A RESOUNDING NO TO DOUBLE TAXATION – A MILESTONE JUDGEMENT

Union Of India v. M/s Mohit Minerals Pvt. Ltd.

May 19, 2022

PREAMBLE

There are times when a Judgement delivered is so resounding and emphatic that it puts a pause in ones thinking. The order Passed by the Hon’ble Supreme Court in the case of M/s Mohit Minerals Pvt. Ltd. is one such judgement in the space of Indirect taxes.

It is almost five years since GST ecosystem came into space. While GST simplified many facets of Indirect tax regime, there have been few areas where there has been disconsonance. One such area is the imposition of Ocean Freight. While on the CIF value, one gets to pay Customs duties as well as IGST on the value of the imports, there has been an artificial levy of IGST on the freight component treating the same as chargeable to GST under Reverse Charge Mechanism as well.

It is well understandable that the very concept of CIF would mean that the freight element is inbuilt in the transaction value on which duties including IGST would be discharged. Therefore, this was a clear case of double taxation on the element of Ocean freight. Further, while the predominant supply in such cases were supply of goods, it was also held that the other charges towards the supply of goods would be considered as a “Composite Supply”. To vivisect the two with an artificial value deemed to be attached to the same would be sheer perversion of law.

The Hon’ble Supreme Court has laid to rest the anomaly in the space of levy of Reverse Charge Mechanism on the Ocean Freight element.

The Hon’ble High Court of Gujarat in the case of Mohit Minerals Private Limited vs. Union of India observed that the levy of tax on aforementioned transactions brought in by the Notifications was in excess of the powers conferred by the IGST Act upon the delegated legislation, and finally held the Notifications to be unconstitutional.

The Hon’ble Supreme Court has upheld the judgement of the Gujarat High Court taken on the levy of IGST on the Ocean Freight Component on import under the CIF method on a reverse charge basis.

FACTS OF THE CASE:

The respondents in the case were importers paying customs duties on CIF contract. Notification No.8/2017 – IGST, levied IGST on ocean freight and Notification No. 10/2017 categorized the importer as the recipient of services of supply of goods by a person in a non-taxable territory by a vessel under Section 2(26) of the Customs Act 1962.

The respondent filed a writ petition before the Gujarat High Court challenging Notification 8/2017 and Notification 10/2017 on the grounds that: the notifications are ultra vires the GST Acts, there is a double taxation on ocean freight, Importers are not recipients of service, and the notifications created an impermissible deeming fiction and a taxable event.

The Gujarat High Court held that:

• The RCM Notification is ultra vires the IGST Act, 2017.
• The aforesaid service is neither an inter-state supply nor an intra state supply.
• The time of supply for ocean freight service cannot be determined since the Indian importer would not know the details of invoice issued by the foreign shipping agency to the foreign exporter.
• The Importer, not being the “recipient” of services, was not entitled to input tax credit of the tax paid by it on the said services
• No levy can be imposed twice under the same Act which eventually amounts to double taxation
• ‘Deeming fiction of value’ in the Rate Notification is illegal.
• IGST Act, 2017 vests power on the Government to specify categories of supply on which tax shall be paid by the recipient of the supply. However, the provision does not provide that the Government may also specify the persons (other than the recipient of supply) liable to pay tax.

The matter was taken to the Hon’ble Supreme Court which has now passed their order on the issue.

In the case, the submissions of the Appellants i.e., the Union of India were that

