarily focuses on departing passengers, as the Sandeep Patil case dealt with departure areas. The respondents had argued that incoming passengers’ purchases shouldn’t be entitled to refund under Rule 95-A, but the court’s reasoning about export treatment would apply to both.

Q16: What is the Aarish Altaf Tinwala order?

A: This is a Central Government order dated 31st August 2018 that held supply of goods from arrival DFS is treated as export by DFS, and the passenger becomes the importer. The Supreme Court affirmed this position by rejecting a writ petition filed against it. This order supported the petitioners’ position.

Q17: What is Circular No.106/245/2019-GST?

A: This is a circular issued by the Central Board of Indirect Taxes and Customs on 29th June 2019, clarifying that since procurement of imported/warehoused goods is governed by the Customs Act, the same procedures and rules apply under GST. This circular supported the petitioners’ argument that Customs Act treatment should apply to GST.

Q18: Why does the court say goods are “sold before crossing customs frontiers”?

A: All goods sold at DFS are stored in customs bonded warehouses and removed only under supervision of the Jurisdictional Commissioner. They haven’t been imported into India yet. When sold to a departing passenger, the goods are sold while still in the customs area, before they cross into India. This makes them exports.

Q19: What is the practical impact of this judgment?

A: DFS operators can now claim 100% refund of ITC on goods and services they purchase to run their operations. This significantly reduces their tax burden and makes their business more profitable. It also ensures consistency across India, as operators in other states were already getting this benefit.

Q20: Can the government appeal this judgment?

A: Yes, the government could potentially file an appeal in the Supreme Court. However, given that the Central Government has already decided not to challenge the similar Sandeep Patil judgment from the Bombay High Court, it’s unlikely they will challenge this judgment. The fact that they didn’t file an SLP in the Bombay case suggests they’ve accepted this position.

All the seven writ petitions are being disposed of with this common judgment as they arise out of the same cause of action.

2. In writ petitions bearing Nos.12278, 12279, 12280, 12274 & 12317 of

2020, challenge has been laid to orders whereby prayer for refund of the

Input Tax Credit (hereinafter called as ‘ITC’) has been rejected for the

period tabulated below, though earlier granted:-

W.P. (C) No.12278 of 2020 February, 2018 to April, 2018

W.P.(C) No.12279 of 2020 July, 2019 to December, 2019

W.P.(C) No.12280 of 2020 December, 2018 to June, 2019

W.P. (C) No.12274 of 2020 July, 2017 to January, 2018

W.P.(C) No.12317 of 2020 May, 2018 to November, 2018

3. In writ petition bearing W.P.(C) Nos.6850 of 2018 a declaration has

been sought to the effect that the Central Goods and Service Tax Act, 2017,

the Integrated Goods and Service Tax Act, 2017 and the Kerala State Goods and Service Tax Act, 2017 and the rules thereunder do not apply to the supply of goods and services effected by the petitioner in the arrival and

departure Duty Free Shops (hereinafter called as ‘DFSs’) at Calicut International Airport in terms of the Concession Agreement dated 22.04.2016 with a further prayer of issuance of direction to the respondents not to apply the aforementioned Acts to the DFS operated by the petitioner and to quash Exhibits P-3 & P-10 to the extent of levying CGST and IGST on the revenue sharing in terms of the Concession Agreement dated 22.04.2016.

4. In writ petition bearing W.P.(C) No.13237 of 2020 the petitioner has

sought quashing of orders (Exhibits P-17 and P-20) whereby refund already

ordered has been rejected by the respondents.

5. Learned counsel appearing for the petitioners before commencement of arguments referred to an order of the Hon’ble High Court of Bombay rendered in Sandeep Patil and others Vs. Union of India and others 2019 (31) GSTL 398 wherein a similar controversy raised i.e. refund of ITC pursuant to sale of duty free goods from Duty Free Shops at the departure area of airport, had been declined and GST towards the minimum guaranteed fees/concession fees for grant of rights and use of licensed premises of duty free in the departure or arrival area of international airport had been made accessible.

