SC: No IGST on Ocean Freight under RCM for CIF Import

The Hon'ble Supreme Court in Union of India & Anr. v. M/s Mohit Minerals Pvt. Ltd.[Civil Appeal No. 1390 of 2022 dated May 19, 2022] upheld the judgement given by the Hon'ble Gujarat High Court to hold that no IGST is payable on ocean freight under Reverse Charge Mechanism ("RCM") for Cost, insurance, and freight ("CIF") imports as Indian importer is 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 Central Goods and Services Tax Act, 2007 ("the CGST Act").

Facts

M/s Mohit Minerals Pvt. Ltd. ("the Respondent") is engaged inimport of non-coking coal from Indonesia, South Africa, and the U.S. by ocean transport on CIF basis (i.e., the contract for transportation of goods is entered into by foreign exporter with foreign shipping line and the person liable to pay consideration is the foreign exporter). The Respondent pays customs duties on the import of coal, which includes the value of ocean freight.

The Department ("the Appellant") filed this appeal against the judgement of Gujarat High Court in Special Civil Application No.726 of 2018 dated January 23, 2020  wherein it was held that no tax is leviable under the Integrated Goods and Services Tax Act, 2007 ("the IGST Act"), on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India on CIF basis and the levy and collection of tax of such ocean freight under the S. No. 10 of Notification No. 10/2017- Integrated Tax (Rate) dated June 28, 2017 ("the Service RCM Notification" or "Impugned Notification") is ultra vires.

Appellant's contentions

• Section 13(9) of the IGST Act stipulates that the place of supply of services for transportation of goods other than by way of mail or courier shall be the place of destination of such goods. Even though the contracting parties – the foreign shipping line and the foreign exporter – are outside the territory of India, the provision of service is for the Indian Respondent and consequently the consumption and exhaustion of service which is a critical limb, both commercially and legally, happens only in the hands of the Respondent.
• The CIF transaction and IGST on ocean freight are two independent transactions, entitled to suffer independent levies and do not qualify as a composite supply under Section 2(30) of the CGST Act.
• The IGST is being sought to be imposed on the supply of service and not on the goods. Separate aspects are being taxed, hence it cannot be termed as overlapping. Moreover, the tax is on the value of goods, and not the freight. Tax paid at an anterior stage is not double taxation if it is included in the overall value.
• In terms of Section 2(93)(c), Section 24(iii) read with Section 2(98) of the CGST Act and Section 5(3) of the IGST Act the Respondent is the recipient.
• GST is a consumption tax and the tax jurisdiction extends to the place where the supply is consumed.
• A combined reading of Articles 246A and 279A of the Constitution of India elucidates that the GST Council is the ultimate decision-making body in framing the GST law since it is a constitutional body that acts as a converging platform for both the Union and the States.
• The power of the Parliament and the State Legislature under Article 246A and the power of the GST Council under Article 279A must be balanced and harmonised, such that neither overrides the other.
• For the purpose of valuation residual method under Rule 31 of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules") can be taken where Rule 27 to 30 of the CGST Rules are not applicable.
• The purpose is to make the Indian shipping lines as competitive as foreign shipping lines. ITC is available to the Respondent and the tax paid on RCM can be offset in the Respondent's output tax liability. Therefore, there is no additional burden on the Respondent- it is a mere alteration of the mechanism.
• The expression 'by the recipient' in Section 5(3) of the IGST Act does not impede the authority of the GST Council in making recommendations for issuance of notifications for identifying such persons who shall be governed by reverse charge and once the identification is complete, such taxable person would automatically be interpreted as "the recipient".

