September 20, 2022

No GST on ocean freight under Reverse Charge Mechanism on CIF Contract

Held by the Hon’ble Supreme Court

In the matter of

Union of India & Anr. Versus M/s Mohit Minerals Pvt. Ltd. (Civil Appeal No. 1390 of 2022)

M/s Mohit Minerals Private Limited (“The Respondent”) is importing goods on a CIF basis. The respondent is liable to pay customs duty on the import of goods. For the computation of custom duty, the value of taxable supply includes the value of ocean freights. Under the CIF contract, Ocean freight is payable by foreign exporters to the foreign shipping company. As per N/No. 8/2017, GST is payable on the value of transportation of goods by a vessel from a place outside India to a customs station of India at @5%. As per N/No. 10/2017, For the purpose of payment of GST on ocean freight when the shipping company is based in a non-taxable territory, an importer is considered a “Recipient of service” and therefore, liable to pay GST under RCM. The respondent first filed a petition to Gujarat High Court contending that IGST on transportation value is already paid by the importer at the time of clearance of goods in form of customs duty. Therefore, paying GST under RCM on transportation value will lead to double taxation.

Hon’ble Gujarat High Court held that impugned notifications are unconstitutional for exceeding the power conferred by the IGST and CGST Act. Aggrieved by order of Gujarat High Court, Union of India filed an appeal before Apex court.

Hon’ble Apex court held that Indian importer is already liable to pay IGST on the ‘composite supply’, comprising a supply of goods and supply of services of transportation, insurance, etc. at the time of customs clearance. Therefore, 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.

A detailed analysis of judgment is given below.

1. Brief Facts of the case

The Respondent is importing certain materials from Indonesia, South Africa, and the US by the ocean.
Goods are imported under the “Cost-Insurance-Freight”(“CIF”) contract, i.e., the exporter is responsible for all risks associated with goods till goods reach the port of the importer.
Respondent pays custom duty on import of goods. For the computation of custom duty, taxable value includes the value of ocean freight.
Under the CIF contract, a freight invoice is issued by a foreign shipping company to the foreign exporter and the respondent is nowhere involved in this transaction.
Under the GST regime, GST is levied on the transportation of goods in a vessel from a place outside India to a customs station of clearance in India @ 5%. (Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017)
When goods are transported by a vessel from a place outside India up to the customs station of clearance in India and the shipping company is located in the non-taxable territory then GST is payable under RCM on such freight amount. GST under RCM is payable by importers located in taxable territory.
Therefore, in the above-mentioned case, the respondent is liable to pay GST under RCM on ocean freight even when he was not a party to the contract.
Further, while computing custom duty on imported goods, the value of freight is included in taxable value.
Therefore, the respondent filed a writ petition before hon’ble Gujarat High Court contenting:
- N/No. 8/2017 and 10/2017 are ultra vires the IGST Act and CGST Act.
- customs duty is levied on the component of ocean freight. Therefore, a levy of IGST on the same amount would result in double taxation
- in the case of a CIF contract, service is provided by a foreign shipping line located in non-taxable territory to an exporter located in non-taxable territory by a vessel outside the territory of India. Therefore, a such transaction can’t be subject to IGST under RCM.

Hon’ble Gujarat High Court held that impugned notifications are unconstitutional for exceeding the power conferred by the IGST and CGST Act.
Aggrieved by order of Gujarat High Court, Union of India filed an appeal before Apex court.

2. Question before Apex Court

whether an Indian importer is liable to pay IGST under RCM on ocean freight paid by the foreign seller to a foreign shipping line for transport of goods sold on a CIF basis?

