When Taxation Tests Its Own Boundaries
The journey of Goods and Services Tax (GST) in India has not only been about improving procedures or clarifying legal provisions; it has also been about understanding how far taxation can legitimately extend under the law. Over time, certain disputes have played an important role in defining these limits, and the issue of GST on ocean freight is one such significant example.
At first, the issue appeared straightforward: whether GST should be levied on the freight element of imports made on a CIF (Cost, Insurance, and Freight) basis. However, as the matter was examined more closely, it raised deeper, more fundamental questions. It required a careful consideration of whether a person can be made liable to pay tax on a service when he is neither a party to the contract nor the recipient of that service. It also raised the question of whether a cost component already included in the value of imported goods and taxed at the time of import can be taxed again separately.
These were not merely narrow legal issues; they went to the heart of how GST is intended to operate. The courts eventually addressed these questions and provided clarity, resulting in a settled legal position on ocean freight. However, the position is not uniform across all situations. The tax treatment of air freight continues to be governed by the existing statutory framework, as it has not yet undergone a similar level of judicial scrutiny.
Statutory Framework - Import Valuation and the Concept of Composite Supply
The GST framework governing imports is designed to maintain parity between domestic and imported goods. This objective is achieved by levying Integrated Goods and Services Tax (IGST) on the value of imported goods at the time of import. The value is determined in accordance with the provisions of the Customs Tariff Act, which follows the transaction value principle and includes not only the cost of goods but also insurance and freight.
In commercial terms, this arrangement is commonly used in CIF (Cost, Insurance, and Freight) contracts, in which the exporter assumes responsibility for transportation and insurance up to the destination port. From a legal perspective, such transactions are treated as a composite supply of goods, in which freight is not regarded as a separate or independent supply but is an integral part of the overall value of the goods. Accordingly, when IGST is levied on this composite value at the time of import, the freight component stands taxed as part of that unified transaction.
This structure reflects a clear legislative intent to treat imports as indivisible supplies, thereby avoiding the artificial splitting of components and ensuring consistent, coherent taxation.
Reverse Charge on Ocean Freight - A Departure from Statutory Design
Despite the clarity of the statutory framework, the GST regime introduced a reverse charge mechanism through Notification No. 10/2017–Integrated Tax (Rate) dated 28 June 2017. Under this provision, the Indian importer was liable to pay IGST on ocean freight for CIF imports.
This levy created a clear mismatch between legal liability and commercial reality. In a typical CIF transaction, the transportation service is provided by a foreign shipping line to a foreign exporter. The Indian importer neither contracts for the service nor bears the freight cost. However, the above notification treated the importer as the service recipient under a legal deeming provision, even though no such relationship existed.
The real issue, therefore, was not merely about how the levy was structured, but about its practical impact. The freight component was already included in the CIF value of the goods and was subject to IGST at the time of import. By taxing the same component again under reverse charge, the law effectively imposed tax twice on the same value,without any separate supply or independent taxable event. This raised serious concerns about double taxation and also about whether delegated legislation could impose such a liability beyond what is permitted under the parent statute.
Judicial Intervention - Gujarat High Court Restores Statutory Balance
The validity of the reverse charge levy on ocean freight was examined by the Gujarat High Court in Mohit Minerals Pvt. Ltd. v. Union of India - -2020 (36) GSTL 481 (Guj.), decided on 23 January 2020. The Court carefully analysed the relevant statutory provisions along with the nature of CIF transactions. It held that the importer could not be treated as the recipient of the transportation service, since there was no contractual relationship between the importer and the foreign shipping line. The Court noted that the service was actually provided by the shipping line to the foreign exporter, while the importer’s role was limited to purchasing the goods.
The Court also observed that the levy resulted in double taxation. Since the freight component had already been included in the value of imported goods and taxed at the time of import, taxing it again under the reverse charge amounted to double taxation of the same value. On this basis, the Court held that the notifications imposing such liability were beyond the scope of the IGST Act and therefore ultra vires.
This judgment reaffirmed an important principle of tax law—that tax liability must arise strictly from the provisions of the statute and must be based on real transactions between identifiable parties. It cannot be imposed through artificial legal constructs that do not reflect the actual commercial reality.
