TaxTMI 
TaxTMI 
2022 (5) TMI 968
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Adv. Ms. Nisha Bagchi, Adv. Mr. Rupesh Kumar, Adv. Mr. Sharath Nambiar, Adv. Mr. Ashutosh Jain, Adv. 4 Mr. Kartikey Singh, Adv. Mr. Mukesh Kumar Maroria, AOR For the Respondent : Mr. Harish N. Salve, Sr. Adv Mr. JK Mittal, Adv. Ms. Neeha Nagpal, Adv. Mr Malak Manish Bhatt, AOR Ms. Vandana Mittal, Adv Ms. Aashna Suri, Adv Mr. Apurva Mehta, Adv. Mr. Shashank Shekhar, Adv. Mr. Tushar Joshi, Adv. Mr. Rajat Mittal, AOR Mr. Vikram Nankani, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Anshuman Srivastava, Adv. Mr. Rohan Talwar, Adv. Mr. Abhinabh Garg, Adv. Mr. E. C. Agrawala, AOR Mr. Arvind P. Datar, sr. Adv. Mr. Harish Bindumadhavan, Adv. Mr. Pawanshree Agrawal, AOR Ms. Shrayshree Thyagarajan, Adv. Mr. Kumar Visalaksh, Adv. Mr. Harsh Shah, Adv. Ms. Ruchita Shah, Adv. Mr. Udit Jain, Adv. Mr. Arihant Tater, Adv. Mr. Archit Gupta, Adv. Mr. Ajitesh Dayal Singh, Adv. Mr. Abhishek Vikas, AOR Mr. Rishabh Sancheti, Adv. Ms. Padma Priya, Adv. Mr. Anchit Bhandari, Adv. Mr. Suyash Jain, Adv. Ms. Saloni Bhandari, Adv. Mr. Zeeshan Ali, Adv. Mr. K. Paari Vendhan, AOR Mr. Ranjan Kumar, AOR Mr. Kapil Dev Yadav, Adv. Mr. Sanjay Kumar, Adv. Mr. Avushka Singh, Adv. Mr. Simranjeet Singh, Adv. Ms. Rhea Dube, Ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t? ......................... 114 D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state supply or is it an extra-territorial tax? ................................................................ 115 D.4.(b) Are importers service recipients under CIF contracts? ..................... 125 D.5 Applicability of Section 5(4) of IGST Act .................................................... 135 D.6 Composite Supply and Issues of Double Taxation..................................... 141 E Conclusion ........................................................................................................ 150 A Introduction 1 The Union of India "Union Government" or "Central Government" is in appeal against a judgment of a Division Bench of the Gujarat High Court dated 23 January 2020. The High Court allowed a petition instituted by the respondents under Article 226 for challenging the constitutionality of two notifications of the Central Government. The bone of contention is whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax "IGST" on the component of ocean freight paid by the foreign seller to a foreign shipping....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed under Section 3 of the Customs Tariff Act 1975 "Customs Tariff Act" at the point when customs duties are levied on the goods under Section 12 of the Customs Act 1962 "Customs Act". Section 11 of the IGST Act stipulates that the place of supply of goods in the case of goods imported into India shall be the place of the importer. Section 13(9) of the IGST Act contemplates that the place of supply of services, in the case of transportation of goods shall be the destination of the goods. The respondent alleges that the impugned notifications create an element of double taxation, as ocean freight is included in the value of goods for the purpose of customs duty which the importer is liable to pay. The respondent does not dispute the liability of integrated tax on supply of service of transportation when it imports goods on an FOB basis. 6 The respondent filed a writ petition before the Gujarat High Court challenging Notification 8/2017 and Notification 10/2017 Collectively referred as "impugned notifications" on the grounds that: (i) the notifications are ultra vires the IGST Act and CGST Act; (ii) customs duty is levied on the component of ocean freight and the levy of IGST on th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... input tax credit used for export. Import Foreign Section 13(9) of the IGST Act - the place of supply of services of transportation of goods shall be place of destination of such goods. Transaction is liable for tax as the place of supply is India. Tax will be paid under reverse charge and can be claimed as input tax credit. Export Foreign Section 13(9) of the IGST Act - the place of supply of services of transportation of goods shall be place of destination of such goods. Since the place of supply will be outside India, the transaction is not liable for tax. 9 The Division Bench of the Gujarat High Court held that the impugned notifications are unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act. The High Court held: (i) The importer of goods on a CIF basis is not the recipient of the transport services as Section 2(93) of the CGST Act defines a recipient of services to mean someone who pays consideration for the service, which is the foreign exporter in this case; (ii) Section 5(3) of the IGST Act enables the Government to stipulate categories of supply, not specify a third-party as a recipient of such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f IGST (i) Under Article 286(2), Parliament is empowered to formulate inter alia the principles for determining when a supply of goods or services takes place in any of the ways mentioned in Article 286(1), which includes imports; (ii) Article 269A enables the Union Government to levy GST on inter-state supplies. The explanation to Article 269A(1) creates a deeming fiction that a supply of goods or services in the course of imports is to be considered as a supply of goods or services or both in the course of interstate trade; (iii) Article 269A(5) enables Parliament to formulate the principles for determining the place of supply and when a supply of goods and services or both takes place in the course of inter-State trade or commerce. This constitutional mandate finds legislative effect in the IGST Act; (iv) As contemplated in Article 286(2) read with Article 269A(1), the IGST Act enacts provisions relating to the levy and collection of integrated tax (Section 5(1)), export of goods [Section 2(5)], export of services [Section 2(6)], import of goods [Section 2(10)], import of services [Section 2(11)], location of recipient of services [Section 2(1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sted by the aforesaid sections of the IGST Act or the CGST Act; (x) A person covered by reverse charge becomes a taxable person in terms of Section 2(107) of the CGST Act read with Section 24(iii) of the CGST Act. Pertinently, Section 24(iii) of the CGST Act employs the language of "persons who are required to pay tax under reverse charge" and not "persons who are recipient of services under Section 2(93) of the CGST Act 2017"; (xi) Section 5(3) of the IGST Act and Section 9(3) of the CGST Act permit the Government, on the recommendation of the GST Council, to specify the categories of goods or services or both, the tax for which shall be paid on reverse charge basis by the recipient of such goods or services or both; (xii) Presently, neither the provisions nor the rules have identified the taxable persons for reverse charge. Hence, the impugned notifications are a legitimate exercise of delegated legislation. Notification 10/2017 identifies an importer as a recipient for the purposes of reverse charge. The power to issue such a notification can be traced back to Sections 5(3) and 5(4) of the IGST Act; D. Inter-state supply and Place of Supply ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to Section 5(1) read with Sections 3(7) and 3(8) of the Customs Tariff Act. On the other hand, what is sought to be taxed under IGST on reverse charge basis derives power under Section 5(1) (taxable person) read with Section 24(iii) of the CGST Act and Section 5(3) of the IGST Act and the impugned notifications; (xx) A Constitution Bench of this Court in McDowell and Company Ltd. v. Commercial Tax Officer 1985 (3) SCC 230 ["McDowell"] has held that a single element can constitute the basis of a levy and can also form part of the value for another transaction. This cannot be termed as double taxation. G. Extra-territoriality (xxi) There is sufficient territorial nexus for the purpose of taxation since the importer is the final beneficiary of a service provided by a foreign shipping line by way of transportation up to the customs station of clearance in India. The transaction between the foreign exporter and the foreign shipping line has a nexus to the taxable territory of India. The importer is the beneficial owner of the goods at the time of clearance. The appellant relies on the decisions of this Court in M/s Electronic Corporation of India v. Commissioner of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmed as recipient of the service. I. Applicability of Section 5(4) of the IGST Act (xxiii) In the alternative, the impugned notifications would be saved by Section 5(4) of the IGST Act which permits the Union Government, on the recommendations of the GST Council, to specify a class of registered persons who shall in respect of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient and all the provisions of the Act would apply to such a recipient; (xxiv) It is admitted that the impugned notifications do not refer to Section 5(4) of the IGST Act. However, it is settled law that once a power is available to grant or identify the taxable person, taxable event, rate and measure, non-reference of the source of power will not vitiate its exercise and application in given facts and circumstances of the case; J. Parliamentary legislation v. Excessive delegation (xxv) This Court in Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills 1968 (3) SCR 251 and Avinder Singh v. State of Punjab 1979 (1) SCC 441 has held that only essential legislat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (xxx) The GST Council recommends the law, rules and notifications through a voting architecture that is prescribed in Article 279A(6) and quorum requirements in Article 279A(7). Every decision flows from one common source; (xxxi) The GST Council is the only constitutional body which acts as a converging point or a platform for both the federal units to work in a harmonious manner in structuring the goods and service tax, in the process of developing a harmonised national market for goods and services; (xxxii) Article 246A states that the power to legislate GST laws is only with the Union of India and the States. Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A. Judicial interpretation must strike a harmony such that Parliament, the state legislatures and the GST Council work in unison and harmony; and (xxxiii) The constitutional scheme therefore envisages a two-step process. At the first level of the GST Council, Article 279A(6) envisages cooperative federalism and in the absence of either a non obstante clause in Article 279A or a 'subject to' clause in Article 246A, the need or requirement is that both....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the first time, which violates Section 5(1) of the IGST Act. The appellant submits that in terms of Section 15(4) and Section 15(5) of the CGST Act, Rules 27 to 31 of the Central Goods and Service Tax Rules 2017 "CGST Rules" have been formulated. The Revenue can also assess the transaction by taking aid of a residual method prescribed under Rule 31 of the CGST Rules. Any discretion vested in quasi-judicial authorities must be regulated. The corrigendum dated 30 June 2016 amending Notification 8/2017 and prescribing the methodology for determining valuation can be read as a guideline for dealing with infirmities in assessment practices. It is only a reference or a guideline for making assessments. Even if it were to be held inapplicable, the revenue can assess the transaction under Rule 31 of the CGST Rules. Thus, Notification 8/2017 does not impinge on Rule 31 of the CGST Rules but only aids uniformity; (v) The respondents rely on Section 2(87) of the CGST Act and Section 5 of the IGST Act to argue that prescription can only be through rules, and not notifications. However, Section 15(1), (2) and (3) of the IGST Act prescribes values. Section 15(4) and 15(5) of the IGST ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as decided on the ground of the impingement on the exclusive domain of the Union to impose service tax under Entry 97, List I; (xi) In the alternative, the integrated tax derives authority from Section 5(4) of the IGST Act which permits the government to specify a class of registered persons who receive goods or supplies from an unregistered supplier, who shall pay the tax on a reverse charge basis as the recipient. If this section is deemed applicable, then the importers would be liable for tax with effect from 1 February 2019, though exempted for the period from 13 October 2017 till 31 January 2019; (xii) The creation of the GST Council under Article 279A embodies the spirit of collaborative federalism. The GST Council is constitutionally mandated, particularly under Article 279A(6), to promote harmony and alignment amongst the federal partners; (xiii) Under Article 279A(4), decisions of the GST Council transform into recommendations to the Unions and the States. The GST Council is the only constitutional body that acts as a converging space or platform for the federal units to work in a harmonious matter. The principal function of the GST Council is to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ic commerce operator through whom supply is made is taxed; and (e) In case the Parliament desired the tax to be collected from a person other than a supplier or recipient, it would have expressly provided so in the legislation. Since Parliament has specified the person liable for tax, it is not a matter to be governed by delegated legislation; (ii) Section 2(98) of the CGST Act defines 'reverse charge' as the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both. In other words, only the recipient can be made liable to pay tax under reverse charge basis and the reverse charge cannot be disintegrated from the recipient of supply; (iii) Section 5(3) clearly stipulates that (i) the tax shall be paid on a reverse charge basis and (ii) the tax is payable by the recipient; (iv) GST laws contemplate only one recipient for one supply: (a) The interpretation of the ASG that the foreign exporter is the recipient under clause (a) of Section 2(93) of the CGST Act and the Indian importer is the recipient under clause (c) of Section 2(93) of the CGST Act leads to absurdit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onstrued as a reference to the recipient of supply and shall include an agent acting on behalf of the recipient; and (c) The above provision implies that if the Act does not use the term 'recipient' but makes a reference to the person to whom supply is made, then they shall be construed as a 'recipient'. It does not however, create a new category of recipient. (vi) The taxable event for levy of GST is 'supply' of goods or service. In the absence of supply, no tax can be levied under IGST, CGST or State Goods and Services Tax Act "SGST": (a) Article 366(12A) of the Constitution defines the 'goods and services tax' as the tax on 'supply' of goods or services or both; (b) Section 5 of the IGST Act, which is the charging section for levy of tax, also states that the IGST will be levied on all inter-State 'supplies' of goods or services or both; and (c) Each transaction has to be evaluated independently to determine its taxability. The transaction of supply takes place between the contracting parties, that is, at whose instance the supply is made; (vii) The CGST Act does not envisage a taxable supply without consideration, other than....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pay tax under reverse charge basis under Section 5(4) at the time when the impugned notification was issued on 28 June 2017. The power has been granted by amendment w.e.f. 1 February 2019; * Section 2(93) of the CGST Act provides that any reference to a person to whom supply is made shall be construed as reference to the recipient of supply. Thus, the person under Section 5(4) who has received the supply is the recipient of the supply. Even after the amendment of Section 5(4), only the recipient can be specified as a person liable to pay tax; and * Section 2(98) of the CGST Act defines 'reverse charge' as the liability to pay tax by the recipient of the supply instead of the supplier. Thus, only the recipient can be made liable to pay tax on a reverse charge basis; (ix) Section 13(9) of the IGST Act is only relevant to determine the place of supply and not the recipient of supply. Whether the supply of service is an export of services under Section 2(6)(a) of the IGST Act or an import of services under Section 2(11), read with Section 7(4) of the IGST Act; or an inter-State supply of service, is not determined by Section 13(9); (x) Notification 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... inward supply. The supply of ocean freight service is neither an inward supply nor an outward supply; (xiii) In case of CIF contracts, the customer contracts for a supply of delivered goods at the port of destination. The contract for transportation of goods is entered into by the foreign exporter with the foreign shipper. Thus, the person liable to pay consideration to the foreign shipper is the foreign exporter. The importer of goods in India is not the person liable to pay the consideration, and is thus, not the 'recipient' of the service; (xiv) The contract of the Indian importer with the foreign exporter is for supply of delivered goods. The service of transportation is a component of the supply of goods similar to raw material, manufacturing cost or employee cost of the supplier. To contend that the purchaser has received the supply of raw material or the services of an employee is illogical. Similarly, the argument that the Indian importer has received transportation services is irrational; and (xv) Serial No. 9(ii) of Notification 8/2017 read with Para 4 and Serial No. 10 of Notification No. 9 of 2017-Integrated Tax (Rate) dated 28 June 2019 desc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es for apportionment of GST on inter-state supply of goods or service. If import IGST was a customs duty, then the revenue proceeds would be distributed in accordance with Article 270 of the Constitution; (j) At the introduction of GST, the understanding of the Government was in consonance with the above legal position and accordingly, the Government issued a notification exempting goods and services imported from an SEZ unit or developer under the IGST Act. Subsequently, the Government rescinded the above exemption notifications and issued separate notifications under the Customs Act and IGST Act; and (k) The Government has also issued various notifications exempting payment of IGST in case of import of goods on lease or temporary import basis. The intention of Government is not to impose IGST in case of import of goods that do not amount to supply. 