Supreme Court strikes down levy of IGST on Ocean Freight
UOI vs Mohit Minerals Pvt. Ltd.
The Supreme Court in its landmark ruling in the case of UOI vs. Mohit Minerals Pvt. Ltd. [C.A. No. 1390 of 2022] has struck down the levy of IGST on importers in respect of ocean freight services- which are provided by foreign shipping lines to foreign suppliers in a CIF contract for import of goods into India.
This decision has been passed on the ground that that a CIF contract for import of goods forms a composite supply, comprising of supply of goods and supply of services of transportation, insurance, etc., on which the Indian importer discharges IGST. Thus, a separate levy of IGST on the service aspect of the transaction would violate the principle of composite supply under Section 8 of Central Goods and Services Tax Act, 2017 (CGST Act). While dealing with the argument of the Union that recommendations of GST Council are binding on Union and States, the Supreme Court held that the recommendations of the GST Council would only have a persuasive value.
- Notification No. 8/2017-Integrated tax (Rate) [dated 28.06.2017 (‘Notification 8/2017’)] vide Entry No. 9, notifies IGST rate of 5% on ocean freight services provided or agreed to be provided by a person located in a non-taxable territory to another person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs stations of clearance in India.
- By virtue of the power conferred under Section 5(3) of Integrated Goods and Services Tax Act, 2017 (IGST Act), Notification No. 10/2017 – Integrated Tax (Rate) [dated 28.06.2017 (‘Notification 10/2017’)] notifies that for the said category of service, IGST would be payable under reverse charge mechanism by the importer, located in the taxable territory, as defined in clause 2(26) of the Customs Act, 1962.
- The constitutional validity of the Notifications, – seeking IGST under reverse charge from an Indian importer on ocean freight services between persons located in a non-taxable territory with respect to import of goods in India on a CIF basis – was challenged before the Gujarat High Court.
- The Gujarat High Court in Mohit Minerals Pvt. Ltd. vs. UOI [SCA No. 726/2018] struck down such a levy of IGST as unconstitutional and ultra vires the IGST Act. It was struck inter alia on the ground that (a) the notifications amount to extraterritorial law, (b) the reverse charge payment of IGST amounts to double taxation of the same transaction inasmuch as IGST paid on import of goods and (c) the importer is not a “recipient of service” to be made liable to tax on a reverse charge basis.
- A batch of Special Leave Petitions (SLPs) were filed before the Supreme Court by the Department against the decision of the Gujarat High Court.
Findings of the Court
- The ‘recommendations’ of the GST Council are a product of a collaborative dialogue involving the Union and States and are recommendatory in nature. Under Article 246A of the Constitution of India, both the Union and the States are conferred equal power to legislate on GST. Thus, to regard recommendations of GST Council as binding would disrupt fiscal federalism.
- Notification 10/2017 does not specify a taxable entity different from that which is prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge. Hence, the said Notification does not suffer from excessive delegation.
- Notification 8/2017 cannot be struck down for excessive delegation when it prescribes ten percent of the CIF value as the mechanism for imposing tax on a reverse charge basis.
- Section 2(31) of the CGST Act defines ‘consideration’ to include payment made by the recipient or by any other person. Thus, in the case of goods imported on CIF basis, the fact that consideration is paid by the foreign exporter to the foreign shipping line would not stand in the way of it being considered as a “supply of service” under Section 7(4) of the IGST Act.
- The services by foreign shipping lines to foreign exporters for import of goods into India has a nexus with the territory of India inasmuch as the destination of the goods is India and the services are rendered for the benefit of the Indian importer.
- When the place of supply of ocean freight services is deemed to be the destination of goods under Section 13(9) of the IGST Act, the supply of services would necessarily be “made” to the Indian importer, who would then be considered as a “recipient” under the definition of Section 2(93)(c) of the CGST Act.
- The supply of services of transportation by the foreign shipper forms a part of the “composite supply” between the foreign exporter and the Indian importer, on which the IGST is already payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act.
- While the notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of the principle of ‘composite supply’ enshrined under Section 8 of the CGST Act and the overall scheme of the GST legislation.
|Broader issue – Legislation of GST
- The Supreme Court has held that Article 246A of the Constitution of India confers equal power to the Centre and States to legislate on aspects of GST. States are not sub-servient to the Centre or the GST Council and are free to engage in co-operative as well as competitive federalism.
- In terms of the finding of the Supreme Court on the non-binding nature of recommendations of GST Council, the State has independent power to legislate various provisions of State GST law.
Issue on Ocean Freight
- This ruling brings in a huge respite for the importers who are not eligible to claim Input tax credit or face accumulation of credit. The importers who have paid IGST on ocean freight services and have not claimed Input tax credit or claimed but not utilized the Input tax credit of such IGST can claim refund claim under Section 54 of the CGST Act.
- Section 54 of the CGST Act provides a limitation period of two years for refund. However, one may argue that the tax collected without the authority of law by the Government is violative of Article 265 of Constitution of India and hence, the bar of limitation should not apply.
- While the ruling goes in the favour of importers, the finding that importers may be deemed to be the ‘recipient’ may set a wrong precedent giving liberty to the Government to shift the onus of payment on persons other than the actual recipient of goods or services in any other similar situations.
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