Liability under RCM on Ocean Freight under FOB Imports

After the landmark verdict of the Hon’ble Supreme Court in the matter of UNION OF INDIA & ANR. VERSUS M/S MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR - 2022 (5) TMI 968 - SUPREME COURT,  it was debated & argued in professional circles that the RCM liability on ocean freight is now extinguished but only for CIF transactions & not what is executed on FOB basis. This discussion arose because the conclusion drawn by the Hon’ble Supreme Court vide its para reproduced below, did not specifically mention FOB imports:

“(v) 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.”

On plain reading of the above, it is argued that the aforementioned conclusion of the Hon’ble Supreme Court does not specifically mention FOB contract. Since the conclusion does not specifically provides for FOB contracts, it is argued that the verdict of the Hon’ble Supreme Court is not applicable in case of FOB contracts.

Adding to the confusion, is para 5 of the landmark verdict, wherein it was stated that the respondent (M/s Mohit Minerals) does not dispute the liability of IGST under FOB.

“5……………….. The respondent does not dispute the liability of integrated tax on supply of service of transportation when it imports goods on an FOB basis.”

Even after the relevant entry on ocean freight from the notification was omitted, doubts were still raised about the liability under RCM on FOB imports.

This confusion has now been put to rest by the Honourable High Court of Bombay, in the matter of M/S. AGARWAL COAL CORPORATION PVT. LTD. VERSUS THE ASSIST. COMMISSIONER OF STATE TAX - 2024 (3) TMI 1265 - BOMBAY HIGH COURT, relying upon the judgment of Mohit Minerals, & Agarwal Fuel Corporation, has categorically held the case of Mohit Minerals involved both the categories of contracts, namely CIF as well as FOB.

The Honourable High Court of Bombay relied upon the facts apparent from para 15 of the Judgment of Gujarat HC in Mohit Minerals:

“(b) In case of purchases made on FOB basis, the writ-applicant engages foreign shipping line and pays the Ocean Freight to the foreign shipping line;”

The debate & confusion can now be put to rest as it is clear from the facts of the case of Mohit Minerals relied upon by the Honourable Bombay High Court, that even in case of FOB contracts, the importer is not liable for payment of tax under RCM on ocean freight.

In any case, when a bill of entry is filed by the importer, freight charges are included in the assessable value. Thus, IGST is paid on freight charges being a part of the assessable value before clearing of such goods. Hence, GST has already been paid on freight charges at the time of clearing of such goods. When tax has already been paid upon such amount, the importer cannot be made liable for double payment of taxes even if full input tax credit is available to importer.