The Hon’ble Supreme Court vide its order dated 19th May 2022 in the matter of Union of India Vs. Mohit Minerals Private Limited in Civil Appeal NOS 1390, 1394 OF 2022 & OTHS held that the IGST would not be levied on the ‘service’ portion in CIF contracts entered by the Indian importer with the foreign shipping lines when the IGST has already been paid on the ‘composite supply’ comprising of supply of goods and supply of transportation and, insurance etc.  It was further held that the impugned levy on the ‘service aspect’ is in violation of the principle of ‘Composite Supply’ prescribed under Section 2(30) read with Section 8 of the CGST.

The Appellant (Union of India) preferred the appeal before the Hon’ble Supreme Court against the judgment of Division Bench of Gujarat High Court dated 23rd January 2020 Wherein the Gujarat High Court allowed the writ petition under Article 226 challenging the constitutional validity of Entry 9 of Notification 8/2017 dated 28.06.2017 and Serial No. 10 of Notification 10/2017 dated 28.06.2017.

Facts:

  • The respondents import non-coking coal from Indonesia, South Africa and the U.S. by ocean transport on a ‘Cost-Insurance-Freight’ basis which is supplied to domestic industries. The goods are transported from a place outside India, up-to the customs station in India and the respondents is paying custom duty on the import of coal, which includes the value of ocean freight.  The foreign shipping lines raises the freight invoice to the foreign exporter without involvement of the importer, however in the case of FOB ‘Free on Board’ ocean freight is paid by the importer only.
  • That prior to introduction of GST the ocean freight was exempted vide Notification 25/2012 dated 20th June 2012, however later on it was made taxable with the issuance of Notification 12/2017 dated 12th January 2017.
  • That with the introduction of GST Notification No. 8/2017 – Integrated Tax (Rate) dated 28th June 2017 by the Central Government on the recommendation of the GST Council, and in exercise of powers under Section 5(1), 6(1) and Section 20 (iii) of IGST Act read with Section 15(5) and Section 16(1) of CGST Act, entry 9 of the said notification levied an ‘integrated tax at the rate of 5 percent on the supply of specified services, including transportation of goods, in a vessel from a place outside India up to the Customs station of clearance in India.’
  • That another notification No. 10/2017 dated 28.06.2017 was issued categorizing the recipient of services of supply of goods by a person in a non-taxable territory by a vessel to include an importer under Section 2(26) of the Customs Act 1962 at Serial No. 10 of the said Notification.
  • Further section 5(1) provides for levy of integrated tax on all inter-state supplies of goods and services or both and it can also be levied on goods imported in India on the value determined under Section 3 of the Custom Tariff Act 1975, at the point when custom duties are levied on goods under Section 12 of Custom Act, 1862. Section 11 provides that the place of supply of goods in the case of goods imported into India shall be the place of the importer. Section 13(9) of the IGST Act contemplates that the place of supply of services, in the case of transportation of goods shall be the destination of the goods
  • It was the contention of the respondents that impugned notifications give rise to an element of double taxation as the value of Ocean Freight is included in the value of goods in case of CIF contract for the purpose of custom duty which the importer is liable to pay, however liability of IGST on FOB basis is not disputed by the respondents.
  • The respondent before the High Court challenged the impugned notifications i.e. Notification 8/2017 entry 9 & Serial No. 10 of Notification 10/2017 contending that these notifications are ultra-vires the CGST & IGST Act and with all other submissions it was submitted that it creates a deeming fiction and a separate taxable event which is not permissible in law.
  • The contention of Union of India before the High Court was that although tax is being paid twice on the value of ocean freight, it is not unconstitutional as the tax is on two different aspects of the transaction, namely, the supply of service and import of goods.
  • The Division Bench of Gujarat High Court while declaring the impugned notifications unconstitutional held that ‘ (i) The importer of goods on a CIF basis is not the recipient of the transport services as Section 2(93) of the CGST Act, (ii) Section 5(3) of the IGST Act enables the Government to stipulate categories of supply, not specify a third-party as a recipient of such supply, (iii) There is no territorial nexus as the supply of service of transportation of goods is by a person in non-taxable territory to another person in non-taxable territory, (iv) since the goods are transported on a CIF basis, the recipient of service is the foreign exporter who is outside India, (v) Section 7(5)(c) of the IGST Act cannot be read so extensively that it conflates the “supply of goods or services or both in the taxable territory” to “place of supply”, (vi) Section 12 & 13 would not apply if the supplier and recipient of service is based outside India, (vii) That Section 20 and Section 13 IGST Act are applicable only vis-à-vis the actual recipient of the supply of service, which is the foreign exporter in this case, (viii) Section 15(1) of the CGST Act enables the determination of the value of the supply, only between the actual supplier and actual recipient of the service, (ix) importer would not be in a position to avail ITC as the importer is not the recipient of Service as per Section 2(93), (x) Since the importer pays customs duties on the goods which include the value of ocean freight, the impugned notifications impose double taxation through a delegated legislation, which is impermissible.

Submissions on behalf of Union of India (Appellant): –

  • It was submitted on the behalf of the Appellant that the Parliament is empowered to formulate the principles of determining when a supply of goods or services takes place in any of the ways mentioned in Article 286(1), which includes imports and under Article 269 enables Union Government to levy GST on inter-state supplies., however explanation to Article 269(1) creates a deeming fiction that a supply of goods or services in the course of imports is to be considered as a supply of goods or services or both in the course of inter-State trade.
  • Further Article 269A (5) enables Parliament to formulate the principles for determining the place of supply and when a supply of goods and services or both takes place in the course of inter-State trade or commerce.
  • In terms of Article 286(2) and Article 269 A(1), Section 5(1)), export of goods [Section 2(5)], export of services [Section 2(6)], import of goods [Section 2(10)], import of services [Section 2(11)], location of recipient of services [Section 2(14)] and location of supplier of services [Section 2(15) of IGST Act, were enacted. In the same way in terms Article 269A (5), Section 7, Section 9, Section 11, Section 12 & Section 13 of IGST Act, were enacted.