• The Parliament is empowered to formulate the principles for determining when a supply of goods or services takes place, create deeming fictions to levy GST on inter-state supplies, to formulate the principles for determining the time and place of supply
• The charge created by Section 5(1) of the IGST Act extends to an ocean freight transaction based on the taxable event, the person on whom the levy is imposed, the rate at which the levy is imposed and the measure or the value to which the rate will be applied;
• The notifications identifying an importer as a recipient for RCM are issued in exercise of the powers of the Union Government vested by Sections 5(3) and 5(4) of the IGST Act;
• Section 13(5) of the CGST Act contains a residual provision for determining time of supply to be the date on which the tax is paid which would be applicable on an ocean freight transaction
• The CIF transaction and IGST on ocean freight are two independent transactions, entitled to suffer independent levies and do not qualify as a composite supply under Section 2(30) of the CGST;
• IGST as part of Customs is levied under Sections 3(7) and 3(8) of the Customs Tariff Act, while RCM under IGST is levied under Section 5(1) read with Section 24(iii) of the CGST Act and Section 5(3) of the IGST Act;
• The importer is the recipient in the Ocean Freight Transaction as importer qualifies under “A supply can be made to ‘a person’, ‘a registered person’ and ‘a taxable person’ and such a supply shall be construed to be a supply to a recipient.”
• There is no tax cost to the importer as ITC is available on the Tax levied and GST being a consumption tax needs to extend on such transactions on RCM model.
• The integrated tax was introduced to ensure a level playing field between foreign and Indian shipping lines. This objective must be appreciated while determining constitutionality.

The respondents in the case i.e., M/s Mohit Minerals Pvt. Ltd. made the following submissions:

• Under Section 5(4) of the IGST Act, the Government cannot specify the person liable to pay tax on a reverse charge basis when the impugned notifications are issued under Section 5(3) of the IGST Act and where an exception has already been made for e commerce operators through Section 5(5) of the IGST Act.
• Only the recipient can be made liable to pay tax under reverse charge basis and the reverse charge cannot be disintegrated from the recipient of supply and that the question of who the beneficiary of the supply is or who has received the supply are irrelevant in determining the ‘recipient’ under Section 2(93) of the CGST Act.
• Parliament has not envisaged the situation where there are two recipients for a single supply when the place of supply is based on either the location of the supplier or recipient.
• In case of CIF contracts, the contract for transportation of goods is entered into by the foreign exporter with the foreign shipper and the person liable to pay consideration is the foreign exporter. Thus, the importer is not the ‘recipient’ of the service.
• Sections 5(3) and 5(4) of the IGST Act are merely machinery provisions for collection of tax, and not the charging provision while Section 5(1) which is the charging section levies IGST on import of goods, which already suffers IGST on CIF value, the question of reverse charge does not arise.
• Notification 10/2017 cannot be sustained under Section 5(4) of the IGST Act on the grounds that before the amendment to the section, there was no power to issue a notification specifying the class of registered person liable to pay tax under reverse charge basis and even then, only the recipient can be made liable to pay tax on a reverse charge basis.
• Section 13(9) of the IGST Act is only relevant to determine the place of supply and not the recipient of supply.
• The objective of the tax or levy cannot validate an ultra vires levy even if the same is said to be introduced to create parity for Indian shipping lines with foreign shippers. The scheme of IGST Act does not envisage a person other than the supplier or the recipient as a person liable to pay tax neither can a person other than a recipient determine the time of supply.
• The High Court has held that that the notifications under challenge were ultra vires. The Government has not urged that any of these findings are incorrect and has only contended that Section 5(1) of the IGST Act satisfies all ingredients of a valid tax law.
• To impose a levy on a service that is extra-territorial, there has to be a deeming fiction in the form of a statutory provision which deems the supply of transportation by a vessel to a non-resident exporter. In this case, such a deeming fiction does not exist. Thus, the transportation service cannot be deemed as a ‘supply’ under the IGST Act.
• Imposition of IGST on ocean freight will lead to double taxation.
• Interpretation of Article 279A of the Constitution was not an issue before the High Court and the present appeal should be restricted to the validity of the impugned notification.
• IGST Act import of goods or import of services and not services subsumed into the value of goods imported into India

ROLE OF GST COUNCIL – DOES IT REIGN SUPREME?

It was put forth before the Court that recommendations of the GST Council are binding on the legislature and the executive.

