BACKGROUND
The expansion of international trade over the years is due to the globalisation process. This has led many countries having policies and tax levies on transactions pertaining to international trade to ensure balance of trade as well as ensuring a level playing field for the domestic players.
Apropos, one such as measure undertaken by the Indian government is the levy of Duties of Customs or Integrated Goods and Services Tax (‘IGST’) on transactions pertaining to international trade. The present case of Mohit Minerals Pvt Ltd v. Union of India, [2020 (1) TMI 974 - GUJARAT HIGH COURT] is regarded as a landmark decision pertaining to levy of IGST on ocean freight services provided by a person located in a non-taxable territory.
BREIF FACTS OF THE CASE
The Applicant was engaged in the business of importing coal from various countries. The Applicant discharges the applicate rate of custom duty at the time of import on the value as determined under Section 14 of the Customs Act, 1962. It is pertinent to note that the goods are imported under the incoterms of “Cost, Freight and Insurance” (‘CIF’) for the purposes of Customs valuation i.e., the import value include ocean freight.
In addition to the levy of Customs and IGST at the time of import, the Applicant as an import was also required to pay IGST on ocean freight by virtue of Entry 10 of Notification number 10/2017- Integrated Tax (Rate) dated 28 June 2017 read with Notification number 8/2017- Integrated Tax (Rate) dated 28 June 2017. Thereby, effectively leading to double taxation on the amount of ocean freight. Aggrieved, the Applicant had approached the Hon’ble Gujarat High Court challenging the vires of the aforementioned notifications.
CONTENTIONS OF THE APPLICANT
The primary averments of the Applicant are summarised as follows:
The provisions under the IGST Act, apply only when the supplies are made within the taxable territory. In the present instance, both the service provider i.e., the shipping line and the service recipient i.e., the exporter both are located outside the taxable territory for the purposes of the IGST Act.
It was submitted that IGST was paid at the time of import on CIF basis as per the valuation. Whereas, the notification requires the importer to once again pay IGST on the same component i.e., Ocean Freight, therefore, tantamounting to double taxation.
It is pertinent to highlight that Section 5(3) of the IGST Act, the liability to pay tax can be shifted from the ‘supplier’ to the ‘recipient’ on reverse charge basis, which may be notified by the government. In the instant case, the impugned Entry 10 of the Notification number 10/2017- Integrated Tax (Rate) dated 28 June 2017 the entry has been shifted upon the importer and not on the recipient. Thus, the aforementioned notification is ultra vires and in contravention of the legislative intention under Section 5(3) of IGST Act.
CONTENTIONS OF THE DEPARTMENT
The arguments canvased by the Department are summarised as follows:
The Department averred that it is a settled position of law following the case State of T.N. and others v. P.Krishnamurthy and others, reported in 2006(4) SCC 517 that there is a presupposition that subordinate/ delegated legislation can be challenged only on the limited grounds and there is a presumption in favour of constitutionality or validity of a sub-ordinate Legislation and the burden is upon the Applicant who assails it to show that it is invalid.
The Department canvased that the notifications were a result of representations from shipping lines, as the levy of service tax on inward transport resulted in FOB contracts converted to CIF and those being entered into outside the taxable territory. Thus, Indian carriers losing competitive advantage over its foreign counterparts. Therefore, the Department argued that the tax on inward freight was introduced to create a level playing field as it was not possible to collect tax from foreign carriers.
Having regard to the above, the Department argued that the legislative competence must be determined in accordance with the object of the tax. Further, with regard to the alleged double taxation, the Department stated that since the tax was levied on the event of service and not a levy on goods. As IGST is levied as per Section 5(1) of the IGST Act on inter-state supplies. Whereas, Customs is levied under Section 3 of the Customs Tariff Act, 1975 according to the valuation arrived under Section 12 of the Customs Act, 1962. Further, by the virtue of Section 7(4) of the IGST Act, supply of services imported into the territory of India shall also be treated to be a supply of services in the course of the inter-State trade or commerce.
Having regard to above, as per Section 11 of the IGST Act, the place of supply of goods imported into India shall be the location of the importer. Whereas, in the case of of supply of services of transportation of goods other than by way of mail or courier, shall be the place of destination of such goods, as per Section 13(9) of IGST Act. Accordingly, ocean freight shall be taxable in India, as both Customs clearance and ocean freight are two separate taxable events. Further, it was submitted that the IGST levied does not result in additional cost as the GST paid by the importer is available as ITC.
