Supreme Court Clarifies GST on Ocean Freight in CIF Contracts: Union of India vs. Mohit Minerals Pvt. Ltd. (2022) INSC 486

Introduction

Date of the Judgment: 19 May 2022
Citation: (2022) INSC 486
Judges: Dr Dhananjaya Y Chandrachud, J, Surya Kant, J, and Vikram Nath, J. This was a unanimous decision by a three-judge bench, with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Can the Indian government impose Integrated Goods and Services Tax (IGST) on the ocean freight component of goods imported under Cost-Insurance-Freight (CIF) contracts? This was the core question before the Supreme Court in Union of India vs. Mohit Minerals Pvt. Ltd. The case revolved around whether the Indian importer could be considered the recipient of shipping services provided by a foreign shipping line to a foreign exporter, and whether such a levy would amount to double taxation. The Supreme Court examined the constitutional architecture of GST, the relevant provisions of the IGST Act, and the arguments of both sides to arrive at its decision.

Case Background

The case involves several respondents who import non-coking coal from countries like Indonesia, South Africa, and the U.S. They use ocean transport under ‘Cost-Insurance-Freight’ (CIF) contracts. In a CIF contract, the foreign seller arranges for the shipping and pays the ocean freight to a foreign shipping line. The Indian importer pays customs duties on the imported coal, which includes the value of ocean freight. The freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of the importer. The importer only pays ocean freight when goods are imported under a ‘Free-on-Board’ (FOB) contract. In high seas sale transactions, the coal is bought from the original buyer before it reaches Indian ports.

Before the Goods and Services Tax (GST) regime, service tax on ocean freight was exempted. However, this exemption was withdrawn in 2017, and a service tax on the importer was introduced through a reverse charge mechanism. Under the GST regime, the Central Government issued notifications to levy an integrated tax on the transportation of goods by vessel from outside India to the customs station in India. These notifications also categorized the recipient of such services as the importer. The respondents challenged these notifications, arguing that they lead to double taxation since ocean freight is already included in the value of goods for customs duty.

Timeline

Legal Framework

The judgment discusses several key legal provisions:

• ✓ Article 286(2) of the Constitution: Empowers Parliament to formulate principles for determining when a supply of goods or services takes place, including imports.
• ✓ Article 269A of the Constitution: Enables the Union Government to levy GST on inter-state supplies. It also deems a supply of goods or services in the course of imports as a supply in the course of inter-state trade.
• ✓ Section 5(1) of the Integrated Goods and Services Tax Act, 2017 (IGST Act): Authorizes the levy of an integrated tax on all inter-state supplies of goods and services. It also allows the levy of integrated tax on goods imported into India.
  “Subject to the provisions of sub-section (2), there shall be levied a tax called integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person: Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.”
• ✓ Section 5(3) of the IGST Act: Allows the government to specify categories of supply of goods or services on which tax shall be paid on a reverse charge basis by the recipient.
  “The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both 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.”
• ✓ Section 5(4) of the IGST Act: (unamended) Stipulated that integrated tax on supplies by an unregistered supplier to a registered person shall be paid by such person on a reverse charge basis. (amended) Allows the government to specify a class of registered persons who shall pay tax on a reverse charge basis for supplies received from an unregistered supplier.
• ✓ Section 11 of the IGST Act: Stipulates that the place of supply of goods in the case of goods imported into India shall be the place of the importer.
• ✓ Section 13(9) of the IGST Act: Contemplates that the place of supply of services in the case of transportation of goods shall be the destination of the goods.
  “The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.”
• ✓ Section 2(93) of the Central Goods and Services Tax Act, 2017 (CGST Act): Defines the “recipient” of a supply of goods or services.
  “(93) “recipient” of supply of goods or services or both, means — (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;”
• ✓ Section 2(30) of the CGST Act: Defines “composite supply” as a supply of two or more taxable supplies, naturally bundled and supplied together, with one being the principal supply.
• ✓ Section 8 of the CGST Act: States that a composite supply shall be treated as a supply of the principal supply.
• ✓ Section 2(26) of the Customs Act 1962: Defines “importer” as any owner, beneficial owner or any person holding himself out to be the importer.

Arguments

Submissions by the Union of India:

• ✓ The IGST Act, under Article 269A, allows the Union to levy GST on inter-state supplies, including imports.
• ✓ Section 5(1) of the IGST Act is the charging section and extends to ocean freight transactions.
• ✓ The concept of reverse charge, defined in Section 2(98) of the CGST Act, allows the recipient to pay tax instead of the supplier.
• ✓ Notification 10/2017 validly identifies the importer as the recipient for reverse charge purposes.
• ✓ The import of service is an inter-state supply under Section 7(4), read with Section 13(1) and 13(9) of the IGST Act.
• ✓ The CIF transaction and IGST on ocean freight are independent transactions, not a composite supply.
• ✓ There is sufficient territorial nexus for taxation since the importer is the final beneficiary of the service.
• ✓ The Indian importer can be termed as the recipient of the service under Section 2(93)(c) of the CGST Act.
• ✓ Alternatively, the notifications are saved by Section 5(4) of the IGST Act.
• ✓ The GST Council’s recommendations are binding, promoting cooperative federalism.