6. The question raised in the afore cited judgment has been answered in

favour of the assessee whereby by referring to a unanimous decision of Constitutional Bench of Hon’ble Supreme Court of India rendered in J.V. Gokal and Co. (P) Ltd. Vs. The Assistant Collector of Sales Tax (Inspection) and others AIR 1960 SC 595 and judgment rendered in Hotal Ashoka (Indian Tourism Development Corpn. Ltd. VS. Assistant Commissioner of Commercial Tax and others AIR 2012 SC 982) holding that owners are not liable to pay customs duty nor IGST and show cause notices with regard to accessibility of GST under concession agreement had been quashed. It has, further, been held that the assessee would be entitled for refund of ITC as it would not cause any prejudice, for, first would, pay the GST on the services provided to DFSs by respondent No.4 and then take ITC of the entire tax amount and thereafter claim refund of the same by following the procedure contained in Rule 89 of the Central Goods and Services Tax Rules, 2017.

7. Mr.Benny Thomas, learned counsel representing CIAL in support of averments made in the writ petition submitted that DFSs run by the petitioner are licensed by the Jurisdictional Commissioner of Customs under

Section 58 and 58A of the Customs Act, 1962 (hereinafter called as “Act of

1962”) . The products are transferred to DFSs at CIAL’s Arrival and Departure Terminals for subsequent sales to international passengers travelling through the international terminal. Once the entire items are sold to passengers, petitioner-CIAL applies for closure of bond of Bill of

Exchange (BOE) with the Customs Authorities after adhering through all the

processes and procedures as per Notifications No.68 & 69/2016-Customs

(N.T) and Circular No.20/2016-Customs. On account of zero rated supplies,

petitioner preferred applications under Section 54(3) of CGST and SGST

read with Rule 89 of CGST Rules and SGST Rules, 2017 for refund of

unutilized ITC, which were allowed but thereafter received show cause

notices for cancellation. Petitioner has been granted licence No.1 of 2016

(Exhibit P-1) by the competent authority i.e. the Jurisdictional Commissioner of Customs to operate special warehouse to store duty free

goods meant for sale at its DFSs at the airport. The goods brought in by the petitioner and sold in DFSs do not attract customs duty. Sales to international passengers are generally made against payment in foreign currency and up to the limit prescribed by the Reserve Bank of India in Indian currency. Every sale at the DFS located at departure terminal

is covered by sale voucher (deemed to be a shipping bill under Section 69 of

the Act of 1962) and these transactions are carried out according to the

guidelines issued by the Department of Customs from time to time. As per

Section 2(11) of the Act of 1962, all duty-free shops in India are Customs

Area, which includes a warehouse and customs station. The products, which

are brought from foreign suppliers and brought into India are kept in custom

bonded warehouses and are transferred to DFSs situated at the airport as and

when stocks are needed. The aforementioned activities are carried out under

supervision of Customs Authorities and the petitioner has no access to the

products without permission/leave of the Customs Authority. In other words, products have not crossed the customs frontiers of India. Despite having given detailed reply to the show cause notices and after having been granted refund, the impugned orders are not sustainable, for, the judgments rendered by the High Court of Bombay in Sandeep Patil’s case (supra) and Flemingo Travel Retail Limited and another Vs.Union of India and others passed in Writ Petition No.1511 of 2019 dated 07.10.2019 have been accepted by the Government to be final having chosen not to prefer an Special Leave Petition (SLP) before the Hon’ble Supreme Court of India. The goods sold at DFSs if do not attract imposition of any import duty on a duty free operator, the question of accessibility under GST regime introduced w.e.f. 01.07.2012 is also not applicable.

8. The transactions undertaken at petitioner’s DFSs at arrival and

departure terminals are ‘export’ under Section 69 of the Act of 1962, which

provides that warehoused goods may be exported outside India without

payment of import duty. As per Circular No.20/2016 dated 20.05.2016

(Exhibit P-5), Duty Free Shops located in customs area are not treated as

warehouse.

9. In respect of sales through DFSs in the arrival terminal, the arriving

passenger’s baggage is exempted from customs duty under Notification

No.43/2017-Cus dated 30.06.2017 and IGST Notification No.2/2017 IGST(rate) dated 28.06.2017 read with the duty-free allowance available under the applicable Baggage Rules, as such goods do not attract any customs duty or IGST. Definition of ‘export’ under Section 2(18) of the Act of 1962 and Section 2(5) of the IGST, 2017 is the same.

