SC Strikes Down IGST On Ocean Freight – Tax Authorities

Supreme Court strikes down levy of IGST on Ocean Freight

UOI vs Mohit Minerals Pvt. Ltd.

Introduction

• The Supreme Court in its landmark ruling in the case of
  UOI vs. Mohit Minerals Pvt. Ltd. [C.A. No. 1390 of
  2022] has struck down the levy of IGST on importers in
  respect of ocean freight services- which are provided by foreign
  shipping lines to foreign suppliers in a CIF contract for import of
  goods into India.

• This decision has been passed on the ground that that a CIF
  contract for import of goods forms a composite supply, comprising
  of supply of goods and supply of services of transportation,
  insurance, etc., on which the Indian importer discharges IGST.
  Thus, a separate levy of IGST on the service aspect of the
  transaction would violate the principle of composite supply under
  Section 8 of Central Goods and Services Tax Act, 2017 (CGST Act).
  While dealing with the argument of the Union that recommendations
  of GST Council are binding on Union and States, the Supreme Court
  held that the recommendations of the GST Council would only have a
  persuasive value.

Background

• Notification No. 8/2017-Integrated tax (Rate) [dated 28.06.2017
  (‘Notification 8/2017’)] vide Entry No. 9, notifies IGST
  rate of 5% on ocean freight services provided or agreed to be
  provided by a person located in a non-taxable territory to another
  person located in a non-taxable territory by way of transportation
  of goods by a vessel from a place outside India upto the customs
  stations of clearance in India.

• By virtue of the power conferred under Section 5(3) of
  Integrated Goods and Services Tax Act, 2017 (IGST Act),
  Notification No. 10/2017 – Integrated Tax (Rate) [dated
  28.06.2017 (‘Notification 10/2017’)] notifies that for the
  said category of service, IGST would be payable under reverse
  charge mechanism by the importer, located in the taxable territory,
  as defined in clause 2(26) of the Customs Act, 1962.




• The constitutional validity of the Notifications,- seeking IGST
  under reverse charge from an Indian importer on ocean freight
  services between persons located in a non-taxable territory with
  respect to import of goods in India on a CIF basis – was challenged
  before the Gujarat High Court.

• The Gujarat High Court in Mohit Minerals Pvt. Ltd. vs.
  UOI [SCA No. 726/2018] struck down such a levy of IGST as
  unconstitutional and ultra vires the IGST Act. It was
  struck inter alia on the ground that (a) the notifications
  amount to extraterritorial law, (b) the reverse charge payment of
  IGST amounts to double taxation of the same transaction inasmuch as
  IGST paid on import of goods and (c) the importer is not a
  “recipient of service” to be made liable to tax on a
  reverse charge basis.

• A batch of Special Leave Petitions (SLPs) were filed before the
  Supreme Court by the Department against the decision of the Gujarat
  High Court.

Key Findings

• The ‘recommendations’ of the GST Council are a product
  of a collaborative dialogue involving the Union and States and are
  recommendatory in nature. Under Article 246A of the Constitution of
  India, both the Union and the States are conferred equal power to
  legislate on GST. Thus, to regard recommendations of GST Council as
  binding would disrupt fiscal federalism.

• Notification 10/2017 does not specify a taxable entity
  different from that which is prescribed in Section 5(3) of the IGST
  Act for the purposes of reverse charge. Hence, the said
  Notification does not suffer from excessive delegation.

• Notification 8/2017 cannot be struck down for excessive
  delegation when it prescribes ten percent of the CIF value as the
  mechanism for imposing tax on a reverse charge basis.

• Section 2(31) of the CGST Act defines ‘consideration’
  to include payment made by the recipient or by any other person.
  Thus, in the case of goods imported on CIF basis, the fact that
  consideration is paid by the foreign exporter to the foreign
  shipping line would not stand in the way of it being considered as
  a “supply of service” under Section 7(4) of the IGST
  Act.

• The services by foreign shipping lines to foreign exporters for
  import of goods into India has a nexus with the territory of India
  inasmuch as the destination of the goods is India and the services
  are rendered for the benefit of the Indian importer.

• When the place of supply of ocean freight services is deemed to
  be the destination of goods under Section 13(9) of the IGST Act,
  the supply of services would necessarily be “made” to the
  Indian importer, who would then be considered as a
  “recipient” under the definition of Section 2(93)(c) of
  the CGST Act.

• The supply of services of transportation by the foreign shipper
  forms a part of the “composite supply” between the
  foreign exporter and the Indian importer, on which the IGST is
  already payable under Section 5(1) of the IGST Act read with
  Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST
  Act.

• While the notifications are validly issued under Sections 5(3)
  and 5(4) of the IGST Act, it would be in violation of the principle
  of ‘composite supply’ enshrined under Section 8 of the CGST
  Act and the overall scheme of the GST legislation.

ELP Comments

Broader issue – Legislation of GST

• The Supreme Court has held that Article 246A of the
  Constitution of India confers equal power to the Centre and States
  to legislate on aspects of GST. States are not sub-servient to the
  Centre or the GST Council and are free to engage in co-operative as
  well as competitive federalism.

• In terms of the finding of the Supreme Court on the non-binding
  nature of recommendations of GST Council, the State has independent
  power to legislate various provisions of State GST law.

Issue on Ocean Freight

• This ruling brings in a huge respite for the importers who are
  not eligible to claim Input tax credit or face accumulation of
  credit. The importers who have paid IGST on ocean freight services
  and have not claimed Input tax credit or claimed but not utilized
  the Input tax credit of such IGST can claim refund claim under
  Section 54 of the CGST Act.

• Section 54 of the CGST Act provides a limitation period of two
  years for refund. However, one may argue that the tax collected
  without the authority of law by the Government is violative of
  Article 265 of Constitution of India and hence, the bar of
  limitation should not apply.

• While the ruling goes in the favour of importers, the finding
  that importers may be deemed to be the ‘recipient’ may set
  a wrong precedent giving liberty to the Government to shift the
  onus of payment on persons other than the actual recipient of goods
  or services in any other similar situations.

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