Background and facts of the case
Goods and Services Tax (‘GST’) law in India envisages levy of GST on a Reverse Charge basis, treating importers in India as deemed service recipients of shipping services when imports are made on a Cost, Insurance, Freight (‘CIF’) basis; the law also provides that 10% of CIF value of the imported goods would be deemed to be freight for discharge of tax liability. This provision is applicable, irrespective of the fact that the contract of transport was between a foreign supplier and the foreign shipping line and the Indian importer was not a party to such contracts. The taxpayer challenged the constitutional validity of such provision on various grounds. The Gujarat High Court, in 2020, in the case of Mohit Minerals Private Ltd. had held the levy unconstitutional. The Tax authority preferred an appeal against the said Gujrat High Court judgment before the Supreme Court.
The Supreme Court disposed-off the appeal and pronounced its judgment and key observations from the judgment are as under:
- The GST Council, which is a constitutional body, is entrusted with the responsibility to make recommendations on a wide range of areas concerning GST. However, on a reading of Article 246A and 279A of the Constitution of India, the recommendations of the GST Council can neither transform itself into legislation without any intervening act nor there is a requirement to mandatorily table the recommendations of the GST Council in the legislature. The use of the phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the Government in enacting GST legislation. Basis such provisions in the Constitution of India, the Supreme Court held that the recommendations made by the GST Council would only have persuasive value and will not have binding force on the legislature. Thus, the principal plank of tax authority to defend levy of GST on the freight, that since GST Council having recommended the levy it passes the test of legitimacy, was rejected by the Apex Court.
- The IGST Act and the CGST Act define Reverse Charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case, the importer – by notification no:10/2017-IT (R) dated 28 June 2017, is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge. 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.
- As regards the question of valuation of the services, the court observed that the notification prescribing 10% of CIF value as the value of services is valid as the CGST Rules provide for a residual power to determine a valuation in specific cases, using reasonable means. Such determination of value can be said to be under that power.
- Since the destination of the imported goods in India and the services are rendered for benefit of the Indian importer, the transaction can be said to be having nexus with India and it cannot be said that the levy is extraterritorial. Also, since the destination of goods in India, the provisions are broad enough to cover a taxable event having extra-territorial aspects.
- When the ‘place of supply’ of services is deemed to be the destination of goods, the supply of shipping services would necessarily be made to the Indian importer. The ultimate benefactor of the shipping service is also the importer in India, who will finally receive the goods at a destination which is within the taxable territory of India. Accordingly, the Indian importer would be considered a recipient of services. The provisions of reverse charge can be made applicable.
- The Court reiterated that even when a source of power legally exists, a non-reference or an incorrect reference during its exercise of the power does not vitiate the legality of the provision.
- However, the Supreme Court rejected the argument of the tax authority on a critical point as regards levy of tax on ‘composite supply’, as envisaged in CGST Act 2017. The Court concluded that the impugned levy imposed on the ‘service’ aspect of the transaction violates the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the 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 violate Section 8 of the CGST Act.
- It is illustrated in section 2(30) of the CGST Act itself that a CIF contract for the supply of goods is a composite supply under GST law and the principal supply is the supply of goods. Accordingly, the entire consideration would be taxed as consideration for supply of goods. Since entire CIF value paid towards import of goods is subjected to customs duty, the taxpayer is not required to again separately pay GST on the freight component of CIF value.
BDO comments
This is an important judgment resolving the controversy on the demand of GST on the amount of ocean freight paid by the importer as a part of CIF value paid for imports. While the Supreme Court has ultimately decided the issue in favour of the taxpayers, it has also made some important observations on issues such as determination of recipient of services, prescription of valuation mechanism, etc. The taxpayers may be required to evaluate the impact of these observations of the Supreme Court. It is also important to note that the SC judgment covers only the imports on CIF basis and cannot be considered to have application in Free on Board (‘FOB’) terms, where the Indian service recipient may be required to discharge GST liability on reverse charge basis.
Now that the Supreme Court has eventually held that GST cannot be levied on freight in a CIF contract, taxpayers who have discharged the tax liability (and interest) in the past, may be eligible to claim a refund of the amounts so paid (and not availed Input Tax Credit of the taxes so paid or passed on such tax liability). It is relevant to keep in mind the time limit for the claim of refund, including the Supreme Court of India’s extension of the time limit due to Covid 19.
The Supreme Court’s observation that GST Councils recommendation has only persuasive value and they are not binding on legislatures, could be a massive jolt to the GST architecture. To regard GST Council’s recommendations as merely recommendatory in nature would undermine the current fiscal order where the Union and State have converged on the decisions taken in the GST council treating them as sacrosanct. It is expected that the cohesive approach and the spirit of cooperative federalism displayed by the Union and State would continue to thrive and forge the indirect tax eco-system to inspire confidence in all stakeholders including business, trade, consumers, statutory authorities, and the government.
[Union of India & Anr Vs Mohit Minerals Pvt. Ltd. order dated 19 May 2022]
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