13 Mr Harish Salve, learned senior counsel, appearing on behalf of the respondent CA No. 13958 of 2020 has submitted: (i) A CIF contract is an inclusive price covering cost of goods, insurance and freight payable for carriage of goods to the destination specified in the contract. The essence of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....affreightment. The Indian recipient is only a recipient of goods, not of service; (vi) The law recognises and maintains the integrity of a CIF contract under Section 2(30) read with Section 2(93), and Section 8. These sections maintain the integrity of a composite contract by providing that where the goods come with insurance and freight, the tax is imposed only on supply of goods; (vii) The High Court has held that that the notifications under challenge were ultra vires. The Government has not urged that any of these findings are incorrect and has only contended that Section 5(1) of the IGST Act satisfies all ingredients of a valid tax law; (viii) Notification 8/2017 is ultra vires the IGST Act. Section 5(1) of the IGST Act only empowers the issuance of notifications for rates and requires other provisions to be prescribed. Section 5(1) does not empower the Government to define 'description of service' which is an essential legislative function; (ix) Entry 9(ii) of Notification 8/2017 imposes a tax on ocean freight in import of goods. Such a power however, has not been provided in the statute; (x) Para 4 of Notification 8/2017 determine....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and IGST Act are limited to the territory of India. Thus, any service received outside the territory of India cannot be considered to be 'supply' under the IGST Act or the CGST Act; (d) To impose a levy on a service that is extra-territorial, there has to be a deeming fiction in the form of a statutory provision which deems the supply of transportation by a vessel to a non-resident exporter. In this case, such a deeming fiction does not exist. Thus, the transportation service cannot be deemed as a 'supply' under the IGST Act; (e) Only once the service provided outside the territory of India is deemed as a 'supply' by way of statute, can there be a determination of the supplier and the recipient; (f) By way of the impugned notification, the freight charges incurred abroad are sought to be taxed in India on the ground that the service recipient is in India. If this argument is accepted, then any service (such as insurance or incidental services) rendered abroad can be taxed in India on the ground that the recipient is in India. This practice is in contrast with international taxation laws and will lead to hardship for Indian importers; (g) Article....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a provision, the freight services rendered outside India cannot be deemed to be received in India merely because the recipient is in India. (iv) The importer is not the 'recipient' of services under Section 2(93) of the CGST Act: (a) Under clause (c) of Section 2(93), when there is no consideration payable for the supply of services, then the person to whom the services are rendered is the service recipient. However, in this case, the importer is not the service recipient as the importer does not pay the consideration or receive the services; (b) The argument of the ASG that the importer is a 'recipient' as they are the ultimate beneficiary enlarges the scope of Section 2(93) by adding words that are absent in the statute; (c) Even if the ultimate beneficiary is considered to be the recipient, the importer is not the beneficiary of the service of transportation of goods. Under the terms of a CIF contract, the foreign vendor is obligated to arrange for transportation of goods for which he engages the services of a shipping line. Thus, the foreign vendor is the ultimate beneficiary; (d) The importer is only the beneficiary of the imported ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... High Court. The appeal must test the correctness of the impugned judgment without expanding its scope; and (ix) Interpretation of Article 279A of the Constitution was not an issue before the High Court and the present appeal should be restricted to the validity of the impugned notification. 15 In addition to the above, Mr Vikram Nankani, learned senior counsel, appearing on behalf of the respondent SLP(C) No. 843/2021 urged the following submissions: (i) Section 7(4) of the IGST Act provides that supply of services imported into the territory of India shall be treated as a supply of services in the course of inter-state trade or commerce. Section 2(11) of the IGST Act defines "import of services" when the supplier of service is located outside India, the recipient of service is located in India and the place of supply of service is in India. When these provisions are read together, it implies that in case of import of services into the territory of India, the location of the supplier of services is outside India and the location of the recipient is in India. Thus the IGST Act covers either import of goods or import of services and not services subsumed into th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....context of imposition of customs duty, it was held that in a CIF contract, the freight is part of the price paid to the seller and further addition of transportation charges is contrary to the statutory provisions; and (iv) The judgment of this Court in Union of India v. Jalyan Udyog (1994) 1 SCC 318 which states that a legal fiction can be created even by delegated legislation, is inapplicable as in that case, the fiction created was within the parameters of the parent provision. In this case, the fiction violates Section 5(3) of the IGST Act. 17 Mr Rajesh Kumar Gautam, learned counsel appearing on behalf of the intervenor IA No. 118754/2021 in SLP(C) No in SLP(C) No. 13958/2020, has submitted that the argument of the ASG that the levy has been introduced to create a level playing field is fallacious as: (i) Prior to 2016, all import transportation, whether undertaken by Indian or foreign shipping lines was outside the scope of levy. Service tax was imposed on import transactions undertaken by Indian shipping lines only to allow them to avail CENVAT credit. This credit was protected even though no service tax was payable on export transportation. Further, Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Constitution (One Hundred and First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council. (2) The Goods and Services Tax Council shall consist of the following members, namely:- (a) the Union Finance Minister...................... Chairperson; (b) the Union Minister of State in charge of Revenue or Finance................................................................ Member; (c) the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government........................................................Members. (3) The Members of the Goods and Services Tax Council referred to in sub-clause (c) of clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice-Chairperson of the Council for such period as they may decide. (4) The Goods and Services Tax Council shall make recommendations to the Union and the States on- (a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to, or e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....intment of a person as a Member of the Council; or (c) any procedural irregularity of the Council not affecting the merits of the case. (11)The Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute - (a) between the Government of India and one or more States; or (b) between the Government of India and any State or States on one side and one or more other States on the other side; or (c) between two or more States, arising out of the recommendations of the Council or implementation thereof.'' 21 The Union Government has contended that the recommendations of the GST Council are binding on the legislature and the executive. It was submitted that since the recommendations are binding, the rule making power of the Government under the provisions of the IGST Act and CGST Act, exercisable on the 'recommendations' of the GST Council, are also very wide. The arguments of the Union Government are as follows: (i) A combined reading of Articles 246A and 279A elucidates that the GST Council is the ultimate decision-making body in framing the GST law since it is a constitutional body that acts as a converging....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2003 had recommended a shift to consumption taxes to increase efficiency in production and enhance international competitiveness of Indian goods and services. The need for such an enormous change in the tax regime arose out of the distortions in the then existing indirect tax regime which suffered from the drawback of multiplicity of taxes, taxable events, compliances, and authorities. For instance, the rate of the sales tax and value added tax on the same goods would differ across India. Several states would impose entry taxes on goods before the goods entered their boundaries. The First Discussion Paper on Goods and Services Tax in India released by the Empowered Committee in November 2009 explained the rationale for introducing the GST regime in the following terms: Empowered Committee, First Discussion Paper on Goods and Services Tax, (2009) Pars 1.13-1.14 "The introduction of GST at the Central level will not only include comprehensively more indirect Central Taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value added addition in the distrib....