No GST on Indian importer for ocean freight paid by foreign exporter to foreign shipping line

The Supreme Court held that levy of IGST on ocean freight is not valid as Indian importer is liable to pay IGST on composite supply comprising of supply of goods and supply of services of transportation and insurance in CIF contract.

It was held that the deeming Indian importer as recipient of service of transportation of goods by vessel under Notification No. 10/2017-Integrated Tax (Rate) is not invalid on ground of excessive delegation as essential legislative functions vis-à-vis reverse charge have not been delegated. The stipulation of recipient for specified categories of supply as notified is only clarificatory.

It was further held that the definition of consideration includes payment made by recipient or any other person and therefore, payment of consideration by foreign exporter to foreign shipping line in CIF imports does not mean the same is not supply of service.

The Importer of goods in India is to be considered as recipient of service of transportation of goods by vessel from outside India to a place in India as place of supply is destination of goods; Ultimate beneficiary is also importer receiving the goods in taxable territory though shipping service is provided by foreign shipping line to foreign exporter in CIF contract.

It was also held that the levy of GST on supply of transportation service by foreign shipping line to foreign exporter to import goods into India is not extra-territorial as services are rendered for the benefit of Indian importer and the transaction has nexus with the territory of India.

While analysing the vires of the impugned levy, the Supreme Court has also analysed the nature of the recommendations of GST Council. It is held that the recommendations of the GST Council are not binding on the Union and States.

The Article 246A of the Constitution provides Parliament and State Legislatures with equal and concurrent power to legislate on GST without repugnancy clause.

[2022] 138 taxmann.com 331 (SC)
SUPREME COURT OF INDIA
Union of India
v.
Mohit Minerals (P.) Ltd.
Dr. Dhananjaya Y Chandrachud, Surya Kant & Vikram Nath, JJ.
MAY 19, 2022

Ocean freight – Levy of GST in CIF contract – Composite supply – Double taxation – Whether levy of IGST on ocean freight in CIF contracts amounts to double taxation when customs duty on imported goods is paid on value inclusive of such freight
HELD: CIF transaction is a composite supply and principal supply is supply of goods – Composite supply introduced to ensure various elements of a transaction are not dissected and levy is imposed on bundle of supplies together – Supply of goods is accompanied by supply of services of transportation and insurance in CIF contract – Supply of transportation service forms part of the bundle of supplies between foreign exporter and Indian importer – Levying IGST on service component will contradict composite supply provision and scheme of GST law – Indian importer being liable to pay IGST on composite supply comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, separate levy on such importer for supply of service by shipping line is not valid – Impugned order of High Court holding that tax on supply of service already included as tax on composite supply of goods is not permissible, upheld – Sections 2(30) and 8 of Central Goods and Services Tax Act, 2017 – Section 5 of Integrated Goods and Services Tax Act, 2017 [Paras 136, 143, 145 & 147]

Ocean freight – Levy of GST in CIF contract – Validity of notifications – Levy of IGST on ocean freight under reverse charge basis on importer in India when the same paid by foreign seller to foreign shipping line whether valid – Whether Notification No. 8/ 2017-Integarted Tax (Rate) and No. 10/2017-Integarted Tax (Rate) are ultra vires the IGST Act
HELD: In CIF contract, freight invoice is issued by foreign shipping line to foreign exporter without involvement of importer – Importer deemed as recipient in respect of service of transportation of goods by vessel from outside India to India as per Notification No. 10/2017-Integarted Tax (Rate) – Power under Section 5(3) of IGST Act is to specify categories of goods or services where tax is payable under reverse charge basis by recipient and it does not empower the government to specify recipient of supply – Essential legislative functions vis-à-vis reverse charge have not been delegated – Stipulation of recipient for specified categories of supply as notified is only clarificatory – Sections 5(3) and 5(4) of IGST Act are inextricably linked to Section 5(1) and should be construed together in determining vires – Neither Section 2(107) defining taxable person nor Section 24 of CGST Act on persons liable for registration qualify imposition of reverse charge on recipient of service – Impugned notifications cannot be invalidated for alleged failure to identify taxable person and also on charge of excessive delegation while prescribing 10% of CIF value as the taxable value – Section 5 of Integrated Goods and Services Tax Act, 2017 – Sections 2(107) and 24 of Central Goods and Services Tax Act, 2017 [Paras 62, 64, 67, 84, 85, 86, 90, 91, 92 & 94]

