IGST IS NOT APPLICABLE ON OCEAN FREIGHT UNDER RCM - THE HON'BLE GUJARAT HIGH COURT RULED IN FAVOUR OF M/S. MOHIT MINERALS PVT LTD.

[Ganeshan Kalyani]

GST is payable by a registered person supplying the goods or services or both. However, there is a provision under GST which makes the receiver of goods or services or both responsible to pay GST on behalf of the supplier of goods or services or both. This concept is called as 'reverse charge mechanism' (in short 'RCM'). Some goods and services are listed out by the Govt. on which the supplier of goods or services is exempted from paying tax. It is their receiver who are duty bound to pay tax under RCM. One such recipient of service is an importer of goods who is required to pay tax on ocean freight under RCM. It is simple and clear that at the time of import an importer pays customs duty on assessment value which includes the cost of ocean freight. An importer is again made liable to pay IGST on ocean freight under RCM as per RCM notification. Thus it amounts to double taxation on the same transaction.

Several writ-applications were filed challenging the validity of IGST on ocean freight which is assumed as a certain percentage of assessable value of import under entry no.10 of Notification no.10/2017-ITR dated 28.06.2017. The importer already paid customs duty on assessable value of import. Hence, it tantamount to double taxation on single transaction.

One of the importer, M/s. Mohit Minerals Pvt Ltd had filed a writ-application. The Hon'ble High Court of Gujarat after going through all the submissions has ruled that "No tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in law.

The impugned Notification No.8/2017 – Integrated Tax (Rate) dated 28th June 2017 and the Entry 10 of the N/N.10/2017 – Integrated Tax (Rate) dated 28th June 2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are hereby declared to be unconstitutional"

In this writ-application the importer M/s. Mohit Minerals is importing goods on CIF basis where the contract of buying/importing is that the supply of goods is to be made by the foreign vendor upto the customs border of India. Hence, it is implied as to how the goods reaches the Indian customs border is not a matter of concern for the importer. It is infact the responsibility of the foreign vendor to arrange for the ocean freight and ensure that the goods are reached upto the importer's country's customs border. Since, importer does not arranges for ocean freight and does not pays ocean freight charges to the foreign shipper and also not avails the service the importer is not the recipient of ocean freight hence he cannot be made liable to pay IGST on ocean freight.

Further, an importer cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service. The term 'recipient' has to be read in the sense in which it has been defined under the Act. There is no room for any interference or logic in the tax laws.

The impugned notifications levying tax on supply of service of transportation of goods by a person in a non-taxable territory to a person in a non-taxable territory from a place outside India upto the customs station of clearance in India and making the petitioner, i.e. the importer, liable for paying such tax, are ultra vires the provisions of the IGST Act.

The supply of service of transportation of goods by a person in a non-taxable territory to another person in a non-taxable territory from a place outside India upto the customs station of clerance in India, is neither an inter-state supply nor an intra-state supply. Thus, no tax can be levied and collected from the importer.

Conclusion:

No tax is leviable under the Integrated Goods and Services Tax Act, 2017, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in law.

The impugned Notification No.8/2017 – Integrated Tax (Rate) dated 28th June 2017 and the Entry 10 of the N/N.10/2017 – Integrated Tax (Rate) dated 28th June 2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are hereby declared to be unconstitutional - Application allowed.

Author's view: It is a undoubtedly a double taxation. Also, the assumption that 10% of  CIF is ocean freight component is not acceptable.The importers who were getting input tax credit of IGST paid on ocean freight were not having any impact. However,  there are importers who outward supplies are exempted and IGST paid on ocean freight under RCM would become a cost of them. Hence, writ-petitions were filed in a large numbers. The Gujarat High Court has ruled on 23.01.2020 that IGST on ocean freight under RCM is not applicable. This ruling is very useful to all the importers importing taxable materials. However, the High Court of other States may take a difference view. Also, the Order of High Court of Gujarat may be appealed in Supreme Court. Hope that all the High Court takes the same view as Gujarat High Court has taken and relieve the importer from double taxation.

Discussions to this article

[Alkesh Jani]

Sir,

The decision of High Court is definitely helpful to various sections of Taxpayers and stake holders. The discussion of High Court is worth to be note

"132. The GST is implemented by subsuming various indirect taxes. The difficulty which is being experienced today in proper implementation of the GST is because of the erroneous misconception of law, or rather, erroneous assumption on the part of the delegated legislation that service tax is an independent levy as it was prior to the GST and it go vivisect the transaction of supply to levy more taxes on certain components completely overlooking or forgetting the basic concept of composite supply introduced in the GST legislation and the very idea of levying the GST. Prima facie, it appears that while issuing the impugned notification, the delegated legislature had in mind the provision of the Finance Act, 1994, rather than keeping in mind the object of bringing the GST by making the Constitutional (101st) Amendment Act, 2016 to merge all taxes levied on the goods and services to one tax known as the GST."

Thanks

[Ganeshan Kalyani]

Sri Alkesh ji, thanks for your comment. Now there is a question amongst taxpayers of other states as to whether to pay tax or not.

[VaibhavKumar Jain]

Please advice, whether we shall stop payment of GST under RCM in case of ocean freight related to CIF imports citing the Gujarat High Court order, OR, We will continue to make payment of GST under RCM.

[Alkesh Jani]

Sir,

I am not aware that the said decision of High Court is accepted by the department or have filed an appeal before the Hon'ble SC. For taxpayer, you can pay the tax under protest along with intimation to department that issue is covered by the High Court. In second case, you may intimate the department that on the basis of decision of High court, you will not pay the tax and said tax shall be paid along with interest after the final outcome of the appeal, if appealed against.

Thanks

[MUKESH Sikarwar]

Dear Vaibhav Ji,

You should be wait for upcoming more decision in this regard from high court or supreme court.

Hope, this double taxation on ocean freight incurred on imported on CIF basis need to be sorted out by the GST council at the earliest.

Mukesh Sikarwar