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax." (emphasis supplied) 24 The Finance Minister while introducing the 2014 Amendment Bill in Parliament noted that the object of the constitutional amendment is to bring about a "certain amount of convergence between these taxes so that the taxation mechanism becomes extremely simple". Speech by Arun Jaitley in Lok Sabha on 24.4.2015; Tarun Jain, Goods and Services Tax: Constitutional Law and Policy (EBC 2018) 16 He also highlighted the fact that there was no uniformity in the tax rates and structure across the States. The Statement of Objects and Reas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scrutiny of Lists I and II of the Seventh Schedule would show that there is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. Following the scheme of the Government of India Act, 1935, the Constitution has made the taxing power of the Union and of the States mutually exclusive and thus avoided the difficulties which have arisen in some other Federal Constitutions from overlapping powers of taxation. 76. It would therefore appear that there is a distinction made between general subjects of legislation and taxation. The general subjects of legislation arc dealt with in one group of entries and power of taxation in a separate group. In M.P.V. Sundararamier & Co. v. State of A.P. [AIR 1958 SC 468 : 1958 SCR 1422 : (1958) 9 STC 298] this court dealt with the scheme of the separation of taxation powers between the Union and the States by mutually exclusive lists. In List I, Entries 1 to 81 deal with general subjects of legislation; Entries 82 to 92-A deal with taxes. In List II, Entries 1 to 44 deal with general subjects of legislation; Entries 45 to 63 deal with taxes. This mutual exclusiveness is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....between central and state laws on matters in the Concurrent list. Article 246A entrusts Parliament and State legislatures the power to legislate on the goods and services tax. The power of the States is however subject to the conferment of an exclusive domain to Parliament to levy the goods and services tax where the supply of goods or services takes place in the course of inter-state trade and commerce. 28 In Union of India v. Mohit Mineral Pvt. Ltd. (2019) 2 SCC 599, this Court while deciding the constitutional validity of the GST (Compensation to States) Act 2017 noted that the Constitution Amendment Act 2016 introduced changes in the legislative powers of the Parliament and State legislature relating to indirect taxation. It observed that the amendment "confers concurrent taxing powers on the Union as well as the States for levying GST on transactions of supply of goods or services or both". In Baiku v. State Tax Officer, GST 2019 SCC OnLine Ker 5362, a writ petition was filed challenging the legality of the notices and assessment orders issued under the Kerala Value Added Tax Act 2003 "KVAT Act" for the assessment years 2010-11 and 2011-12. The notices and orders were chall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the State legislature, the constitutional design of Article 246A does not stipulate the manner in which such inconsistency between the laws made by Parliament and the State legislature on GST can be resolved. The concurrent power exercised by the legislatures under Article 246A is termed as a 'simultaneous power' to differentiate it from the constitutional design on exercise of concurrent power under Article 246, the latter being subject to the repugnancy clause under Article 254. The constitutional role and functions of the GST Council must be understood in the context of the simultaneous legislative power conferred on Parliament and the State legislatures. It is from that perspective that the role of the GST Council becomes relevant. Role of the GST Council 31 The Thirteenth Finance Commission set up the Task Force on GST. The Task Force recommended that the Empowered Committee of State Finance Ministers may, upon the introduction of GST, be transformed into a permanent constitutional body known as the 'Council of Finance Ministers'. The Task Force had recommended that: (i) The Council would be responsible for modification in the design of dual GST regulating th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d surcharges levied by the Centre, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to or exempted from the goods and services tax; (c) the threshold limit of turnover below which goods and services tax may be exempted; (d) the rates of goods and services tax; and (e) any other matter relating to the goods and services tax, as the Council may decide. (5) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services. (6) One-third of the total number of members of the Goods and Services Tax Council shall constitute the quorum at its meetings. (7) The Goods and Services Tax Council shall determine the procedure in the performance of its functions. (8) Every decision of the Goods and Services Tax Council taken at a meeting shall be with the consensus of all the members present at the meeting. (9) No act or proceedings of the Goods an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Council. (5) The Goods and Services Tax Dispute Settlement Authority shall pass suitable orders including interim orders. (6) A law made under clause (1) may specify the powers which may be exercised by the Goods and Services Tax Dispute Settlement Authority and provide for the procedure to be followed by it. (7) Notwithstanding anything in this Constitution, Parliament may by law provide that no Court other than the Supreme Court shall exercise jurisdiction in respect of any such adjudication or dispute or complaint as is referred to in clause (1). Explanation.- For the purpose of this article, "State'' includes a Union territory with Legislature." 34 The Standing Committee on Finance, Ministry of Finance in its 73rd report on the 2011 Amendment Bill explained the salient features of the Amendment Bill introducing the GST regime. Standing Committee on Finance, The Constitution (One Hundred and Fifteenth Amendment) 2011 (73rd report, 2013) It was noted that the GST Council will be a joint forum for the Union and the States to discuss issues on GST and the recommendations of the GST Council will be a benchmark and guiding force for the Union a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....endations of the GST Council would undermine the power of the legislature. In response, the Attorney General stated that though the GST Council has the power to make recommendations, both Parliament and State legislatures, have the power to either accept or reject those recommendations. Ibid, paragraph 63 The Attorney General stated: "This is an important point which has been raised and the short answer to it is that it is certainly open to Parliament to approve any recommendation. However, this does not mean that the GSTC recommendations will have no value. Having regarding to the nature of the Constitution of GSTC, the Council would have performed useful role in making recommendations but the ultimate authority whether to accept such recommendations can and must rest only in the Legislatures, namely, Parliament and the State Legislatures. In this view of the matter, the setting up of the GSTC does not strike at the root of the legislative powers over Finance. The powers of the legislature over Finance are sacrosanct and are not affected by the setting up of the GSTC." 36 The States raised concerns over the establishment of the GST Dispute Settlement Authority on the g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tic governance. As this will be a political and a recommendatory body, it would be in a position to play a constructive and enabling role vis-à-vis the Legislature, which needless to emphasise, would remain supreme in matters of legislation including taxation. In the Committee's view the mandate entrusted to the GST Council under the proposed Article 279A of the Constitution (Amendment) Bill does not in any way alter the existing constitutional scheme in so far as the Legislature, both Union and State, is concerned." 38 Taking into account the recommendations of the Standing Committee, Parliament introduced the 2014 Amendment Bill in which Article 279B was deleted and the GST Council was given the power under Article 279A(11) to devise a mechanism of dispute resolution. The GST Council consists of the Union Finance Minister as the Chairperson, the Union Minister of State in charge of Revenue or Finance and the Minister in charge of Finance or Taxation or any other Minister nominated by the State Government. The role of the GST Council is to make recommendations to the Union and the States on seven specific categories revolving around GST including principles of levy and a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... determining and taking decisions relating to the States. So, none of us is going to be surrendering his or her authority or autonomy. We are both going to be pooling our sovereignty together so that we are able to create a new taxation mechanism." 40 A Select Committee of the Rajya Sabha examined proposed Article 279A. It was suggested before the Select Committee that a 'dispute settlement body' to adjudicate on disputes arising from the non-compliance of recommendations of the GST Council should be constituted. Select Committee, Report on the Constitution (One Hundred and Twenty Second Amendment) Bill , 2014, (Submitted to the Rajya Sabha, 2015) There was, in other words, a suggestion to reintroduce Article 279B as it found place in the 2011 Amendment Bill. The Government submitted that Article 279A(11) provides the GST Council with the power to decide the 'modalities' of dispute resolution, which may range from mediation, arbitration or even judicial adjudication depending on the nature of dispute: "2.71 It may further be mentioned that Article 279A (11) only provides that GST Council may decide the 'modalities' to resolve disputes arising out of its recommendations.