In the case of Union of India v. Mohit Minerals Pvt. Ltd. & Ors., Civil Appeal No. 1390 of 2022, dated 19.05.2022, the Supreme Court held that though the Notifications No. 8/2017 – Integrated Tax (Rate) and 10/2017 – Integrated Tax (Rate) dated 28.06.2017 were validly issued under the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), they were in violation of Section 8 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) and the entire scheme of the CGST Act.
FACTS
Mohit Minerals Pvt. Ltd. (hereinafter referred as the “Respondent”) was engaged in the import of non-coking coal from various countries via water transport on a ‘Cost-Insurance-Freight’ (“CIF”) basis. The Respondent paid Customs Duty on the import of coal, which was inclusive of ocean freight as the goods were brought from outside India to custom stations in India.
With the onset of Goods and Services Tax (“GST”) Regime, the Central Government issued Notification No. 8/2017 – Integrated Tax (Rate) dated 28.06.2017, which imposed IGST at the rate of 5% on the supply of specified services, including cargo transportation, in a vessel from a location outside India to a customs station for clearance in India.
Thereafter, the Central Government issued Notification No. 10/2017 – Integrated Tax (Rate) dated 28.06.2017 which classified the recipient of services of supply of goods by any person in a non-taxable region by a vessel as an “importer” under Section 2(26) of the Customs Act, 1962.
The Respondent filed a writ petition before the Gujarat High Court alleging that the aforesaid Notifications result in double taxation, as ocean freight is included in the value of goods for the purpose of calculating the Customs duty that the importer is liable to pay.
The Gujarat High Court held that the aforesaid Notifications are unconstitutional for surpassing the powers conferred by the IGST Act and the CGST Act, and that the importer of goods is not the recipient of transport services on CIF basis.
The Gujarat High Court observed that there was no territorial nexus for taxation as the said supply was neither inter-state nor an intra-state supply; and as the Customs Duty was paid on the import value inclusive of ocean freight, further levying IGST as per the aforesaid Notifications imposed double taxation through delegated legislation, which is impermissible.
That, aggrieved by the decision of the Gujarat High Court, the Union of India (hereinafter referred to as “the Appellant”) preferred the instant appeal before the Supreme Court.
ISSUE BEFORE THE SUPREME COURT
Whether an Indian importer, who has already paid Customs Duty on the value of import inclusive of ocean freight, can be subjected to levy of IGST on the component of ocean freight paid by the foreign seller to a foreign shipping line, on reverse charge mechanism?
CONTENTIONS OF THE PARTIES
The Appellant contended that the Central Government is empowered to impose GST on inter-state supplies under Article 269A of the Constitution of India, as the explanation to Article 269A(1) of the Constitution creates a deeming fiction that a supply of goods or services made during import of goods is to be treated as a supply of goods or services, or both, made during inter-state trade.
The Appellant submitted that the four canons of taxation under Section 5(1) of the IGST Act are satisfied in the present case, and thus, ocean freight transaction becomes taxable at the hands of the importer.
The Appellant further argued that the power to issue the aforesaid Notifications flows from Section 5(3) read with Section 5(4) of the IGST Act, which allows the Central Government, on recommendations of GST Council, to specify goods and services on which GST may be imposed on reverse charge mechanism.
The Appellant claimed that the Customs Duty on CIF transaction, and IGST on ocean freight are two separate aspects of taxation, and cannot be termed as overlapping, as IGST is being sought to be imposed on the supply of services and not on goods.
The Appellant also stated that the requirements of ‘composite supply’ under Section 2(30) of the CGST Act were not satisfied, as the contract between the foreign shipping line and the foreign exporter were distinct and independent of the contract between the foreign exporter and the Indian importer.
The Appellant additionally submitted that the territorial nexus for the purpose of taxation can be established, as the importer who is the beneficial owner of the goods at the time of clearance is in India.
The Appellant laid down various grounds on the basis of which the importer could be termed as the recipient of service and further contended that under Section 5(4) of the IGST Act, the Central Government is empowered to specify the class of registered persons, receiving goods from an unregistered supplier, who shall be liable to pay IGST as a recipient under reverse charge mechanism.
