CIF import service tax liability cannot be fastened on the Indian importer for ocean freight paid by the foreign supplier.

In CIF imports, where the foreign supplier contracts for and pays the ocean freight, the Indian importer is neither the recipient nor a contracting party to the transportation service. The Karnataka HC held that Notifications No. 15/2017-ST and 16/2017-ST, insofar as they fastened service tax on such imports, were beyond legislative and delegated competence because they sought to tax an extraterritorial service and impose liability on a third party without statutory authority. The court consequently set aside the related demand notice. Refund was left open to be pursued by application in accordance with law, subject to the doctrine of unjust enrichment.

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Issues: (i) whether Notifications No. 15/2017-ST and 16/2017-ST dated 13.04.2017, insofar as they fastened service tax liability on CIF imports, were valid in law; (ii) whether the consequential demand notice could survive; and (iii) whether refund was available, subject to the doctrine of unjust enrichment.

Issue (i): whether Notifications No. 15/2017-ST and 16/2017-ST dated 13.04.2017, insofar as they fastened service tax liability on CIF imports, were valid in law.

Analysis: The Court accepted the admitted factual position that in CIF contracts the foreign supplier engages the transporter and pays the ocean freight, while the Indian importer is neither the recipient of the transportation service nor a contracting party to that service. Relying on the reasoning that taxation cannot be levied on services rendered and consumed beyond India and that the Finance Act, 1994 does not authorise the rule-making power to fasten liability on a third party in such circumstances, the impugned notifications were held to be beyond legislative and delegated competence.

Conclusion: The notifications were declared illegal and set aside.

Issue (ii): whether the consequential demand notice could survive.

Analysis: Once the notifications constituting the foundation of the demand were invalidated, the consequential demand had no independent footing.

Conclusion: The demand notice was set aside.

Issue (iii): whether refund was available, subject to the doctrine of unjust enrichment.

Analysis: The Court held that the petitioner would be entitled to refund of the amount collected pursuant to the impugned proceedings, but only upon making an appropriate refund application to be decided in accordance with law, including the principles governing unjust enrichment.

Conclusion: Refund was left open for consideration in accordance with law subject to unjust enrichment.

Final Conclusion: The challenge to the impugned notifications succeeded, the consequential demand fell with them, and the petitioner obtained the substantive relief sought, with refund to be worked out through the statutory refund process.

Ratio Decidendi: In a CIF import, where the foreign supplier alone contracts for and pays the ocean freight, delegated taxing power cannot be used to impose service tax on the Indian importer as a third party for an extraterritorial service beyond the statutory territorial and charging framework.

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