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted." In Kalpana Mehta v. Union of India (2017) 7 SCC 295, Chief Justice Dipak Misra held that reports of the Parliamentary Committees and the speeches made in the Parliament can be referred to identify the circumstances that led to the enactment of the legislation along with the intention of the legislature: "129. We have referred to these authorities to highlight that the reports or speeches have been referred to or not referred to for the purposes indicated therein and when the meaning of a statue is not clear or ambiguous, the circumstances that led to the passing of the legislation can be looked into in order to ascertain the intention of the legislature. It is because the reports assume significance and become relevant because they precede the formative process of a legislation." 43 The parliamentary debates and the legislative history of the constitutional amendment, and the committee reports on Articles 246A and 279A indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irst, if the GST Council cannot make binding recommendations, the entire structure of GST will collapse as each State would then levy a conflicting tax and collection mechanism; and second, if the recommendations are non-binding, then there would be no dispute to be resolved under Article 279(11) as the States would be free to disregard the recommendations. The arguments against interpreting the 'recommendations' of the GST Council as binding on the Union and the States are two-fold Ajitesh Kir, 'India's Goods and Services Tax: A Unique Experiment in Cooperative Federalism and a Constitutional Crisis in Waiting' Canadian Tax Journal (2021) 69:2, 391-445: first, it would violate the supremacy of Parliament and State legislatures since both have a simultaneous power to legislate on GST; and second, it would violate the fiscal federalism of the States since the Centre has a one-third vote share and the States collectively have a two-third vote share. Therefore, no recommendation on a three-fourths majority can be passed without the consent of the Centre. 45 One of the important characteristics of a federal polity is the distribution of legislative power between the Union and the St....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the Centre and the State on indirect taxation by providing Parliament and State legislatures with 'simultaneous powers' and no provision for repugnancy. Therefore, according to Article 246A, both Parliament and the State Legislature possess equal power to legislate on aspects of GST. It is the contention of the Union that the recommendation of the GST Council should be binding on Parliament and the State Legislatures precisely because equal power is granted to both the federal units. The Union has argued that if the recommendations are not binding, then it would lead to an impasse where different Central and State legislations could be guiding the same field. 46 Article 246A vests Parliament and the State Legislatures with a unique, simultaneous law-making power on GST. It is in this context that the role of the GST Council gains significance. The recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union's vote counts as one-third, while the States' votes have a weightage of two-thirds of the total votes cast. There are two significant attributions of the voting system in the GST C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rise between the Union and the State Governments in their respective pursuits of development. The Union Government and the State Governments should endeavour to address the common problems with the intention to arrive at a solution by showing statesmanship, combined action and sincere cooperation. In collaborative federalism, the Union and the State Governments should express their readiness to achieve the common objective and work together for achieving it. In a functional Constitution, the authorities should exhibit sincere concern to avoid any conflict. This concept has to be borne in mind when both intend to rely on the constitutional provision as the source of authority. We are absolutely unequivocal that both the Centre and the States must work within their spheres and not think of any encroachment. But in the context of exercise of authority within their spheres, there should be perception of mature statesmanship so that the constitutionally bestowed responsibilities are shared by them. Such an approach requires continuous and seamless interaction between the Union and the State Governments." 48 The Indian Constitution has sometimes been described as quasi-federal or a Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not necessarily cooperative. Harmonised decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the States and the Centre constantly engage in conversations. Such dialogues can be placed on two ends of the spectrum - collaborative discussions that cooperative federalism fosters at one end of the spectrum and interstitial contestation at the other end. Jessica Bulman and Heather K, in their essay connote interstitial contestation as 'uncooperative federalism'. Bulman-Pozen and K. Gerken (n 74) They argue that the States which possess lesser power could use licenced dissent, dissent by using regulatory gaps or by civil disobedience such as passing a resolution against the decision of the Central Government as means of contestation. Differentiating the forms of cooperative federalism from the dissent in uncooperative federalism, the authors state: "We think the best proxy for distinguishing dissent from routine negotiations is whether the state's action can be fairly understood as an effort to change national policy. An attempt to obtain an accommodation or modification of federal policy within the state should usually be u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e authority recommending the initiation of the discussion and the decision-making authority are different. (ii) Category 2: Recommendation followed by consultation: Article 233 uses the phrases 'consultation' and 'recommendation'. Article 233(1) states that the district judge shall be appointed by the Governor in 'consultation' with the High Court. Clause 2 states that the criteria for the appointment of a person who is not already in the service of the Union or the State is that he should have been a pleader or an advocate for at least seven years and he should be recommended by the High Court for the appointment to the post of a District Judge. There is a two-step process for appointment, first, the candidature must be recommended by the High Court; and second, the recommended candidate is appointed by the Governor in 'consultation' with the High Court. (iii) Category 3: Recommendation with accountability: Articles 243I, 243Y, 280, 281, 338, 338B and 340. Articles 243I and 243Y stipulate that the Finance Commission shall make 'recommendations' to the Governor on apportionment of taxes to the Panchayats and Municipalities. Article 280 states that it "shall be the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... members of the Lok Sabha and Rajya Sabha. The Committee will have to examine the recommendations of the Commission and report its opinion to the President. The President after considering the report, shall issue directions in accordance with the whole or any part of the report. Article 349 deals with the special procedure for enactment of law relating to language in the first fifteen years from the commencement of the Constitution. Articles 270 and 275 stipulate that the percentage of tax apportionment and fixation of the grants for the States from the Consolidated Fund of India shall be ordered by the President on the recommendation of the Finance Commission. 53 A survey the above provisions indicates that the nature and meaning of the term 'recommendation' differs contextually. All the provisions qualify the nature of recommendation. For instance, in category one, the recommendation of the President is for the initiation of the discussion; in category two, a decision on the recommendation is arrived upon 'consultation'; in category three, the decision-making authority has to submit an explanatory note on the action or inaction taken on the recommendations.; in category four, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
