Five years ago, the GST regime implemented a unified tax system in India. Yet the experience of the industry players is a shade different. Businesses witnessed roadblocks in cohesive implementation of the provisions and faced issues typically arising from a dis-jointed regulatory system. While concerns during the implementation of a unified law are natural irrespective of jurisdiction, its continued prevalence indicates a need for increased emphasis on the smooth execution of appropriate regulations.
Recently, the Honourable Supreme Court (“the Court”) was once again faced with a double taxation case; this time, relating to the levy of GST on ocean freight charged on imported goods. In the case of Union of India vs Mohit Minerals Pvt Ltd (“Mohit Minerals”)[1], the primary issue dealt with by the Court was whether the government can charge Integrated GST (“IGST”) on ocean freight paid by the foreign seller to a foreign shipping line on a reverse charge mechanism in India.
The Court held the tax levy on ocean freight based on Reverse Charge Mechanism (“RCM”) violative of the principle of composite supply.[2] A supply of goods and services is considered to be composite when it involves two or more goods and services. However, only a natural bundling of goods and services in the course of business can be deemed to be a composite supply. In the instant case, the supply of sea transportation service and the imported goods on board can be classified as a composite supply since the said services are naturally bundled in the due course of business involving a CIF contract.
The matter was initially brought before a Division Bench of the Gujarat High Court in which the counsel for Mohit Minerals highlighted the erroneous IGST levy on ocean freight under Notification No. 01/2017-ST[3] although it had already paid the 5% tax on the reverse charge mechanism on ocean freight service as per Notification No. 8/2017[4].
After due appreciation of arguments advanced and evidence filed by the parties, the bench set aside the added IGST liability imposed on Mohit Minerals and also held the said notifications ultra vires the provisions of the IGST Act, 2017.[5]
Aggrieved by this decision, the Union of India filed a Special Leave Petition before the Supreme Court, under Article 136 of the Constitution of India, challenging the constitutionality of certain notifications of the Central Government. The Court deliberated upon the same and addressed larger issues of composite supply and cooperative federalism.
The transaction involved three parties; the seller and the shipping line located in a non-taxable jurisdiction, and an Indian importer. It was carried out in two main phases:
Phase 1: Between foreign exporter and Mohit Minerals (Indian importer)
The Indian importer is liable to pay IGST on the transaction value of goods (inclusive of freight and insurance) under S. 5(1) of IGST Act read with S. 3(7) & 3(8) of the Customs Tariff Act.
Phase 2: Between the foreign exporter and the shipping line
Based on the principle of composite supply under S. 2(30) of the CGST Act[6], the tax liability on the same under S. 8 of the said Act[7] will be applicable only on the ‘principal supply’. Therefore, in the instant case, the tax can be levied on the service of supply of goods (transportation service will be considered a part of the same in a CIF contract).
Union of India: It claimed that the two phases of the transaction i.e., the contract between the foreign shipping line and the foreign exporter are distinct and independent of the contract between the foreign exporter and the Indian importer. Further, it argued that the levy of IGST on ocean freight while also charging tax on a CIF value basis cannot be construed as double taxation as they are from independent transactions.
Mohit Minerals: It argued that the two phases cannot be deemed as separate transactions and that Notification No. 10/2017 cannot be sustained under Section 5(4) of the IGST Act[8] which provides that integrated tax on supplies made by an unregistered supplier to a registered person shall be paid by such person on an RCM basis as a recipient of the supply.
Supreme Court’s ruling: The concept of composite supply was introduced to prevent dissection of various elements of transactions and double taxation. In the instant case, the shipping service forms a part of the supply of goods since the contract between the parties was on a CIF basis. It upheld Gujarat High Court’s order and held that levying IGST on ocean freight will be violative of the concept of composite supply. Where an Indian importer is liable to pay IGST on composite supply in a CIF contract, a separate levy for the ‘supply of services’ by shipping line would be a violation of Section 8 of the CGST Act.
The subject-matter transaction is a CIF contract which constitutes an inter-state supply which can be subject to IGST where the importer would be the recipient of the shipping service under Notification No. 10/2017. The said notification read with Notification No. 8/2017[9] prescribes 5% IGST on ocean freight which is calculated as 10% of the CIF value.
Union of India: It claimed that the said notifications do not refer to Section 5 of the IGST Act, however, it is settled law that once a power is available to grant or identify the taxable person, taxable event, rate and measure, non-reference of the source of power will not vitiate its exercise and application in the instant case.
Mohit Minerals: It contended that the said notification is ultra vires the IGST Act. It claimed that since the power to issue the said notification flows from Section 5(3), IGST Act, the Government can only specify the categories of goods and services on which it intends to levy tax on an RCM basis.
Supreme Court’s ruling: Upholding the Gujarat High Court judgement, the Court explained that along with the power to specify goods and services, the Government also has the power to specify a class of registered persons as a recipient of the supply. Therefore, the said notifications cannot be invalidated due to alleged failure to identify a taxable person and on a charge of excessive delegation while prescribing 10% of CIF value as taxable value.
The Government has, in the spirit of cooperative federalism, replaced multiple central and state tax laws with GST laws to promote ease of doing business in India. With the same objective under the 101st Constitutional Amendment Act, 2016, the GST Council is formulated with central and state representation.
The Supreme Court held that the Government, while exercising its rule-making powers under the law, is bound by the GST Council recommendations. Nevertheless, the said recommendations made under Article 279A (4) cannot be said to be binding on the legislature’s power to enact primary legislation.
The Court finally upheld the Gujarat High Court’s judgement stating that the impugned notifications are liable to be struck down since IGST is already paid on the ocean freight that makes a part of the value of imported goods. It explained that the Government cannot seek payment of additional taxes from an importer beyond the contract between the foreign shipping line and foreign exporter. A separate levy on the Indian importer for the ‘supply of services’ by the shipping line would violate Section 8 of the CGST Act.
The issue of double taxation on ocean freight for importing goods on a CIF basis is problematic in terms of liquidity. However, because of the Court’s ruling, importers can now claim a refund of IGST paid towards ocean freight from the exchequer provided they have not claimed any input tax credit. This judgement is a gesture welcomed by importers and affected taxpayers considering the decrease of cash burden in the backdrop of an economic market predicted to experience a slowdown in the upcoming years.[10] Affected entities are likely to make judicious use of this window of opportunity to review, audit and amend their tax filings to claim benefits.
[1] Union of India vs Mohit Minerals Pvt Ltd, AIR 2018 SC 5318.
[2] Section 2(30) read with Section 8 of the Central Goods and Services Tax Act, 2017.
[3] Notification No. 01/2017-ST, dated 12 January 2017.
[4] Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.
[5] Mohit Minerals Pvt LTd v. Union of India & Anr, C/SCA/726/2018.
[6] Section 2(30), Central Goods and Services Tax Act, 2017, “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
[7] Section 8, CGST Act, Tax liability on composite and mixed supplies, The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—
[8] Section 5(4), IGST Act, Levy and collection of tax, The integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
[9] Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.
[10] “Prospects of an economic rebound in India are firming up as GDT is set to expand by 9.4% in FY 2021-22 and reverting to 8.1% in FY 2022-23, before moderating to 5.5% in FY 2023-24.”, OECD Economic Outook, Volume 2021 Issue 2.