  • That placing reliance on the decision of Constitution Bench in Mathuram Agrawal v. State of Madhya Pradesh, and on Gobind Saran Ganga Saran v. Commissioner of Sales Tax, it was submitted the charge created by Section 5(1) of the IGST Act can extend to an ocean freight transaction to be taxed in the hands of the importer.
  • That Section 5(1) (Charging Section) fulfils the four fundamental principles of taxing enactment i.e. (i) Taxable Event (ii) Taxable Value (determined under Section 15 of CGST) (iii) Taxable rate (not exceeding 40% as may be notified) (iv) Taxable Person.
  • The impugned notifications have been issued in exercise of powers under Sub section (3) & (4) of Section 9 of CGST Act, Section 2(98) of the CGST Act and sub section (3) & (4) of Section 5 of IGST Act.
  • Any person covered by reverse charge mechanism becomes a taxable person in terms of Section 2(107) read with Section 24(iii), further it is to be noted that Section 24(iii) provides for ‘persons who are required to pay tax under reverse charge” and not “persons who are recipient of services under Section 2(93) of the CGST Act 2017’.
  • That Notification 10/2017 identifies an importer as a recipient for the purposes of reverse charge. The power to issue such a notification can be derived from Sections 5(3) and 5(4) of the IGST. Thus, the impugned notifications are legitimate exercise of delegated legislation.
  • That import of service in this case is an inter-State Supply in terms of Section 7(4) read with Section 13(1) and 13(9). Further Section 13(9) provides for ‘the 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.’ Even though the contracting parties are outside the territory of India, the provision of service and consequently the consumption and exhaustion of service which is a critical limb, both commercially and legally, happens only in the hands of the Indian importer.
  • That Section 13(5) of the CGST Act provides for a residual provision for determining time of supply to be the date on which tax is paid.
  • That the CIF transaction and IGST on ocean freight are two independent transactions and do not qualify as ‘Composite Supply’ under Section 2(30) of the CGST Act. Further GST being a destination-based tax, is sought to be imposed on the supply of service and not on the goods.
  • That the contract between the foreign supplier and the foreign exporter is a different contract and independent of the contract entered between the foreign exporter and Indian importer. Merely because the contracts are inter-related does not make it a Composite Supply.
  • Further it was submitted that taxability of ‘supply of goods’ is governed by Section 5(1) read with Section 3(7) & 3(8) of the Customs tariff Act. On the other hand, the taxability of ‘supply of service’ is governed by Section 5(1) read with Section 24(iii) and Section 5(5).
  • Reliance was place on the Constitution Bench of this Court in McDowell and Company v. Commercial Tax Officer Wherein it was held that ‘a single element can constitute the basis of a levy and can also form part of the value for another transaction. This cannot be termed as double taxation.’
  • That relying on the decisions of the Supreme Court in M/s Electronic Corporation of India v. Commissioner of Income Tax and GVK Industries v. Income Tax Officers, it was submitted that there is a sufficient territorial nexus as the importer who is a final beneficiary is located in India.
  • Referring to Section 2(93) which provides for ‘recipient of intangible service as one who does not pay consideration’, and to Section 24(iii), Section 2(98) of the CGST Act, Section 5(3) of the IGST Act, it was submitted that on a conjoint reading of Section 5(3) of the IGST Act read with Section 2(93) of the CGST Act, a service recipient can be identified through a notification. Moreover Section 2(31) of CGST Act defines consideration and does not restrict its payment to only the owner of such goods and services. Thus, the Indian importer would qualify as recipient of service.
  • That the impugned notifications would be saved by Section 5(4) which allows the Union Government to specify a class of registered persons, who shall pay tax on reverse charge when supply of good or services is received from an unregistered person. Mere non reference of the same will not vitiate its exercise and application in facts and circumstances of the case.
  • Relying on Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills and Avinder Singh v. State of Punjab, it was submitted that constitutional mandate of Article 269A and 286 finds effect under IGST Act. However, Only the identification of the taxable person is delegated to the Union Government which makes its decisions on the basis of the recommendations of the GST Council and rest is already there in the act.
  • That GST is a consumption tax and is applicable where the supply is consumed. Foreign exporter and shipping line is located outside the taxable territory, and the Indian importer has to be taxed on reverse charge as the service is consumed in India. Further the tax paid would be available to Indian importer as ITC and can be used to offset its output liability. Thus, there is no additional burden on the importer.
  • Relying on Union of India v. VKC Footsteps India Private Limited, wherein it was held that ‘that there is a need for a harmonised structure of goods and service tax’, it was submitted that the spirit of cooperative federalism must guide the functioning of the GST Council as envisaged under Article 279A (6). As prescribed under Article 279A (6) GST council is empowered to decide on every aspect of GST Law and its recommendations are binding on executive and the legislature.
  • That Article 246A states that the power to legislate GST laws is only with the Union of India and the States. Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A. Judicial interpretation must strike a harmony such that Parliament, the state legislatures and the GST Council work in unison and harmony.
  • That Section 5(1) delegates certain functions to GST council in order to achieve legislative object. The Union and the States after exercising their legislative power have agreed to go by the recommendations of the GST Council, the spirit of this Cooperative federalism must be respected by upholding the constitutional validity of impugned notifications. 

Supplementary submissions on behalf of Union of India: –

  1. The purpose of the integrated tax is to introduce a level playing field between foreign shipping lines and Indian shipping lines.
  2. Referring Section 2(107) of the CGST which defines ‘taxable person’, and as any person liable to be registered under Section 22 and 24, it was submitted that Section 24 classifies persons liable for compulsory registration, and Section 24(iii) includes persons governed by the reverse charge mechanism.