3. Observations made by Hon’ble Gujarat High Court

The view was accepted by the Hon’ble Gujarat High Court and held that impugned notifications are unconstitutional. The Gujarat High Court in its order stated as under

1. As per Section 2(93) of the CGST Act, The importer of goods on a CIF basis is not the recipient of transport services.
Section 5(3) of the IGST Act enables the Government to stipulate categories of supply, i.e., when a transaction is an inter-state supply or intra-state supply. It does not specify the third party as a recipient of such supply.
“import of service” means the supply of service where the supplier of service is located outside India, the recipient of service is located in India and the place of supply of service is in India.
In the case of goods transported on a CIF basis, the recipient of service is the foreign exporter who is outside India.
Sections 12 and 13 specify the place of supply in various scenarios. However, Neither of them will apply if both the supplier and recipient of service are based outside India.
Merely because service terminates in India does not make the service of supply of transportation to be taking place in India.
The importer is not the “recipient” of the service under Section 2(93) of the CGST Act. Therefore, it will not be able to avail ITC under Section 16(1) of the CGST Act.
Since the importer pays customs duties on the goods which include the value of ocean freight, the impugned notifications impose double taxation through delegated legislation, which is impermissible.

4. Relevant Legal Extract

Relevant legal extracts of the notifications are reiterated below for ready reference:
Entry No. 9(ii) of Notification No. 8/2017-IGST (Rate) dated 28th June 2017 (To notify the rates for supply of services under IGST Act):

*SI No.*	*Chapter, Section, or Heading*	*Description of Service*	*Rate*	*Condition*
9	Heading 9965 (Goods transport services)	(ii) Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India up to the customs stations of clearance in India.	5	Provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers, tankers) used in supplying the service has not been taken Explanation: This condition will not apply where the supplier of service is located in the nontaxable territory. [Please refer to Explanation no. (iv)]

Entry No. 10 of N/No. 10/2017-Integrated Tax (Rate), dt. 28-06-2017 (To notify the categories of services on which integrated tax will be payable under the reverse charge mechanism under the IGST Act).

S. No.	Category of Supply of Services	Supplier of	Recipient of Service
10	Services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India	A person located in a non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act 1962 (52 of 1962), located in the taxable territory

5. Observations of Hon’ble Apex Court

5.1 Whether recommendations by GST Council are binding

Union contended that recommendations of the GST council are binding in nature. Therefore, the rule-making power of the government is very wide.
The recommendations by the GST Council are transformed into legislation on a combined reading of Article 279A and Sections 5,6, and 22 of the IGST Act 2017 and Sections 9,11, and 164 of the CGST Act.
Hon’ble Apex court held that the GST council was enacted to create a uniform taxation system.
Recommendations of the GST Council are binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system.
Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislation, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature.
Accordingly, all recommendations of the GST Council are not binding.

5.2 Do the impugned notifications suffer from excessive delegation

Respondent contended that Section 5(3) of the IGST Act only delegates power to identify the category of goods or services on which tax is to be paid under the Reverse Charge Mechanism.
However, contended notification 10/2017 identifies the importer as the recipient of service for Section 5(3) of the IGST Act. Therefore, such notification is ultra vires the parent Act on the ground of excessive delegation
Hon’ble Apex court analyzed that the legislature is required to perform its essential legislative functions. Once the skeletal structure of the policy is framed by the legislature, the details can emerge through delegated legislation. It is a settled position that the legislature cannot delegate its ‘essential legislative functions.
The essential legislative functions with respect to the GST law are:
- the levy of tax,
- the subject matter of tax,
- taxable person,
- rate of taxation and
- value for the purpose of taxation

All these essential legislative functions are well defined under IGST Act.
The CGST Act stipulates a two-fold requirement for a recipient to be taxed on an RCM basis that the recipient must be a ‘person’ as defined under Section 2(84) of the CGST, and the person is a “taxable person” only if registered or is liable to be registered under Section 22 or Section 24.
Section 24(iii) of the CGST Act states that persons who are required to pay tax under reverse charge must be registered.
Therefore, both the IGST and CGST Act clearly define reverse charge, the recipient, and taxable persons. Thus, the essential legislative functions vis-à-vis reverse charge have not been delegated.

