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Supreme Court strikes down levy of IGST on Ocean Freight
UOI vs Mohit Minerals Pvt. Ltd.
- 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
- 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
- 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
- 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
- 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.
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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