Supreme Court - Doctrinal Clarity and Constitutional Discipline
The issue reached finality before the Hon’ble Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd., 2022 (61) GSTL 257 (S.C.), decided on 19 May 2022. The Court affirmed the Gujarat High Court's conclusions and explained the issue in broader legal terms.
The Supreme Court clarified that CIF contracts are to be treated as composite supplies, where the main supply is that of goods. Once IGST is levied on the total value of imported goods, which already includes freight, the law does not permit isolating the freight component for a separate levy. In other words, the same value cannot be split and taxed twice under different heads.
The Court also rejected the deeming fiction that treated the importer as the recipient of the transportation service. It emphasised that tax liability must be based on real legal relationships and actual commercial arrangements, and not on artificial assumptions. Further, the Court held that delegated legislation, such as notifications, cannot go beyond the provisions of the parent statute or create a new basis of taxation.
The Supreme Court also made important observations on the role of the GST Council, clarifying that its recommendations carry persuasive value but are not binding. The judgment, therefore, not only settled the issue of ocean freight but also laid down important principles on the limits of taxation under the GST framework.
Legislative Alignment - From Judicial Pronouncement to Statutory Correction
Following the Supreme Court's judgment, the Central Board of Indirect Taxes and Customs (CBIC) accepted the ruling and decided not to file any further appeal. This administrative decision effectively brought closure to the issue from an implementation and enforcement perspective.
The Government then aligned the statutory framework with the law declared by the Court by issuing Notification No. 13/2023–Integrated Tax (Rate) dated 26 September 2023, effective from 1 October 2023. This notification omits the reverse charge provision for ocean freight, thereby removing the legal basis for the levy.
As a result, the position is clear and settled. With the combined effect of judicial pronouncement, administrative acceptance, and legislative amendment, IGST on ocean freight under reverse charge is no longer payable.
Air Freight - The Continuing Statutory Position
In contrast to the now-settled position on ocean freight, the taxability of air freight remains governed by existing statutory provisions, without any comparable judicial intervention. Under the GST framework, transportation of goods by air is treated as a separate taxable service and is classified under Service Accounting Code (SAC) 996532 . It is subject to GST under Notification No. 11/2017–Central Tax (Rate) dated 28 June 2017, as amended from time to time, including Notification No. 15/2025–Central Tax (Rate) dated 17 September 2025.
Importantly, there has been no change in law to alter this position, nor has any court examined or set aside the levy in the way it was done for ocean freight. As a result, the statutory framework continues to operate in its original form, and GST remains applicable on air freight.
This position is important because it sets the starting point for analysis. Before considering whether the reasoning of judicial decisions on ocean freight can be applied to air freight, it is necessary to first recognise that air freight continues to be a valid and taxable supply under the existing law.
FOB Contracts - Where Reverse Charge Retains Its Ground
While the position on ocean freight in CIF contracts now stands settled, a distinct legal position emerges in the case of FOB (Free on Board) arrangements. Under such contracts, the responsibility for arranging transportation and insurance shifts from the foreign exporter to the Indian importer. The importer, therefore, directly engages the foreign shipping line for transportation of goods.
This distinction is not merely commercial but carries decisive legal consequences. In FOB contracts, there exists a clear privity of contract between the Indian importer and the foreign shipping line. The service of transportation is thus supplied by a person located in a non-taxable territory to a recipient located in the taxable territory.
In such circumstances, the transaction squarely falls within the scope of Entry No. 1 of Notification No. 10/2017–Integrated Tax (Rate) dated 28 June 2017, read with Section 5(3) of the IGST Act. The said entry is cast in wide terms and covers “any service supplied by any person who is located in a non-taxable territory to any person other than a non-taxable online recipient.” The expression is deliberately broad and is not confined to any specific category of service. Consequently, where a foreign shipping line provides transportation services to an Indian importer under an FOB arrangement, the service clearly answers this description. The importer, being a person located in the taxable territory and not falling within the category of a non-taxable online recipient, becomes the recipient of such service, and the transaction satisfies the conditions for levy under the reverse charge mechanism.
