26 May 2022
Apex Court's respite to importers: No GST on ocean freight in CIF contracts

The taxability of ocean freight under the reverse charge mechanism, in the case of Cost, Insurance, and Freight (CIF) import of goods, has been a matter of litigation right from its introduction during the service tax era. The importers have repeatedly represented their concerns to the government over such a levy, such as incidence of double taxation, extraterritorial applicability, valuation, etc.

When put forth before the judiciary, the Hon'ble Gujarat High Court, exercising its writ jurisdiction in the matter of Mohit Minerals Pvt Ltd. vs. Union of India & Anr.1, struck down the levy as ultra vires the GST law. Aggrieved thereby, the Revenue preferred an appeal2 before the Hon'ble Supreme Court, which was recently dismissed by a three judge bench on the ground that the levy on the 'service' aspect of import transaction violates the principle of 'composite supply' enshrined under Section 2(30) r/w Section 8 of the CGST Act.

While this landmark ruling has given respite to the importers, it brings to light several key aspects of the interpretation of the GST provisions. Some of the noteworthy observations are highlighted below:

Violation of the principle of 'composite supply'
The levy imposed on the 'service' aspect of the transaction violates the principle of 'composite supply' enshrined under Section 2(30) r/w Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the value of '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.

Existence of territorial nexus
The 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. Moreover, since the destination of goods is India, the statute itself [Section 13(9) of the IGST Act] is broad enough to cover a taxable event that has extraterritorial aspects, which bears a nexus to India.

Relevance of 'consideration'
In the case of goods imported on a CIF basis, the fact that the foreign exporter pays consideration to the foreign shipping line would not stand in the way of it being considered as a "supply of service" in the course of inter-state trade or commerce, that can be subject to IGST.

Wide scope of the term "recipient"
The tax on reverse charge basis is payable by the 'recipient' of such goods or services or both. The power under Section 5(3) of the IGST Act is to specify categories of goods or services (or both). The provision does not empower the government to specify the recipient of the supply of goods or services. On the other hand, the amended Section 5(4) of the IGST Act enables the government to create a deeming fiction of declaring a class of registered persons "as the recipients." In deploying the language "as the" and not "by the" recipient, the applicability of the definition of recipient vis-à-vis Section 2(93) of the CGST Act is no longer necessary for determining the validity of such a Notification. The effect of the amendment has been as follows – (i) the powers of the Central Government to specify through a notification have been clarified; and (ii) the power to specify a class of registered persons as the recipient has been recognized. It is a settled law that non-reference of the source of power may not vitiate its exercise and application in given facts and circumstances of a case.

Importer is a "taxable person"
Neither Section 2(107) nor Section 24 of the CGST Act qualify the imposition of reverse charge on a "recipient of service" and broadly impose it on "the persons who are required to pay tax under reverse charge." Since the impugned Notification No. 10/2017-IGST identifies the importer as the recipient liable to pay tax on a reverse charge basis under Section 5(3) of the IGST Act, the argument for the failure to identify a specific person who is liable to pay tax does not stand.

Validity of deemed valuation
Parliament has provided the basic framework and delegated legislation provides necessary supplements to create a workable mechanism. Rule 31 of the CGST Rules 2017 specifically provides for a residual power to determine the valuation in specific cases, using reasonable means that are consistent with the principles of Section 15 of the CGST Act. Thus, the impugned Notification No. 8/2017-IGST cannot be struck down for excessive delegation when it prescribes 10% of the CIF value as the mechanism for imposing a tax on a reverse charge basis.

Recommendations of GST Council not binding
The recommendations of the GST Council are not binding on the Union and States. The deletion of Article 279B and inclusion of Article 279(1) indicates that the 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 Parliament and the State legislatures possess simultaneous power to legislate on GST. While exercising its rule-making power under the provisions of the CGST Act and IGST Act, the government 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 Article 279A(4) are binding on the legislature's power to enact primary legislation.

1. [2020 (33) GSTL 321 (Guj)]
2. Union of India & Anr. vs. Mohit Minerals Pvt Ltd. [C.A. No. 1390 of 2022]
Our Comments
This is a welcome verdict for all the businesses regularly engaging in imports on a CIF basis. Pursuant to the said judgment, the importers who have already paid GST on ocean freight and have not claimed input tax credit could seek a refund on the ground that tax was collected without the authority of law.

However, it may be pertinent to note that the levy has been struck down only on the ground of violation of principles of 'composite supply' as the Indian importers are liable to pay GST on goods, including freight portion in a CIF contract and hence cannot be asked to pay GST on supply of transportation service. The Apex Court has upheld the validity of the impugned Notifications on various counts such as constituting an inter-state supply, importer being the recipient, the relevance of consideration, deemed valuation, etc.

The decision also widens the scope of the term "recipient." Such an interpretation may allow the government to shift the burden of GST payment on the beneficiaries of supply instead of the actual recipient who pays the consideration. This could lead to prolonged disputes with the Department.

Another crucial aspect that may require a detailed deliberation is the binding effect of GST Council recommendations on the Union and State legislatures. Their recommendatory and persuasive nature could open gateways to an entirely new era of litigation.
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