Landmark Judgement of Supreme Court on GST on ocean freight – 19th May 2022

Synopsis

In a landmark Judgment in the case of Mohit Minerals Pvt Ltd Supreme court held that the impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

Relevant provisions

The said levy of IGST on ocean freight was introduced vide Notification No. 8-2017 – Integrated Tax (Rate) dated June 28th, 2017. In terms of the said notification, the Government had notified IGST at the rate of 5% being leviable on the service of transport of goods in a vessel including the services provided or agreed to be provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs stations of clearance in India.

Further, in terms of Notification No.10-2017 -Integrated Tax (Rate) dated June 28th, 2017, the importer as defined in clause 2(26) of the Customs Act located in the taxable territory shall be the recipient of service. Thereby, importer is considered as the deemed recipient of the services and IGST liability is fastened with the importer under reverse charge mechanism.

Since the IGST is paid at the time of import on the freight component, the said notification mandating the importer to discharge IGST liability once again on the same component amounts to double taxation.

Issue Involved:

Whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis?

Ocean Freight in case of FOB and CIF contracts:

• FOB (Free on Board): The foreign exporters’ (hereinafter also referred to as the ‘Supplier’) responsibility ends at the load port and Indian importer would be responsible for transportation of goods therefrom till their factory.
• CIF (Cost, Insurance, and freight) the Supplier is responsible for transportation of the goods sold, till the port of destination.

In case of FOB contracts, since importer pays consideration to vessel owner (person located in the non-taxable territory) for transportation services in form of ocean freight, he would be the recipient of the service and all the conditions for liability under RCM will be satisfied.

However, in the case of CIF (Cost, Insurance, and Freight), the contract will be between the vessel owner and the foreign supplier wherein the scope of transportation is up to customs station in India but the foreign supplier pays the consideration thereby making him the recipient of service. Thereby, it can be said that in the case of the CIF contracts, the actual importer would not be liable to GST under RCM, and it is not the recipient of the services.

Supreme Court pronounces judgment in Mohit Minerals case (Ocean Freight matter).

Supreme court decision agrees with the High Court to the extent that a tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed. While upholding the judgment of Gujarat High Court, the Supreme Court holds that GST not leviable on ocean freight. Point wise conclusion of supreme court decision is as below:

1. The recommendations of the GST Council are not binding on the Union and States for the following reasons:

• Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units.
• The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST.
• The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations.

1. The import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service.
2. The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge.
3. Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation.
4. The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2 (30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

M/s Mohit Minerals Pvt. Ltd

Disclaimer:  This Article is only a knowledge sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update etc. if any.

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