Gujarat High Court ruling on levy of IGST on ocean freight service under reverse charge

Facts of the case

• The company is engaged in the business of supplying non-cooking coal imported from Indonesia, South Africa and U.S.A.
• It has obtained registration under GST in India. It purchased goods on Cost, Insurance and Freight (CIF) and Free on Board (FOB) basis.
• The company paid basic custom duty on value of imported goods (value included freight amount) determined under section 14 of the Customs Act, 1962.Also, IGST was paid on the value of imported goods.

Relevant Provisions

• Entry No. 10 of Notification No.10/ 2017 -IT rate provides that if supplier and recipient of the ocean freight service are in non-taxable territory i.e. they are outside India, then tax has to be paid by importer as defined in the Customs Act, under reverse charge.
• Further, Entry No. 9 of the Rate Notification No. 8/2017-IT rate provides that importer is liable to 5% IGST on 10% of CIF value.

Issue

• The Company prayed for quashing the Rate Notification and relevant entry of RCM Notification are ultra vires the IGST Act and hence, unconstitutional.

High Court ruling

This dispute was settled by Hon Gujarat High Court in case of Mohit Minerals Pvt Ltd. Few important observations based on which ruling was given by Gujarat High Court are as follows:

Applicability of charging section

• The section 5(1) of the IGST Act provides that tax shall be levied on on supplier of goods or services on forward charge. Further, section 5(3) requires that recipient is liable to pay tax under reverse charge in case of notified services.
• High Court observed that meaningful reading of charging section would entail that person who is neither supplier nor recipient of supply cannot be made liable to pay tax.

Meaning of term ‘recipient’

• The term 'recipient’ is defined as a person liable to pay consideration where the same is payable and where person to whom the services are rendered, where no consideration is payable.
• In CIF contracts, foreign exporter enters into contract with shipping line and thus, he is liable to pay the freight charges. The obligation to transport goods is on exporter and importer is not at all concerned. Even in a case of non-payment, shipping line cannot recover it from importer.
• Basis above, it can be said that importer has neither availed transportation service nor he is liable to pay consideration. Therefore, he cannot be termed as ‘recipient’

Authorization of levy by law

• Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law.
• Basis the Article 265, both levy and collection of tax shall be provided by a statute. Thus, there is no statutory sanction for levy of IGST on ocean freight service under reverse charge.

Non-applicability of provisions of CGST Act / IGST Act

• Section 12 of the IGST Act determines place of supply where location of supplier and recipient are in India whereas section 13 deals with cases where location of either of them is in India. In present facts of the case, location of foreign exporter and shipping line, both are outside India and hence, transaction  does not get covered under section 12 or section 13. Basis this, High Court observed that place of supply cannot be determined.
• The provisions in the CGST Act (which also applies to IGST Act) relating to time of supply, value of supply and filing of returns are applicable to supplier and recipient of supply. High Court concluded that since importer is not considered as ‘recipient’, these provisions also cannot be applied.

Double taxation

• IGST is paid at the time of import on value of imported goods including freight. Thus, levy of IGST on ocean freight service under reverse charge as supply of service leads to double taxation.

Conclusion

High Court  held that the Notification prescribing rate of 5% in case of transportation service for import of goods and Entry No. 10 of RCM Notification requiring importer to pay tax under reverse charge, are ultra vires the IGST Act and hence, unconstitutional.

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