Notifications levying IGST on importer on component of Ocean Freight are Ultra vires & Unconstitutional
In the HIGH COURT OF GUJARAT
MOHIT MINERALS PVT LTD. v. UNION OF INDIA & 1 other(s).
R/Special Civil Appln. Nos. 726 of 2018, 1984, 1988 of 2019 & Oths.
Whether Notification No. 8/2017-Integrated Tax (Rate), dated 28.6.2017 and Entry 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28.6.2017 are ultra vires to the Integrated Goods and Services Tax Act, 2017 and unconstitutional?
Whether tax is leviable under the Integrated Goods and Services Tax Act, 2017 on Ocean Freight for services supplied by a person located in 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 under the impugned Notifications?
The Petitioners were engaged in importing non-cooking coal from Indonesia, South Africa and U.S.A. and supplying the same to various domestic industries such as power, steel, etc., all over the country.
The Revenue had levied and collected the integrated tax on reverse charge basis under the Notification No. 8/2017-Integrated Tax (Rate), dated 28.6.2017 and Entry 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28.6.2017 on ocean freight.
Whereas, the Petitioner had already suffered the incidence of integrated tax (IGST) at the time of import on the the component of ocean freight as it was naturally included in the value of the imported coal.
CLASS OF IMPORTERS
The petition involved three class of importers, as under:
1.CIF basis – The cost itself is the sum of cost, insurance and freight basis with no separate invoice of freight. The freight invoice is issued by foreign shipping line to the foreign exporter.
2.FOB basis – The Ocean Freight is paid to foreign shipping line, and,
3.High Sea Purchase – The value is similar to CIF basis with no identification of freight charges.
SUBMISSIONS BY PETITIONER
The Petitioner submitted that:
1.The impugned notifications, are ultra vires to the IGST Act and on the supply made beyond the territory to which the Act applies.
2.The “Deeming fiction of value” in the notification is illegal and there is no concept of “value of taxable service”in the Act.
3.The scheme of the IGST does not contemplates the levy and collection of tax from a person who is neither the supplier nor the recipient of supply.
4.The Petitioner has already paid the IGST on imported value as determined under the Customs Tariff Act, 1975 (vide proviso to Section 5(1) of the IGST Act, 2017). The value naturally included the value component of the Ocean Freight. Thus, no levy could be imposed twice under the same Act.
5.the impugned notifications are contrary to the provisions of Article 265 of the Constitution of India.
SUBMISSIONS BY RESPONDENT
The Respondent defending the notifications submitted that:
1.The levy of IGST as introduced by way of impugned notifications on the import freight service does not result in additional cost to the importer.
2.The GST paid by the importer on the inward transportation of goods as well as on the import freight services is available to them as ITC and the notifications are not arbitrary and are merely aimed at providing level playing field to the Indian Shipping Lines.
The Court before dealing categorically with the issues made the following observations:
1.it emphasised upon the salient features of GST.
2.it held that under the supply of services provided by a person in a non-taxable territory to a person in a non-taxable territory, by way of transportation of goods in a vessel from a place outside India to the place of customs station of clearance in India, is not an inter-state supply as per the provisions of Section 7 of the IGST Act.
3.the provisions and manner of levy of service tax in the erstwhile service tax regime were also referred.
4.the levy by a subordinate legislation, which has no sanction of law, cannot be validated, however, laudable may have been the object to introduce it.
COURT ON FIRST ISSUE
The Court observed that impugned notifications have been issued in exercise of the powers conferred by Section 5(3) of the IGST Act.
The said Section provides power to the Government to specify the categories of supply on which the tax shall be paid by the recipient of the supply.
The Section does not further provide that the Government may also specify the other person (other than the recipient of supply) liable to pay tax.
Under Section 5(3), the person liable to pay tax can only be the recipient of supply. Thus, the impugned notifications making the importer, liable for paying such tax, are ultra vires to the provisions of the IGST Act and unconstitutional under Article 265 of Indian Constitution as there is no statutory sanction for levy and collection of such tax.
COURT ON SECOND ISSUE
The Court observed that the impugned Notification No. 8/2017-Integrated Tax (Rate) read with Notification No. 10/2017-Integrated Tax (Rate) both dated 28.06.2017 seek to levy and collect the integrated tax again on the amount of Ocean freight as a supply of service by deeming the importer in India as the recipient of supply of transportation service.
The Court categorically held that:
“It is a fundamental principle of construction of tax statutes that if the words of the Act on one construction results into double taxation of the same transaction, that result will be avoided by adopting another construction which may reasonably be open. Further, double taxation, by way of delegated legislation, when the statute does not expressly provide, is not permissible.”
REASON OF JURISPRUDENCE
The Court has mainly discussed upon the principles of tax and mechanism of its levy.It stated that the basic intention of the legislature while enacting the Section 5(3) of the IGST Act is that Government is only authorized to specify the categories of supply on which the tax is to paid by the recipient of the supply under the reverse charge basis.
The Government cannot further specify the person liable to pay tax as other than the recipient of the supply.
The Court also observed that while enacting the IGST Act, the government was aware of the wide provisions under the Finance Act, 1994, which provide the Government the power to collect tax under the reverse charge basis only from the recipient of the service but also from any other person as may be prescribed.
However, while enacting the IGST Act, the legislature consciously curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply.
RELIED UPON CASE LAWS
Amongst many cases referred and relied upon, one of the most prominent decision was the case of United Shippers Ltd. v. CCE, 2015 (37) STR 1043 (T), wherein the Tribunal held that:
“there can be no levy of service tax on barge charges and the handling charges which is part of the import transaction into India and form an integral part of the transaction value on which the customs duty is leviable.”
The judgment of the Tribunal has been affirmed by the Supreme Court in the case of CCE v. United Shippers, 2015 (39) STR J369 (SC).
Thus, having paid the IGST on the amount of freight which is included in the value of the imported goods, the impugned notifications levying tax again as a supply of service, without any express sanction by the statute, are illegal and liable to be struck down.
The second case which made the concluding view of the Court was Phulchand Exports Limited v. O.O.O. Patriot, (2011) 10 SCC 300 wherein it relied on para 21 of Johnson v. Taylor Brothers and Company Limited, 1920 AC 144 (HL).
The Court relied upon the view taken in this case that in a C.I.F. contract, the seller is obliged to procure a contract of affreightment under which the goods would be delivered at their destination.
“Therefore, the Court was of opinion that in a case of C.I.F. contract, the contract for transportation is entered into by the seller, i.e. the foreign exporter, and not the buyer, i.e. the importer, and the importer is not the recipient of the service of transportation of the goods.”