GST ON OCEAN FREIGHT

This write-up explores on one of the significant areas that requires elaborate discussion for transparency. The subject matter of discussion is the taxability and valuation for levying GST on ocean freight services as a taxable service provided by a person located in a non-taxable territory to 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.

 Statutory Provisions

NN 8/2017-IT (Rate) dated 28.06.2017- Levy of GST is introduced and IGST is leviable @5% under the clause (ii) of heading 9965 for the services described as under:

“Transport of goods in a vessel including services provided or agreed to be provided by a person located in a non-taxable territory to a person located in 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.”

Therefore, ocean freight in relation to transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is liable to IGST.

 Scope of GST Acts

Let us first deliberate the scope of GST Act, if activity of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India viz. Ocean Freight covers under the ambit of the GST Act.

If we observe the basic section viz. applicability Section 1(2) of the CGST Act and IGST Act clarifies that the provisions of the Act apply to the whole of India. Section 5(1) of the IGST Act (viz. the charging section) explains that the Integrated Tax is levied on all the inter-state supplies. Also, as per the definition of ‘taxable supply’ cited in sub-section (108) of Section 2 of the CGST Act, means a supply of goods or service or both which is leviable to tax under this Act and definition of ‘taxable territory’ cited in Section 2(109) of the CGST Act, the ‘taxable territory' means the territory to which the provisions of the Act applies, i.e. the whole of India. With combined reading of the aforesaid provisions, it can be observed that the supply made within the ‘taxable territory' is leviable to tax.

Also, to determine the scope of GST Act, following judicial pronouncements can be relied upon:

• Indian Association of Tour Operators Union of India and others, reported in 2017(5) GSTL 4 (Del.), which is under the Finance Act, 1994, which also had the similar provisions under Section 64 of the said Act, where the Act was applied to the whole of India except the State of Jammu & Kashmir and the taxable territory was defined as the territory to which the provisions of the said Act was applicable. In this context, reliance is also placed on a decision of the Delhi High Court, wherein it is held that the services rendered outside India cannot be brought to tax by a delegated legislation by fixing a deeming provision without amending Section 64 of the Finance Act, 1994. It is an essential legislative function.
• The Supreme Court, in GVK Industries Ltd. ITO cited in (2011)4 SCC 36, clearly stated that the Parliament may exercise its legislative powers with respect to the extra-territorial aspect, that too when they have an impact on or nexus with India. Therefore, it does not empower the delegated legislation to exercise such power and nor such power can be delegated by the Parliament.
• Ishikawajma-Harima Heavy Industries Ltd. Director of Income Tax, Mumbai, AIR 2007 SC 929, held that the ‘entire services having been rendered outside India, the income arising therefrom cannot be attributable to the permanent establishment so as to bring within the charge of tax'. The Court further held that the taxation liability of the oversea services would not arise in India.
• The Hon’ble Supreme Court in the case of Mathuram Agrawal State of MP, AIR cited in 2000 SC 109, held that: '12… The statute should clearly and unambiguously convey the three components of the tax law, i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law'.
• The Supreme Court in the case of Govind Saran Ganga Saran CST, AIR cited in 1985 SC 1041, held that: ‘6… The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity'.

The same analogy should be extended to determine levy of GST on Ocean Freight. However, based on the present scenario and relevant notifications, let’s continue our deliberation on the subject matter.

 Who is responsible to pay GST on Ocean Freight Services

Section 5(3) of the IGST Act states that the Government by notification may specify certain category of supply of services on which tax will be paid by the recipient of service on reverse charge basis. NN 10/2017- IT (rate) dated 28.06.2017 prescribes that Importer, as defined in clause (26) of section 2 of the Customs Act, 1962, is liable to pay integrated tax as recipient of service under reverse charge for the services specified therein as under:

Nature/Supply of Service	Supplier of Service	Recipient of Service
Services supplied by a person located in 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.	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory.

Wherein, Importer as per clause (26) of section 2 of the Customs Act, 1962, Importer in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner, beneficial owner or any person holding himself out to be the importer.

The term recipient of service is defined in section 2(93) of the CGST Act, and the same is provided hereunder:

“recipient” of supply of goods or services or both, means—

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;

It is evident from the provisions of section 5(3) of the IGST Act read with NN 10/2017- IT (rate) dated 28.06.2017 that recipient of service is liable for payment of tax under reverse charge mechanism. However, as per Entry 10 of the NN 10/2017 – IT (Rate), dated 28.6.2017, the liability has been shifted on the ‘importer' and not on the ‘recipient' which is contrary to the provisions of Section 5(3) of the IGST Act, under which the said Notification has been issued. Hereafter, the point of discussion here is if Importer of goods would be the recipient of services of Ocean freight:

Based on the above mentioned provisions & definition, it is to be construed that importer can be recipient of service when consideration in respect of said supply of service is to be payable by the importer of service or if consideration is not payable then if service is rendered to importer of goods.

