Ocean Freight Reaches Destination Amid Choppy Waters

Dhruv Rastogi – [2022] 138 taxmann.com 452 (Article)

Introduction

In the current challenging global economic conditions, Foreign Trade (both Exports and Imports) has become a crucial pillar of Indian economy. Smooth functioning of Imports & Exports is a vital part of the economic ecosystem. Since introduction of Goods and Service Tax regime in 2017, an issue has plagued Importers who Import goods on a CIF (Cost, Insurance, Freight) contract. The bone of contention is the levy of Integrated Goods and Service Tax on supply of service of transportation of goods by vessel commonly referred to as ‘Ocean Freight’ payable by the Indian importer on Reverse Charge basis. The Supreme Court in Union of India v. Mohit Minerals has delivered a landmark verdict upon the said issue. In this article, the author attempts to provide an overview of the decision and the reasoning behind it along with analyzing its consequences.

Background

The respondent assessee is an importer of non-coking coal into India. In the instant case goods are imported under a CIF contract wherein the foreign exporter arranges and pays for the Insurance and Freight by entering into contract for transportation of goods with a foreign shipping line. The respondent pays Customs Duty on value of import of coal which includes value of Ocean Freight. Through Notification 8/2017, 5% IGST was levied upon supply of service of transportation of goods in a vessel from a place outside India upto the customs station clearance in India. Through Notification 10/2017, the liability to pay such IGST was imposed upon the importer (on reverse charge basis) who was declared to be recipient of such transportation service. The respondents challenged this levy by Writ Petition filed in Gujarat High Court. Herein lie the origins of the case at hand.

The Gujarat High Court agreed with contentions of the assessee that a separate levy of IGST on Ocean Freight services in cases of a CIF contract would lead to double taxation. It also was in agreement with assessee that under reverse charge mechanism, only the recipient is liable to pay tax whereas in case of CIF contracts the foreign exporter is the recipient, not the Importer. Consequently, both the above-mentioned notifications were held to be ultra vires to the extent that they imposed IGST liability on the importer upon Ocean Freight service in a CIF contract.

Issues

The Union of India went in appeal against the Gujarat High Court judgment. The following issues were argued upon:-

1. Whether Notification No. 8/2017 & 10/2017 suffer from vice of ‘Excessive Delegation’

a. Union of India claimed that the said notifications do not suffer from excessive delegation because government has been bestowed power to decide who is the taxable person in case of Reverse Charge in Section 5(3) and 5(4) of IGST Act.
b. Respondents argued that Section 5(3) only empowers the government to specify class of goods and services wherein IGST will be paid on reverse charge basis while Section 5(4), as it stood when the said Notifications were issued, did not empower the government to provide for class of persons who shall be deemed to be recipients for purposes of Section 5.

2. Whether service of transportation of goods via vessel from a location outside India upto the Custom frontiers in India constitute an Inter-State Supply of services?

a. The Union of India contended that there is a strong nexus of such supply of service of transport goods with India because the destination of the goods is India and the ultimate beneficiary of this service is the Importer who is located in India.
b. Respondents countered the above contention by claiming that mere fact the service of transportation of goods ends in India does not mean it is provided in India. Furthermore, there is no statutory backing of Union of India’s argument relating to a beneficiary of a service becoming liable to pay tax. Since the contract of Ocean Freight is between the foreign exporter and the shipping company, the Importer located in India is only beneficiary of the goods imported and not the service of their transportation.

3. Whether the Importer can be classified as Recipient of Ocean Freight Services –

a. The Union of India argued that upon a joint reading of Section 2(93)(c) and 24(iii) of Central Goods and Services Act (CGST Act), it can be concluded that an Importer located in India is the recipient of service of transportation of goods where goods are moved from location outside India upto the Customs frontiers in India. As per Section 2(93)(c), in cases where no consideration is paid, the person to whom the service is rendered is the ‘Recipient of Services’, while Section 24 (iii) makes registration mandatory for persons liable to pay tax on reverse charge basis. It was contended that since the Importer does not pay for the Ocean Freight service (foreign exporter pays), Section 2(93)(c) will be applicable and the ultimate beneficiary of transportation service being the Importer will be ‘Recipient of Service’.
b. The respondents countered the above argument by stating that Section 2(93)(c) is not applicable in instant case since there is no absence of consideration for transport services. It is paid by the foreign exporter to the foreign shipping line and the privity of contract exists between those two parties. As a result, the importer can not be deemed to be recipient of service as per this provision

4. Whether IGST can be levied on Ocean Freight Services in a CIF contract basis the Aspect Theory –

a. The Union of India urged the apex court to apply ‘Aspect Theory’ whereby on two aspects of the same transaction, different taxes can be levied. It was contended that Customs Duty is payable upon the value of goods imported while IGST is levied on the service aspect of Ocean Freight.
b. Respondents denied applicability of ‘Aspect Theory’ because in instant case the value of ocean freight is already included in the value of goods imported.

5. Whether import of goods under a CIF contract is a Composite Supply –

a. The Union of India contended that import of coal and services of transportation of goods imported are separate supplies, the former being supply of goods while the latter being supply of service.
b. Respondents argued that import of goods by CIF contract is Composite Supply where import of goods is principal supply whereas insurance and ocean freight are naturally bundled ancillary supplies. Therefore, the import of goods on CIF basis should be treated as one supply which is the principal supply of goods. As a result, a separate levy of IGST on the ancillary supply (ocean freight) should not be permitted.

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