5.2 Is the importer considered a “recipient of Service” under the CIF Contract

By Entry 9(ii) of Notification 8/2017, IGST @ 5% is levied on transportation of goods in a vessel from a place outside India up to the customs station of clearance in India.
Entry 10 of Notification 10/2017 deems an importer of goods as the ‘recipient of service’ of transportation of goods by a foreign shipping line irrespective of the fact that import was on a FOB basis or CIF basis.
As per Section 5(3) of the IGST Act, GST is payable under RCM by “the Recipient” of service.
Further, Section 2(93) of the CGST Act has set out 3 scenarios to identify “Recipient of Service:

Scenarios	Who is considered as “Recipient”
when consideration is payable for the supply of goods or services (clause (a))	the recipient is the person by whom consideration is payable
when no consideration is payable for the supply of goods; (clauses (b))	the recipient is the person to whom (a) the goods are delivered or made available, or (b) possession or the use of the goods is given or made available
when no consideration is payable for the supply of service (Clause (c))	person to whom the service is rendered

The Union Government has contended that import of goods on a CIF basis would be construed as import of services and clause 2(93)(c) shall apply to determine the recipient.
However, The respondents have argued that the importer in a CIF contract can be considered a recipient of the service only in a colloquial sense. T
Hon’ble Apex court analyzed that Section 13(9) of the IGST Act read together with Section 2(93)(c) of the CGST Act defines a “recipient”.
Section 13(9) of the IGST Act defines a place of service to be the destination of goods when they are transported by means other than mail or courier.
In such a scenario, when the place of supply of 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 and therefore, Indian Importer will be considered as a “recipient” under Section 2(93)(c) of the CGST Act.

5.4 Composite supply and Issue of double taxation

The respondent has submitted that the transaction between the foreign exporter and the respondents is already subject to IGST under Sections 5 of the IGST Act as “Supply of Goods”.
Therefore, levying IGST on the value of transportation service by the designated importer as “Recipient of Service” would amount to double taxation.
Apex court analyzed that this transaction has 3 parties namely foreign exporter, Indian Importer, and Shipping Line.
First leg:
- CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter.
- Foreign exporter ensures the safe arrival of goods to the place of destination and the Indian importer pays the transaction value to the exporter
- On this leg, IGST is payable by importer u/s 5(1) of the IGST Act.
- This transaction involves the provision of services such as insurance and freight; it falls under the ambit of ‘composite supply. Transaction value would include elements of freight and insurance.
- Section 8 of the CGST Act provides that the tax liability on a composite supply which comprises two or more supplies will only be levied on the ‘principal supply.
- In a CIF transaction, the principal supply, according to Section 2(30), is the supply of goods. Thus, the tax would be levied as if the transaction was one of the supplies of goods.

Second Leg:
- an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for the transport of goods to the destination, i.e., in the territory of India.
- The respondent contended that the impugned levy of IGST on the ‘service’ aspect of the transaction would be in violation of the principle of ‘composite supply.
- However, the appellant submitted the second leg of the transaction, which is a standalone contract between the foreign exporter and the foreign shipping line. While the first leg of the transaction, between the foreign exporter and the Indian importer, is (according to the submission) a composite supply, the second leg is an independent transaction.
- The question before the Hon’ble Apex court is whether the imposition of IGST on the supply of services can be sustained when there is a concomitant imposition of IGST on the supply of goods.
- Analysis by Apex Court:
  - Both legs of transactions are independent and ordinarily, the IGST could be levied on both sets of transactions- one as the supply of goods (under the ambit of composite supply) and the other as the supply of services.
  - In a CIF contract, the supply of goods is accompanied by the supply of services of transportation and insurance.
  - The supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) considering the same as Composite supply.
  - To levy, the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation.
Conclusion
Therefore, the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act. However, levying IGST on transportation services would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.

6. Conclusion

Considering and analyzing all the applicable provisions of GST law, the Hon’ble Apex court has concluded the following points:

The recommendations of the GST Council are not binding on the Union and States.
The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature.
To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST.
Import of goods by a CIF contract is construed as an “inter-state” supply and is subject to IGST. Further, the importer of such goods would be the recipient of the shipping service.
The IGST Act and the CGST Act define reverse charges and prescribe the entity that is to be taxed for these purposes.
Specifying the importer as the recipient of service under Notification 10/2017 is only clarificatory in nature. He was already a “Recipient” prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge.
However, the impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply.
Indian importer is already 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.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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