2022 (5) TMI 968 - SC - GST

Indian importers cannot be subjected to IGST levy on ocean freight under reverse charge mechanism

The SC held that Indian importers cannot be subjected to IGST levy on ocean freight components paid by foreign sellers to shipping lines under reverse ... Recommendations of the Goods and Services Tax Council - reverse charge mechanism - place of supply - transportation of goods by vessel - import of services / import of goods on CIF basis - composite supply - double taxation / aspect theory - excessive delegation - territorial nexus / extra territorial taxationRecommendations of the Goods and Services Tax Council - Whether the recommendations of the GST Council are binding on the Union and the States - HELD THAT: - The Court held that the GST Council's recommendations are recommendatory and not automatically binding on the Union or the States. The deletion of the earlier draft provision for a binding dispute settlement authority and the text and constitutional placement of Articles 246A and 279A indicate Parliament intended the Council to play a cooperative, recommendatory role. Certain statutory provisions require the executive to act on Council recommendations when issuing notifications, but that statutory obligation does not convert all Council recommendations into binding law or displace the legislative function of Parliament and state legislatures. The nature and context of 'recommendation' in Article 279A and the constitutional scheme support a persuasive, not plenary, legislative effect of Council decisions. [Paras 148]Recommendations of the GST Council are recommendatory in character and not per se binding on the Union and the States.Place of supply - transportation of goods by vessel - import of services / import of goods on CIF basis - territorial nexus / extra territorial taxation - Whether transportation of goods by a foreign shipping line up to Indian customs station (in CIF imports) can be treated as an inter state supply with place of supply in India - HELD THAT: - The Court construed Section 13(9) of the IGST Act (place of supply of transportation of goods is place of destination) together with the definitions of import of services to conclude that where goods are transported to India the place of supply of that transportation service is the destination in India. The IGST/CGST scheme contemplates such deeming fictions; Parliament may legislate for extra territorial aspects where a real nexus with India exists. Given the destination nexus and consumption in India, the transportation service in CIF imports can be characterized as an inter state/import of service with a sufficient territorial connection. [Paras 148]Services of transportation by vessel up to the customs station of clearance in India in CIF imports can constitute an inter state (import) supply with place of supply in India.Reverse charge mechanism - excessive delegation - Section 5(3) and Section 5(4) of the IGST Act - Whether the impugned notifications (Notification 8/2017 and 10/2017) exceed delegated powers in specifying the importer as the person liable on reverse charge - HELD THAT: - The Court examined Sections 5(3) and the amended Section 5(4) of the IGST Act and the CGST definitions of 'recipient' and 'reverse charge'. It held that the statute contemplates reverse charge on specified categories of supply and that the Government may, on Council recommendation, notify such categories; the specification of the recipient in notifications is clarificatory rather than a usurpation of core legislative functions. The 2018 amendment to Section 5(4) expressly permits notification to specify classes of registered persons as recipients for reverse charge. Established principles permit upholding delegated instruments where a statutory source of power exists even if the notifications do not cite the precise enabling sub section. [Paras 148]The issuance of notifications identifying categories of supplies and specifying the importer as liable on reverse charge falls within the delegated powers conferred by the IGST/CGST scheme and the amended Section 5(4).Composite supply - double taxation / aspect theory - Whether imposing IGST again on the freight component (by treating the importer as recipient of shipping services) results in impermissible double taxation contrary to the composite supply scheme - HELD THAT: - The Court applied the CGST/IGST provisions on composite supply (Section 2(30) CGST and Section 8 CGST, applied mutatis mutandis) and observed that where a CIF contract results in a composite supply whose principal supply is goods, the tax liability is to be determined as that principal supply. The freight and insurance are components of the composite supply of goods; levying IGST again on the transportation service as a separate supply to the importer would conflict with the statutory rule governing composite supplies and produce double taxation on the same element. While aspect theory permits taxation of different aspects in