GST: Supreme Court Strikes Down Levy Of Ocean Freight On Import Of Goods
The Supreme Court has held that the recommendations of the GST Council only have persuasive value.
The Supreme Court has dismissed an appeal against the Gujarat High Court order that struck down the ocean freight levy when goods are imported on a cost, freight, insurance contract.
The top court upheld the Gujarat High Court’s judgment that the central government can’t levy integrated goods and services tax on ocean freights for Indian importers.
The dispute stemmed from the levy of IGST on transport charges that arise on the shipping service being provided for goods supplied to an Indian importer under a CIF contract. For instance, a foreign exporter enters into an agreement with a foreign shipping company to deliver the goods to an Indian company. In such a situation whether the recipient of the goods should be made to pay the GST on the shipping service is what the court examined.
A 2017 notification required a 5% tax rate on the service provided by a shipping company through a reverse charge mechanism, which means that the recipient instead of the supplier has to pay the tax under the GST regime.
One of the companies that challenged the levy was Mohit Minerals Pvt.—an importer of non-cooking coal from Indonesia, South Africa and the U.S. The company succeeded in its objection in the Gujarat High Court, prompting the central government to challenge the decision in the Supreme Court.
The ruling will mean that GST on ocean freight paid in case of import of goods is “unconstitutional”, but further it may also change the landscape of provisions under the GST regime which are subject to judicial review, Abhishek A Rastogi, partner at Khaitan & Co., who argued for parties that challenged the levy, said.
The court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.Abhishek Rastogi, Partner, Khaitan & Co.
Companies Contested
The objection of the companies was broadly on three main grounds:
The CIF contract was between the exporter and the shipping company and in no way included the importer. Therefore, the companies said they could not be considered as the recipient under the reverse charge mechanism for payment of tax.
The levy taxed an extra-territorial activity which was outside the ambit of the GST scheme.
The tax was already being paid for the import of goods and in CIF contracts that included the shipping costs and another levy on freight would amount to double taxation which was illegal.
An Indian importer was only a recipient of goods and not of the service, Mohit Minerals argued in the Supreme Court. This was a transaction between two foreign entities, and the receiver of the goods should not be made to pay taxes on the transaction.
The companies also pointed out that charging the freight component of the transaction ended up with them being taxed twice under the same law.
Mohit Minerals argued that it already pays custom tariffs on imported coal, which includes the value of freight, cost and insurance. The notifications seeking to levy tax on the freight component again amounted to double taxation, which was impermissible under the law, it said.
“…when the goods are imported and integrated tax is levied and collected on the value of goods (coal), which includes the ocean freight, the ocean freight cannot be taxed as a separate supply under the impugned notification.” – Submission by Mohit Minerals
The companies also argued that the contract between the foreign shipping company and foreign exporter cannot be taxed as it would qualify as a transaction outside India which is not covered through the GST law.
Government’s Argument
The central government’s case was built on the argument that the supply of goods and the service of shipping those goods were two different transactions and therefore the levy was valid. It argued that the end beneficiary was the importer who can be considered as the recipient for taxation under the reverse charge mechanism.
Additional Solicitor General N Venkataraman, arguing for the government in the Supreme Court, defended the levy.
According to the central government, even though the contract was between foreign shipping line and the foreign exporter, the end destination of the goods was India which would bring the transaction under the territorial jurisdiction of the GST law.
The GST act applies only to the territory of India.
...the provision of service is for the Indian importer and consequently the consumption and exhaustion of service which is a critical limb both commercially and legally happens only in the hands of the Indian importer.Submissions By The Central Government
The government also disagreed with the petitioners that the levy was equivalent to double taxation on the basis that customs tariff was being paid on the goods being imported.
The contract between the foreign shipping line and the foreign exporter was distinct from the contract between the foreign exporter and the Indian importer, the central government said. What was being taxed under the Customs Tariff Act was the transaction value of goods supplied by the foreign exporter to the Indian importer.
The ocean freight levy, the central government argued, was on the value of freight based on the contract between the foreign shipping line and the foreign exporter as the foreign shipping line was delivering the goods to the Indian importer on behalf of the foreign exporter.
Citing the instance of excise duty, the central government said, “Excise duty is a levy on manufacture. But the value of excise duty paid can intrinsically form part of the total value of goods for the purpose of levy of sales tax/VAT. This is neither impermissible nor called as double taxation. This is a permissible taxation.”