Supreme Court strikes down levy of IGST on Ocean Freight
The apex court upholds the Gujarat High Court’s ruling in Mohit Minerals case and declares the CBIC notifications imposing 5% IGST on ocean freight under RCM as ultra vires and unconstitutional.
Introduction
The Supreme Court of India, in a landmark judgement, has struck down the levy of Integrated Goods and Services Tax (IGST) on ocean freight under reverse charge mechanism (RCM) on cost, insurance and freight (CIF) contracts of import of goods by the Indian importers. The court has upheld the Gujarat High Court’s ruling in Mohit Minerals Pvt. Ltd. vs Union of India and declared the Central Board of Indirect Taxes and Customs (CBIC) notifications imposing 5% IGST on ocean freight under RCM as ultra vires and unconstitutional.
The case involved a challenge to the validity of Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017 and Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 issued by the CBIC under the IGST Act, 2017. These notifications imposed 5% IGST on ocean freight services provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, and made the importer liable to pay such tax under RCM.
The petitioner, Mohit Minerals Pvt. Ltd., an importer of coal from Indonesia, contended that these notifications were contrary to the provisions of the IGST Act, 2017 and the Constitution of India, as they resulted in double taxation and violated the principles of territorial nexus, destination-based consumption tax, and value addition.
Analysis
Provisions of law involved
The main issue before the court was whether the levy of IGST on ocean freight under RCM on CIF contracts of import of goods by the Indian importers was valid and constitutional.
The court examined the provisions of the IGST Act, 2017 and the Constitution relating to GST law and observed that:
- Section 5(3) of the IGST Act, 2017 empowers the Central Government to specify categories of supply of goods or services or both where tax shall be paid by recipient under RCM.
- Section 7(5)(b) of the IGST Act, 2017 provides that supply of goods or services or both when supplier is located in non-taxable territory and recipient is located in non-taxable territory shall be treated as inter-state supply and shall be subject to IGST.
- Article 269A(1)(a) of the Constitution provides that supply of goods or services or both in the course of inter-state trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council (GST Council).
- Article 269A(5) of the Constitution provides that Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods or services or both takes place in the course of inter-state trade or commerce.
- Article 279A(4)(f) of the Constitution provides that the GST Council shall make recommendations to the Union and the States on any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
- Article 279A(5) of the Constitution provides that the GST Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
Government notifications involved
The court also referred to various notifications issued by the CBIC under the IGST Act, 2017 that were challenged by the petitioner. These notifications were:
- Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017: This notification prescribed different rates for different categories of services supplied in inter-state trade or commerce under Section 5(1) of the IGST Act, 2017. Sl. No. 9 (ii) of this notification provided that on supply of services by way of transportation of goods by a vessel from a place outside India up to customs station in India, IGST shall be levied at 5%.
- Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017: This notification specified the categories of services on which tax shall be paid by the recipient under RCM under Section 5(3) of the IGST Act, 2017. Sl. No. 10 of this notification stated that services supplied by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to customs station in India shall be taxable under RCM.
- Notification No. 11/2023-Integrated Tax (Rate) dated 26.09.2023: This notification amended Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017 and omitted Sl. No. 9 (ii) of the said notification with effect from 01.10.2023.
- Notification No. 12/2023-Integrated Tax (Rate) dated 26.09.2023: This notification amended Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 and omitted Sl. No. 10 of the said notification with effect from 01.10.2023.
- Notification No. 13/2023-Integrated Tax (Rate) dated 26.09.2023: This notification inserted a new entry at Sl. No. 9A in Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017 to provide that on supply of services by way of transportation of goods by a vessel from customs station in India to a place outside India, IGST shall be levied at zero rate with effect from 01.10.2023.
Arguments and submissions of both sides
The petitioner argued that:
- The ocean freight was already included in the value of imported goods and subjected to customs duty (which included IGST) at the time of clearance at the port of destination. Therefore, levying IGST again on ocean freight under RCM amounted to double taxation and violated Article 265 of the Constitution.