......]" (emphasis supplied) 56 If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act Section 166 of the CGST Act and IGST Act Section 24 of the IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase 'recommendations to the Union or States' indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST. 57 In Manohar v. State of Maharashtra (2012) 13 SCC 14, a two-judge Bench of this Court while interpreting Section 20(2) of the Right to Information Act 2005 observed that the phrase 'recommendation' must be interpreted in contradistinction to 'direction' or 'mandate'. It was observed as follows: "....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of statutory power is needed to enable the Board to recommend text books and no question of ultra vires can arise in such a case. Now the text books which formed the subject matter of the notifications dated April 5, 1972, April 25, 1972, April 26 and May 17, 1972 were merely recommended and not prescribed by the Board and being only recommended text books as distinguished from prescribed text books, they obviously could not be said to be 'in force' immediately before the appointed day. Section 4, sub-section (2) did not, therefore, apply in respect of these text books and they could not be regarded as text books prescribed under Section 4, sub-section (2)." In numerous cases, this Court has reiterated that recommendations cannot create binding and enforceable rights, in contradistinction to a 'direction' or 'mandate'. Union of India v. Pradip Kumar Dey, (2000) 8 SCC 580; Kesoram Industries and Cotton Mills Ltd. v. CWT, (1966) 2 SCR 688; Som Mittal v. Government of Karnataka, (2008) 3 SCC 753; State of AP v. T. Gopalakrishnan Murthi, (1976) 2 SCC 883. Interpretation of 'recommendation' vis-à-vis the provisions of IGST Act and CGST Act 58 The contention of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ates by exercising its legislative power. The constituent power of the legislature is of a higher constitutional order as compared to its legislative power. Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature. 60 With this background and context, we shall now proceed to analyse the scheme of the GST legislation and whether the impugned levy, imposed on the recommendations of the GST Council, is valid and permissible under law. D Analysis D.1 Statutory Provisions and Scheme of the IGST Act Note: In order to facilitate convenience while reading the judgment, some of the statutory provisions are reflected in more than one place in the judgment 61 The IGST Act enables the Central Government to impose IGST on inter-state supply of goods and services. The Preamble to the IGST Act describes it as: "An Act to make a provision for levy and collection of tax on inter-State supply of goods or service....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962." The proviso to Section 5(1) of the IGST Act clarifies that the tax is levied on goods imported into India, in accordance with Section 3 of the Customs Tariff Act 1975. The value is determined under the Customs Tariff Act at the point when the customs duties are levied in accordance with the Customs Act. 64 The payment of IGST on a reverse-charge basis is contemplated in sub-sections (3) and (4) of Section 5. Sub-section (3) provides that IGST may be paid on a reverse charge basis on specified categories of supply of goods or services or both. The Central Government is empowered to specify these categories on the recommendations of the GST Council. Hence, on its plain terms, the payment of IGST on a reverse charge basis is envisaged on specific categories of supply of goods or services, or both as notified by the Central Government. The tax on a reverse charge basis is payable by the recipient of such goods or services, or both. The power, in other words, is to specify categories of goods or services (or both....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i) Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in 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 up to the customs stations of clearance in India. 5 Provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers, tankers) used in supplying the service has not been taken Explanation: This condition will not apply where the supplier of service is located in non-taxable territory. [Please refer to Explanation no. (iv)] By Entry 9(ii) of Notification 8/2017, an integrated tax of 5 per cent was levied on supply of specified services, including transportation of goods in a vessel from a place outside India up to the customs station of clearance in India. 66 On 28 June 2017, Notification 10/2017 was issued by the Central Government in exercise of powers conferred by Section 5(3) of the IGST Act. Notification 10/2017 specified the importer as the recipient of transportation of service when the supplier is location in a non-taxabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e above clause, under the reverse charge mechanism, the liability to pay is on the recipient of the supply of goods or services, as opposed to the supplier of goods or services. Section 24(iii) of the CGST Act provides for compulsory registration of "persons who are required to pay tax under the reverse charge". "24. Compulsory registration in certain cases.-Notwithstanding anything contained in sub-section (1) of Section 22, the following categories of persons shall be required to be registered under this Act,- (i) persons making any inter-State taxable supply; (ii) casual taxable persons making taxable supply; (iii) persons who are required to pay tax under reverse charge; [.....] (xii) such other person or class of persons as may be notified by the Government on the recommendations of the Council." (emphasis supplied) 70 Section 2 (105) of the CGST Act defines the 'supplier' in relation to goods or services as: "(105) "supplier" in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such suppli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent most directly concerned with the provision of the supply; and (d) in absence of such places, the location of the usual place of residence of the supplier;" 73 Chapter IV of the IGST Act determines the nature of the supply. Section 7 of the IGST Act determines the nature of supply as inter-State supply, Section 8 provides for intra-State supply and Section 9 provides for supplies in territorial waters. 74 Section 7 of the IGST Act lay down the conditions for a supply to be construed as an "inter-State supply". The relevant provisions, particularly sub-Sections (3) and (4) of Section 7 are as follows: "7. Inter-State supply.-(1) Subject to the provisions of Section 10, supply of goods, where the location of the supplier and the place of supply are in- (a) two different States; (b) two different Union territories; or (c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce. [.....] (3) Subject to the provisions of Section 12, supply of services, where the location of the supplier and the place of supply are in- (a) two different Stat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India. (2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services: Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services. (3) The place of supply of the following services shall be the location where the services are actually performed, namely:- [.....] (6) Where any services referred to in sub-section (3) or sub-section (4) or sub-section (5) is supplied at more than one location, including a location in the taxable territory, its place of supply shall be the location in the taxable territory. [....] (9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods. (10) The place of supply in respect of passenger transportation services shall be the place where t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "13. Time of supply of services. [...] (3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:-- (a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or (b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier: Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply: Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier." Sub-section (5) of Section 13 provides for the time of supply when it cannot be determined under sub-Section (2), (3) or (4): ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....course of import of the goods or services or both into, or export of the goods or services or both out of, the territory of India. (2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1)." 81 Article 269A provides that GST on supplies in the course of inter-state trade or commerce shall be levied and collected by the Union Government. The manner of apportionment between the Union and the States has to be provided by Parliament on the recommendations of the GST Council. The explanation to Article 269A(1) states that supply of goods or services in the course of import shall be deemed to be supply in the course of inter-State trade or commerce. Clause (5) provides that Parliament may by law formulate principles for determining the place of supply and when the supply of goods or services takes place in the course of inter-state trade or commerce: "269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the mann....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n emerge through delegated legislations. Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills, AIR 1968 SC 1232; Avinder Singh v. State of Punjab, 1979 1 SCC 137 It is a settled position that the legislature cannot delegate its 'essential legislative functions'. In re Delhi Laws Act 1912, AIR 1951 SC 332; Edward Mills Co. Ltd. v. State of Ajmer, AIR 1955 SC 25; A.N Parasaran v. State of Tamil Nadu, (1989) 4 SCC 683 The essential legislative functions with respect to the GST law are the levy of tax, subject matter of tax, taxable person, rate of taxation and value for the purpose of taxation. The principles governing these essential aspects of taxation find place in the IGST Act: Section 5(1) identifies the subject matter of taxation as inter-State supplies of goods, services or both; Section 2(107) of the CGST Act identifies a taxable person; Section 5(1) provides a maximum cap of 40% as the rate of taxation; and Section 5(1) stipulates that the value of taxation be determined under Section 15 of the CGST Act. 85 Section 2(98) of the CGST Act defines "reverse charge" as the liability of the recipient of the supply of goods or services or both to pay tax inst....