some contexts, the statutory composite supply rule precludes treating the freight element as a separate taxable supply in CIF imports for the purpose of imposing an additional IGST on the importer. [Paras 148, 149]A separate levy of IGST on the freight component in CIF imports, when IGST is already chargeable on the composite supply (goods) including freight, is inconsistent with the composite supply provisions and results in impermissible double taxation.Final Conclusion: The notifications challenged were considered in light of the IGST/CGST scheme: the GST Council's recommendations are recommendatory; the place of supply of transportation to India in CIF imports can be India and the importer may be treated as recipient for reverse charge purposes under the statutory scheme; however, imposing an additional IGST on the freight component in CIF transactions conflicts with the composite supply rules and results in impermissible double taxation. For these reasons the appeals were dismissed. Issues Involved:1. Constitutionality of GST notifications.2. Excessive delegation of powers.3. Validity of taxable events under GST.4. Interpretation of 'recipient' in CIF contracts.5. Applicability of Section 5(4) of IGST Act.6. Composite supply and double taxation.Detailed Analysis:1. Constitutionality of GST Notifications:The Union of India challenged the Gujarat High Court's decision that deemed two GST notifications unconstitutional. The core issue was whether an Indian importer could be subject to IGST on ocean freight paid by a foreign seller to a foreign shipping line on a reverse charge basis. The Supreme Court examined the legislative history and the constitutional architecture of GST, noting that while the GST Council's recommendations are significant, they are not binding on the Union and States. The Court emphasized that the recommendations are persuasive, aiming to foster cooperative federalism without disrupting fiscal federalism.2. Excessive Delegation of Powers:The respondents argued that Section 5(3) of the IGST Act only allows the government to specify categories of goods or services for reverse charge, not to designate the recipient of the supply. The Court held that the essential legislative functions, such as identifying the taxable event, person, rate, and value, were not delegated. The notifications were found to be a legitimate exercise of delegated legislation, clarifying the recipient within specified categories.3. Validity of Taxable Events under GST:The Court examined whether the import of goods on a CIF basis constitutes a valid import of service under Section 5(3) of the IGST Act. It was held that the supply of transportation services by a foreign shipping line to a foreign exporter, with the destination of goods being India, has a sufficient territorial nexus. The place of supply, as per Section 13(9) of the IGST Act, is the destination of goods, thus making the import of services taxable.4. Interpretation of 'Recipient' in CIF Contracts:The Court analyzed whether the importer could be considered the recipient of shipping services under CIF contracts. It was concluded that the importer, as the ultimate beneficiary of the shipping service, can be deemed the recipient under Section 2(93)(c) of the CGST Act. This interpretation aligns with the destination-based tax philosophy of GST, making the importer liable for IGST on the transportation service.5. Applicability of Section 5(4) of IGST Act:The Union Government argued that the notifications could derive validity from Section 5(4) of the IGST Act, which allows specifying a class of registered persons as recipients. The Court noted that the amended Section 5(4) clarifies the government's power to designate recipients, thereby validating the notifications even if the importers do not qualify as service recipients.6. Composite Supply and Double Taxation:The respondents contended that the impugned levy results in double taxation, as IGST is already paid on the transaction value of goods, including freight. The Court agreed, stating that the supply of goods in a CIF contract is a composite supply under Section 2(30) of the CGST Act. Thus, levying IGST on the supply of services separately violates the principle of composite supply and the scheme of GST legislation.Conclusion:1. The recommendations of the GST Council are persuasive but not binding on the Union and States.2. The notifications are a legitimate exercise of delegated legislation, specifying categories of supply and recipients.3. The import of goods on a CIF basis constitutes a taxable event under GST, with the importer being the recipient of shipping services.4. Section 5(4) of the IGST Act validates the notifications by allowing the designation of recipients.5. The impugned levy violates the principle of composite supply, leading to double taxation.The appeals were dismissed, and the notifications were deemed valid under Sections 5(3) and 5(4) of the IGST Act but invalidated due to the principle of composite supply.