There can be two different cases in respect of import of goods; first if goods are imported on FOB basis and second if goods are imported on CIF basis. While importing the said goods on FOB basis, the importer is liable to bear the cost of transportation of goods from the respective country upto Indian ports. Hence, for the transportation of the goods, the importer avails the services of a shipping entity for bringing the said goods to India in a vessel and accordingly, importer of goods is recipient of said service of transportation as per NN 10/2017-IT (rate).

Further, in case import of goods on CIF (Cost, Insurance and Freight) basis, the supplier of goods is liable to bear the cost of transportation of goods from the respective country upto Indian ports. Thus, exporter or supplier of goods avails the services of shipping entity for bringing the goods to India in a vessel. Here, recipient of service is supplier or exporter of goods to be imported into India.

On the basis of above legal provisions and discussion, in respect of service of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, we may comment that importer can be recipient of service when goods are imported on FOB basis (as the notification is silent) where the respective service will be rendered to importer of goods. Accordingly, importer of goods is liable for payment on GST under reverse charge.

 ‘Deeming fiction of value' in the Notification is illegal and there is no concept of ‘value of taxable service' in GST Law:

It is important to refer Corrigendum to NN 8/2017-IT (rate) dated 28.06.2017 vide F. No. 334/1/2017- TRU dated 30.06.2017 whereby the following has been inserted:

“Where the value of taxable service provided by a person located in non-taxable territory to a person located in 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 is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance, and freight) of imported goods.”

Firstly, in para mentioned supra, the expression used is the ‘value of taxable service provided', which was also used in the erstwhile Finance Act, 1994. The present Act has used the terms ‘supply' and ‘taxable supply'.

It is to be noted here that this valuation mechanism is applicable if value of ocean freight is not known to importer of goods. As it can be seen from NN 10/2017-IT (rate) that importer of goods is liable for payment of GST under reverse charge only if importer of goods is recipient of service and valuation mechanism is available where service is provided by a person located in non-taxable territory to a person located in non-taxable territory viz. recipient of service. Hence, provision of levy and provision of valuation are contradictory in order to charge GST on ocean freight. Here, valuation mechanism cannot justify the levy of tax in the absence of provision to attract or to levy GST.

Therefore, we are of the view that where import of goods is made on CIF basis, then importer is not required to pay GST on ocean freight under reverse charge reason because importer is not recipient of service and as per NN 10/2017-IT (rate), only the importer in the capacity of recipient of service is liable for payment of GST on ocean freight under reverse charge.

 Levy of Service Tax on Ocean Freight

It is pertinent to mention here about pre GST regime where service tax leviable on ocean freight. Prior to GST regime, the Government has notified the category of services on which tax was payable under reverse charge mechanism by the recipient of service or any other person.

The relevant entry from service tax is here as under:

“service provided by a person located in 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.”

Further, in respect of services provided or agreed to be provided by a person located in non-taxable territory to a person located in 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, person liable for paying service tax other than the service provider shall be the importer as defined under clause (26) of section 2 of the Customs Act, 1962 (52 of 1962) of such goods.

Here, supplier of service is located in non-taxable territory & recipient of service is also located in non-territory and importer is person other than the recipient of service unlike the situation in GST where supplier is located in non-taxable territory and recipient of service is importer of goods located in India.

 Comparison between GST & Service Tax provisions

Here, it is relevant to discuss that to the extent the provisions of the service tax regime differ from the GST regime. In order to collect tax on the services of transportation of goods by vessels upto a port in India, the Government notified the importer (i.e. person other than service provider or service recipient) as the person liable to pay tax.

Since, the same was within the legislative competence of the Central Government but the same is not the case with GST as the statute specifically provides for service recipient only. Here, based on the section 5(3) of the IGST Act read with NN 10/2017-IT (rate) dated 28.06.2017 service recipient is liable for payment of GST on ocean freight under reverse charge and by any means importer cannot be construed as recipient of service. It is evident here that in respective transaction recipient of service is supplier or exporter of goods. As a result, importer of goods (in the capacity of other person) not being recipient of service is not required to pay GST on such ocean freight.

Further, in respect of valuation the Government has provided by way of corrigendum mentioned above that where value of ocean freight is not available, the same shall be deemed to be 10% of the CIF value (sum of cost, insurance, and freight) of imported goods.

Also, as mentioned above ocean freight will be included in the transaction value of imported goods on which IGST is to be paid by importer of goods. Thus, levy of GST on ocean freight will result into double taxation on value of ocean freight.

To determine levy of GST on ocean freight, applications have been made to Authority of Advance Ruling and and decisions were made against the applicant as provided here under:

Ocean Freight liable to double taxation in case of CIF imports

The Rajasthan Authority for Advance Ruling in the case of M/s Chambal Fertilisers & Chemicals Limited, RAJ/AAR/2018-19/14 held that the service supplied by foreign shipping entity of transportation of goods in a vessel to a port in India is an inter-State supply in terms of section 7 of the IGST Act and IGST is leviable on the same under section 5 of the IGST Act.