• A combined reading of Articles 246A and 279A elucidates that the GST Council is the ultimate decision-making body in framing the GST law since it is a constitutional body that acts as a converging platform for both the Union and the States.
• The functions and role of the GST Council are unique and incomparable to other constitutional bodies. Therefore, interpretations of other provisions of the Constitution do not have precedential value while interpreting the role of the GST Council.
• The power of the Parliament and the State Legislature under Article 246A and the power of the GST Council under Article 279A must be balanced and harmonised, such that neither overrides the other.
• The ordinary legislative process for enacting a statute is that bills are introduced and voted on by the legislature. However, Article 264A departs from this as the framing of the policy, discussion on the policy, and decision making are vested with the GST Council. The Parliament or the State Legislature cannot legislate a law on GST under Article 246A independent of the recommendations of the GST Council.
• The recommendations by the GST Council are transformed into legislation on a combined reading of Article 279A and Sections 5,6, and 22 of the IGST Act 2017 and Sections 9,11, and 164 of the CGST Act.

Role of the GST Council

The role of GST Council was initially set out by the Thirteenth Finance Commission set up the Task Force on GST.

2011 Amendment Bill vide Article 279B provided for the establishment of a GST Dispute Settlement Authority to adjudicate on any complaint referred to it by a State Government or the Union Government, arising out of deviation from any recommendations of the Council that resulted in the loss of revenue, or which affected the harmonised structure of the GST.

The Standing Committee on Finance, Ministry of Finance in its 73rd report on the 2011 Amendment Bill sought the opinion of the Attorney General through the Department of Legal Affairs on whether the recommendations of the GST Council would undermine the power of the legislature. In response, the Attorney General stated that though the GST Council has the power to make recommendations, both Parliament and State legislatures, have the power to either accept or reject those recommendations.

The Court held that though the traditional view of interpretation of statutes is that legislative history is not readily used in interpreting a law, the modern trend of thinking on the subject has enabled courts to look into the history of a legislation to understand the full purport of the words used and the mischief sought to be remedied by the law.

The omission of GST Dispute Settlement Authority and amendments made to the Article 279A takes relevance.

The nature of the recommendations of the GST Council

The court evaluated the impact of treating the recommendations as binding and non-binding.

The arguments in favour of reading the ‘recommendations’ of the GST Council as binding are two-fold

• if the GST Council cannot make binding recommendations, the entire structure of GST will collapse as each State would then levy a conflicting tax and collection mechanism
• if the recommendations are non-binding, then there would be no dispute to be resolved under Article 279(11) as the States would be free to disregard the recommendations

The arguments against interpreting the ‘recommendations’ of the GST Council as binding on the Union and the States are two-fold

• it would violate the supremacy of Parliament and State legislatures since both have a simultaneous power to legislate on GST.
• it would violate the fiscal federalism of the States since the Centre has a one-third vote share and the States collectively have a two-third vote share. Therefore, no recommendation on a three-fourths majority can be passed without the consent of the Centre.

The Union contended that the recommendation of the GST Council should be binding on Parliament and the State Legislatures precisely because equal power is granted to both the federal units. The Union also argued that if the recommendations are not binding, then it would lead to an impasse where different Central and State legislations could be guiding the same field.

The Court observed that one of the important features of Indian federalism is ‘fiscal federalism’. A reading of the Statement of Objects and Reasons of the 2014 Amendment Bill, the Parliamentary reports and speeches indicate that Articles 246A and 279A were introduced with the objective of enhancing cooperative federalism and harmony between the States and the Centre. However, the Centre has a one-third vote share in the GST Council. This coupled with the absence of the repugnancy provision in Article 246A indicates that recommendations of the GST Council cannot be binding. Such an interpretation would be contrary to the objective of introducing the GST regime and would also dislodge the fine balance on which Indian federalism rests. Therefore, the argument that if the recommendations of the GST Council are not binding, then the entire structure of GST would crumble does not hold water.

The recommendation of the GST Council made under Article 279A falls under the category of non-qualified recommendation i.e., there is no explanation on the value of such a recommendation. Yet the notion that the recommendations of the GST Council transform into legislation in and of themselves under Article 246A would be farfetched. If the GST Council were intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is ‘subject to’ Article 279A.

Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act and IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST

Interpretation of ‘recommendation’ vis-à-vis the provisions of IGST Act and CGST Act

The provisions of the IGST Act and CGST Act which provide that the Union Government is to act on the recommendations of the GST Council must be interpreted with reference to the purpose of the enactment, which is to create a uniform taxation system.

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. As a matter of first principle, the provisions of the Constitution cannot be interpreted based on the provisions of a primary legislation. It is only the provisions of a primary legislation that can be interpreted with reference to the Constitution. The legislature amends the Constitution by exercising its constituent power and legislates by exercising its legislative power.

Even if the Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature.

ANALYSIS OF THE CASE:

The basis of Section 5(3) of the IGST gives the Central Government the power to specify the categories of supply of goods or services on which such reverse charge is to be levied, however, it empowers the government to specify the recipient of supply of goods or services.

Notification 8/2017 dated 28 June 2017

On 28 June 2017, the Central Government issued Notification 8/2017, wherein entry 9(ii) was included, which stated that a 5% IGST shall be levied on supply of specified services including transportation of goods in a place outside India up to the customs station clearance in India.

Notification 10/2017 dated 28 June 2017

Further, on 28 June 2017, the Central Government issued Notification 10/2017, which specified that the importer is the “recipient” of transportation of service when the supplier is location in a non-taxable territory and the service of transportation is supplied by a person in a non-taxable territory.

Thus, the said notification deemed the importer of goods as the deems the importer as the “recipient of service’ of such transportation of goods.

Ultra Vires to IGST Act – The larger question

Both these notifications have been challenged by the respondents to say the same are Ultra Vires to IGST Act, 2017. Prior to understanding the issues with the notifications, let us understand various other contentions raised by the respondents.

1. Whether the taxable event as stipulated in the impugned notifications constitutes a ‘supply’ under IGST Act.
2. Whether the importer of goods on a CIF basis can be deemed to be the ‘recipient’ of shipping services when they do not pay the consideration.
3. Whether the import of goods constitutes a composite supply.

Let us understand a few important provisions before delving into the analysis. Section 2(98) of the CGST Act, 2017 defines reverse charge. It essentially means that the liability to pay tax is on the recipient of the supply of goods or services, as opposed to the supplier of goods or services.

It is also imperative to understand the meaning of supply. Section 7 of the CGST Act, 2017 defines supply. Section 7 (1) (b) includes import of services for a consideration whether or not in furtherance of business as supply. In furtherance, Schedule I specifies activities which are to be treated as supply even when made without any consideration which includes import of services.

Section 7 of the IGST Act, lays down the conditions for a supply to be construed as an interstate supply. Sub Section 4 states that supply of services imported into the territory of India shall be treated as interstate supply.

Section 13 of the IGST Act determines the place of supply wherein sub section 9 states that 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 15 of the CGST Act provides for the determination of value of taxable supply wherein the value of taxable supply shall be the transaction value and shall include taxes, duties, fees etc. charged separately under the goods and services tax regime, incidental expenses, interest, late fee penalty.

Now that we have understood the important provisions of the CGST and IGST Act, let us have a look at the allegations and the responses.

Do the impugned notifications suffer from excessive delegation?

Article 286 states that State shall not levy tax when the supply of goods or services takes place outside the State or in the course of import or export of goods or services from the territory of India.

Article 269A provides that GST on supplies in the course of inter-state trade or commerce shall be levied and collected by the Union Government. The manner of apportionment between the Union and the States has to be provided by Parliament on the recommendations of the GST Council. The explanation to the same states that an import shall be deemed interstate transaction.

Article 286 and 269 empowers the Parliament to formulate principles for determining, place of supply, whether the same is interstate supply, import/export etc. IGST Act provides for the levy and collection and determining the nature of supply.

