Introduction
The Hon’ble Supreme Court in one of its landmark judgments in the case of UOI v. Mohit Minerals Private Limited, quashed the levy of IGST on ocean freight in case of CIF contracts. It is a significant judgment covering important aspects of the role of GST council, binding nature of its recommendations and discussion on the vires of the levy of IGST on ocean freight.
Background
The case went up to the Apex Court by way of an appeal filed by the Revenue against the decision of the Hon’ble Gujarat High Court in the case of Mohit Minerals Private Limited v. UOI. Mohit Minerals Private Limited (‘company’) is an importer of non-coking coal from several countries on CIF basis. The company pays IGST on such imports at the rate of tax applicable on the principal supply, i.e., non-coking coal, considering the transaction to be a composite supply. The goods are imported by the company by sea.
Notification 10/2017 – Integrated Tax (Rate), imposes GST under RCM on services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.
Therefore, the freight component of such CIF contracts is taxed twice, once for import of goods and second, separately on ocean freight. The company filed a writ petition before the Gujarat High Court against such double taxation which was allowed by the High Court in their favour. It was held that the levy of IGST on ocean freight is unconstitutional, and that the importer is not a recipient of services of transportation in case of a CIF contract. Subsequently, an appeal was filed by the Revenue against the decision.
Issues Involved
- Whether IGST should be leviable on the ocean freight transaction as a supply of services under Section 5(3) of the IGST Act.
- Whether the imported goods on a CIF basis constitute inter-state supply or is it extra-territorial in nature.
- Whether the importer can be considered a recipient of services under CIF contracts.
- Whether segregating the supply of service of transportation from the composite supply leads to double taxation.
- Whether the impugned Notifications result from excessive delegation.
Case Analysis
Composite Supply and Double Taxation
The most important issue in the case relates to the double taxation on the supply by an additional levy of IGST on the service component of the transaction. To elaborate, there are two transactions – one, CIF contract existing between Indian importer and foreign exporter and two, contract existing between foreign exporter and shipping company providing transport services.
As regards the first transaction, it shall be considered as a composite supply (consisting of cost, insurance and freight) under Section 8 of the CGST Act read with Section 20 of the IGST Act where IGST shall be leviable at the rate applicable on the principal supply. The issue pertained to the second leg of the transaction, i.e., ocean freight. Since GST was already being paid on the CIF value of the imported goods, the levy of GST on ocean freight additionally would lead to double taxation.
The main purpose of introducing the concept of composite supply was to “ensure that various elements of a transaction are not dissected and the levy is imposed on the bundle of supplies altogether”. Further, it has not been the intention of the legislature to empower the Central Government to interpret a composite supply as two segregable supplies as has also been stated by the Supreme Court. 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.
Territorial Nexus
Secondly, another contention raised was whether the transportation services between two foreign entities for goods which were being imported into India, had any territorial nexus with India and whether it would be appropriate to consider it as a supply under the CGST Act and IGST Act. This issue was raised on the premise that the supply of service of shipping in a CIF contract from the foreign shipping line to the foreign exporter cannot be said to have territorial nexus to India and therefore, cannot constitute supply.
Placing reliance on the Supreme Court decision in GVK Industries, the Court held that the only requirement imposed to legislate over events occurring extraterritorially is that there should be some real connection to India which must be provided by the Parliament through some statute. Section 7 of the CGST Act which deals with supply, provides in its sub-section 1 clause b that import of services for consideration shall constitute supply. Additionally, Section 7(4) of the IGST Act treats imports of services into India as inter-state supply. Further, Section 13(9) creates a deeming fiction in law by considering the place of supply of services of transportation of goods to be the destination of such goods. Hence, though the services are availed by the foreign exporter, it shall be assumed that the place of supply is not the location of the foreign exporter but the destination of goods i.e., India.
It was held that impugned levy on the supply of transportation service by the shipping line to the foreign exporter to import goods into India has a two-fold connection: first, the destination of the goods is India and thus, a clear territorial nexus is established with the event occurring outside the territory; and second, the services are rendered for the benefit of the Indian importer. Thus, the transaction does have a nexus with the territory of India.
