2020 (1) TMI 974 - HC - GST

Constitutional validity of levy of IGST on Ocean Freight - Ultra Vires provisions - Reverse charge - Levy tax twice - once levy of customs duty on imported goods, second IGST on ocean freight - estimated component of the Ocean Freight paid for the transportation of the goods by the foreign seller - N/N. 8 of 2017-Integrated Tax (Rate) dated 28th June 2017 HELD THAT - In the present case, the writ-applicant is importing goods on the CIF basis, i.e. the contract is for supply of goods delivered at the Indian port. Thus, the transportation of goods in a vessel is the obligation of the foreign exporter. The foreign exporter enters into contract with the shipping line for availing the services of transportation of goods in a vessel. The obligation to pay consideration is also of the foreign exporter. Thus, the writ-applicant could be said to have neither availed the services of transportation of goods in a vessel nor he is liable to pay the consideration of such service. Hence, the writ-applicant is not the 'recipient' of the transportation of goods in a vessel service as per Section 2(93) of the CGST Act. The principle of construction in tax statutes is that if the person sought to be taxed comes within the letter of the law he must be taxed. In a taxing Act one has to merely look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. In our opinion, the writ-applicant 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 writ-applicant. Scope of Import of services - Concept of place of supply - Held that - Section 66B of the Finance Act, 1994, levied the service tax on the value of all services (other than those specified in the negative list). Further, Section 68(2) of the Finance Act, 1994, provided the power to the Central Government to specify the categories of services and also the person by whom the service tax shall be paid. Under the IGST Act, the integrated tax is leviable only on inter-state supplies made or agreed to be made. As stated above, the supply of services provided by a person in a non-taxable territory to a person in a non-taxable territory by way of transportation of goods in a vessel from a place outside India to the place of customs station of clearance in India is not an inter-state supply as per the provisions of Section 7 of the IGST Act. There is no doubt that in the taxing legislation, the legislature deserves the greater latitude and the greater play in joints. This principle, however, cannot be extended so as to validate a levy by a subordinate legislation which has no sanction of law, however, laudable may have been the object to introduce it. The legislature, while enacting the IGST Act, was aware of the wide provisions under the Finance Act, 1994, which provide the Government the power to collect tax under the reverse charge basis only from the recipient of the service but from any other person as may be prescribed. However, while enacting the IGST Act, the legislature consciously curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply. Conclusion 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 - Application allowed.

Summary

Issues Involved:
1. Legislative competency and ultra vires nature of the impugned notifications.
2. Double taxation and composite supply.
3. Validity of reverse charge mechanism on ocean freight.
4. Definition and scope of "recipient" under the IGST Act.
5. Administrative and procedural inconsistencies in the levy of IGST on ocean freight.

Detailed Analysis:

1. Legislative Competency and Ultra Vires Nature of the Impugned Notifications:
The court examined whether the notifications levying IGST on ocean freight were within the legislative competence of the government. It was argued that the notifications were ultra vires the IGST Act, 2017, and lacked legislative competency. The court concluded that the impugned notifications levying tax on the supply of service of transportation of goods by a person in a non-taxable territory to another person in a non-taxable territory were beyond the scope of the IGST Act. The notifications were declared ultra vires and unconstitutional as they imposed a tax on transactions that were neither inter-state nor intra-state supplies under the IGST Act.

2. Double Taxation and Composite Supply:
The court addressed the issue of double taxation, noting that the writ-applicants already paid IGST on the value of imported goods, which included ocean freight. Imposing IGST again on the same ocean freight as a separate supply of service amounted to double taxation, which is impermissible. The court emphasized the concept of composite supply under the GST regime, where the principal supply determines the tax liability. Since the ocean freight was already included in the value of imported goods and taxed accordingly, taxing it again as a separate service was deemed illegal.

3. Validity of Reverse Charge Mechanism on Ocean Freight:
The court scrutinized the reverse charge mechanism applied to ocean freight. Section 5(3) of the IGST Act allows the government to specify categories of supply on which the tax shall be paid by the recipient. However, the court found that the notifications went beyond this provision by making the importer liable for tax on services provided by a foreign supplier to another foreign entity. The court held that the importer, not being the recipient of the service, could not be made liable to pay tax under the reverse charge mechanism.

4. Definition and Scope of "Recipient" under the IGST Act:
The court examined the definition of "recipient" under Section 2(93) of the CGST Act, which is applicable to the IGST Act. The term "recipient" is defined as the person liable to pay consideration for the supply. In CIF contracts, the foreign exporter arranges and pays for transportation, making the foreign exporter the recipient of the service, not the Indian importer. The court concluded that the importer could not be considered the recipient of the transportation service and thus could not be held liable for IGST on ocean freight.

5. Administrative and Procedural Inconsistencies in the Levy of IGST on Ocean Freight:
The court identified several administrative and procedural inconsistencies in the levy of IGST on ocean freight. It noted that the scheme of the IGST Act does not contemplate the levy of tax on a person who is neither the supplier nor the recipient of the supply. Additionally, the court highlighted the lack of provisions for determining the time of supply, value of supply, and input tax credit for ocean freight services when the importer is not the recipient. These inconsistencies further supported the court's decision to declare the notifications ultra vires and unconstitutional.

Conclusion:
The court allowed the writ applications, declaring the impugned Notification No.8/2017 – Integrated Tax (Rate) and Entry 10 of Notification No.10/2017 – Integrated Tax (Rate) dated 28th June 2017 as ultra vires the IGST Act, 2017, and unconstitutional. The notifications were struck down, and no tax was held to be leviable on ocean freight for 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 up to the customs station of clearance in India.