Decision of Hon'ble Supreme Court on alleged extra-territorial applicability of levy on ocean freight under CIF Contracts

[Gaurav Gupta]

Dear All!

The Hon'ble Supreme Court has recently delivered a path breaking judgment in the batch of civil appeals with lead case of UNION OF INDIA & ANR. VERSUS M/S MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR [2022 (5) TMI 968 - SUPREME COURT]

The civil appeal was preferred by the Appellants (Union of India & Anr.) being aggrieved by the decision of Hon'ble Gujarat High Court, being decision dated 23.01.2020. The High Court had allowed the petition instituted by the Respondents u/A 226 of the Constitution of India for challenging the constitutionality of two notifications of the Central Government.

The issue framed by Hon'ble Apex Court is as under:

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.

The Hon'ble Supreme Court has delivered its judgment on many issues, and we shall endeavour to dwell upon the following question and the decision of the Hon'ble Court on it:

Do imported goods procured on a CIF basis constitute an inter-State supply or is it an extra-territorial tax?

The brief facts of the case are as under:

• The Respondents import non-coking coal from Indonesia, South Africa and US by ocean transport on 'Cost-transport-freight' basis (hereinafter referred to as "CIF") which is supplied to domestic industries. In the case of a CIF contract, the freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of importer.
• The Central Government issued Notification 10/2017 whereof S. No. 10 categorized an importer as recipient of services of supply of goods by a person in a non-taxable territory by a vessel, u/s 2(26) of the Customs Act, 1962.

Petition in Gujarat High Court

• The Petition in Gujarat High Court was filed by the Respondents to the Civil Appeal therein inter-alia raising a plea that in the case of a CIF contract, the supply of service of transport of goods in a vessel is by a foreign shipping line located in a non-taxable territory to an exporter located in a non-taxable territory by a vessel outside the territory of India which cannot be subject to tax under the IGST Act.

Petition allowed by Gujarat High Court

• Petition was allowed by the High Court holding that impugned notifications are unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act. It was inter-alia held that the importer of goods on a CIF basis is not the recipient of the transport services as Section 2(93) of CGST Act defines a recipient of service to mean someone who pays consideration for the service, which is the foreign exporter in this case.

• It was also held that there is no territorial nexus for taxation since the supply of service of transportation of goods is by a person in a non-taxable territory to another person in a non-taxable territory from a place outside India up to the Indian customs clearance station and this is neither an inter-state nor an intra-State supply.

• The mere fact that the service terminates in India does not make the service of supply of transportation to be taking place in India.

Argument of the Revenue

On behalf of the Revenue, it was urged as under:

• There is sufficient territorial nexus for the purpose of taxation since the importer is the final beneficiary of a service provided by a foreign shipping line by way of transportation upto the customs station of clearance in India.

• As such, the above transaction has a nexus to the taxable territory of India.

• The importer is the beneficial owner of goods at the time of clearance.

Argument of the Respondent-Assessees

On behalf of the Respondent- Assessees, the following contentions were advanced on the issue of extra-territorial operation of the impugned levy:

• The question of who is the beneficiary of the supply or who has received the supply are irrelevant in determining the 'recipient' u/s 2(93) of the CGST Act. The arguments of Ld. ASG to see the ultimate beneficiary only enlarges the scope of Section 2(93) by adding words that are absent in the statute.

• The person liable to pay consideration under CIF contract to the foreign shipper is the foreign exporter. The importer of goods in India is not the person liable to pay the consideration, and is thus, not the 'recipient' of service.

• The levy of IGST on ocean freight by virtue of Notification 10/2017-Integrated Tax (R) is extra territorial and ultra vires Section 1 read with Section 2(22) of the IGST Act. The levy imposed is on the service of transportation of goods rendered by the shipping line to the foreign vendor/ exporter, occuring outside the territory of India, that is outside the taxable territory.

• 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 is absent in the instant case.

Hon'ble Apex Court's decision

• The Hon'ble Court noted that the critical fact in this case is that the service of shipping in these CIF contracts is availed by the non-taxable exporter who engages and pays a foreign shipping line of their choice, without the involvement of the importer.

Taxable event

• The Hon'ble Court identified that the taxable event in the present case is as follows:

“services supplied by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India”

Question posed 

• The question raised by the Hon'ble Court was that whether the above taxable event constitutes an "inter-State supply" for the purposes of charging section 5(1) read with Section 5(3) and the unamended Section 5(4) of the IGST Act?

Hon'ble Court's decision and important observations

Complexities of supply

• Section 5(3) confers power on Government, on recommendation of GST council, to specify categories of supply of goods or services or both where the tax shall be paid on a reverse charge basis by the recipient.

• In modern commerce, the distinction between goods and services is increasingly
  becoming a matter of degree than substance. GST seeks to focus on the taxation of “supply” of goods or services. The provisions of the IGST and CGST Act focus on implementing a workable machinery to adequately capture the complexities of
  supply in a global and digital age.

• The provisions of the IGST and CGST Act focus on implementing a workable machinery to adequately capture the complexities of supply in a global and digital age.

• Section 7(4) of the IGST Act states that supply of services imported into India would be considered as a supply of services in the course of “inter-State trade or commerce”. Thus, an Indian importer could also be considered as an importer of the service of shipping which is liable to IGST on inter-state supply, if the activity falls within the definition of “import of service” for the IGST Act and CGST Act.

Definition of supply

• It was observed that the term 'supply' has been defined in the IGST Act with reference to the CGST Act.

• The Hon'ble Court examined the definition of 'import of service' as defined in Section 2(11) of the CGST Act, and observed that the said definition entails three aspects:

1. the supplier of service must be located outside India;
2. the recipient of the service must be located in India; and
3. the place of supply of service ought to be in India.

• The Hon'ble Court thereafter proceeded to interpret the expressions, "recipient" and "place of supply" and observed that Section 13(9) of IGST Act provides 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.

• This the Hon'ble Court observed appears to create a deeming fiction and accordingly, place of supply of shipping service by a foreign shipping line, would thus be India. This observation of the Hon'ble Court was borne out from reading of Section 7(1)(b) of the CGST Act, Section 2(11)(iii) of the CGST Act and Section 13(9) of the IGST Act.

• The Hon'ble Court further observed that the definition of "consideration" in Section 2(31) of the CGST Act includes payment made or to be made, in money or any other form, for the inducement of supply of goods or services to be made by the recipient or by any other person.

• Thus, it was held that in the case of goods imported on a CIF basis, the fact that consideration is paid by the foreign exporter to the foreign shipping line would not stand in the way of it being considered as a “supply of service” under Section 7(4) of the IGST Act which is made for a consideration, thereby constituting “supply of service” in the course of inter-state trade or commerce that can be subject to IGST under Section 5(1) of the IGST Act.

On alleged extra-territorial applicability of impugned levy

• On the question of alleged extra-territorial applicability of the impugned levy, it was observed by the Hon'ble Court that the decision in GVK Industries clearly recognises the power of Parliament to legislate over events occuring extra-territorially. And that in this regard, the only requirement to be seen is that such an event must have a real connection to India.

• Following observations were made by Hon'ble Court to answer that the transaction does have a nexus with the territory of India and thus fulfills the test laid down in GVK Industries:

1. the destination of goods is India and thus, a clear territorial nexus is established with the event occurring outside the territory, and second,
2. the services are rendered for the benefit of the Indian importer.

We trust that you will find the above discussion of the Hon'ble Apex Court's judgment as useful for furthering academic discourse on the path breaking judgment.

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