  3. In Laghu Udyog Bharati v. Union of India, ‘this Court struck down the imposition of service tax on a reverse charge basis since the legislature had failed to identify the persons on whom service tax could be imposed’, which is not the case in GST as Section 24(iii) of the CGST Act which also defines persons liable to pay tax on reverse charge as taxable person.
  4. The notification 8/2017 does not impinge on Rule 31 of the CGST Rules but only aids uniformity.
  5. That countering the contention of the respondents i.e., ‘As per Section (5) and 2(87) of CGST, prescription can only be through rules’, it was submitted referring to Section 15(1), (2), (3), (4) & (5) that delegation is envisaged in the statutory mechanism.
  6. That a static meaning to Section 2(93) would be like denuding the power to notify person for reverse charge under Section 5(1) and Section 5(2) of the IGST Act read with Section 24(iii) of the CGST Act.
  7. Referring to Section 2(98), Section 2(93), Section 2 (84) of CGST Act & Section 5(3) of IGST Act, it was submitted that consideration is paid by the foreign exporter to the foreign shipping line and it does not vitiate the IGST Act’s scheme which enables payment of tax on reverse charge basis.
  8. That reference was made to section 13(9) and this court decision in Union of India v. Jalyan Udyog, wherein it was held that ‘deeming fictions can be created even by the executive’.
  9. That the decision of this court in BSNL Vs. Union of India on double taxation has no applicability to the present case.
  10. The integrated tax derives authority from Section 5(4) of the IGST Act which allows government to specify a class of registered person who shall pay tax on receipt of goods or supplies from an unregistered supplier, thus the importer would be liable to tax from 1st February, 2019, though exempted for the period from 13th October 2017 till 31st January 2019.
  11. That under Article 279A(4), the decisions of GST council becomes recommendations to the Union and the States and the GST council is the only constitutional body which act as a platform for the federal units to work in harmonious matt Janer.
  12. The integrated tax was introduced to ensure a level playing field between foreign and Indian shipping lines. This objective must be appreciated while determining constitutionality. 

Submissions on behalf of the respondent-assessee: –

  • It was submitted by the first counsel appearing on behalf of the respondents that under Section 5(4) & Section 5(3) the Government cannot specify the person liable to pay GST under reverse charge mechanism and the power under section 5(3) is only to specify the categories of supply. The impugned notification has been issued under Section 5(3), therefore, by impugned notification 10/2017 the Government can only specify the ‘categories of supply’.
  • Further in CGST Act and IGST Act, under Section 5(5) of the IGST Act only any person other than a supplier or recipient can be made liable to pay tax and if the intent of the Parliament is to tax any other person than a supplier of recipient, it would have been specified in the legislation.
  • That as per Section 2(98) only recipient can be made liable to pay tax under reverse charge basis and cannot be disintegrated from the recipient of supply. Moreover, Section 5(3) clearly provides that tax shall be paid on reverse charge by the recipient.
  • That countering the submissions of the Appellant i.e. ‘that foreign exporter is recipient under clause (a) of Section 2(93) and the importer is recipient under clause (c) of Section 2(93)’, submitted that clause (a), (b), (c) are mutually exclusive cannot be simultaneously applied. The question as raised by the appellant that ‘who is the beneficiary’ is not relevant in determining the recipient.
  • Referring to Section 7(3) and Section 8(2) of IGST Act, it was submitted that as per the contention of the Appellant the transaction in dispute will become intra & inter-state supply both, such a situation has not been envisaged by the Parliament.
  • That if the contention of the Appellant is accepted, there would be two recipients and ITC would be available to both and the rate of tax is dependent on the recipient of supply. If there are two recipients, this would result in an anomaly.  Further as per section 10(1) (b) of the IGST Act the place of supply of good in three party transaction would be the principal place of the business of the recipient and not the person to whom goods are delivered.
  • That referring to Section 2(93), it was submitted that this section provides three categories of recipients and also provides that that if the Act does not use the term ‘recipient’ but ‘makes a reference to the person to whom supply is made, then they shall be construed as a “recipient”.’ It does not however, create a new category of recipient.
  • The taxable event for levy of GST is ‘supply’ of goods or service. In the absence of supply, no tax can be levied under IGST, CGST or State Goods and Services Tax Act in view of Article 366(12A) of the Constitution & Section 5 of the IGST Act.
  • That the CGST Act under Section 7(1) clause (a) & (b) does not envisage a taxable supply without consideration except those specified in Schedule – I, thus the argument of the Appellant that supplies can be made without consideration is redundant.
  • The unamended Section 5(4) of IGST provides for payment of tax on reverse charge by a registered person in case of supply from an unregistered person. However, Section 5(4) was amended in GST (Amendment Act), 2018 w.e.f. from 1st February 2019 to provide that ‘the Government may, on recommendation of the GST council, by notification specify a class of registered persons who shall be liable to pay tax on reverse charge in case of supply from a unregistered person.’  Thus, there was no power to issue the impugned notification on date of its issuance, i.e. 28.06.2017, and it came later on in February 2019.
  • Even after the amendment of Section 5(4), only the recipient can be specified as a person liable to pay tax under Section 2(93), in the same way, only the recipient can be made liable to tax on reverse charge under Section 2(98).
  • That Section 13(9) is relevant only to determine the place of supply and not the recipient of Supply. Further the impugned notification has been issued under Section 5(3) not under Article 279A of the constitution. The proper course of implementation was not followed, by making an amendment in IGST Act and seek approval of Parliament.
  • That countering the contention of the Appellant, i.e. ‘the levy of tax is to create parity for Indian shipping lines with foreign shippers’ it was submitted that the impugned notification has been lifted from erstwhile service tax regime without considering the changes in language in Section 5(3) of IGST as opposed to Section 68(2) of the Finance Act. Thus, the notification is ultra vires the act.