10. The second respondent failed to consider a specific submission made

by the petitioner that under the terms of the Customs Act, activity undertaken from the DFSs of petitioner qualifies as export. The act of second respondent is not only arbitrary but is also discriminatory in as much as identical applications for refund of unutilized ITC filed by similar

operators in duty free business in the State of Karnataka, Punjab, Tamil

Nadu, Goa, West Bengal and Gujarat have been processed and allowed. It is in view of the judgment referred to above, the DFSs situated at the arrival and departure lounge of international airports are concededly beyond customs frontiers. In addition to aforementioned arguments, paras 5, 6, 11 and 13 of the judgment rendered in Sandeep Patil’s case (supra) have been referred to.

11. The issue in other two writ petitions pertains to non-applicability of Central Goods and Service Tax Act, 2017, the Integrated Goods and Service Tax Act, 2017 and the Kerala State Goods and Service Tax Act, 2017 and other rules framed thereunder as well as quashing of impugned order declining the refund. It is argued that the Concession Agreement dated 22.07.2016 has been entered into between the petitioner and respondent No.3 i.e. Airports Authority of India in respect of DFSs located at arrival and departure of the airport at Calicut. Sales of products like cigarettes, alcohol, perfumes, confectionary and cosmetics etc. to the passengers, who will have a fixed destination outside India or passengers arriving India, are done on receipt of consideration in foreign exchange or Indian rupees to the extent permissible. Most of the goods are primarily imported or occasionally procured from Special Economic Zones units in India (hereinafter called as ‘warehoused goods”). DFSs are located within customs stations and had been issued special warehouse licence under Section 58-A of the Act of 1962. Respondents No.3 and 4 in view of the enactment of CGST Act, IGST Act, SGST Act and the rules thereunder from the month of July, 2017 started charging CGST at 9% and SGST 9% on the amounts due and payable by the petitioner as minimum guarantee/revenue share for both the arrival and departure locations under Concession Agreement dated 22.04.2016.

12. Rent is paid for space in arrival and departure lounge and being a non-taxable territory, no tax is chargeable at the first instance on rental of customs bonded warehouses (Duty Free Shops) whether its arrival or departure lounge. Products are not sold by the petitioner in the domestic market are only meant for international passengers flying in or out of India. Sales to such passengers are made only against valid documents and payment in foreign or Indian currency as permitted by CBEC. Every such sale is covered by a sale voucher which is deemed to be a shipping bill.

13. As per the terms of the Concession Agreement, respondent No.4 on

behalf of respondent No.3 was to raise monthly invoices towards both the

arrival and departure DFSs towards Minimum Guarantee/Revenue Share. Accordingly, upon the commencement of the business in April 2016,

respondent No.4 started raising such invoices under the name and style of

‘Licence Fees for Exclusive Concession to Develop, Operate and Maintain

Duty Free Shops’ for both the arrival and departure which were to be duly

paid by the petitioner towards Minimum Guarantee/Revenue Share.

14. On introduction of GST regime in 2017, State of Kerala enacted

Kerala State Goods and Service Tax, 2017 and the corresponding rules

thereunder. As per Section 9(1) of CGST Act, a tax called the central goods and service tax is levied on all intra-State supplies of goods or services or both except on the supply of alcoholic liquor for human consumption on the value determined under Section 15 and at such rates, not exceeding 20%.

15. Section 2(79) of the CGST Act defines ‘non-taxable territory’ as the

territory which is outside the taxable territory whereas ‘taxable territory’ is defined under Section 2(109). Similarly a non-taxable supply has been defined under Section 2(78), which would mean supply of goods or services

or both which is not leviable to tax under this Act or under the CGST Act.

