2022 (5) TMI 968 - SC - GST

Levy of IGST - Ocean Freight - scope of supply - composite supply or not - time and place of supply - whether an Indian importer can be subject to the levy of IGST on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis? - Scope and power of state legislature versus GST Council - HELD THAT - The provisions of composite supply in the CGST Act (and the IGST Act) play a specific role in the levy of GST. 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. It is true that in this case, the first leg of the transaction between the foreign exporter and the Indian importer is a composite supply, while the second leg, between the foreign exporter and the shipping line may, from a perspective, be regarded as a standalone transaction. Both of them are independent transactions and ordinarily, the IGST could be levied on both sets of transactions- one as supply of goods (under the ambit of composite supply) and the other as supply of services. However, the impugned notifications seek to tax the importer as the deemed recipient of the supply of service - The Union of India cannot be heard to urge arguments of convenience treating 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. This Court is bound by the confines of the IGST and CGST Act to determine if this is a composite supply. It would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements. In a CIF contract, 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) - 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. Following conclusion is reached (i) The recommendations of the GST Council are not binding on the Union and States for the following reasons (a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that 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; (b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws 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 edicts 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. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and (c) 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; (ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an inter-state supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service; (iii) 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; (iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation; (v) 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. Appeal dismissed.

Summary

Issues Involved:
1. Constitutionality of GST notifications.
2. Excessive delegation of powers.
3. Validity of taxable events under GST.
4. Interpretation of "recipient" in CIF contracts.
5. Applicability of Section 5(4) of IGST Act.
6. Composite supply and double taxation.

Detailed Analysis:

1. Constitutionality of GST Notifications:
The Union of India challenged the Gujarat High Court's decision that deemed two GST notifications unconstitutional. The core issue was whether an Indian importer could be subject to IGST on ocean freight paid by a foreign seller to a foreign shipping line on a reverse charge basis. The Supreme Court examined the legislative history and the constitutional architecture of GST, noting that while the GST Council's recommendations are significant, they are not binding on the Union and States. The Court emphasized that the recommendations are persuasive, aiming to foster cooperative federalism without disrupting fiscal federalism.

2. Excessive Delegation of Powers:
The respondents argued that Section 5(3) of the IGST Act only allows the government to specify categories of goods or services for reverse charge, not to designate the recipient of the supply. The Court held that the essential legislative functions, such as identifying the taxable event, person, rate, and value, were not delegated. The notifications were found to be a legitimate exercise of delegated legislation, clarifying the recipient within specified categories.

3. Validity of Taxable Events under GST:
The Court examined whether the import of goods on a CIF basis constitutes a valid import of service under Section 5(3) of the IGST Act. It was held that the supply of transportation services by a foreign shipping line to a foreign exporter, with the destination of goods being India, has a sufficient territorial nexus. The place of supply, as per Section 13(9) of the IGST Act, is the destination of goods, thus making the import of services taxable.

4. Interpretation of "Recipient" in CIF Contracts:
The Court analyzed whether the importer could be considered the recipient of shipping services under CIF contracts. It was concluded that the importer, as the ultimate beneficiary of the shipping service, can be deemed the recipient under Section 2(93)(c) of the CGST Act. This interpretation aligns with the destination-based tax philosophy of GST, making the importer liable for IGST on the transportation service.

5. Applicability of Section 5(4) of IGST Act:
The Union Government argued that the notifications could derive validity from Section 5(4) of the IGST Act, which allows specifying a class of registered persons as recipients. The Court noted that the amended Section 5(4) clarifies the government's power to designate recipients, thereby validating the notifications even if the importers do not qualify as service recipients.

6. Composite Supply and Double Taxation:
The respondents contended that the impugned levy results in double taxation, as IGST is already paid on the transaction value of goods, including freight. The Court agreed, stating that the supply of goods in a CIF contract is a composite supply under Section 2(30) of the CGST Act. Thus, levying IGST on the supply of services separately violates the principle of composite supply and the scheme of GST legislation.

Conclusion:
1. The recommendations of the GST Council are persuasive but not binding on the Union and States.
2. The notifications are a legitimate exercise of delegated legislation, specifying categories of supply and recipients.
3. The import of goods on a CIF basis constitutes a taxable event under GST, with the importer being the recipient of shipping services.
4. Section 5(4) of the IGST Act validates the notifications by allowing the designation of recipients.
5. The impugned levy violates the principle of composite supply, leading to double taxation.

The appeals were dismissed, and the notifications were deemed valid under Sections 5(3) and 5(4) of the IGST Act but invalidated due to the principle of composite supply.