X X X X Extracts X X X X
X X X X Extracts X X X X
....respondents would have to be addressed. The respondents have argued that no charge has been created for the ocean freight transaction to be taxed in the hands of the importer. It has been alleged that only Section 5(1) is a charging provision and Sections 5(3) and 5(4) cannot independently create a charge. 88 In assessing this claim, this Court is bound by a decision of the Constitution Bench in Mathuram Agrawal (supra) which has identified three essential elements of taxation: (i) The subject of the tax; (ii) The person who is liable to pay the tax; and (iii) The rate at which the tax is to be paid. This test has been further elaborated by a two-judge Bench of this Court in Gobind Saran Ganga Saran (supra) by further requiring the designation of the measure or the value to which the rate of the tax will be applied. Thus, the four canons of taxation are as follows: (i) The taxable event; (ii) The person on whom the levy is imposed; (iii) The rate at which the levy is imposed; and (iv) The measure or the value to which the rate will be applied. 89 Section 5(1) of the IGST Act specifically identifies the four canons of taxation: (i) the inter-State suppl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... charge basis under Section 5(3) of the IGST Act, the argument of the failure to identify a specific person who is liable to pay tax does not stand. 92 The decision in Laghu Udyog (supra), rendered by a two-judge Bench of this Court, invalidated certain service tax rules formulated under the Finance Act 1997 to give effect to the collection of service tax. Section 66 read with Section 68(1)(a) of the Finance Act 1997 specifically identified the taxable person to include only those persons responsible for collecting the service tax. The rules had sought to effect a reverse charge by identifying the customers of goods transport operators and of clearing and forwarding agents as the assessee, even though they were not responsible for collecting the service tax. The basis for nullifying the rules was that the Finance Act 1997 did not enable the imposition of such a reverse charge on the person who is not supplying the service. The Court held: "9. Section 68(1-A) is a special provision which has been inserted by the Finance Act, 1997. According to Section 68(1) "every person who was providing the taxable service is the one who is required to collect the service tax at the ra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....finitions contained in Rule 2(d)(xii) and (xvii), which seek to make the customers or the clients as the assessee, are clearly in conflict with Sections 65 and 66 of the Act." (emphasis supplied) The decision in Laghu Udyog (supra) has no applicability to the facts of the present case since Parliament has statutorily incorporated the concept of a reverse charge under Sections 5(3) and 5(4) of the IGST Act. The impugned notification 10/2017 clearly specifies a taxable person who is liable to pay a reverse charge that is envisaged in the statute. Thus, the impugned notifications cannot be invalidated for an alleged failure to identify a taxable person. Taxable value 93 By a corrigendum dated 8 June 2016, Notification 8/2017 was amended to include the measure of taxable value to be ten per cent of the CIF value. Section 5(1) of the IGST Act enables the taxable value to be determined under Section 15 of the CGST Act. The respondents have argued that the value has to be strictly determined by Section 15(1) "Section 15: Value of Taxable Supply- (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or paya....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e mechanism for imposing tax on a reverse charge basis. D.4 Taxable event: Is an ocean freight transaction for import of goods a valid category of supply of services under Section 5(3) of IGST Act? 95 The other limb for contesting the validity of the impugned notification is with respect to its identification of a "taxable event". The question that falls for the determination is whether the impugned notifications issued in 2017, under Section 5(3) of the IGST Act, validly prescribe a taxable event that constitutes an inter-State supply of goods and services with the importer being a recipient of shipping services in CIF transactions. 96 The analysis of whether import of goods under CIF contracts constitutes a valid import of service has to be answered on two prongs: (i) whether classification of imports as a specific category of supply of shipping service is valid under Section 5(3) read with Section 5(1) of the IGST Act; and (ii) whether the recipient of the imported goods is also a recipient of shipping services in CIF transactions under Section 5(3). D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state supply or is it an extra-territorial tax? ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; [(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;] [(b) import of services for a consideration whether or not in the course or furtherance of business; [and] (c) the activities specified in Schedule I, made or agreed to be made without a consideration; [....] (3) Subject to the provisions of sub-sections (1), (1-A) and (2), the Government may, on the recommendations of the Council, specify, by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Thus, an Indian importer could also be considered as an importer of the service of shipping which is liable to IGST on inter-state supply, if the activity falls within the definition of "import of service" for the IGST Act and CGST Act. 102 The term 'importer' is not defined in the IGST Act or the CGST Act. Section 2(26) of the Customs Act defines an 'importer' as: "(26) "importer", in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes [any owner, beneficial owner] or any person holding himself out to be the importer" The term 'import of goods' is defined in Section 2(10) of the CGST Act as: "(10) "import of goods" with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India" "Import of services" is defined in Section 2(11) of the CGST Act as: "(11) ''import of services" means the supply of any service, where-- (i) the supplier of service is located outside India; (ii) the recipient of service is located in India; and (iii) the place of supply of service is in India;" The conditions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ply of shipping service by a foreign shipping line, would thus be India. 104 The respondents argued that since Section 7(1)(b) of the CGST Act does not define "supply" of import of service without consideration, other than the ones specified in Schedule 1, this would be inapplicable to importers with CIF contracts as the consideration is paid by the exporter. Thus, the importer of goods cannot be said to be an importer of shipping service since the latter is not an import of service for a consideration under Section 7(1)(b) of the CGST Act. However, this argument misses out on some crucial definitions. The term 'supply' has been defined in the IGST Act with reference to the CGST Act. Thus, the three conditions for "import of services" under Section 2(11)(iii) must be understood with reference to the provisions of the CGST and IGST Acts, including the provisions for determination of place of supply under Section 13(9) of the IGST Act. As mentioned previously, Section 13(9) of the IGST Act creates a deeming fiction of place of supply of transportation services to be in India when the destination of goods is in India. In this case, it is clear the supplier of service- the foreign s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... occurs outside India, that is outside the taxable territory and bears a nexus with India only as the destination of goods is India. However, the submission is that since the import of goods is taxed under Section 5(1) as 'supply of goods', there remains no territorial nexus of the transportation service with the Indian territory. An extension of this argument is that in case Parliament seeks to levy a tax outside its territory, it makes a deeming fiction in the statute and not by way of delegated legislation. 107 A Constitution Bench in GVK Industries (supra), considered the question whether Parliament is competent to enact legislation with regard to extra-territorial aspects of certain events. Answering the question in affirmative, Justice B Sudarshan Reddy, speaking for the Constitution Bench, held: "124. [...] The answer to the above would be yes. However, Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes-events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like-that occur, arise or exist or may be expected to do so, naturally or on account of some human a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial 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. 109 As an alternative, the respondents submitted that though the levy may have a nexus with the Indian territory, the levy of tax extra-territorially must be provided by Parliament through statute and not by the Union Government through delegated legislation. We do not find any applicability of this submission to the facts at hand. As stated above, the IGST Act under Section 13(9) recognises the place of supply of services as the destination of goods when the supplier is located outside India. Since the destination of goods is India, the statute itself is broad enough to cover a taxable event that has extra-territorial aspects, which bears a nexus to India. 110 In determining the vires of the impugned notifications, the only question that falls for determination is whether the importer of goods can be considered as the recipient of the service of shipping in CIF contracts. D.4.(b) Are importers service recipients under CIF contracts? 111 The impugned not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;" (emphasis supplied) Thus, the language employed in Section 2(93)(a) of the CGST Act clearly stipulates that when a consideration is payable for the supply of services, the recipient would mean the person who is liable to pay that consideration. However, when no consideration is payable for the supply of a service, Section 2(93)(c) states that the recipient shall be the person to whom the service is rendered. Further, Section 2(93) provides that "any reference to a person to whom supply is made shall be construed as a reference to the recipient". Hence, where the statute refers to a person to whom a supply is made, it has to be construed as a reference to the recipient of service. 113 In a CIF transaction, the foreign exporter contracts with a foreign shipping line. The service of shipping is rendered by the foreign shipping line to the foreign exporter and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction. Section 2(98) of the CGST Act, which defines "reverse charge" reiterates that it means the "liability to pay tax by the recipient of supply of goods or services or both instead of the supplier...". It cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the recipient of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act. As it currently stands, Section 5(3) of the IGST Act enables the delegated legislation to create a deeming fiction on categories of supply of goods/services alone. 