Supply – Transportation of goods by vessel – Ocean freight transaction whether can be considered as supply
HELD: Place of supply of shipping service provided by foreign shipping line to foreign exporter selling goods to Indian importer would be India since destination is in India and services in CIF contract for transport of goods would enter India – Definition of consideration includes payment made by recipient or any other person – Payment of consideration by foreign exporter to foreign shipping line does not mean the same is not supply of service – Section 5 of Integrated Goods and Services Tax Act, 2017 – Section 2(31) of Central Goods and Services Tax Act, 2017 [Paras 103 & 105]

Ocean freight – Recipient of service – Whether importer can be treated as recipient of service of transportation of goods by vessel
HELD: Shipping service provided by foreign shipping line to foreign exporter in CIF contract – Place of supply of service is destination of goods – Supply of service would necessarily be made to Indian importer and such importer would be considered as recipient – Service of shipping is imported into India for consumption and the same is routed through import of goods – Ultimate beneficiary is also importer receiving the goods in taxable territory – Section 13(9) of the IGST Act read with Section 2(93)(c) of the CGST Act inherently create a deeming fiction of the importer of goods to be the recipient of shipping service – Section 2(93)(c) of Central Goods and Services Tax Act, 2017 [Paras 113, 119 & 123]

Transportation of goods by vessel – Territorial nexus – Levy of GST on supply of transportation service by foreign shipping line to foreign exporter to import goods into India whether extra-territorial
HELD: Destination of goods is India and a clear territorial nexus is established with the event occurring outside the territory – Services are rendered for the benefit of Indian importer and the transaction has nexus with the territory of India – Destination of goods recognized as place of supply of service – Statute broad enough to cover taxable event having extra-territorial aspects bearing nexus with India – Section 13(9) of Integrated Goods and Services Tax Act, 2017 [Paras 108 & 109]

GST Council – Role, functions and powers – Role of GST Council must be understood in the context of simultaneous legislative power conferred on Parliament and State Legislatures – GST Council is a constitutional body entrusted with duty to make recommendations on wide range of areas concerning GST – Article 279A in constituting GST Council envisions that neither Centre nor the States can act independent of the other – Recommendation of the GST Council is non-qualified but notion that such recommendation transforms into legislation is not correct since neither Article 279A begins with non-obstante clause nor Article 246A provides that legislative power is subject to Article 279A – Use of phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the government in enacting legislation on GST – Recommendations of GST Council are made binding when government exercises power to notify secondary legislation to give effect to uniform taxation system – Merely because few of the recommendations are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council’s recommendations are binding – Articles 246A and 279A of Constitution Of India [Paras 30, 54, 56 & 59]

Goods and Services Tax – Legislative powers – Simultaneous power – Article 246A of the Constitution provides Parliament and State Legislatures with equal and concurrent power to legislate on GST – Article 254 provides that law made on a subject in concurrent list by Parliament will prevail over conflicting laws made by State Legislature – Article 246A having non-obstante clause overrides Article 254 – Power exercised under Article 246 is subject to repugnancy clause under Article 254 while Article 246A does not provide for such repugnancy clause – Power under Article 246A is termed as simultaneous power to differentiate it from concurrent power as provided under Article 246 – Constitution Amendment for GST is sui generis as it introduced unique features of federalism – Articles 246, 246A and 254 of the Constitution of India [Paras 30, 45 & 46]

CASE REVIEW 
Mohit Minerals v. Union of India [2020] 113 taxmann.com 436 (Guj.) affirmed.
JUDGMENT