Submissions by the Respondent Assessees:

• ✓ Section 5(3) of the IGST Act only allows specifying categories of supply, not the person liable to pay tax.
• ✓ The definition of “reverse charge” in Section 2(98) of the CGST Act means only the recipient can be made liable to pay tax.
• ✓ GST laws contemplate only one recipient for one supply.
• ✓ The last leg of Section 2(93) of the CGST Act does not create a separate category of recipient.
• ✓ The taxable event is the “supply” of goods or services, and there is no supply of service to the importer in a CIF contract.
• ✓ Notification 10/2017 cannot be sustained under Section 5(4) of the IGST Act.
• ✓ Section 13(9) of the IGST Act is only relevant to determine the place of supply, not the recipient.
• ✓ The objective of tax cannot validate an ultra vires levy.
• ✓ The scheme of the IGST Act does not envisage a person other than the supplier or recipient as a person liable to pay tax.
• ✓ In CIF contracts, the importer is not the recipient of the shipping service.
• ✓ The levy of IGST on ocean freight is extra-territorial and ultra vires the IGST Act.
• ✓ The value of a CIF contract is indivisible, making the computation of tax on such a contract impossible.
• ✓ The importer is not the recipient of services under Section 2(93) of the CGST Act.
• ✓ Imposition of IGST on ocean freight will lead to double taxation.
• ✓ The GST Council is a recommendatory body, and its recommendations cannot override the parent legislation.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether the Indian importer can be considered the recipient of shipping services under a CIF contract.
2. Whether the levy of IGST on ocean freight constitutes double taxation.
3. Whether the impugned notifications are ultra vires the IGST Act and CGST Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ Mathuram Agrawal v. State of Madhya Pradesh [1999 (8) SCC 667]*: Cited to establish the essential components of a taxing statute.
• ✓ Gobind Saran Ganga Saran v. Commissioner of Sales Tax [AIR 1985 SC 1041]*: Cited to elaborate on the four fundamental principles of a taxing enactment.
• ✓ McDowell and Company Ltd. v. Commercial Tax Officer [1985 (3) SCC 230]*: Cited to argue that a single element can constitute the basis of a levy and form part of the value for another transaction.
• ✓ M/s Electronic Corporation of India v. Commissioner of Income Tax [1989 Supp 2 SCC 642]* and GVK Industries v. Income Tax Officers [2011 (4) SCC 36]*: Cited to support the argument of territorial nexus for taxation.
• ✓ Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills [1968 (3) SCR 251]* and Avinder Singh v. State of Punjab [1979 (1) SCC 441]*: Cited to argue that only essential legislative functions need to be performed by the legislature.
• ✓ Union of India v. VKC Footsteps India Private Limited [(2022) 2 SCC 603]*: Cited to highlight the need for a harmonized structure of goods and service tax.
• ✓ Laghu Udyog Bharati v. Union of India [1999 (6) SCC 418]*: Distinguished based on the specific identification of taxable persons.
• ✓ Union of India v. Jalyan Udyog [1994 (1) SCC 318]*: Cited to support the argument that deeming fictions can be created by delegated legislation.
• ✓ BSNL v. Union of India [2006 (3) SCC 1]*: Distinguished on the grounds of the overlap of VAT and service tax in the pre-GST regime.
• ✓ Ispat Industries Ltd. v. Commissioner of Customs [(2006) 12 SCC 583]*: Cited to show that in a CIF contract, the freight is part of the price paid to the seller.
• ✓CIT v. B C Srinivas Setty [AIR 1981 SC 972]*: Cited for the principle that machinery provisions of an Act and the charging sections are inextricably linked.
• ✓ K.P Varghese v. ITO [(1981) 4 SCC 173]*: Cited for the principle that the speech made by the mover of the Bill can be referred to for understanding the mischief sought to be remedied by the legislation.
• ✓ Kalpana Mehta v. Union of India [(2017) 7 SCC 295]*: Cited for the principle that reports of the Parliamentary Committees and the speeches made in the Parliament can be referred to identify the circumstances that led to the enactment of the legislation.
• ✓ Hoecst Pharmaceuticals Ltd. v. State of Bihar [(1983) 4 SCC 45]*: Cited for recognizing the exclusive powers held by the Union and the State on taxation.
• ✓ Union of India v. Mohit Mineral Pvt. Ltd. [(2019) 2 SCC 599]*: Cited for the principle that the Constitution Amendment Act 2016 confers concurrent taxing powers on the Union as well as the States.
• ✓ Baiku v. State Tax Officer, GST [2019 SCC OnLine Ker 5362]*: Cited for the principle that the power under Article 246A can be exercised simultaneously by the State legislature and Parliament.
• ✓ State (NCT of Delhi) v. Union of India [(2018) 8 SCC 501]*: Cited for the principle that India follows the model of cooperative federalism.
• ✓ Manohar v. State of Maharashtra [(2012) 13 SCC 14]*: Cited for the principle that a ‘recommendation’ must be interpreted in contradistinction to ‘direction’ or ‘mandate’.
• ✓ Naraindas Indurkhya v. State of Madhya Pradesh [(1974) 4 SCC 788]*: Cited for the principle that a ‘recommendation’ has persuasive value.
• ✓ Union of India v. Pradip Kumar Dey [(2000) 8 SCC 580]*, Kesoram Industries and Cotton Mills Ltd. v. CWT [(1966) 2 SCR 688]*, Som Mittal v. Government of Karnataka [(2008) 3 SCC 753]*, and State of AP v. T. Gopalakrishnan Murthi [(1976) 2 SCC 883]*: Cited for the principle that recommendations cannot create binding and enforceable rights.
• ✓ Union of India v. Tulsi Ram Patel [1985 3 SCC 398]* and Titagarh Paper Mills v. Orissa State Electricity Board [1975 2 SCC 436]*: Cited for the principle that when a source of power legally exists, a non-reference or an incorrect reference during its exercise does not vitiate the action.
• ✓ Governor General -in-Council v. Province of Madras [AIR 1945 PC 98]* and Federation of Hotels & Restaurant Association of India v. Union of India [(1989) 3 SCC 634]*: Cited for the principle that the same transaction may involve two or more taxable events in its different aspects.