Provisions of Kerala State Goods and Service Act, 2017 are in pari materia

to CGST. Section 2(4) of IGST Act defines ‘customs frontier of India’, which would mean the limits of customs area as defined in Section 2 of the Customs Act, 1962. Respondent No.3 in view of the aforementioned enactment raised invoices for the month of July 2017 to January 2018 (Exhibit P-3 to P-10). The petitioner sent a detailed representation dated 31.10.2017 (Exhibit P-11) requesting to withdraw the invoices being not accessible to 9% CGST and 9% SGST. The judgment of Hon’ble Supreme Court in the case of Hotel Asoka was also cited. However, respondent No.4 continued to precipitate the illegality by issuing monthly invoices for the months of November, 2017 to January, 2018 by levying CGST and SGST on the Minimum Guarantee/Revenue Share whereas in respect of other airports situated in the country, such demands had at relevant point of time already been stayed by various High Courts.

16. Supply of goods by DFSs and the services take place in a ‘non-taxable

territory’ as defined under Section 2(79) of the CGST Act, 2017. Section 16

of the IGST Act provides that export of goods or services or both qualifies as zero rated supply.

17. Transactions of leasing/licensing inter alia of land or buildings are

specifically treated as a ‘supply of service’, which would fall outside the

ambit of all three Acts i.e. CGST, SGST and IGST and the rules framed thereunder. The terms ‘non-taxable supply’ defined under Section 2(78) of the CGST Act would mean supply of goods or services or both which is not leviable to tax under this Act or under IGST Act.

18. To buttress his arguments, Mr. Shah argued that the point that has to be examined is whether such transactions of leasing are leviable to tax under the IGST Act. In support of aforementioned argument by referring to provisions of Sections 13 and 13(4), it was submitted that the immovable property is the duty-free shops of the petitioner, which is undisputedly outside the customs frontiers and thus, for all intents and purposes would be outside the territory of India. Consequently, the place of supply or services will also be outside the territory of India and being a non-taxable territory, the services would also be non-taxable. Thus, orders of levy are illegal and unlawful.

19. Further reliance had been made to judgment rendered by Allahabad High Court in PIL (Civil) No.12929 of 2019 titled as ‘Atin Krishna Vs. Union of India and others’ decided on 03.05.2019. It was further submitted that their action to first pay GST and then claim refund of the same by following the procedure as enunciated under Rule 89 though accepted in Sandeep Patil’s case (supra) but in other judgment of Hon’ble Supreme Court passed in the matter of Commissioner of Central Excise, Pune vs. Coca - Cola India Pvt. Ltd., 2007 ( 213 ) ELT 490 ( SC) , the procedure of payment of instances of GST to pay and claim credit was not accepted. Also on similar lines judgment of High Court of Bombay in Cipla Limited Vs. UOI 1995 (80) ELT 17 (Bom), wherein the demand of customs duty in excess of 2% on goods allowed to be re-exported in view of its findings that the petitioner before it was entitled to 98% of the duty by way of drawback was set aside. It is also submitted that as per judgment dated 07.10.2019 in Sandeep Patil (supra), supply of goods by DFSs has been treated to be an export of goods under IGST and a zero rated supply making and therefore, the petitioner is eligible to claim 100% ITC and claim its refund w.e.f. 01.07.2020 onwards as Vide order dated 21.03.2020, this Court was pleased to admit the writ petition and pass an interim order in favour of the petitioner. Accordingly, w.e.f. 01.01.2018 to 30.06.2018, the petitioner had not paid GST on concession fee to respondent No.4.

20. As per understanding of the petitioner, respondent No.4 may have

deposited GST on concession fee with the Government for period

aforementioned and further from 01.07.2018, in view of the stay granted by

this Court, factually respondent No.4 may not have deposited GST nor the

petitioner to reimburse GST to respondent No.4.

The stand of the State by relying upon Circular No.106/25/2019-GST

dated 29.06.2019 introducing Rule 95-A of CST Rules, 2017 confining the

benefit of non-accessibility of GST to sale and supply of services to the

passengers at ‘departure’ only cannot be read in a restricted term, in view of the definitions of taxable territory as well as ratio decidendi culled out in Sandeep Patil’s case (supra).

21. In another writ petition i.e. W.P.(C) No.13237 of 2020 similar

arguments have been raised.