Respondent's arguments

• The contract for transportation of goods is entered into by the foreign exporter with the foreign shipper. Thus, the person liable to pay consideration to the foreign shipper is the foreign exporter. The Respondent is not the person liable to pay the consideration, and is thus, not the 'recipient' of the service.
• The ocean freight transaction cannot be considered as 'supply' since Section 7(1)(b) of the IGST act requires the import of service to be for a 'consideration'.
• Section 5(3) of the IGST Act provides that the Government may specify the 'categories of supply of goods or services or both' on which the tax shall be paid on RCM basis by the recipient of the goods or services whereas the Impugned Notification specifies the 'recipient' also.
• As per Section 2(98) of the CGST Act only the recipient can be made liable to pay tax under RCM and the RCM cannot be disintegrated from the recipient of supply.
• There cannot be 2 recipients of the same service i.e., the foreign exporter and the Respondent.
• The taxable event for levy of GST is 'supply' of goods or service. In the absence of supply, no tax can be levied.
• Section 13(9) of the IGST Act is only relevant to determine the place of supply and not the recipient of supply.
• The objective of the tax or levy cannot validate an ultra vires levy as the service provider and the recipient both are in non-taxable territory.
• The scheme of IGST Act does not envisage a person other than the supplier or the recipient as a person liable to pay tax.
• Double taxation as cost of freight already included in value of goods imported.
• The law recognises and maintains the integrity of a CIF contract under Section 2(30) read with Section 2(93) and 8 of the CGST Act. These sections maintain the integrity of a composite contract by providing that where the goods come with insurance and freight, the tax is imposed only on supply of goods.
• 'Value of service' as 10% of the CIF value, which is contrary to Section 15(1) of the CGST Act which says 'transaction value'.
• IGST Act has no extra-territorial application as the it extends to the whole of India only.

Issue

Whether the Respondent can be subject to the levy of IGST on the component of ocean freight paid by the foreign seller to a foreign shipping line, on RCM basis?

Held

The Hon'ble Supreme Court in Civil Appeal No. 1390 of 2022 dated May 19, 2022 held as under:

• The Impugned Notification, besides specifying the criteria, has also mentioned the corresponding recipient in those categories: The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. Therefore, the stipulation of the recipient in each of the categories is only clarificatory as the Impugned notification does not specify a taxable entity different from that which is prescribed in Section 5(3) of the IGST Act.
• Valuation: Sections 15(4) and (5) provide for the value of the supply of goods or services if it cannot be determined under sub-section (1) of Section 15 of the CGST Act whereby Rule 27 to 31 of the CGST Rules have been prescribed thus, valuation can be prescribed via notifications under residual power- Rule 31 ibid.
• Import of services: An Indian importer i.e., the Respondent could also be considered as an importer of the service of shipping which is liable to IGST on inter-state supply, if the activity falls within the definition of 'import of service' for the IGST Act and CGST Act:
  • the supplier of service is located outside India- Fulfilled
  • the recipient of service is located in India- 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. Further, Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation.
  • the place of supply of service is in India- Section 13(9) of the IGST Act appears to create a deeming fiction, where in case of supply of services of transportation of goods by a supplier located outside India, the place of supply would be the place of destination of such goods. The supplier, the foreign shipping line, in this case would be a non-taxable person. However, its services in a CIF contract for transport of goods would enter Indian taxable territory as the destination of such goods. The place of supply of shipping service by a foreign shipping line, would thus be India.
• Inter-state supply: On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an 'inter-state supply' which can be subject to IGST where the importer of such goods i.e., the Respondent would be the recipient of shipping service.
• Consideration- Supply: Section 2(31) of the CGST Act defines 'consideration' to include payment made or to be made by the recipient or by any other person. Thus, in the case of goods imported on a 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 which is made for a consideration, thereby constituting 'supply of service' in the course of inter-state trade or commerce that can be subject to IGST under Section 5(1) of the IGST Act.
• Territorial nexus: The impugned levy on the supply of transportation service by the shipping line to the foreign exporter to import goods into India has a two-fold connection:
  • the destination of the goods is India and thus, a clear territorial nexus is established with the event occurring outside the territory; and
  • the services are rendered for the benefit of the Indian importer i.e., the Respondent.

Thus, the transaction does have a nexus with the territory of India.

• Objective- level playing field for Indian shipping lines: Stated that the Court is not in a position to adjudicate the desirability of a taxation scheme, as long as it is legally issued. Commenting on the efficacy of the tax intervention with the desired goals would be delving into the arena of policy.
• Composite supply and double taxation:
  • The illustration to Section 2(30) of the CGST Act clarifies that a transaction such as the CIF contract for supply of goods reflects a composite supply under the CGST Act, where the principal supply is the supply of goods. Thus, the tax would be levied as if the transaction was one of supply of goods as per Section 8 of the CGST Act.
  • The impugned levy imposed on the 'service' aspect of the transaction is in violation of the principle of 'composite supply' enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Respondent is 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 Respondent for the 'supply of services' by the shipping line would be in violation of Section 8 of the CGST Act.
• GST Council recommendations: The recommendations of the GST Council are not binding on the Union and States for the following reasons:
• The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units.
• Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. 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. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.
• The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature's power to enact primary legislations.