- The ocean freight service was provided by a foreign shipping company to a foreign exporter in a foreign territory, and there was no supply of service in India or consumption of service in India. Therefore, there was no territorial nexus or jurisdiction to levy IGST on such service under RCM.
- The CIF contract was a single indivisible contract for supply of goods, and the ocean freight was merely an incidental component of such contract. Therefore, levying IGST on ocean freight under RCM was contrary to the concept of destination-based consumption tax and value addition.
The respondent, Union of India, defended the notifications on the following grounds:
- The levy of IGST on ocean freight under RCM was not double taxation, but a separate levy on a separate taxable event, i.e., supply of service by a foreign shipping company to a foreign exporter. The customs duty (which included IGST) was levied on the value of imported goods at the time of clearance at the port of destination, whereas the IGST under RCM was levied on the service component of such value.
- The levy of IGST on ocean freight under RCM was based on the principle of destination-based consumption tax, as the service was consumed in India by the importer who availed the benefit of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.
- The levy of IGST on ocean freight under RCM was within the legislative competence and constitutional framework of GST law, as it was authorized by Section 5(3) and Section 7(5)(b) of the IGST Act, 2017 and Article 269A(1)(a) and Article 269A(5) read with Article 279A(4)(f) and Article 279A(5) of the Constitution.
Observations and findings of the court
The court referred to various judgments of the Supreme Court and High Courts on the principles of taxation and interpretation of fiscal statutes and held that:
- The levy of IGST on ocean freight under RCM on CIF contracts of import of goods by the Indian importers was not a valid exercise of power under Section 5(3) of the IGST Act, 2017, as it was not a category of supply where tax could be shifted from supplier to recipient. The supplier (foreign shipping company) and recipient (foreign exporter) were both located in non-taxable territory and were not liable to pay tax in India. The importer was neither a supplier nor a recipient of ocean freight service, but only a beneficiary of such service. Therefore, imposing tax liability on importer under RCM was arbitrary, irrational and unjustified.
- The levy of IGST on ocean freight under RCM on CIF contracts of import of goods by the Indian importers was not covered by Section 7(5)(b) of the IGST Act, 2017, as it was not a supply of goods or services or both when supplier is located in non-taxable territory and recipient is located in non-taxable territory. The supplier (foreign shipping company) and recipient (foreign exporter) were both located in non-taxable territory, but there was no supply or consumption of service in India. The place of supply of ocean freight service was outside India, as per Section 13(8)(b) read with Section 2(6) of the IGST Act, 2017. Therefore, there was no inter-state supply or taxable event in India to attract IGST.
- The levy of IGST on ocean freight under RCM on CIF contracts of import of goods by the Indian importers was ultra vires and unconstitutional, as it violated Article 265 and Article 14 of the Constitution. Article 265 provides that no tax shall be levied or collected except by authority of law. Article 14 provides that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. The notifications imposing IGST on ocean freight under RCM were issued without any authority of law and discriminated between importers who entered into CIF contracts and those who entered into FOB (free on board) contracts. The notifications also resulted in double taxation, as ocean freight was already included in the value of imported goods and subjected to customs duty (which included IGST) at the time of clearance at the port of destination.
Conclusion
The Supreme Court, after considering all the aspects, upheld the Gujarat High Court’s ruling in Mohit Minerals case and declared the CBIC notifications imposing 5% IGST on ocean freight under RCM as ultra vires and unconstitutional. The court held that no IGST is payable on ocean freight under RCM on CIF contracts of import of goods by the Indian importers, as it amounts to double taxation and violates the GST Act and the Constitution. The court also discussed the constitutional framework of GST law and the role and powers of the GST Council. The judgement is a significant pronouncement that may have a wide impact on the indirect tax regime and the federal structure of India.
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