Tax Vista Your weekly tax recap Edn. 270 - 12th January 2026 Kasi Viswanathan V

 

 

The Penultimate Sale is not an Export under GST

The central dispute before the Andhra Pradesh High Court was whether the supply of electricity by the petitioner to Power Trading Corporation of India Ltd. (PTC), which was thereafter supplied to the Bangladesh Power Development Board (Bangladesh Board), could be regarded as an export of goods under GST and consequently qualify for refund of accumulated input tax credit. There was no controversy with respect to the petitioner's direct supply of electricity to the Bangladesh Board, which was accepted as export. The contest arose only in respect of the supplies routed through PTC.

 

PTC had entered into an agreement with the Bangladesh Board for supply of electricity, under which the power was to be sourced from a specified Indian generator. When that arrangement could not be operationalised, the petitioner was substituted as the power supplier through an amendment agreement. The petitioner emphasized that with this substitution, there is effectively a tri-partite arrangement, and that PTC had not claimed any GST refund.

 

The petitioner placed reliance on the definition of "export of goods" under the IGST Act and contrasted it with "export of services", to argue that the point of sale was not determinative. According to the petitioner, once the supply resulted in goods being taken out of India, the statutory test for export stood satisfied. The Revenue, on the other hand, stressed that the supply of electricity by the petitioner was contractually completed in India itself, at the delivery point specified in the agreements. Relying on Serajuddin v. State of Orissa 1975-VIL-05-SC-CB, it was argued that only the supply which actually causes the export can qualify as a exports, and not a penultimate supply preceding it.

 

The Court was clear that the controversy had to be tested as per the framework of the IGST Act. It examined the scheme of sections 2(5) and 16, enacted pursuant to Article 286, and drew an important distinction: while export of goods does not require the supply to occur outside India, it must be a supply that results in the goods being taken out of India. The test is whether the supply was for taking the goods out of India and the goods were taken out of India.

 

However, on facts, both the power purchase agreement between the petitioner and PTC, and the agreement between PTC and the Bangladesh Board, specified the delivery point as the Bohronpur Substation at Murshidabad, India. This contractual stipulation led the Court to conclude that the petitioner's supply was completed within India. Accordingly, the Court characterized the transaction between the petitioner and PTC as a supply for export rather than an export of goods per se.

 

Appreciating that IGST Act is formulated by law in accordance with Article 286(2), the exports were tested for its protection under Article 286(1)(b). The protection under clause (b) extends to supplies made "in the course of" export. The Court revisited the jurisprudence under the CST Act and noted that Parliament had amended Section 5 of CST Act in 1976 to grant specific exemption to penultimate sales. This legislative intervention was seen as recognition of the position that penultimate sales did not enjoy the constitutional immunity under Article 286(1)(b).

Unlike the CST regime, GST does not contain an equivalent provision extending zero-rating to penultimate supplies, therefore the real issue to be decided is whether penultimate sales are otherwise in the course of export' The arguments to show that these were in the course of export were largely based on 'integrated activity' and 'privity'.

 

Relying on Shanmugha Vilas Cashewnut Factory [1953-VIL-01-SC], the Court reiterated that a supply made in contemplation of export is merely preparatory and does not become a supply "in the course of" export. The integration recognized in earlier decisions was between the sale and the export and not between the domestic sales preceding an export and export.

 

Decisions such as K.G. Khosla [1979-VIL-03-SC-LB] and Indure [2010-VIL-14-SC] were distinguished on the ground that, in those cases, the exemption was claimed by the importer, who was a party to both legs of the transaction. In contrast, the present claim was made by the petitioner and not PTC.

 

Once the export character of the penultimate supply is denied, the petitioner's supply of electricity remains a domestic exempt supply. The denial of export status therefore does not merely affect refund eligibility, but strikes at the availability of input tax credit itself.

 

Last week's TaxVista examined how the excise-era understanding of "manufacture" is being tested under GST. This week, the focus shifts to penultimate sales, raising a similar question on how far GST can, or should, travel with CST concepts [2026-VIL-03-AP]

 

Rule 39(1)(a) is held ultra vires pre-amended Section 20(1):

The controversy before the Telangana High Court arose from the time limit within which input tax credit was to be distributed by an Input Service Distributor. The credit was distributed in the last month of the financial year (2018-19), instead of on a month-wise basis as contemplated under Rule 39(1)(a) of the CGST Rules. This was objected during audit, culminating in a show cause notice proposing penalty under Section 122(1)(ix). The petitioner challenged not only the notice, but also the validity of Rule 39(1)(a) itself.

 

The High Court allowed the Writ and held that Rule 39(1)(a), to the extent it mandated month-wise distribution of credit, was ultra vires the unamended section 20. The Court noted that Section 20(1) empowered the prescription of the manner of distribution of credit but did not contemplate the imposition of a time limit. In doing so, the Court relied on the well-settled principle laid down in K.I. Abraham [1967-VIL-08-SC] that a rule-making authority cannot introduce a period of limitation in the absence of such prescription in the parent statute.

 

The argument that Section 164 of the CGST Act provided a wider rule-making power was also rejected. The Court observed that section 164 enables the Government to make rules for carrying out the provisions of the Act, but does not authorise the creation of substantive conditions or restrictions that the legislature itself did not envisage.

 

With effect from 1 April 2025, Section 20 has been amended and sub-section (2) expressly provide that credit shall be distributed "within such time". To that extent, the declaration of ultra vires would operate only for the period prior to this amendment.

 

The Court's reasoning that the restriction is discriminatory does more than resolve a past controversy, it also offers a ray of hope even for periods after the statutory amendment. Under Section 16(4), a recipient unit is permitted to avail input tax credit up to 30th November of the subsequent financial year. Denying an identical benefit merely because the credit is routed through an ISD mechanism results in hostile discrimination and is manifestly arbitrary and violation of Articles 14 and 300-A of the Constitution of India. The distinction rests not on the nature of the credit, but solely on the channel through which it flows [2026-VIL-26-TEL].

 

Previous edition, dated 5th Jan., 2026

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)