As per Entry No. 10 of NN 10/2017-IT (Rate) dated 28.06.2017 issued under section 5 of the IGST Act, in case of import of goods on CIF (Cost, Insurance, Freight) basis, the importer of goods is liable to pay GST under reverse charge mechanism on the component of ocean freight paid by foreign supplier to the shipping company.

Also, in the case of M/s Bahl Papers Mills Ltd. MANU/AR/0056/2018, the Uttrakhand AAR held that:

In this regard it is observed that vide NN 8/2017- IT (rate): MANU/GSIT/0006/2017 dated 28.6.2017 and NN 10/2017- IT (rate): MANU/GSIT/0014/2017 dated 28.6.2017 an importer is required to pay IGST on the ocean freight. Therefore as on date, even if the importer has already paid IGST on CIF value imported goods, he is still required to pay IGST on ocean fright. Authority also observe that the applicant has also submitted a copy of Special Civil Application No. 726 of 2018 filed by Mohit Minerals (P) Ltd. before Hon'ble High Court of Gujarat in this regard. Authority observes that mere filing of an application before the Hon'ble High Court does not render a notification issued by the Central Government ultra vires until or unless the same is turned down by the competent court.

Judicial Section

Recently, a landmark judgment has been announced by the in the case of Mohit Minerals (P) Ltd. vs. Union of India cited in [2020] 113 taxmann.com 436 (Gujarat). The Hon’ble High Court of Gujarat has held that no tax is leviable under Integrated Goods and Service Tax Act, 2017, 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 upto customs station of clearance in India and levy and collection of tax of such ocean freight is not permissible in law. The Hon’ble High Court has held that notification no. 8/2017-IT (Rate) dated 28.06.2017 and entry 10 of notification no. 10/2017-IT (Rate) dated 28.06.2017 are unconstitutional.

Consequently, the Hon’ble High Court of Gujarat in the case of Gokul Agro Resources Ltd. vs. Union of India cited in [2020] 116 taxmann.com 1 (Gujarat), has further announced the decision in favour of the applicant by upholding the decision of the case Mohit Minerals (P.) Ltd. vs. High Court of Gujarat, prayed for issuance of directions to Competent Authority to grant refund of amount of IGST already paid pursuant to said Entry, Entry No. 10 was to be declared as ultra vires of section 5(3) of the IGST Act and further, assessee was directed to prefer application for refund of amount before Competent Authority.

 Yet again, the Hon’ble High Court of Gujarat in the case of M/s Sal Steel Ltd. vs. Union of India has challenged the levy of service tax on ocean freight services and proclaimed the decision in favour of applicant by striking down the chargeability of service on ocean freight services. The High Court has allowed the writ application by contending that

46. In the present cases, since the value of ocean freight is not available, Sub Rule (7CA) is inserted in Rule 6 of the Service Tax Rules thereby giving an option to the importer to pay service tax on 1.4% of CIF value of imported goods. But this insertion of Sub Rule (7CA) in Rule 6 is also ultra vires the machinery provision of Section 67, and also rule making power of Section 94.
47. There is no power conferred upon the Central Government under Section 94 to fix value of any service, the way such power is conferred upon the Board under Section 14(2) of the Customs Act, 1962. In absence of any power vested in the Central Government to fix value of any service by way of making a rule or a notification, Rule 6(7CA) of the Service Tax Rules is ultra vires the Rule making power. Secondly, it is an option under Rule 6(7CA) to pay service tax on the amount calculated @1.5% of CIF value of the imported goods; but if the importer does not exercise this option, then there is void because actual value of this service i.e. ocean freight is not known even to the Revenue officers. Therefore, the scheme of taxation would fail and fall in absence of a machinery provision for valuation of the service when tax is proposed to be recovered from a third party not having any information about the value of such service.
48. Therefore, Rule 6(7CA) amended by the Central Government is also ultra vires Section 67 and Section 94 of the Finance Act.

…….

58. In view of the aforesaid discussion, the writ application succeeds and is hereby allowed. The Notification Nos.15/2017- ST and 16/2017-ST making Rule 2(1)(d)(EEC) and Rule 6(7CA) of the Service Tax Rules and inserting Explanation-V to reverse charge Notification No.30/2012-ST is struck down as ultra vires Sections 64, 66B, 67 and 94 of the Finance Act, 1994; and consequently the proceedings initiated against the writ applicants by way of show cause notice and enquiries for collecting service tax from them as importers on sea transportation service in CIF contracts are hereby quashed and set aside with all consequential reliefs and benefits.

By way of series of judgment announced by Hon’ble Gujarat High Court, it can be interpreted that IGST should not be levied and collected on Ocean Freight under RCM and tax paid, if any, should be claimed as refund.

Author’s View: Based on the discussion held supra, we are of the view that GST shall not be levied under RCM on Ocean Freight. However, it can be analyzed that in the absence of proper clarification in respect of levy of GST on ocean freight, some decisions are already given against the importer. Therefore, non-payment of GST on ocean freight by importer under reverse charge could remain subject to litigation till GST Department/Council issue some clarificatory statement.