22. On the other hand, learned counsels appearing on behalf of the State

as well as for Airport Authority i.e. respondents No.3 and 4 in W.P.(C)

Nos.6850 of 2018 and 13237 of 2020 emphatically relied upon Rule 95-A

introduced w.e.f. June, 01.07.2019 whereby retail outlets established in

departure area of an international airport beyond immigration counters have

been rendered to be tax free supply to the outgoing international tourist. It was further contended that writ petitions except W.P.(C) No.6850 of 2018

are liable to be dismissed being not maintainable, in view of the availability of an alternative remedy against the order of rejection of refund. In fact, the authorities are only enforcing law, thus, there cannot be any violation of Article 14, 19, 21 or 300A of the Constitution of India.

23. Though provisions of Article 286 of the Constitution of India have

imposed restrictions of tax on sale and purchase of goods in the course of

import of goods or services or both in India or export of the goods or services or both outside the territory of India as observed by Hon’ble

Supreme Court in Hotel Ashoka’s (supra) but would not be relevant, for, it

pertain to levy of VAT and CST but not GST. As per Section 1(2) of the

CGST Act and Kerala GST Act, the said Acts extend to the whole of India

and as per Section 1(2) of the MGST Act, it extends to the whole of State of

Maharashtra. DFS is located in Kerala limits and within India. Since the

international airport is itself in India, therefore, operations of the petitioner are in taxable territory as defined in Section 2(109) of the Act and the non-taxable territory in Section 2(79), which is referred to by the counsel appearing for the petitioner.

24. Though under the Customs Act, 1962, sale by a DFS is treated as

‘export’ and the bills issued by DFS are treated as shipping bills, the same

cannot be mutatis mutandis under the GST laws. The DFS and passengers

receiving goods are located at airport within India and in view of Section 19 of the Sale of Goods Act, 1930, the outgoing passengers immediately

become owners of the goods purchased from DFS. Mere nomenclature of

Duty Free Shop does not entitle the petitioner to be free from entire indirect tax burden under every law. The input tax credit is limited to tax only on value of goods supplied whereas GST paid on services cannot be allowed to be given as input tax credit entitling for refund. The supply of goods is applicable to both outgoing and incoming passengers. Retail outlets

established in the departure area of international airport supplying goods and service to the incoming passengers cannot be entitled for refund, in view of provisions of Rule 95-A of CGST Rules, 2017, thus, urges this Court for dismissal of the writ petitions.

25. In rebuttal, the counsel representing the petitioner(s) submitted that

though objections qua non-maintainability of writ petitions due to availability of alternative remedy were raised in the judgments referred to

above in Sandeep Patil and Hotel Ashoka but keeping in view of the facts

and circumstances of the cases and finding the orders to be without

jurisdiction, the same were over ruled, similar is position in present cases.

26. I have heard learned counsel for the parties, appraised the paper book

and the case laws cited.

27. Before giving my reasoning, it is worthwhile to mention that both the

parties are ad idem that the Central Board of Indirect Taxes and Customs

vide communication dated 25.06.2020 on the subject of proposal for filing SLP against the judgment of Bombay High Court dated 07.10.2019 in Writ

Petition No.1511 of 2019 and 1535 of 2019 preferred by M/s Flemingo Travel Retail Ltd. has not chosen to file SLP. The relevant content of the letter is reproduced as under:-

“Please refer to your SLP proposal vide your office letter F.

No.V CGST/ME/Legal/HC/Flemingo/Div-III/08/19-20/592 dated

07.11.2019 on the above-mentioned subject.

2. In this regard the undersigned is directed to intimate that the

proposal has been examined and it has been decided not to file SLP

in the subject matter. The same is informed for further necessary

action, if any.”

28. The question posed qua entitlement of refund of taxes in respect of

goods and services provided at international airport would be applicable to

outgoing international tourist i.e. departure area in view of the Circular dated 29.06.2020 as has been argued by the Revenue, would also not be required to be answered by this Court, as the aforementioned circular has also been discussed in the judgment rendered by the High Court of Bombay in