The contention was that IGST Act only delegates the power to identify the categories of goods or services on which the tax shall be paid on reverse charge basis. It is contended that since Notification 10/2017 identifies an importer as a service recipient for the purposes of Section 5(3), it is ultra vires the parent Act on the ground of excessive delegation.

Section 5(3) of IGST only provides the government power to specify categories of supply of goods or services or both on which tax shall be paid on a reverse charge basis by the recipient. Notification 10/2017 specifies the ‘categories of the supply’ which shall be subject to reverse charge’. It does not define reverse charge or prescribe taxation measures. The same is only clarificatory in nature and cannot be construed as delegation.

The Charging Sections

The parties argued that no charge has been created for the ocean freight transaction to be taxed in the hands of the importer. In assessing this claim, the court is bound by a decision of the constitution bench in Mathuram Agrawal, which identifies the three essential elements of taxation namely-

1. The subject of tax
2. The person liable to pay tax
3. The rate of tax

This was further elaborated by a two judge bench for identifying the value to which the rate of the tax will be applied. Thus, the four canons of taxation are-

1. The taxable event
2. The person on whom the levy is imposed
3. The rate at which the levy is imposed
4. The measure or the value to which the rate will be applied

As per Section 5 of the IGST, the response to the above questions can be identifies as

1. Interstate supply of goods as the taxable event
2. The taxable person is the person on whom the tax is imposed
3. Taxable rate is as notified by the GST council
4. Taxable value is determined as per Section 15 of the CGST Act

Who is a taxable person?

The respondents had alleged that an importer cannot be termed as a taxable person, but the argument failed when the impugned notifications were read with Section 2(107) and Section 24 of the CGST Act.

Neither Section 2(107) nor Section 24 of the CGST Act qualify to impose reverse charge on recipient of service but broadly state that ‘the persons required to pay tax under reverse charge’. As Notification 10/2017 identifies importer as the recipient liable to pay, the argument that failure to identify a specific person liable does not hold good.

Taxable Value

The respondents have argued that the value has to be strictly determined by Section 15(1) of the CGST Act and not by way of delegated legislation and urged that the determination of the value of supply has to be specified only through rules, and not by notification. However, this would be an unduly restrictive interpretation. The Parliament has provided the basic framework and delegated legislation provides necessary supplements to create a workable mechanism.

Rule 31 of the CGST Rules 2017 specifically provides for a residual power to determine valuation in specific cases, using reasonable means that are consistent with the principles of Section 15 of the CGST Act, where the value of the supply of goods cannot be determined in accordance with Rules 27 to 30 of the CGST Rules 2017. Thus, the impugned notification 8/2017 cannot be struck down for excessive delegation when it prescribes 10 per cent of the CIF value as the mechanism for imposing tax on a reverse charge basis

On Territorial Issue

It was submitted that transportation of goods from a non-taxable territory as a specified category of service under Section 5(3) of the IGST Act. This categorization taxes the recipient of such transportation service on a reverse charge basis. That the supply of service of shipping in a CIF contract is from the foreign shipping line to the foreign exporter and that the transaction has no territorial nexus to India and does not constitute “supply” that can be taxed within the meaning of the CGST Act and IGST Act.

On Ingredients for an Import of Service.

The conditions for an “import of service” would entail three aspects: (i) the supplier of service must be located outside India; (ii) the recipient of the service must be located in India; and (iii) the place of supply of service ought to be in India.

It was argued that conditions (ii) and (iii) are not satisfied in the case of CIF contracts since the recipient of shipping services would be the foreign exporter and the place of supply would be the place of business of such foreign exporter.

Section 13(9) of the IGST Act appears to create a deeming fiction, where in case of supply of services of transportation of goods by a supplier located outside India, the place of supply would be the place of destination of such goods. The supplier, the foreign shipping line, in this case would be a non-taxable person. However, its services in a CIF contract for transport of goods would enter Indian taxable territory as the destination of such goods. The place of supply of shipping service by a foreign shipping line, would thus be India.