COURT FINDINGS
The Hon’ble High Courts findings are summarised as two-fold hereunder:
ON THE ASPECT OF DELEGATED LEGISLATION
Upon perusal of the Charging Section i.e., Section 5 of the IGST Act, it would suggest that the person who is neither the supplier or the recipient of supply, cannot be made liable to pay tax under the IGST Act.
The Applicant is importing goods on CIF basis, which included the cost transportation of goods and insurance within the negotiated contact price. Accordingly, the obligation is placed upon the foreign exporter. Thus, the Applicant is not concerned with how the foreign exporter delivers the goods at the Indian port or what are the commercials between the shipping line and the foreign exporter. Further, the Applicant cannot be said to have availed the services of ocean freight nor he is liable to pay consideration to such logistics provider. Therefore, the Applicant is not the ‘Recipient’ of service.
Apropos, the Applicant cannot be required to pay tax on the assumption that services are directly or indirectly receiving the services. Moreover, the impugned Notification issued under the powers conferred under Section 5(3) of the IGST Act. Wherein, the said provision empowers the Revenue to notify the categories of supply where the tax shall be paid on Reverse Charge basis i.e., by the recipient of service. However, it must be noted that it does not empower the Revenue to levy tax on persons other than the recipient of supply.
Therefore, inasmuch as the delegated powers are exercised beyond the powers conferred by the statute, such exercise of delegated power shall be regarded as ultra vires.
ON THE ASPECT OF INTER-STATE SUPPLY
The term, ‘Import of services’ under the IGST Act requires that the following conditions are fulfilled:
the supplier of service is located outside India;
the service recipient is located in India; and
the place of supply of service is in India.
Further, the provisions relation to ‘place of supply’ under Section 10 to Section 13 of the IGST Act does not determine where supply takes place in its ordinary sense. They are enacted for determining the situs of supply to determine the supply as inter or intra state. Further, the said provisions can only be applied, where it is expressly provided by the IGST Act, i.e., Section 7(1), Section 7(2), Section 7(5)(a) and Section 8.
At this juncture, it was also observed that the above cannot be applied to residuary Section i.e., Section 7(5)(C) of the IGST Act. As the term ‘supply of goods or services or both, in the taxable territory’ shall suggest that all or major conditions of supply shall be fulfilled in a transaction that takes place in the taxable territory and the Residuary provision applies only to those transaction which cannot be covered under the Provisions of Section 7 of the IGST Act. Whereas, in the given case none of the conditions of supply are satisfied to suggest that the supply takes place in the taxable territory i.e., India. Therefore, mere fact that the transportation of goods terminate in India, will not make the transaction amenable to the provisions of levy under the IGST Act. Unless supply is made in taxable territory.
In light of the above discussion, the Hon’ble High Court held that no tax is leviable under the IGST Act, on ocean freight for the services provided by a person located in a non-taxable territory, by way of transportation of goods by vessel from a place outside India up to the customs barrier in India. Thus, the impugned notification lacks vires as it travels beyond the legislative powers.
ANALYSIS AND COMMENT
It is pertinent to highlight that the dispute of ocean freight has been dealt by the Hon’ble High Court at length covering aspects of double taxation and the fact that the transaction is taking place outside the taxable territory in case of CIF incoterms. However, what remains a question is whether the order can be applied to Free on Board (‘FOB’) transactions.
The other facet of importance is that the scope of residual provision under Section 7(5)(c), where the Hon’ble Court held that the same can be applied to determine the place of supply on when Section 10 to 13 of the IGST Act are not applicable. Thereby, requiring the place of supply to be determined on cases to case basis.
Further, the observation of the Hon’ble Court concerning the non-availability of input tax when payment is made is made by another person other that the recipient may be prone to invite litigation.
The ruling provides much needed relief to the taxpayers momentarily. However, the Department has approached the Supreme Court challenging the orders passed by the Hon’ble Gujarat High Court.
Upheld by Supreme Court in the case of UNION OF INDIA & ANR. VERSUS M/S MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR [2022 (5) TMI 968]
The Supreme Court declared levy of GST on ocean freight on import as Unconstitutional where Indian importer is already paying IGST on CIF value on the composite value of goods, transportation, insurance etc. The Supreme Court held 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.
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