Sandeep Patil’s case (supra). Once there is no dichotomy regarding the contents of letter and as well as the reference of circular in the judgment, I am of the view that it is a fit case where same benefit is required to extend to the petitioner(s) herein as has been extended to similarly situated DFSs in the State of Karnataka as well as in the State of Maharashtra and other states referred by petitioners counsel and remained unrebutted. It is a matter of record that the petitioner(s) sell goods to the international passengers i.e. departing passengers or passengers arriving into India (arriving passengers) like cigarettes, alcohol, perfumes, chocolates and cosmetics etc. The expressions ‘import’ and ‘export’ defined underCustoms Act, 1962 have been identically defined in IGST Act, 2017. Invoices issued by DFSs at the time of sale of goods to the outgoing passengers are duly signed by both the passengers and the cashier. No doubt, it envisages a condition that the passenger will not consume the

goods until he lands at the final destination outside India. In other words,

the passenger shall become owner of the goods only upon reaching of final

destination. The contents of invoices have already been extracted in

paragraph 6 of the judgment rendered in Sandeep Patil (supra). It is a

matter of record that all the goods which are sold at the DFSs are either imported or purchased from Indian market and are stored in a customs

bonded warehouses and are removed from such warehouses only under the

supervision of the Jurisdictional Commissioner, thus, for all intents and

purposes are not sold for domestic purposes. The goods which are brought

from customs warehouses do not cross customs frontiers, thus, before the

goods are imported in the country, they had been sold at DFSs.

29. In my view, if the transaction of sale or purchase takes place when the

goods are imported in India or they are being exported from India, no State

can impose any tax thereon. It is also not in dispute that all the DFSs are

situated at international airports i.e. at Cochin and Calicut, which are beyond the customs frontiers of India and would not be within the customs frontiers of India. When any transaction takes place outside the customs frontiers of India, of course the transaction is said to have taken place outside India, though the transaction might take place within India. Examining the provisions of Section 2(11) of the Act of 1962 read with Section 286 of the Constitution of India, the said transaction would be said to have taken place outside India.

30. Rule 95-A introduced vide circular dated 29.06.2019 has also been discussed in para 16 of the judgment rendered in Sandeep Patil’s case (supra) and the reasoning is assigned in paragraph 17 and 18, is extracted herein below:-

“16. 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 : MANU/GSCU/0033/2019 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

Xare required to be followed for procurement and supply of such goods.

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.

17. The Central Government vide order dated 31st August 2018 in

Aarish Altaf Tinwala (F.No.371/142/B/2018-RA/1391), inter alia, held

that 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. This position has been affirmed by the Supreme Court by rejecting the writ petition filed against the central government order, vide an order dated 10th May 2019 passed Writ Petition (C) No.564 of 2019 titled as Aarish Altaf Tinwala Vs. Union of India.

18. It is pertinent to note that we have held in Sandeep Patil Vs.

Union of India & Ors. (Criminal Public Interest Litigation No.14 of

2019) that sale to the departing passengers amounts to export of

goods and DFS is an “exporter”.

31. I would not like to go in repetition of what has already been laid down

in the judgment of Sandeep Patil’s case (supra). However, it would be in

the fitness of things to extract relevant paragraphs of the said judgment,

which are as under:-

“21. Section 2(5) of the IGST Act defines "export" to mean "taking goods out of India to a place outside India". In view of the above we are satisfied that supply by the DFS of the Petitioner to the outbound passenger constitutes exports by the DFS. Consequently, in terms of section 16(1) of the IGST Act, it becomes a zero rated supply.

22. In our view, the Respondent-Authority has erroneously held that the Petitioner does not satisfy the crucial test of sending of the goods to foreign destination where they would be received as 'imports', to deny the benefits of zero rated supply.

23. During the period between 1st July 2017 and 31st January 2019, the supply of goods from arrival DFSs is also treated as "export" by the central government vide order dated 31st August 2018 in a custom matter of Aarish Altaf Tinwala (supra) and this position has been affirmed by the Supreme Court by rejecting the writ petition filed against this central government order vide its order dated 10th May 2019 in Writ Petition (c) No.564 of 2019. Hence by legal fiction, the supply of goods from arrival DFS would also be an export of goods under the IGST Act, and hence, a zero rated supply. Since the zero-rated supply qualifies for 100% ITC, the Petitioner is eligible for the refund thereof.

