GST on Ocean Freight

GST ON OCEAN FREIGHT

(M/S MOHIT MINERAL VS. UNION OF INDIA)

Author - Charmie Africawala

 

This article discusses the jurisprudence around application of GST on ocean freight with regards to the recent Supreme Court judgment in the case of M/S Mohit Mineral Vs. Union Of India, and refund of the IGST amount already paid by the importers.

 

The question of applicability of GST under Reverse Charge Mechanism (RCM) on ocean freight has been a much debated issue under GST since its inception in 2017. The two notifications, namely, Notifications 8/2017 and 10/2017 issued by the Central Board of Indirect Taxes and Customs (CBIC) had casted a liability on the Indian importers to discharge GST under RCM for ocean freight even when the shipment is made on CIF basis. This triggered a strong litigation in the Gujarat High Court by M/s Mohit Minerals and they filed a petition under Article 226 to contest the constitutionality of these two notifications.

Backdrop of the Case:

The Gujarat High Court received a writ petition questioning Notifications 8/2017 and 10/2017 issued by CBIC, on the following grounds:

  1. Both the Integrated Goods and Services Tax Act (IGST) of 2017 and the Central Goods and Services Tax (CGST) Act of 2017 are violated by these notifications.
  2. In the situation of a Cost, Insurance and Freight (CIF) contracts, an overseas shipping company located in a non-taxable border provides the service of transporting goods in a vessel to an exporter situated in a non-taxable border on a vessel that is beyond the territory of India and is therefore exempt from taxation under the IGST Act, 2017.
  3. These notifications shall be tantamount to double taxation as the element of maritime freight is subject to customs duty, and again the IGST is levied on the freight component during transportation.
  4. According to the notifications even if the importer is a distinct entity in cases of international water sales, this policy would tax the claimant as the importer and further as the receiver of service.
  5. Notification 10/2017 contravenes the provisions of Section 5(3) of the IGST Act, 2017.

The Gujarat High Court’s principal concern was whether an Indian importer might be liable to pay IGST under RCM on the portion of maritime freight paid by an overseas seller to an overseas shipping company. The petitioner argued that if the importer has paid GST once on the total import value then it would be completely wrong to make the importer pay GST on freight separately. They further argued that by the virtue of these notifications an all together another tax liability is created in addition to the enabling statute and therefore these notifications are violating the purpose of introduction of GST.

The Honorable Court accepted the petitioner’s contentions and agreed that the said notifications violate the GST statute. In furtherance, the Union of India appealed in the Supreme Court against Gujarat High Court’s verdict.

Points of Concern and Supreme Court Verdict:

After considering the issues at hand, the Honorable Supreme Court issued the following judgement, which is summarized as below:

ISSUE I: WHETHER THE UNION AND STATES HAVE TO ABIDE BY THE RECOMMENDATIONS MADE BY THE GST COUNCIL?

It was argued by Union of India that the recommendations and notifications issues by GST council are binding to both States as well as Centre. However, the Honorable Supreme Court did not hold this argument and according to the Court, neither Article 246A nor Article 279A contains a non-obstante provision that would indicate that the legislative power is “subject to” Article 279A. The Union of India’s claim that the GST Council’s decisions are binding on the Union and the States is absurd in the lack of such language. The Court additionally ruled that the repugnancy clause in Article 254 and its absence in Article 246A furthermore demonstrate that the GST Council’s recommendations cannot be regarded as legally binding.  Thus making them recommendatory in nature.

ISSUE II: IN CASE OF “CIF” TRANSACTIONS, DOES THE RECIPIENT OF THE IMPORTED GOODS IS ALSO A RECIPIENT OF SHIPPING SERVICES?

The contentions were put forth by Union of India, that the importer cannot be termed as the recipient of supply of services. Honorable Supreme Court right away disagreed to this statement made by Union of India by highlighting the Section 2(93) of CGST Act, 2017 which states the definition of recipient of supply of services and since Section 5(3) reconfirms that the taxable person must be the recipient of the service and the importer wasn’t explicitly defined in the Act as a recipient of service, the argument must be rejected.

ISSUE III: WHETHER SUCH TRANSACTION AMOUNTS COMPOSITE SUPPLY WHICH GIVES RISE TO DOUBLE TAXATION?

Three parties are involved in the transaction: the transportation line, the Indian importer, and the overseas exporter. The Indian importer is required to pay IGST on the transaction value for the first stage of the trade between the overseas exporter and Indian importer, which includes the provision of services like insurance and freight and qualifies as a “composite supply” under Section 2. (30).The agreement between the foreign exporter and the shipping line for the provision of services for the transport of goods to India is the second element of the transaction. This is a separate agreement between a foreign exporter and a transportation line and which, as a result, said that a contract between a foreign exporter and a shipping line to which an Indian importer is not a party cannot be regarded as a portion. The Court rejected the application of aspect theory and stated that the Revenue Department cannot take contradictory stands, which would imply double taxation standards.

 

Implications Of Above Issues
  1. The said notifications have been declared ultra vires and no GST under RCM is applicable on ocean freight on the CIF import.
  2. Refund of IGST already paid under Reverse Charge Mechanism (RCM): In accordance with the Honorable Supreme Court’s decision, the importers can seek refund of IGST already paid under RCM as per Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. It should be noted that the following judgements of The Hon’ble High Courts of India can be relied upon where the allowance of a refund of IGST paid on maritime freight after the limitation time specified by the GST Law which is 3(three) years from the knowledge of such mistake of law has passed:
  • M/s. Comsol Energy Private Limited v. State of Gujarat [R/Special Civil Application No. 11905 of 2020 decided on December 21, 2020],
  • 3E Infotech Ltd. vs. Cestat, [2018 (7) Tmi 276 – Madras High Court],
  • Union Of India Vs. Itc Ltd. [1993 (7) Tmi 75 – Supreme Court Of India]
  • Binani Cement Ltd. Versus Union of India,
CONCLUSION

The judgment of Hon’ble Gujarat High Court in the case of Mohit Minerals Pvt Ltd Versus Union Of India & Other (2020), was upheld by the Hon’ble Supreme Court Judgment stating that the Notification No.8/2017 dated 28.06.2017 and the Notification No.10/2017 dated 28.06.2017 were declared ultra vires as they lacked the legislative competency, thereby making it unconstitutional to levy IGST @ 5% under RCM on overseas freight on the services provided by an overseas exporter in a non-taxable territory by way of transportation of goods through vessel from a place outside India to customs limits of India under CIF contract.

Moreover, on the value of the composite supply of goods, which includes insurance and freight components, a levy of IGST u/s 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act, is made and no separate levy of IGST @ 5% under RCM can to be made on the Indian importer for the supply of services of transportation of goods by the transportation  line as it would be in violation of Section 8 of the CGST Act, 2017and shall tantamount to double taxation.

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