It was also argued before the court that since Section 7(1)(b) of the CGST Act does not define “supply” of import of service without consideration, other than the ones specified in Schedule 1, this would be inapplicable to importers with CIF contracts as the consideration is paid by the exporter. Thus, the importer of goods cannot be said to be an importer of shipping service since the latter is not an import of service for a consideration under Section 7(1)(b) of the CGST Act.

It was also put forth before the Court that the service of transportation occurs outside India, that is outside the taxable territory and bears a nexus with India only as the destination of goods is India. However, the submission is that since the import of goods is taxed under Section 5(1) as ‘supply of goods’, there remains no territorial nexus of the transportation service with the Indian territory.

Powers of Parliament on Extra Territorial Aspects.

The Court also stated that the powers of legislation of Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ought not to be subjected to some a priori quantitative tests, such as “sufficiency” or “significance” or in any other manner requiring a predetermined degree of strength. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful.

Specific Person as Recipient in Deeming fiction

The Court held that Union Government has attempted to make a far-fetched argument that Section 24(iii) of the CGST Act mandating compulsory registration of persons liable to pay tax on a reverse charge basis extends to designating any person to pay the tax on a reverse charge basis, irrespective of their status as either a recipient or a supplier of service. This argument inverts the identification of a category of goods and services under Section 5(3) and the recipient therein, who is then liable to compulsorily register themselves under Section 24(iii) of the CGST Act.

The power of the Central Government to designate persons and categories of supply for reverse charge derives from Sections 5(3) and 5(4) of the IGST Act and not Section 24(iii) of the CGST Act which mandates the compulsorily registration as a logical corollary to ensure tax collection. It cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the recipient of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act. As it currently stands, Section 5(3) of the IGST Act enables the delegated legislation to create a deeming fiction on categories of supply of goods/services alone.

The Court observed that the term “by the recipient” should be guided vis a vis the categories of goods and services identified in Section 5(3) of the IGST Act only. The Court also held that the ineffectiveness of a tax collection mechanism under Section 24(iii) of the CGST Act cannot be argued to obfuscate the concept of a “recipient” of a good or service that is uniformly understood across the IGST Act, CGST Act and tax jurisprudence.

The Union Government has argued that the expression “by the recipient” in Section 5(3) of the IGST Act does not impede the authority of the GST Council in making recommendations for issuance of notifications for identifying such persons who shall be governed by reverse charge and once the identification is complete, such taxable person would automatically be interpreted as “the recipient”, the Court completely discarded the principles of determining the recipient of a service and replace it with whichever taxable person is identified. The Court also held that if the Parliament’s intention were to designate certain persons for reverse charge, irrespective of them being the recipient of such goods and services, it must make a suitable amendment to confer such power for exercise of delegated legislation.

As regards the question that falls for determining whether the imports of goods on a CIF basis would also constitute import of shipping services, by way of deeming fiction, the Court clearly held that Section 5(3) of the IGST does not confer the powers on the Central Government to create a deeming fiction vis-à-vis who constitutes the recipient. Section 5(3) merely enables the Central Government to identify certain categories of goods and services, where the recipient of such services is subject to a reverse charge, as opposed to the usual mode of taxation where the supplier of the service is charged on a forward charge basis.

Role of GST Council

The impugned notifications were issued with the intention of creating a level playing field between the Indian and foreign shipping lines. It was submitted before the Court that in the Eighteenth GST Council meeting held on 31 June 2017, the agenda of taxing importers on a reverse charge basis was discussed and that it was decided that the liability to pay GST on such transportation service provided by a foreign shipping line to a foreign supplier shall be of the importer in India and the notifications are being issued accordingly. That the Council approved the proposal.

CIF transaction is in fact a Composite Supply

In a CIF transaction, the foreign exporter contracts with a foreign shipping line. The service of shipping is rendered by the foreign shipping line to the foreign exporter and the consideration is accordingly payable by the latter to the former. The cost of such shipping may form a component of the price that is eventually charged to the importer, based on the negotiated terms. If an FOB contract were to be negotiated, the importer would independently avail of the service of shipping and pay for the consideration.