Importer as Service Recipient
It was argued that specification of the Indian importer as the recipient of services of transportation was ultra vires the IGST Act inasmuch as the scheme of IGST Act does not envisage a person other than the supplier or the recipient as a person liable to pay tax. However, it was held that the specification of the recipient, i.e., 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;
Further, 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.
Nature of GST Council Recommendations – Binding or Persuasive?
Prevalence of Cooperative Federalism
Ever since the framing of the Inian Constitution, the states have been provided significant autonomy as reflected by the formation of the List-II (State List) in the Seventh Schedule which empowers the states to exclusively legislate on the enlisted matters. India, which is neither absolutely unitary nor absolutely federal, follows cooperative federalism and encourages the Union and states to work in a harmonized manner. This cooperative federalism is also reflected in the current GST Model where the GST Council consists of representatives from both – the Union and the states and the same can be ascertained from the Statement of Object and Reasons of the Constitution (122nd Amendment) Bill, 2014.
Principle of Simultaneous Levy
As held by the Supreme Court in the case of VKC Footsteps, Article 246A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. This principle of simultaneous levy gives equivalent power to the Union and states to make laws on GST. This is different from the principle of concurrence, which though gives equivalent legislative power to the Union and states on certain matters, yet in a case of repugnancy, it is the law of the Union that prevails. No such repugnancy provision exists in the overall scheme of GST.
Pooled Sovereignty
A reference to Parliamentary Debates during the formation of the GST scheme reveals that the then Union Finance Minister informed the states that the Centre and all the states will have to interact with one another and pool their sovereignty rather than surrendering it, in order to collectively implement the scheme of GST. Further, the establishment of a GST Council is not to take away the fiscal autonomy of states, but rather to foster the cooperative federalism between the Union and states.
Hence, from the aforementioned discussion, it can be inferred that, though the recommendations of the GST Council are not binding, in order to successfully implement the law, the constitutional design is such that any recommendation cannot be made by the Centre or states alone. However, the non-binding nature of the recommendations does not take away the sanctity being accorded to the GST Council by the Constitution itself. In fact, the recommendations by the GST Council shall serve as a useful guide at all times in the GST regime.
Other Notable Aspects
Taxability of ocean freight in case of FOB contract
In case of an FOB contract, the insurance and freight are directly borne by the importer and the services are directly taken by the importer without any interference from the foreign exporter. In such cases, the impugned judgment would not squarely apply inasmuch as the judgment covers only the case of CIF contracts. However, it is pertinent to note that in case of FOB contracts, the assessable value as per Customs Act, 1962 is calculated by adding notional value of freight to the value of goods imported in order to compute IGST. Therefore, litigation with respect to the vires of levy of IGST on such notional value under Customs may arise.
Cases relating to the Erstwhile Regime
In the service tax regime, the service tax on ocean freight was exempt but the same was withdrawn by the Central Government vide Notification No. 01/2017-ST dated January 12, 2017. The notification sought to levy service tax on the importer through the reverse charge mechanism. The notification was challenged before various courts contending the notifications to be ultra vires. It is important to understand that the present case cannot be made applicable to these cases in the service tax regime since there was no concept of composite supply then. It is noteworthy that the issue is presently under litigation and the matter is pending before the Supreme Court in the case of UOI v. M/s Raajratna Metal Industries Limited (Diary No. 27027/2020). It is interesting to note that similar to the current case, the decision travelled to the Supreme Court by way of an appeal against the Gujarat High Court decision.
Retrospective Amendment superseding SC Judgment?
There has been hearsay that the Government has been exploring possible avenues against the judgment of the Apex Court in order to levy tax on the ocean freight component. The Government can possibly file a review petition or even bring about a retrospective amendment in the GST law as has been the past trend. Though nothing can be said with surety at the moment, it shall be interesting to see the fate of the issue in near future.
Post published in ACAE’s House Journal – July 2022 edition (Click here to read)
Author: CA Manish Raj Dhandharia