  • Further referring to Section 20 of IGST read with Section 12 & 13 of CGST, it was submitted that the scheme of IGST does not envisage a person other than the supplier or the recipient as a person liable to tax and person other than a recipient cannot determine the time of supply.
  • That in case of CIF contract, the consideration for transportation of goods is paid by the foreign exporter to the foreign shipper, and not by the Indian importer. Thus, the importer is not the recipient and the argument that the Indian importer has received the transportation services is irrational.
  • That serial no. 9(ii) of Notification 8/2017 read with para 4 of serial no. 10 of Notification 9/2017 Integrated tax (Rate) date 28.06.2017 provides for services by a person in non-taxable territory to the person in non-taxable territory. In case of ocean freight, these notification recognises exporter as recipient and, the argument of the appellant that the IGST paid on the goods at the time of import is customs duty not tax, is erroneous.
  • Further the contention of Union Government that the proviso to Section 5(1) of the IGST Act does not contain the word ‘supply’ and thus, the tax is imposed on import of goods irrespective of whether the transaction is supply or not, is erroneous, merely absence of word ‘Supply’ will not give rise to a situation that the transaction of import of goods becomes leviable to IGST.
  • The Government has also issued various notifications exempting payment of IGST in case of import of goods on lease or temporary import basis. The intention of Government is not to impose IGST in case of import of goods that do not amount to supply.
  • Second Counsel appearing on behalf of the respondents submitted that a CIF contract is an inclusive price covering cost, insurance and freight payable for carriage of goods to the destination as per the contract. And if the seller tenders the documents to buyer, the proper shipping documents, then in case of loss, his remedies lies against the carrier but not the seller.
  • Further the buyer (Indian importer) was not obligated to pay it. If the service is not received, then the question of reverse charge does not arise.
  • That Section 5(3) & (4) are merely machinery provisions for collection of tax, and not the charging sections, which is Section 5(1). Since there is no separate levy under Section 5(1) on ocean freight, as it is an import of goods which already suffers IGST on CIF value, the question of reverse charge does not arise.
  • There must be taxable event, and if it’s not there, it cannot be created through a delegated legislation by the GST Council. There is an absence of a statutory fiction by which the CIF contract can be split into contract for supply of goods and services.  Further the recipient in present case would fall under clause (a) of Section 2(93) of the CGST Act.
  • Referring to Section 2(30) read with Section 2(93) and Section 8 of the CGST, it was submitted that these sections maintain the integrity of the (CIF) composite contract by providing that where goods come with both insurance and freight, the tax is imposed only on supply of goods. Moreover, the findings of the High Court that the notification is ultra-vires has not been challenged by the Appellant, the only contention raised is that Section 5(1) of IGST Act satisfies all ingredient of valid tax law.
  • That entry 9(ii) of the Notification 8/2017 provides for imposition of tax on Ocean Freight. Such a power however, not available in the statute. Moreover para 4 determines the value of service as 10% of the CIF value, which is contrary to Section 15(1).
  • That Section 7(4) treats standalone services imported into India as inter-State supply and does not artificially bifurcate by assuming ocean freight in the transaction of import of goods. Further Section 13 of the IGST has no application to the case as it relates to import of goods and not services standalone.
  • That IGST has not extra-territorial jurisdiction. As stated in GVK Industries(supra) ‘Parliament may exercise its powers with respect to extra-territorial aspect when it has a nexus with India’ cannot be exercised through delegated legislation.
  • Third Counsel (in addition to the submissions already made above) appearing on behalf of the respondents submitted the levy of IGST through Notification 10/2017 Integrated Tax (Rate) is extra-territorial and ultra-vires Section (1) read with Section 2(22) of the IGST Act as levy imposed is on the service of transportation provided by the foreign shipping line to foreign exporter, which is outside the taxable territory.
  • For levy of IGST, the service must be a supply as per the provisions of IGST Act read with Section 7 of the CGST Act. Thus, any service received outside the territory of India cannot be considered to be ‘supply’ under the IGST Act or the CGST Act.
  • To impose levy on service which is extra-territorial, there has to be a deeming fiction in the statutory provisions, and the same is absent in the present case.
  • That if the argument of the Appellant is accepted, then any service rendered outside India can be taxed in India, on the ground that the recipient is in India.
  • Article 245(2) of the Constitution states that a law made by the Parliament will not be invalid on the ground that it has extra-territorial operation. It is to be noted it includes ‘law made by Parliament’ not executive notifications.
  • The value of CIF contract is indivisible, the only way to artificially dissect the value of CIF contract is by way of statute, which is absent in this case.
  • The Appellant’s reliance on the nexus theory to justify the levy of GST on ocean freight, by equating it with the imposition of income tax on income accruing in India or customs duty imposed on goods imported in Inda, is erroneous as in the income tax nexus is provide by deeming fiction under Section 5(2) and in case of Customs duty, the taxing event is the goods entering the territory of India. In the absence of such a provision, the freight services rendered outside India cannot be deemed to be received in India merely because the recipient is in India
  • The impugned levy of IGST on Ocean Freight amount to double taxation, on the same transaction as the value of imported goods includes the cost of transportation, freight and insurance.
  • That in view of the decision of this court in BSNL (Supra), the contention of the Appellant relying on ‘aspect theory’ ‘that the impugned notifications taxes the ‘service’ element of ocean freight and the goods element is taxed by Section 5 of IGST’ is not sustainable.
  • The GST Council which has been created by Article 279A of the Constitution is a recommendatory body, whose recommendations can be implemented by either amending the CGST Act or the IGST Act or by issuing a notification. Further the notifications issued cannot be ultra vires the parent legislation. Moreover, the interpretation of Article, was not the issue before the High Court.  Thus, the present Appeal should be restricted to validity of impugned notifications only.
