Supreme Court Strikes Down GST On Ocean Freight For CIF Imports – Key Implications And Action Points
Objections concerning non-payment of IGST on ocean freight services have been raised in various audit inquiries across the country. With the binding pronouncement of the Hon’ble Supreme Court, this point of controversy should now extinguish says Sudipta Bhattacharjee, Partner, Khaitan & Co
The Hon’ble Supreme Court, on 19 May 2022, decided on the constitutional challenge to the levy of Goods and Services Tax (GST) on ocean freight in the case of imports into India under Cost, Insurance and Freight (CIF) arrangements.
Earlier, in 2020, the Gujarat High Court had struck down the said levy pursuant to its finding that such reverse charge liability of GST was ultra vires the parent legislation, ie., the Integrated Goods and Services Tax Act, 2017 (IGST Act). The High Court had observed that such a charge of IGST could be fastened only upon a “recipient” of service. However, peculiarly, the onus of discharging IGST on ocean freight services was cast upon the Indian CIF importer, who did not contractually qualify as a “recipient” of the ocean freight services in question.
This judgment was followed by the Calcutta High Court too.
The GST authorities assailed the Gujarat High Court’s order in a batch of connected matters.
The Supreme Court judgment
On 19 May 2022, the Apex Court affirmed the judgement of the Gujarat High Court whilst dismissing the GST authorities’ Special Leave Petition (SLP).
Notably, the Supreme Court rejected several arguments of the importers including the ‘recipient’ based argument which found significant favor from the Gujarat High Court. Thankfully, the Supreme Court found merit in the argument that a typical CIF contract is a composite supply of goods which cannot be vivisected and subjected to an additional levy of IGST vis a vis the freight services component – this is the pillar of reasoning on which the Supreme Court’s judgement rests.
Responding to the argument of the GST authorities that the impugned levy of GST on ocean freight was recommended by the GST Council and hence cannot be challenged, the Supreme Court also observed that the recommendations of the GST Council are not binding on the Government and have only persuasive value. The Court also expounded upon aspects of co-operative federalism, which forms the cornerstone of GST enactments. While these observations have generated heated debate about the future of ‘one nation, one tax’ in some parts of the media, the Supreme Court was merely reiterating what is already there in the letter of the law; ie., in the constitutional provisions pertaining to setting up of the GST Council.
A summary of the key arguments considered by the Supreme Court in reaching this judgment
a. SC held that the arguments of taxpayers that an importer cannot be validly termed as a ‘taxable person’ must fail on a reading of the impugned notifications alongside Sections 2(107) and 24 of the CGST Act.
b. Further, SC held that the taxpayers' argument that the determination of the value of supply has to be specified only through rules, and not by notification, tantamounts to an 'unduly restrictive' interpretation and must also be rejected.
c. While the SC agreed that Sec. 5(3) of the IGST Act does not confer the powers on the Central Government to create a deeming fiction vis-à-vis who constitutes the 'recipient' of service, it went on to conclude however that Section 13(9) of the IGST Act read with Section 2(93)(c) of the CGST Act inherently create a deeming fiction of the importer of goods to be the recipient of shipping service. In this context, the SC also upheld the contention of Government that if the importers do not qualify as ‘service recipients’, the impugned notifications would still derive their validity from Section 5(4) of the IGST Act, since as long as a source of power to legislate or issue a notification is available, the lack of a mention, an incorrect reference or mistake does not vitiate the exercise of such power.
d. The SC also concluded that the IGST levy on ocean freight is not an 'extra-territorial' levy since the same has sufficient 'nexus' with India;
e. Having rejected all the foregoing arguments, thankfully the SC still decided to strike down the levy of IGST on ocean freight by holding that the impugned levy imposed on the ‘service’ aspect of an import of goods transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act
f. As mentioned above, the SC also gave detailed observations to reject the notion that GST Council decisions are 'binding' and held "...the notion that the recommendations of the GST Council transform into legislation in and of themselves under Article 246A would be farfetched. The recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. Merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council’s recommendations are binding.". The Apex Court went on to hold that the constitutional role and functions of the GST Council must be understood in the context of the 'simultaneous legislative power' conferred on Parliament and the State legislatures.
Immediate action points and concluding remarks
In conclusion, it stands confirmed that the reverse charge levy on ocean freight, which can be traced to Notification No. 10/2017-IGST (Rate) dated 28 June 2017, did not have the force of law.
Objections concerning non-payment of IGST on ocean freight services have been raised in various audit inquiries across the country. With the binding pronouncement of the Hon’ble Supreme Court, this point of controversy should now extinguish.
As a result, the following implications need to be understood and actioned upon:
Any amounts collected from CIF importers towards ocean freight services lacks / lacked legal sanction and thus were collected in violation of Article 265 of the Constitution. Such importers ought to evaluate the possibility of recouping such amounts via refund claims to the extent not utilized as input credit – such a refund claim may also necessitate reversing the corresponding input tax credit availed but hitherto unutilized.
The above refund option will be pertinent, especially for those CIF importers who are outside the GST credit chain such as oil and gas players, power generation companies and alcohol companies. The Gujarat High Court has already passed several orders directing the processing of refunds.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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