24. With effect from 1st February 2019, in view of the CGST (Amendment) Act, 2018, supply of warehouse goods before clearance for home consumption have been notified/ classified as activities or transactions which shall not be treated as a supply of goods. Accordingly, effective from 1st February 2019, sale of goods from arrival DFS falls under entry 8(a) of Schedule III to CGST/SGST Act; and further, section 17(2) of the CGST Act is amended according to which reversal of ITC pertaining to activity specified in Schedule-III is not required. Accordingly, the Petitioner is to claim ITC pertaining to arrival FS also. Once this ITC is eligible, refund of entire ITC pertaining to departure and arrival DFS is eligible, based on formula of refund prescribed in Rule 89.

25. 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.

26. The impugned show cause notices allege that the goods imported by the petitioner from outside India into the special warehouse would constitute import of goods under the proviso to section 7(2) of the IGST Act, and thereby, liability of payment of tax under the proviso to section 5 of IGST Act is alleged. It further alleges non-payment of SGST on the transactions of sale of goods effected to the international passengers going out of India.

27. We find sufficient merit in the submissions of the petitioner that

import of goods in terms of section 2(10) of the IGST Act means bringing the goods into India from a place outside India. As per Section 7(2) of the IGST Act, goods imported into the territory of India, till such time it crosses the customs frontier of India, shall be treated to be a supply of goods in the course of inter-State trade and commerce. As per Section 2(4) of the IGST Act, the customs frontier of India means the limits of a customs area as defined in section 2 of the Customs Act. The duty free warehouse and DFS of the petitioner are only within the limits of the customs area and therefore, the goods lying therein do not cross the customs frontier and consequently, the importation will continue to be only in the state of inter-State trade and commerce in terms of Section 7(2).

28. We find sufficient merit in the submissions of the petitioner that petitioner only files bill of entry for warehousing. No liability under section 12 read with section 3(12) of the Customs Tariff Act would get triggered at all by filing bill of entry for warehousing. 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.

xxxx xxxx xxxx

32. In view of what has been noticed above, the impugned orders in all

the writ petitions are set aside and accordingly allowed.

33. I refrain myself from giving any declaration as sought qua accessibility of GST at Calicut International Airport but since this Court had granted the stay which is operational during the pendency of the present writ petition, no GST is payable by respondent No.4 Airport Authority and no useful purpose would be served in directing respondents No.1 to 3 to recover any GST on concession fee till 30.06.2020, which respondent No.4 will seek to recover from the petitioner since as per judgment dated 07.10.2019, the supply of goods by DFSs to outgoing passengers is export of goods under IGST and zero rated supply, it would entitle the petitioner(s) to claim 100% of ITC and refund thereof effective from 01.07.2020 onwards. As per the reasoning assigned in para 37 of the judgment referred to above in Sandeep Patil, the petitioner shall pay the GST on input services including Concession Fee to respondent No.4 and claim ITC of the entire tax amount and thereafter claim refund of the same by following the procedure prescribed under Section 54(3) of the Central Goods and Services Tax Act, 2017 and Kerala Goods and Services Tax Act, 2017 read with Rule 89 of Central Goods and Services Tax Rules, 2017 and Kerala Goods and Services Tax Rules, 2017.

34. Consequently, the writ petitions are allowed in above terms.

35. Needless to say that 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. This will also hamper and prejudicially affect our foreign trade, and augmentation and conservation of foreign exchange. In our opinion, this will also negate the intent and purpose of Article 286 of the Constitution of India.

36. We are bound by the judgment of Constitution Bench in J. V. Gokal

& Co. (supra) which was followed by the Supreme Court in the matter

of duty free shops in Hotel Ashoka ( supra), and also in the matter of

Kiran Spinning Mills (supra).

37. 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.

38. Hence, writ petition bearing W.P. No.1511 of 2019 succeeds. The

impugned order dated 10th January 2019 and the impugned show

cause notices are quashed and set aside. So far as Writ Petition No.

1535 of 2019 is concerned, we refrain from issuing any declaration

since the Petitioner is held to be entitled for refund of ITC and as such

no prejudice will be caused to them, if they would first pay GST on the

services provided to DFSs by MIAL and take ITC of the entire tax amount, and thereafter claim refund of the same by following the procedure contained in Rule-89.