  • Fourth Counsel (in addition to above submissions) appearing on behalf of the respondents submits that on reading Section 7(4) with Section 2(11) of the IGST Act, it implies that in case of import of services into the territory of India, the location of the supplier of services is outside India and the location of the recipient is in India. Thus, the IGST Act covers either import of goods or import of services and not services subsumed into the value of goods imported into India.
  • The IGST Act was never intended to apply to the importer of goods on a CIF basis as the services are provided and consumed before the goods reach India and have no nexus with the Indian importer.
  • The transaction between two persons located outside India is not chargeable under Section 5(1) read with the proviso and Section 7(4) read with Section 2(11) of the IGST Act. Thus, Notification 8/2017 is ultra vires and Notification 10/2017, providing for reverse charge is also ultra vires the IGST Act.
  • Fifth Counsel appearing on behalf of the respondents submits that the importers in a CIF contract do not have any privity of contract with the supplier of the transportation service since they neither make payment to the service provider, nor avail any service. The importers only purchase and import goods.
  • The impugned levy is contrary to the object and purpose of the IGST Act. The impugned levy of IGST on the freight element of CIF contracts and high seas purchase contracts is ultra vires as IGST is paid on the total value of goods.
  • Reliance was placed on the judgment of Ispat Industries Vs. Commissioner of Customs Wherein it was held that in the context of imposition of customs duty, it was held that in a CIF contract, the freight is part of the price paid to the seller and further addition of transportation charges is contrary to the statutory provisions. Further the judgment of this court in Union of India V. Jalyan Udyog which states that a legal fiction can be created even by delegated legislation is not applicable to the present case as the fiction created was within the parameters of the parent provision.
  • Similar submissions were made by other counsels appearing on behalf of the Respondents.

Held:

  • The Hon’ble Supreme after considering the submissions from the both sides, facts of the case & law applicable on the issue, discussed the Constitutional Architecture of the GST and observed that as per Article 246A both the Parliament and the State legislatures have the power to legislate on GST. Further, Article 279A constitutes the GST council which shall make recommendations to the Union and the States on a wide range of subjects relating to GST.
  • The Hon’ble Court took note of the contention of the Union of India (the Appellant) that ‘the GST council recommendations are binding on legislature and the executive, the rule making power of Government under the provisions of IGST and CGST Act, exercisable on ‘recommendations’ of the GST Council, are also very wide. That the combined reading of Article 246A & 279A makes it clear that GST council is the ultimate decision-making body in framing the GST law since it is a constitutional body that act as a converging platform for both Union and the States. The power of the Parliament and the State Legislature under Article 246A and the power of the GST Council under Article 279A must be balanced and harmonised, such that neither overrides the other. The recommendations by the GST Council are transformed into legislation on a combined reading of Article 279A and Sections 5,6, and 22 of the IGST Act 2017 and Sections 9,11, and 164 of the CGST Act.
  • The Hon’ble Court discussing the Legislative History of Constitution Amendment Act, 2016 observed that in 2004, the Task force on implementation of Fiscal Responsibility and Budget Management Act, 2003 had recommended a shift to consumption taxes to increase efficiency in Production and enhance international competitiveness of Indian Goods and Services. The need for such an enormous change in the tax regime arose out of the distortions in the then existing indirect tax regime which suffered drawback of multiplicity of taxes, taxable events, compliances, and authorities.  The First discussion paper on Goods and Service tax in India explained the rationale behind introducing GST which was that all taxes like Central Excise, Service Tax, VAT, luxury tax, entertainment tax will be subsumed in ‘one tax’.  Further States should be given the power to tax all the services, which was earlier with the Centre and also to remove the cascading effect on account of CENVAT element.
  • That Parliament introduced the Constitution (one hundred and fifteenth Amendment) Bill 2011 to amend the provisions of the Constitution to introduce the GST regime. Further the Constitution (one hundred and Twenty-Second Amendment) Bill 2014 was introduced to replace almost all the indirect taxes that were levied by the State Governments and the Union Government, with a singular tax system to eliminate the cascading effect of multiple taxes and to provide for a common national market.  The Finance Minister while introducing 2014 bill noted that the object of the constitutional amendment is to bring about a ‘certain amount of convergence between these taxes so that the taxation mechanism becomes extremely simple’ and to prevent the complexities inherent in and the cascading effect of multiplicity of taxes.
  • The Hon’ble Court taking reference of decision in Hoecst Pharmaceuticals Ltd. v. State of Bihar observed that prior to introduction of Article 246A and Article 279A, the Union and the States had exclusive legislative powers on taxation. The Union and the State could not impose the tax under the same head since the concurrent list did not include an entry for taxes.  The Union had the exclusive power to impose indirect taxes on inter-state sale of goods, service tax, customs duty, service tax.   On the other hand, the States had the exclusive powers to impose tax on intra-State sale of goods, luxury tax, entertainment tax, purchase tax, and taxes on gambling and betting.
  • Referring to the judgment of this court in Union of India v. Mohit Mineral Pvt. Ltd. and in Baiku v. State Tax Officer, GST, it was observed that after the introduction of Article 246A the Parliament and the State legislatures can make laws simultaneously.
  • Reference was also made to the decision in VKC Footsteps (supra) wherein it was held that ‘Article 246A provides Parliament and the State legislature with the concurrent power to legislate on GST. Unlike Article 254 which stipulates that the law made by Parliament on a subject in the Concurrent list shall prevail over conflicting laws made by the State legislature, the constitutional design of Article 246A does not stipulate the manner in which such inconsistency between the laws made by Parliament and the State legislature on GST can be resolved.
  • That the Hon’ble Court discussing the role of GST Council observed that The Thirteenth Finance Commission set up the Task Force on GST. The Task Force recommended that the Empowered Committee of State Finance Ministers may, upon the introduction of GST, be transformed into a permanent constitutional body known as the ‘Council of Finance Ministers.
