No IGST on Ocean Freight for CIF and FOB contracts after notification invalidated

[Kamal Aggarwal]

In the matter of BLA COKE PVT. LTD. VERSUS UNION OF INDIA & ORS. - 2024 (10) TMI 492 - GUJARAT HIGH COURT, the Hon’ble Gujarat High Court has held that when the notification is invalidated, the authorities cannot enforce the levy of IGST on the ocean freight for transactions conducted on an FOB basis.

The petitioner, in the present case, imports cooking coal from outside the country for use in the course of business on Cost Insurance and Freight (‘CIF’) basis and Free on Board (‘FOB’) basis. According to Entry No. 10 of Notification No. 10/2017-IGST (Rate) dated June 28, 2017, the petitioner is liable to pay tax on freight for transporting goods by vessel from outside India to an Indian Customs station. This obligation exists even though the petitioner has already paid IGST on the total value of imports, including the freight amount, at the time of clearing the goods for home consumption.

The petitioner reversed the claimed ITC in order to claim refund to avoid double tax benefit. Even after the refund was sanctioned by the authorities, the GST department decided to prefer an appeal against such refund sanction order. Without adequate opportunity of hearing, an adverse ex-parte order was passed by the Appellate Authority; hence present petition.

The petitioner relied upon the judgement of MOHIT MINERALS PVT LTD VERSUS UNION OF INDIA & 1 OTHER - 2020 (1) TMI 974 - GUJARAT HIGH COURT, wherein Notification No. 10/2017-Integrated Tax (Rate) was struck down regarding the levy of IGST on the value of ocean freight.

Furthermore, reliance has been placed on M/S. AGARWAL COAL CORPORATION PVT. LTD. VERSUS THE ASSIST. COMMISSIONER OF STATE TAX. - 2024 (3) TMI 1265 - BOMBAY HIGH COURT, wherein the hon’ble Bombay High Court has held that Mohit Minerals (supra) involved both CIF and FOB contracts and since the relevant notification was declared ultra vires (beyond legal authority) and upheld by the Supreme Court, it cannot be applied by state authorities. This judgement marks the first instance of extending the applicability of Mohit Minerals (supra) to FOB contracts as well. The relevant extract of the judgement is reproduced below:

“8. Before parting, we may also note a submission being made on behalf of the respondent namely that the decision in Mohit Minerals (supra) needs to be applied only in respect of the cases which involve the contracts on CIF basis and not FOB contracts. It is submitted that in the present case the show cause notice has been issued referring to Notification No.8/2017- Integrated Tax (Rate) dated 28-6- 2017 as the contract was a FOB contract. We find that such argument is totally untenable inasmuch as the case in Mohit Minerals (supra) before the High Court of Gujarat, as observed by us herein above, was a case which involved both categories of contract namely CIF and FOB, which was noted in paragraph 57 of the judgment of the High Court of Gujarat. The Court on such facts, declared the revenue's decision ultra vires of the IGST Act. Once the notification itself has been declared as ultra vires and the same has been upheld by the Supreme Court, in our opinion, following the mandate of the settled principle of law as laid down in "KUSUM INGOTS & ALLOYS LTD. VERSUS UNION OF INDIA - 2004 (4) TMI 342 - SUPREME COURT, the notification in no manner was available to the State Authorities to be applied as it would amount to applying an illegal notification. For this reason also, the show cause notice is rendered without jurisdiction.”

After analyzing the provisions of Custom Act, 1962 and IGST Act, 2017, the hon’ble Gujarat High Court held that IGST is applicable based on the value determined under section 3 of the Customs Tariff Act, 1975, at the point Customs duties are assessed as per section 12 of the Customs Act, 1962. This value includes the cost, freight, and insurance at the time of importation. Therefore, whether the transaction is on a CIF or FOB basis, IGST will still be applicable on the total value of the goods as defined by the Customs Act, 1962, which includes freight & insurance.

Therefore, once a notification is declared ultra vires, it cannot be applied by any state authorities, irrespective of the type of contract (CIF or FOB). The legal validity of tax notifications is paramount, and once invalidated, they cannot be enforced, ensuring that taxpayers are not subjected to double taxation or unjust levies. The case reinforces the importance of adhering to established legal principles in taxation matters, protecting the rights of the taxpayer.