Supreme Court strikes down GST reverse charge on ocean freight in CIF imports

The Supreme Court of India ruled (Union of India vs Mohit Minerals Pvt. Ltd.) on 19 May 2022 that an Indian importer is not subject to reverse charge Integrated Goods and Services Tax (IGST) on payments for ocean freight made by a foreign seller to a foreign shipping line, since the importer already is required to pay IGST as a component customs duty, on the “Cost-Insurance-Freight” (CIF) value of the imported goods. The court upheld a 2020 decision of the Gujarat High Court.

The IGST law envisages the levy of GST under the reverse charge on freight component, where goods are imported into India under a “cost-insurance-freight” (CIF) contract. The levy of IGST applies even though the contract for transport is between a foreign supplier and a foreign shipping line and the Indian importer was not a party to the contract. In addition, the importer is required to pay customs duty on the CIF value (which includes freight) of the imported goods. This results in a dual levy of tax on the freight element, i.e., the first being IGST on a “service” under the reverse charge and second as customs duty on ‘goods’ imported.

Facts of the case

The case before the court involved an importer of goods that were transported by ocean to India on a CIF basis. The importer paid customs duties (which includes an element of IGST) on the CIF value of the imported goods, including an ocean freight element. In CIF contracts, the freight invoice is issued by the foreign shipping line to the foreign exporter without the involvement of the importer. The importer also paid customs duty on the imported goods (including the ocean freight) at the time the goods were brought into India. The levy of IGST on the ocean freight separately as a service resulted in double taxation of the ocean freight.

The importer challenged the constitutionality of the rules and, in 2020, the Gujarat High Court held the levy to be unconstitutional. The Indian tax authorities appealed the decision of the Gujarat High Court to the Supreme Court.

Decision of the Supreme Court

The Supreme Court dismissed the government’s petition and confirmed the decision of the Gujarat High Court that the second levy of IGST on ocean freight separately as a service is unconstitutional. In reaching its decision, the Supreme Court made some interesting comments about the GST Council, a body entrusted with the responsibility of making recommendations on a range of areas concerning GST. According to the court, recommendations of the GST Council do not bind the Union or the Indian state legislatures. Based on a reading of articles 246A and 279A of the Constitution, the court observed that legislative powers rest with the parliament and the state legislatures, and neither of these bodies is required to table the Council’s recommendations. Hence, recommendations of the GST Council should only have persuasive value and will not be binding on the legislatures. Thus, the principal basis on which the levy of IGST on the freight was sought—which was recommended by the GST Council—was rejected by the Supreme Court.

Comments

The Supreme Court’s landmark decision resolves the controversy relating to the dual levy of IGST on the amount of ocean freight paid by the importer as a part of the CIF value paid for imports. While the Supreme Court ruled in favour of the taxpayer, it made some important observations on various issues, such as the determination of the “recipient” of services, valuation of the services, etc., that should be considered by affected taxpayers. It also should be noted that the Supreme Court decision applies only to imports on a CIF basis, not goods shipped under an FOB contract, where the Indian service recipient may be required to discharge its IGST liability using the reverse charge.

As a result of the Supreme Court’s determination that IGST cannot be levied on freight, treating it as a service in a CIF contract, taxpayers that have discharged their tax liabilities (and interest) in the past may be eligible to claim a refund of the amounts paid, provided the statute of limitations for a refund claim has not expired, tax paid has not been used as an input credit and/or has not been passed on to other taxpayers.

The Supreme Court’s observation that GST Council’s recommendations only have persuasive value and are not binding on the legislature could have a major impact on the GST architecture. To regard the Council’s recommendations as options that parliament and state legislatures can accept or ignore would undermine the current fiscal order where the Union and states have converged on decisions taken by the GST Council and treated them as set in stone. It is hoped that the Union and states will continue to take a cohesive and cooperative approach in this area.

Gunjan Prabhakaran
GunjanPrabhakaran@bdo.in