Importantly, this position remains unaffected by the judgment of the Supreme Court in Mohit Minerals Pvt. Ltd. v. Union of India. That decision was confined to CIF contracts, where the importer was neither the recipient of the service nor a party to the contract, and the levy was sought to be imposed through a deeming fiction. In FOB contracts, however, the importer is the actual recipient of the service, and the levy arises directly under the statutory framework, without any need for artificial constructs. The provision operates on the basis of location and recipient status, and under GST, liability depends not on who bears the cost, but on who receives the service—placing the importer squarely within its ambit in FOB contracts.
Why Mohit Minerals Does Not Automatically Apply to Air Freight
The idea that the reasoning in Union of India v. Mohit Minerals Pvt. Ltd. can be applied to air freight may appear attractive at first, especially given concepts such as composite supply and the avoidance of double taxation. However, when carefully examined, this view does not withstand legal scrutiny.
The first and most important reason lies in the principle of judicial precedent. A judgment is binding only for the specific issue that was actually examined and decided by the Court. In Mohit Minerals, the Supreme Court dealt only with the levy of IGST on ocean freight for CIF imports under the reverse charge mechanism. The question of air freight was neither argued nor considered. Therefore, extending the judgment to air freight would mean applying it to a situation that the Court never examined, which is not permissible in law.
The second reason is the absence of similar judicial scrutiny in air freight cases. The levy on ocean freight was examined in detail by both the Gujarat High Court and the Supreme Court and was ultimately held invalid. Air freight, however, has not been tested in any such judicial proceedings. In tax law, a levy remains valid unless it is specifically struck down by a court or changed by legislation. Since this has not happened in the case of air freight, the existing statutory framework continues to govern.
The third important aspect is the legislative response after the Supreme Court’s judgment. The Government accepted the ruling and removed the reverse charge levy on ocean freight through Notification No. 13/2023–Integrated Tax (Rate) dated 26 September 2023, effective from 1 October 2023. However, no similar change has been made for air freight. This clearly shows that the law has been deliberately modified only for ocean freight, while the position for air freight has remained unchanged.
Finally, it is important to remember that tax laws must be interpreted strictly. Tax liability cannot be decided based on analogy or similarity. Even if two situations appear similar in principle, their legal treatment may differ depending on the applicable statutory provisions and judicial decisions. The reasoning in Mohit Minerals provides useful insight, but it cannot, by itself, change the taxability of air freight. Any such extension would go beyond the law and would not be legally sustainable.
For all these reasons, the judgment in Mohit Minerals, though important, is limited to ocean freight and cannot be automatically applied to air freight.
Doctrinal Divergence - Not of Facts, but of Law
The difference between ocean freight and air freight is not merely factual in nature; it arises from their distinct legal journeys. The levy on ocean freight was examined by both the High Court and the Supreme Court, where fundamental issues in the law were identified, and the levy was ultimately set aside. This was followed by legislative changes to align the law with the judicial decisions.In contrast, air freight remains governed by the existing statutory provisions. It has not been subjected to similar judicial examination, and therefore, the law in its present form continues to apply.
This distinction highlights an important principle of tax law: outcomes are determined by statutory provisions and judicial decisions, not by conceptual similarity. Even if two situations appear similar, the legal position cannot be assumed to be the same. The relief granted in the case of ocean freight is limited to that specific context and cannot be extended to air freight unless there is a similar judicial ruling or legislative amendment.
The Real Lesson - Law Over Analogy
The issue of GST on ocean freight is now conclusively settled by judicial decisions and subsequent legislative alignment. It reinforces a fundamental principle—that tax must arise from real supplies between identifiable parties and within the framework of the law. The courts have ensured that GST cannot be extended through artificial constructs that lack commercial substance, thereby preserving the integrity of the tax system.
In contrast, the taxability of air freight continues under the existing statutory framework, without similar judicial examination. This difference reflects how tax law evolves—through challenge, scrutiny, and correction where required.
For professionals, the lesson is clear: tax positions must be based on statutory provisions and binding judicial authority, not on perceived similarity. Even where issues appear alike, their legal treatment depends on the law as it stands. In taxation, certainty comes not from analogy, but from authority.
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