Court Strikes Down GST Notifications on Ocean Freight; Declares Them Unconstitutional and Ultra Vires.

The HC allowed the writ applications, declaring Notification No.8/2017 and Entry 10 of Notification No.10/2017 under the IGST Act, 2017, as ultra vires and unconstitutional. The notifications were struck down, and no IGST was deemed leviable on ocean freight for services provided by non-taxable territory entities for transporting goods to India.

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Issues Involved:
1. Legislative competency and ultra vires nature of the impugned notifications.
2. Double taxation and composite supply.
3. Validity of reverse charge mechanism on ocean freight.
4. Definition and scope of "recipient" under the IGST Act.
5. Administrative and procedural inconsistencies in the levy of IGST on ocean freight.

Detailed Analysis:

1. Legislative Competency and Ultra Vires Nature of the Impugned Notifications:
The court examined whether the notifications levying IGST on ocean freight were within the legislative competence of the government. It was argued that the notifications were ultra vires the IGST Act, 2017, and lacked legislative competency. The court concluded that the impugned notifications levying tax on the supply of service of transportation of goods by a person in a non-taxable territory to another person in a non-taxable territory were beyond the scope of the IGST Act. The notifications were declared ultra vires and unconstitutional as they imposed a tax on transactions that were neither inter-state nor intra-state supplies under the IGST Act.

2. Double Taxation and Composite Supply:
The court addressed the issue of double taxation, noting that the writ-applicants already paid IGST on the value of imported goods, which included ocean freight. Imposing IGST again on the same ocean freight as a separate supply of service amounted to double taxation, which is impermissible. The court emphasized the concept of composite supply under the GST regime, where the principal supply determines the tax liability. Since the ocean freight was already included in the value of imported goods and taxed accordingly, taxing it again as a separate service was deemed illegal.

3. Validity of Reverse Charge Mechanism on Ocean Freight:
The court scrutinized the reverse charge mechanism applied to ocean freight. Section 5(3) of the IGST Act allows the government to specify categories of supply on which the tax shall be paid by the recipient. However, the court found that the notifications went beyond this provision by making the importer liable for tax on services provided by a foreign supplier to another foreign entity. The court held that the importer, not being the recipient of the service, could not be made liable to pay tax under the reverse charge mechanism.

4. Definition and Scope of "Recipient" under the IGST Act:
The court examined the definition of "recipient" under Section 2(93) of the CGST Act, which is applicable to the IGST Act. The term "recipient" is defined as the person liable to pay consideration for the supply. In CIF contracts, the foreign exporter arranges and pays for transportation, making the foreign exporter the recipient of the service, not the Indian importer. The court concluded that the importer could not be considered the recipient of the transportation service and thus could not be held liable for IGST on ocean freight.

5. Administrative and Procedural Inconsistencies in the Levy of IGST on Ocean Freight:
The court identified several administrative and procedural inconsistencies in the levy of IGST on ocean freight. It noted that the scheme of the IGST Act does not contemplate the levy of tax on a person who is neither the supplier nor the recipient of the supply. Additionally, the court highlighted the lack of provisions for determining the time of supply, value of supply, and input tax credit for ocean freight services when the importer is not the recipient. These inconsistencies further supported the court's decision to declare the notifications ultra vires and unconstitutional.

Conclusion:
The court allowed the writ applications, declaring the impugned Notification No.8/2017 – Integrated Tax (Rate) and Entry 10 of Notification No.10/2017 – Integrated Tax (Rate) dated 28th June 2017 as ultra vires the IGST Act, 2017, and unconstitutional. The notifications were struck down, and no tax was held to be leviable on ocean freight for services provided by 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 station of clearance in India.

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