The Respondent contended that the Central Government has the authority to specify the categories of supply on which IGST shall be paid on reverse charge mechanism by the recipient, when the liability to pay IGST is fixed on the recipient under Section 5(3) of the IGST Act. However, it is not empowered to issue the aforesaid Notifications, specifying class of persons, liable to pay tax on reverse charge mechanism under Section 5(3) of the IGST Act.
The Respondent submitted that the scheme of IGST Act does not impose the liability to pay GST on any person other than the ‘supplier’ or the ‘recipient’. As the importer of goods in India is not liable to pay the consideration to the foreign shipper, it is not the ‘recipient’ of the service and is subsequently not liable to pay GST.
The Respondent stated that Sections 5(3) and 5(4) of the IGST Act are machinery provisions for levy of GST and the charging provision is Section 5(1) of the IGST Act. In the absence of any deeming fiction to disintegrate CIF contracts into a supply of goods and a supply of services, IGST cannot be levied under Section 5(1) of the IGST Act without a supply of goods by way of import.
The Respondent argued that CIF contracts are indivisible, which makes the calculation of tax on such contracts impossible. The Respondent emphasized that Section 2(30) read with Section 2(93) and Section 8 of the CGST Act recognize and protect the authenticity of a CIF contract, and ensure the integrity of such composite contracts by providing for the levy of IGST only on the supply of goods, where goods are delivered with insurance and freight.
The Respondent additionally submitted that a supply between two individuals situated outside India is not taxable under Section 5(1) and Section 7(4) read with Section 2(11) of the IGST Act. Hence, the aforesaid Notifications were in contravention of the IGST Act.
DECISION AND FINDINGS
The Supreme Court held that the recommendations of the GST Council are not binding on the Union and the States, and only have persuasive value. The Supreme Court noted that the GST Council’s recommendations were not intended to be transformed to legislation, as such a qualification is not included in Article 246A or 279A of the Constitution.
The Supreme Court noted that Section 5(3) and Section 5(4) must be read together with Section 5(1) of the IGST Act to ascertain the vires of taxation. The Supreme Court relied on the decision of CIT v. BC Srinivas Setty AIR 1981 SC 972, wherein the Supreme Court had held that the machinery provisions of the Act and charging sections are inseparably connected.
Hence, the Supreme Court was of the view that if the activity is within the definition of “import of service” under the IGST Act and the CGST Act, then the Indian importer would be regarded as an importer of shipping services and subjected to IGST on interstate supplies.
The Supreme Court held that ocean freight from a foreign place to an Indian customs station in CIF import contracts possesses adequate territorial nexus to be subject to IGST under reverse charge mechanism, as the destination of goods is India and the services are rendered for the benefit of Indian importer.
Thus, the Supreme Court noted that the importer can be designated as the ‘recipient’ of the services based on a conjoint reading of Sections 5(3) and 5(4) of the IGST Act, read with Section 2(93) of the CGST Act.
The Supreme Court further observed that Section 5(4) of the IGST Act neither provides for the segregation of composite supply into goods and services, nor provides for the imposition of IGST on reverse charge mechanism on the services element. Hence, ocean freight in CIF contracts cannot be subject to IGST on reverse charge mechanism as it forms a part of the composite supply subject to Section 2(30) and Section 8 of the CGST Act.
In conclusion, the Supreme Court held that the aforesaid Notifications were valid under Sections 5(3) and 5(4) of the IGST Act, but were ultimately in contravention of Section 8 of the CGST Act and the entire framework of GST Law.
AMLEGALS REMARKS
Through this decision, the Supreme Court finally resolved the confusion surrounding applicability of both Customs Duty and GST on ocean freight by holding that no GST would be applicable on ocean freight under reverse charge mechanism.
The Supreme Court held that the Government has the power to deem any person as a recipient and also to impose reverse charge and thus, Indian importer can be deemed to be a recipient. However, imposing tax on ocean freight is in violation of Section 8 of the CGST Act. Thus, the Government cannot dissect the unified transaction of import to levy tax on shipping aspect.
The Supreme Court further held that Article 246A of the Constitution has not been made subject to Article 279A of the Constitution, and thus, recommendations of the GST Council are not binding. Article 246A of the Constitution has only ensured that state laws are not hit by repugnancy. Federalism is basic constituent of democracy and both must go together.
For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com and riddhi.dutta@amlegals.com.
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