2022 (5) TMI 968 - Supreme Court

The Hon'ble apex court demobilized a petition filed by the Union of India against the decision of Hon'ble Gujarat high Court in case of MOHIT MINERALS PVT LTD VERSUS UNION OF INDIA & 1 OTHER [2020 (1) TMI 974 - GUJARAT HIGH COURT].

In this brief note, we will try to fathom out the law relating to ocean freight raised and decided by honourable Supreme Court, in a CIF contract, a freight invoice as issued by a foreign shipping line to foreign exporter, with no involvement of importer.

Two notifications being an outcome of delegated legislation i.e. Notification 08/2017 and Notification 10/2017 create deeming fiction and separate taxable event on the analogy of "Reverse Charge Mechanism" which is not permissible in law as it creates a double/dual taxation event thereby hurting the legal interests of the Appellant in equity and law both impinging upon constitutional rights.

Accordingly, a writ petition was instituted in the Hon'ble Gujarat High Court challenging aforesaid Notifications (8/2017 and 10/2017) on the basis:

1. The aforesaid notifications are ultra vires the IGST Act and CGST Act.

2. Customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation.

3. As per the prevailing maritime laws/taxation regime, that further talk of contract of affreightment/charter party, the importer is a different entity and not to be treated as literally a recipient of service.

4. In the case of a CIF (Cost, Insurance and Freight) contract, the supply of service of transport of goods in a vessel is by a foreign shipping line located in a non-taxable territory to an exporter located in a non- taxable territory by a vessel outside the territory of India may not be subjected to tax under the IGST Act.

5. Both the aforesaid Notifications diverge from the provisions of Section 5(3) of the IGST Act as though “recipient” is mentioned therein, in the present matter “importer” as defined in section 2(26) of the Customs Act, is made liable to pay tax; Entry 9(ii) and para 2 of Notification 8/2017, read with Notification 10/2017, seek to cause double taxation/deeming fiction.

The GST law has many a "grey areas" where there have been disputes between the Revenue and the taxpayers regarding the taxability/liability of transactions.

Freight portion is already included in the import value and the importer is paying IGST in the form of additional customs duty on the full value, cannot be again called upon to pay GST on the freight portion. The recipient of service is the exporter and not the importer.

Section 5(3) IGST Act enables the Government to stipulate categories of supply, not specify a third-party as a recipient of such supply.

There is no territorial nexus for taxation since the supply of service of transportation of goods is by a person in a non-taxable territory to another person in a non-taxable territory from a place outside India. It being neither an inter-state nor an intra-state supply.

The goods being transported on a CIF basis, the recipient of service is the foreign exporter who is outside India.

Union of India (UOI) assails the order of Hon'ble Gujarat High Court.

The rationale for the aforesaid impugned notifications, according to the Union Government, is to remove the separatism between Indian and foreign shipping lines, as the former are unable to claim input tax credit that forms a part of their transportation costs, since supply of goods was hitherto exempt from service tax. The purpose of the integrated tax is to introduce uniformity between foreign shipping lines and Indian shipping lines.

UOI tried to legitimise the levy of tax on ocean freight in case of CIF transactions stating that it is to remove disparity between Indian and foreign shipping lines. Indian shipping lines were not able to take input tax credit as the supply of goods was exempt from service tax. Further, levy of tax on ocean freight shall not increase cost of the importer as he can anyway claim ITC of the tax paid.

"Co-operative Federalism" as a contention was put up by the UOI, emphasising upon the binding nature of the recommendations of the GST council. This logic was countered by the Respondents as GST Council which has been created by Article 279A of the Constitution is a recommendatory body, whose recommendations can be implemented by either amending the CGST Act or the IGST Act or by issuing a notification, but notifications issued cannot be ultra vires the parent legislation. Further this contention was never raised before or in the impugned judgment of the Hon'ble Gujarat High Court.

The Hon'ble Apex Court refused to accept this contention of UOI, held that recommendations of the GST council are not binding and such compulsion shall be against the principle of fiscal federalism.

The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

Hon'ble Supreme Court opined that tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed. A tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.

Although some recommendations of the UOI were accepted by the Hon'ble apex court, but the petition of the UOI was ultimately dismissed. This judgment may pave the way for the Government to better define the roles and the future road map for the GST council as the GST law would soon be five (5) years old.

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2022 (5) TMI 968 - Supreme Court