116 Interpreting the term "by the recipient" vis-à-vis the categories of goods and services identified in Section 5(3) of the IGST Act should necessarily be governed by the principles governing the definition of "recipient" under Section 2(93) of the CGST Act. Contrary to the arguments of the Union Government, such an interpretation would not annihilate the mandate of compulsory registration under Section 24(iii) of the CGST Act. It would be applicable to suitably worded provisions in the CGST or IGST Act which permit the Central Government to identify a taxab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 2(93) of the CGST Act which is as follows: "(93) "recipient" of supply of goods or services or both, means- (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;" (emphasis supplied) Since a reference to a person to whom a supply is made, is a reference to the recipient, the place of supply is critical. By virtue of Section 13(9) of the IGST Act, the place of supply is the destination of goods. The time of supply is then determined through the provisions of Section 13 of the CGST Act. Sections 2(14) a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... foreign supplier to the foreign shipping line in CIF contracts, the price is consequently factored into the price of the shipment. The ultimate benefactor of the shipping service is also the importer in India who will finally receive the goods at a destination which is within the taxable territory of India. Thus, the meaning of the term "recipient" in the IGST Act will have to be understood within the context laid down in the taxing statute (IGST and CGST Act) and not by a strict application of commercial principles. 120 Some of the respondents have argued that the possibility of two different recipients of services would create absurdities since whether a supply of service is an inter-state supply under Section 7(3) or intra-state supply under Section 8(2) of IGST Act depends on the location of the supplier and the place of supply, which in most cases is the location of the recipient of service. Since there can effectively be two recipients on a reading of Section 2(93)(a) and (c) of the CGST Act, the respondents argue that the transaction may simultaneously become an inter-state or intra-state supply. This could also mean that two recipients can claim ITC. However, this argum....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion has been obtained (a fixed establishment elsewhere), the location of such fixed establishment; (c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and (d) in absence of such places, the location of the usual place of residence of the recipient;" 122 Section 13 of the IGST Act is critical to effectively meet the aim of the GST statute to tax the destination of supplies, as opposed to their origins. The deeming fiction therein is critical to interpret the charging provision under the IGST Act (Section 5). The respondents' argument for the irrelevance of determining the beneficiary of the supply or who has received the supply in view of the definition of 'recipient' of Section 2(93) of the CGST Act mis-reads Section 2(93) which identifies the recipient, inter alia, on the basis of the person to whom "supply is made" i.e. the place of supply. 123 GST laws mark a departure from the previous policy of taxing sale/consignments and focuses on the taxing of supplies. The concept of a supply-centric and destinat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both." (emphasis supplied) The amended Section 5(4) came into effect on 1 February 2019 Notification No. G.S.R. 67(E) dated 29 January 2019. Amending Act 32 of 2018 enables the Central Government to create a deeming fiction of declaring a class of registered persons "as the recipient" of the supply of taxable goods or service. 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 Amending Act 32 of 2018 has been as follows:- (i) the powers of the Central Government to specify through a notification has been clarified; and (ii) the power to specify a class of registered persons as the recipient....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the error committed by it in considering Rule 14 of the Railway Servants Rules by itself and without taking into account the second proviso to Article 311(2). It is also well settled that where a source of power exists, the exercise of such power is referable only to that source and not to some other source under which were that power exercised, the exercise of such power would be invalid and without jurisdiction. Similarly, if a source of power exists by reading together two provisions, whether statutory or constitutional, and the order refers to only one of them, the validity of the order should be upheld by construing it as an order passed under both those provisions. Further, even the mention of a wrong provision or the omission to mention the provision which contains the source of power will not invalidate an order where the source of such power exists. (See Dr Ram Manohar Lohia v. State of Bihar [AIR 1966 SC 740 : (1966) 1 SCR 709, 721 : 1966 Cri LJ 608] and Municipal Corporation of the City of Ahmedabad v. Ben Hiraben Manilal [(1983) 2 SCC 422 : (1983) 2 SCR 676, 681] .) The omission to mention in the impugned orders the relevant clause of the second proviso or the relevant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pay Service Tax on freight. In view of the representations that where the importer purchases goods on CIF basis, he may not have the invoice issued by the shipping line for freight and may not know the amount of freight charged by the foreign shipping line from the foreign supplier; it was stipulated in the Service Tax Rules that in such cases the importer shall have the option to pay an amount calculated at the rate of 1.4% of the CIF value of imported goods. This provision was stipulated on the basis that freight roughly constitutes 10% of the CJF value of goods on an average. Under GST too, it was decided that the liability to pay GST on such transportation service provided by a foreign shipping line to a foreign supplier shall be of the importer in India and the notifications are being issued accordingly. It is proposed that the similar provision deeming value of such service at 10% of the CIF value may be incorporated in the IGST notification. Considering the nature of the service, this provision is not required in the CGST, SGST or UTGST notifications. The Council approved the proposal. [....] 8(v).....in respect of agenda item 3 the Council approved to inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....toms Tariff Act as "supply of goods". An additional levy of IGST on imported goods, that is on the supply of transportation service, by designating the importer as the recipient would amount to double taxation. 133 The transaction at hand involves three parties- the foreign exporter, the Indian importer and the shipping line. The first leg of the transaction involves a CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter. In other words, the foreign exporter is liable to ensure that the goods reach their place of destination and the Indian importer pays the transaction value to the exporter. The second leg of the transaction involves an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for transport of goods to the destination, i.e., in the territory of India. 134 On the first leg of the transaction, between the foreign exporter and the Indian importer, the latter is liable to pay IGST on the transaction value of goods under Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vides that the provisions relating to 'composite supply' under the CGST Act would apply mutatis mutandis under the IGST Act. By extension, the IGST in a transaction of composite supply would be levied on the principal supply of goods. 139 The respondents have urged before this Court that the impugned levy which seeks to impose IGST on the 'service' aspect of the transaction would be in violation of the principle of 'composite supply' incorporated under Section 2(30) read with Section 8 of the CGST Act, which applies equally to the imposition of IGST under Section 20 of the IGST Act. In contrast, the Union Government has submitted that the impugned levy is on the second leg of the transaction, which is a standalone contract between the foreign exporter and the foreign shipping line. Thus, the Union has urged that the contract between the foreign exporter and the foreign shipping line- of which the Indian importer is not a party- cannot be deemed to be a part of 'composite supply'. While the first leg of the transaction, between the foreign exporter and Indian importer, is (according to the submission) a composite supply, the second leg is an independent transaction. In this regar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....phone services involved a transfer of goods which would be amenable to sales tax. In this context, the Court observed: "88. No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax." 142 In the present case, the question is whether the imposition of IGST on supply of services can be sustained when there is a concomitant imposition of IGST on supply of goods. However, we must first analyse the context in which the IGST is levied on the import of goods in this case. 143 The provisions of composite supply in the CGST Act (and the IGST Act) play a specific role in the levy of GST. The idea of introducing 'composite supply' was to ensure that variou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreements. That would imply, that while on the one hand the Union Government seeks to levy tax on the Indian importer by going beyond the text of the contract between the foreign shipping line and foreign exporter (for the purpose of identifying the Indian importer as the recipient of services), on the other hand, as far as the submissions on composite supply are concerned, the Union Government urges that the contracts must be viewed as separate transactions, operating in silos. We are unable to subscribe to this view. The Union of India cannot be heard to urge arguments of convenience - treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply. 145 This Court is bound by the confines of the IGST and CGST Act to determine if this is a composite supply. It would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements. In a CIF contract, the supply of goods is accompanied by the supply of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in mind the provision of the Finance Act, 1994, rather than keeping in mind the object of bringing the GST by making the Constitutional (101st) Amendment Act, 2016 to merge all taxes levied on the goods and services to one tax known as the GST. 133. It appears that despite having levied and collected the integrated tax under the IGST Act, 2017, on import of goods on the entire value which includes the Ocean Freight through the impugned notifications, once again the integrated tax is being levied under an erroneous misconception of law that separate tax can be levied on the services components (freight), which is otherwise impermissible under the scheme of the GST legislation made under the CA Act, 2016. 134. All the learned senior counsel are right in their submission that if such an erroneous impression is not corrected and if such a trend continues, then in future even the other components of supply of goods, such as, insurance, packaging, loading/unloading, labour, etc. may also be artificially vivisected by the delegated legislation to once again levy the GST on the supply on which the tax is already collected. [...] 215. Thus, having paid ....