  • Thereafter the 2011 Amendment Bill included Article 279A in the Constitution which constituted the GST Council. That according to the draft of Article 279A, every decision of the GST Council had to be taken with the consensus of the all the members present at the meeting.  The Bill also provided for the establishment of GST Dispute Settlement Authority under Article 279B, to adjudicate on the complaint by a State Government or the Union Government regarding deviations from any recommendations of the Council which resulted in loss of revenue.  However later, issues being raised by the States, it was omitted by the Committee and the provision GST Dispute Settlement was inserted in Article 279A itself.
  • The Standing Committee on Finance, Ministry of Finance in its 73rd report on the 2011 Amendment Bill explained the salient features of the Amendment Bill introducing the GST regime. It was noted that the GST Council will be a joint forum for the Union and the States to discuss issues on GST and the recommendations of the GST Council will be a benchmark and guiding force for the Union and State Governments. Further it was observed that the legislature would be free to exercise its powers on all issues recommended by the Council. 
  • That on recommendations being sought by the Attorney General, in response it was stated by the Attorney General that though the GST Council has the power to make recommendations, both Parliament and State legislatures, have the power to either accept or reject those recommendations.
  • Later taking into account the recommendations of the Standing Committee, Parliament introduced the 2014 Amendment Bill in which Article 279B was deleted and Council was given the power under Article 279A (11) to devise a mechanism of dispute resolution. The role of the GST Council is to make recommendations to the Union and the States on seven specific categories revolving around GST including principles of levy and apportionment of GST. Further Clause (9) provides that the Council shall take a decision with three-fourths majority of the members present and voting. The vote of the Union Government is given the weightage of one-third of the total votes cast, and the votes of the State Governments are given a weightage of two-thirds of the total votes.
  • The Court discussing about the Parliamentary debates, observed that the inclusion of Article 279A in the 2014 Amendment Bill raised two important concerns in Parliament: first, the GST Council could effectively override the legislative sovereignty of Parliament and the State legislatures; and second, the fiscal autonomy of the States would be diminished since the Centre has the power to stall a consensus reached by all the States. However, the same was very well answered by the FinanceMinister responding to that Member of Parliament of the State of Tamil Nadu that ‘Once you get into the GST pipeline, the States and the Centre will have to interact together; and once they interact together, the State of Tamil Nadu will be involved in determining and taking decisions relating to the States. So, none of us is going to be surrendering his or her authority or autonomy.’
  • The Government also submitted that the voting pattern between the Union and the States does not provide unequal power to any one of the constituent units. The Centre holding only 1/3rd of the votes, the Centre would require support of 20 States/Union Territories to get a resolution passed. This shows that Centre would need co-operation of States to get any decision taken at the GST Council.
  • The parliamentary debates and the legislative history of the constitutional amendment, and the committee reports on Articles 246A and 279A indicate that ‘the deletion of Article 279B while introducing the 2014 Amendment Bill and the inclusion of Article 279(11) in the text of the Constitution has brought about two substantial changes: one, that instead of the creation of a dispute settlement authority, the Council is vested with the power to decide on ‘modalities’ of dispute resolution; and second, while Article 279B stipulated that the authority shall adjudicate on ‘disputes arising out of the deviation from the recommendations’, Article 279(11) states that the disputes arising out of recommendations shall be resolved’ and the recommendations be made with a majority instead of unanimity.
  • The Hon’ble Court discussing the nature of recommendations of GST Council, observed that the Constitution Amendment Act 2016 alters the legislative distribution between the Centre and the State on indirect taxation by providing Parliament and State legislatures with ‘simultaneous powers’ and no provision for repugnancy. Therefore, according to Article 246A, both Parliament and the State Legislature possess equal power to legislate on aspects of GST. The recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the States’ votes have a weightage of two-thirds of the total votes cast.
  • Further the discussions in the GST Council impact both federalism and democracy. Article 246A treats the Centre and States as equal units by conferring a simultaneous power of enacting law on GST.
  • The Indian Constitution has sometimes been described as quasi-federal or a Constitution with a ‘centralising drift’. This is because when the Constitution is read as a whole, the Union is granted a larger share of the power. However, there are instances such as Article 246A, where the Centre and the States are conferred equal power. Merely because a few provisions of the Constitution provide the Union with a greater share of power, the provisions in which the federal units are envisaged to possess equal power, cannot be construed in favour of the Union.
  • The GST Council is not merely a constitutional body restricted to the indirect tax system in India but is also an important focal point to foster federalism and democracy. Further one of the important features of Indian federalism is ‘fiscal federalism. A reading of the Statement of Objects and Reasons of the 2014 Amendment Bill, the Parliamentary reports and speeches indicate that Articles 246A and 279A were introduced with the objective of enhancing cooperative federalism and harmony between the States and the Centre. However, the Centre has a one-third vote share in the GST Council. This coupled with the absence of the repugnancy provision in Article 246A indicates that recommendations of the GST Council cannot be binding.  Therefore, the argument that if the recommendations of the GST Council are not binding, then the entire structure of GST would crumble does not hold water.
  • That referring to the definitions of the term ‘recommendations’ as stated in the five categories, i.e. recommendation by the President prior to laying before the Parliament for voting, recommendation followed by consultation, recommendation with accountability, Non-qualifying recommendation, recommendations which are obligatory in nature, in the Constitution, observed that the GST Council is a constitutional body entrusted with the duty to make recommendations on a wide range of areas concerning GST and the powers have been given to it by Article 279A 4(h) where it could make recommendations on ‘any other matter ‘ related to GST as the Council may decide.
  • The recommendation of the GST Council made under Article 279A is non-qualified. That is, there is no explanation on the value of such a recommendation, the notion that the recommendations of the GST Council transform into legislation, in and of themselves under Article 246A would be farfetched. If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A.
