[Opinion] Ocean freight: Not yet an open-and-shut case

Krishan Arora, Sachin Sharma & Rahul Jhawar – [2022] 139 taxmann.com 421 (Article)

Ocean freight is the term used for transporting goods internationally through ocean. It is an integral part of cross-border trade which allows movement of large quantity of goods through the open ocean. Around 90% of traded goods are carried over the waves. Under ocean freight, the services are drawn from third parties called freight forwarders who pick up the goods for transportation, properly arrange them to be loaded for shipping purposes, and eventually deliver those goods to the final destination.

The ocean freight contracts are generally governed by standard international shipping terms called Incoterms (i.e., international commercial terms). Cost, insurance, and freight (CIF) and free on board (FOB) are amongst the most commonly used incoterms. In CIF contract, the seller is primarily responsible for loading the goods onto the vessel, transporting the goods from the port of origin to the destination port and also bears the cost of shipping and insurance. The buyer assumes the responsibility of the goods once they reach the destination port. Under FOB contract, the responsibility of the supplier is only till the loading of goods onto the shipping vessel at the port of origin and from there on the goods are deemed to be in the control of the buyer.

Taxability of ocean freight

The ocean freight services were initially exempt under the Service tax regime and were brought under the ambit of Service tax law w.e.f. June 01, 2016. This led to a situation, wherein the Service tax was attracted under Forward Charge Mechanism (FCM) in case of services received from the Indian freight forwarders, whereas no such tax liability was attracted in case of foreign freight forwarders, thereby providing them an edge over their Indian counterparts. Accordingly, in order to provide a level playing field to the Indian freight forwarders, ocean freight was made liable to Service tax under Reverse Charge Mechanism (RCM) in the hands of the importer w.e.f. January 22, 2017.

The provisions capturing the taxability of ocean freight under RCM are no different in the GST regime. The taxability of ocean freight (in different scenarios) under GST regime has been tabulated below:

Issue

Albeit, tax levied on the ocean freight component under RCM brought Indian and foreign shipping industry on the same page, however, this led to a rise of multiple disputes in the Service tax regime which got carried forward in the GST regime as well. The said disputes arose on account of multiple grounds which are stated below:

• • Double taxation

    As per the Customs Act, 1962, the importer is required to discharge import duties including IGST at the time of clearance of goods for home consumption on the value which includes the amount of ocean freight paid by the importer. Therefore, further imposition of IGST under RCM on such freight component by treating the same, as supply of service would lead to double taxation which is against the basic idea of GST.

• • Extra-territorial levy

    In case of CIF contracts, the supplier (i.e., the foreign freight forwarder) and recipient of transportation services (i.e., the foreign exporter) are located outside India and the goods are received by an importer registered in India. Therefore, merely on account of the movement of goods terminating in India, it cannot be presumed that the supply of such services is taking place in India.

• • Importer is not the recipient of services

    In case of CIF contracts, the transportation services are procured by the foreign exporter from the foreign freight forwarder. The recipient in such case would be the foreign exporter of such goods and not the importer situated in India. The importer cannot be made liable to pay tax presuming it to be the recipient of such services.

Taxability of the ocean freight in case of CIF contracts has been challenged at different levels on the aforementioned grounds both in the Service tax regime and the GST regime wherein the courts have ended up striking down such notifications which captures the provisions of tax liability under RCM on the ocean freight component as ultra vires Sections 64, 66B, 67 and 94 of the Finance Act, 1994 and IGST Act, 2017 respectively.

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