The transaction at hand involves three parties- the foreign exporter, the Indian importer and the shipping line. The first leg of the transaction involves a CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter. In other words, the foreign exporter is liable to ensure that the goods reach their place of destination, and the Indian importer pays the transaction value to the exporter. The second leg of the transaction involves an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for transport of goods to the destination, i.e., in the territory of India.

On the first leg of the transaction, between the foreign exporter and the Indian importer, the latter is liable to pay IGST on the transaction value of goods under Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariff Act. Although this transaction involves the provision of services such as insurance and freight it falls under the ambit of ‘composite supply’. The court also recognised that the transaction would include value elements of freight and insurance, and yet the IGST is levied as a tax on supply of goods only. Such transactions are termed as “composite supply” under the CGST Act

IGST in case of composite supply would be levied on the principal supply of goods. The idea of introducing ‘composite supply’ was to ensure that various elements of a transaction are not dissected, and the levy is imposed on the bundle of supplies altogether. This finds specific mention in the illustration provided under Section 2(30) of CGST Act, where the principal supply is that of goods. Thus, the intent of the Parliament was that a transaction which includes different aspects of supply of goods or services, and which are naturally bundled together, must be taxed as a composite supply.

The court also held that while on the one hand the Union Government seeks to levy tax on the Indian importer by going beyond the text of the contract between the foreign shipping line and foreign exporter (for the purpose of identifying the Indian importer as the recipient of services), on the other hand, as far as the submissions on composite supply are concerned, the Union Government urges that the contracts must be viewed as separate transactions, operating in silos. The Court said that they were unable to subscribe to this view and that cannot treat the two legs of the transaction as connected, when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply.

Observing that in a CIF contract, the Court held that the supply of goods is accompanied by the supply of services of transportation and insurance, the responsibility for which lies on the seller (the foreign exporter in this case). The supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable. To levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation. Per basis, the Courts held that while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.

No artificial vivisection of a Composite supply to charge a tax separately.

The Court also affirmed that arguments put forth that if such an erroneous impression is not corrected and if such a trend continues, then in future even the other components of supply of goods, such as, insurance, packaging, loading/unloading, labour, etc. may also be artificially vivisected by the delegated legislation to levy the GST once again on the supply on which the tax is already collected.

JUDGEMENT OF THE COURT

The Hon’ble Court held that

“Thus, having paid the IGST on the amount of freight which is included in the value of the imported goods, the impugned notifications levying tax again as a supply of service, without any express sanction by the statute, are illegal and liable to be struck down.” (emphasis supplied)

The Conclusion of the Hon’ble Court

The recommendations of the GST Council are not binding on the Union and States for the following reasons. The Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units. The Parliament and the State legislatures possess simultaneous power to legislate on GST.

The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edict would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions.

The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations.

The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge.

The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

NOVELLO COMMENTS

The supply of goods and supply of services are well contoured in the GST ecosystem. Even the concept of Work Contract has been made simple removing the earlier anomalies found in the legacy laws. On the issue of artificial vivisection of a service element as deemed out of a composite supply, the Hon’ble Court has resoundingly held that if such an erroneous impression is not corrected and if such a trend continues, then in future even the other components of supply of goods, such as, insurance, packaging, loading/unloading, labour, etc. may also be artificially vivisected by the delegated legislation to once again levy the GST on the supply on which the tax is already collected.

There cannot be a case where for the reason that Input Tax Credit is available a double taxation is levied. GST is a levy that enables easier management decision by focussing on business strategies than by looking at taxation contours. The Supreme Court’s order comes at a very opportune time as we are stepping in to the fifth year since GST was implemented. As the Court rightly observed the provisions of the IGST and CGST Act focuses on implementing “a workable machinery to adequately capture the complexities of supply in a global and digital age.”

For coffee and conversations on the matter, feel free to reach out to Mr. N V Raman at 9703803250 or [email protected]