  • That if the recommendations of the GST Council intended to be transformed into legislation without any intervention, there would have been an express provision regarding that in Article 246A and Article 279A.
  • The Hon’ble Court referring to the decisions of this Court in Manohar v. State of Maharashtra and Naraindas Indurkhya v. State of Madhya Pradesh, noted that it has been observed by this court that ‘the ‘recommendations’ must be interpreted in contradistinction to ‘direction’ or ‘mandate’ and recommendation has persuasive value.’ Further in numerous cases this Court has reiterated that recommendations cannot create binding and enforceable rights, in contradistinction to a ‘direction or mandate’.
  • The Hon’ble Court taking note of the contention of Union that ‘the recommendations are binding on Parliament and State Legislature’, observed that the recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. Under Article 279A, the Council has very wide recommendatory powers, however merely because few recommendations of the GST Council are binding on the Government under the provisions of CGST and IGST Act, it cannot be argued that all the recommendations of GST Council are binding.
  • Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature. 

Analysis of impugned levy whether valid or invalid

  • It was observed that the IGST Act enables the Central Government to impose IGST on inter-state supply of goods and services and provides for comprehensive scheme for determining nature of supply, time of supply and place of supply.
  • That in the instant matter service of shipping in CIF contract has been availed by the non-taxable exporter, who engages and pays a foreign shipping line of their choice, without the involvement of the importer. The respondents herein are importers of non-coking coal on a CIF basis.
  • That Section 5 of the IGST Act provides for the levy and collection of tax on inter-State supplies of goods and services. The proviso to Section 5(1) of the IGST Act clarifies that the tax is levied on goods imported into India, in accordance with Section 3 of the Customs Tariff Act 1975.
  • That sub section (3) & (4) of Section 5 provides for the payment of IGST on a reverse-charge basis. The provisions empower the Government to specify categories of goods or services however does not empower the Government to specify the recipient of goods or services.
  • The impugned notification 8/2017 dated 28.06.2017 was issued by the Central Government in exercise of its powers under Section 5(1), Section 6(1) and Section 20 of IGST Act, read with Section 15(5) and Section 16(1) of the CGST Act. That By Entry 9(ii) of Notification 8/2017, an integrated tax of 5 per cent was levied on supply of specified services, including transportation of goods in a vessel from a place outside India up to the customs station of clearance in India.
  • That the Notification 10/2017 was issued on 28.06.2017 by Central Government in exercise of powers under Section 5(3) of the IGST Act. The Entry 10 of Notification 10/2017 deems an importer of goods as the ‘recipient of service’ of transportation of goods by a foreign shipping line.
  • The Hon’ble court taking note of the law stated in Section 5, Section 5(1) of IGST, Section 2(107) (taxable person), Section 2(98) (reverse charge), Section 24(iii) (Compulsory registration of person required to pay tax under reverse charge), Section 2(105) (supplier), Section 2(93) (recipient) of the CGST Act & also Section 2(14), Section 2(15) of IGST which define the location of ‘recipient of supply and the supplier of supply’.
  • It was observed by the Hon’ble Court that Chapter IV of the IGST Act determines the nature of the supply. Section 7 of the IGST Act determines the nature of supply as inter-State supply, Section 8 provides for intra-State supply and Section 9 provides for supplies in territorial waters.
  • The Hon’ble Court further discussed the sub section (3) & (4) of Section 7(inter-State supply) of IGST Act, Section 2(21) (supply) of IGST Act, Section 7 (scope of supply) of CGST Act, Section 2(22) (taxable territory), Section 13 (Place of supply of service where location of supplier or location or recipient is outside India) of IGST Act.
  • The Hon’ble Court taking note of law stated in Section 13 (Time of supply of services), sub-section (2), (3), (4) & and [where time of supply cannot be determined under sub-section (2), (3), (4)] sub-section (5) of Section 13 of the CGST Act. Section 15 (Value of taxable supply) was also discussed and it was observed that as per Section 20 of the IGST Act, the provisions of CGST Act relating to the scope of supply, composite or mixed supply, time and value of supply, shall apply mutatis mutandis to integrated tax.
  • It was observed that Article 286(1) stipulates that ‘the State shall not levy tax when the supply of goods or services takes place outside the State or in the course of import or export of goods or services from the territory of India. Clause (2) of Article 286 states that Parliament may by law formulate principles for determining when there is a supply of goods or services as prescribed by clause (1).’ Further Article 269(A) provides that ‘GST on supplies in the course of inter-state trade or commerce shall be levied and collected by the Union Government. The manner of apportionment between the Union and the States has to be provided by Parliament on the recommendations of the GST Council. The explanation to Article 269A (1) states that supply of goods or services in the course of import shall be deemed to be supply in the course of inter-State trade or commerce. Clause (5) provides that Parliament may by law formulate principles for determining the place of supply and when the supply of goods or services takes place in the course of inter-state trade or commerce.’
  • The IGST Act was enacted prescribing the principles as required under Article 269A and 286 (1).
  • The Hon’ble Court considering the submissions on the behalf of the respondents i.e. ‘that Section 5(3) of IGST Act only delegates the power to identify the categories of goods or services on which the tax shall be paid on reverse charge basis. Since Notification 10/2017 identifies an importer as a ‘service recipient’, is ultra vires the parent Act on the ground of excessive delegation’, observed that the legislature has to perform its essential legislative functions and it is a settled position that legislature cannot delegate its essential legislative functions. The essential legislative functions with respect to the GST law are ‘the levy of tax, subject matter of tax, taxable person, rate of taxation and value for the purpose of taxation.’
  • The Hon’ble Court referring to 2(98) (reverse charge), Section 2(93) (recipient), section 2(84) (person), Section 2(107) (taxable person) read with Section 22 or Section 24(iii) ‘which states that person who are required to pay tax under reverse charge must obtain registration’, observed that both the IGST and CGST Act clearly define reverse charge, recipient and taxable persons. Thus, the essential legislative functions vis-à-vis reverse charge have not been delegated. The Government by impugned notification did not specify a taxable entity different from that which is prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge.