Final Verdict and Reasoning

The Supreme Court dismissed the appeal filed by the Union of India and upheld the judgment of the Gujarat High Court. The Court held that:

• ✓ The Indian importer cannot be considered the recipient of shipping services in a CIF contract.
• ✓ The levy of IGST on the ocean freight component of a CIF contract is unconstitutional as it leads to double taxation.
• ✓ The court clarified that while the importer is deemed the recipient of the service, the levy is invalid due to the composite nature of the CIF contract.
• ✓ The court held that the notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act.
• ✓ The judgment emphasized that although the Indian importer is the recipient of service, the levy of IGST on ocean freight leads to double taxation, as the value of freight is already included in the value of goods for customs duty purposes.

The Supreme Court’s reasoning was based on the following:

• ✓ Composite Supply: The Court noted that in a CIF contract, the supply of goods and the supply of shipping services are naturally bundled together as a composite supply. Therefore, under Section 8 of the CGST Act, a composite supply is treated as a supply of the principal supply, which in this case is the goods themselves.
• ✓ Double Taxation: The Court found that levying IGST on ocean freight in addition to customs duty, which already includes the value of freight, amounts to double taxation, which is not permissible.
• ✓ Recipient of Service: The Court clarified that while the importer is deemed the recipient of the service under Section 13(9) of the IGST Act read with Section 2(93)(c) of the CGST Act, the levy is still invalid due to the composite nature of the supply.
• ✓ Constitutional Scheme: The Court also noted that the constitutional scheme of GST does not envisage a person other than the supplier or recipient as a person liable to pay tax.

Flowchart of Key Events and Decisions

Conclusion

The Supreme Court’s decision in Union of India vs. Mohit Minerals Pvt. Ltd. provides significant clarity on the applicability of GST on ocean freight in CIF contracts. The judgment highlights that:

• ✓ The Indian importer cannot be considered the recipient of shipping services in a CIF contract.
• ✓ Levying IGST on the ocean freight component of a CIF contract leads to double taxation, which is unconstitutional.
• ✓ The composite nature of CIF contracts means that the supply of goods is the principal supply, and a separate levy on the shipping service is not permissible.
• ✓ While the importer may be deemed the recipient of the service under the IGST Act, the levy is invalid due to the composite nature of the supply.
• ✓ The court held that the notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act.

This judgment has significant implications for businesses involved in international trade, particularly those using CIF contracts. It ensures that importers are not subjected to double taxation on the same transaction. The decision reinforces the principle that GST should be levied on the value of the goods and not on the individual elements of a composite supply. This ruling provides clarity and is a significant victory for importers, ensuring a more streamlined and equitable tax framework.