  • The Hon’ble Court considering the argument of the respondents that ‘no charge has been created for the ocean freight transaction to be taxed in the hands of buyer and Section 5(1) is the charging section not Section 5(3) & (4)’ referred to decisions of Constitution Bench in Mathuram Agarwal and in Gobind Saran Ganga Saran to observe that four canons of taxation are (i) the taxable event, (ii) the person on whom levy is imposed, (iii) the rate which the levy is imposed and (iv) the measure or the value to which the rate will be applied.
  • That Section 5(1) of IGST Act specifically identifies these four canons of taxation. Further relying on CIT Vs. B C Srinivas Setty, it was found that Section 5(3) & (4) are inextricably linked with Section 5(1) of the IGST Act, which is a charging provision, and has to be construed together in determining the vires of the taxation.
  • The Hon’ble Court found that the argument of the respondents that ‘the importer cannot be validily termed as taxable person’ has to fail on a close reading of impugned notifications with Section 2(107) and Section 24 of the CGST Act. Section 24 (iii) provides for a person liable to pay tax on reverse charge to take compulsory registration and Section 2(107) defines a ‘taxable person’ as a person who is registered or liable to be registered under Section 24 of the CGST Act. 
  • Further the decision of Laghu Udyog wherein ‘the rules had sought to effect a reverse charge by identifying the customers of goods transport operators and of clearing and forwarding agents as the assessee, even though they were not responsible for collecting the service tax.’ The basis for nullifying the rules was that the Finance Act 1997 did not enable the imposition of such a reverse charge on the person who is not supplying the service. Thus, the said judgment of Laghu Udyog is not applicable to the facts of the present case since Parliament has statutorily incorporated the concept of reverse charge under Section 5 (3) and Section 5 (4) of the IGST Act. The impugned notification 10/2017 clearly specifies a taxable person who is liable to pay a reverse charge that is envisaged in the statute. Thus, the impugned notifications cannot be invalidated for an alleged failure to identify a taxable person.
  • Thereafter the considering the argument of the respondents that ‘the value has to strictly determined by Section 15(1) of the CGST Act and not by way of delegated legislation’ found that Section 15(4) & (5) enables delegated legislation to prescribed methods for determination of value, on the recommendations of the GST Council. Rules 27 to 31 of Chapter IV of the CGST Rules 2017, prescribe the manner of determining value of supply. Rule 31 also provides for residual powers to the GST Council for prescribing modes of valuation. Therefore, the respondents’ contention that the determination of value of supply has to specified only through rules, and not by notification, would be an unduly restrictive interpretation.
  • That where the value of the supply of goods cannot be determined in accordance with Rule 27 to 30, Rule 31 specifically provides for residual power to determine valuation in specific cases that are consistent with the principles of Section 15 of the CGST Act. Thus, the impugned notification 8/2017 cannot be struck down for excessive delegation when it prescribes 10 per cent of the CIF value as the mechanism for imposing tax on a reverse charge basis.
  • The Hon’ble Court considering the contention of the respondents that ‘there is no identification of ‘taxable eventfound that the respondents have argued that supply of service of shipping in CIF contract is from the foreign shipping line to foreign exporter and has no territorial nexus to India and does not constitute ‘supply’ which can be taxed under CGST Act or IGST Act. Further in the present case, it is to be decided that the transaction in dispute constitutes inter-State supply for the purpose of Section 5(1) of the IGST Act, read with Section 5(3) and the unamended Section 5(4), or not.
  • The Hon’ble Court taking note of law stated in Section 2(21) (Supply) of IGST Act, Section 7 (Scope of Supply) of CGST Act & Section 7 (inter-State supply) of IGST Act, observed that Section 7 of the CGST Act defines the term ‘supply’ with a broad brush and is an inclusive definition. The perusal of Section 7 shows that it includes the import of services for a consideration to constitute ‘supply’.  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.
  • That taking reference of definition of ‘importer’ from Section 2(26) of the Customs Act and Section 2(10) (import of goods) & Section 2 (11) (import of services) of IGST Act, it was observed that import of service would include three aspects (i) the supplier of the service must be located outside India, (ii) the recipient of service must be located in India, and (iii) place of service ought to be in India.
  • That on perusal of Section 13 of IGST Act, the Hon’ble Court found that Section 13(9) of the IGST Act creates a deeming fiction, where in case of supply of services of transportation of goods by a supplier located outside India, the place of supply would be the place of destination of such goods. Thus, the place of supply of shipping services by a foreign shipping line in CIF contracts would be India.
  • It was found that the argument of the respondents that, ‘Section 7(1) (b) of the CGST Act does not define ‘supply’ of import of service without consideration, therefore the importer of goods cannot be said to be a importer of shipping service’, misses out on some crucial definitions. As mentioned previously, Section 13(9) of the IGST Act creates a deeming fiction of place of supply of transportation services to be in India when the destination of goods is in India. In this case, it is clear the supplier of service- the foreign shipping line – is located outside India; and the place of supply is India. Accordingly, Section 13 of the CGST Act would be applicable to determine the time of such supply.
  • The Hon’ble Court taking note of the argument on behalf of the respondents that ‘the Ocean Freight transaction cannot be considered as ‘Supply’ since Section 7(1) (b) of CGST Act requires the import of service for ‘Consideration’’, referred to Section 2(31) (definition of Consideration) and found that Section 2(31) of the CGST Act defines ‘consideration’ to include 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, 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.
  • The Hon’ble Court considering the argument of the respondents that ‘the transaction takes place outside the taxable territory of India and is extra-territorial in nature, the only nexus with India is the destination of goods in India. Further in case Parliament seeks to levy tax outside India, it makes a deeming fiction in the statue and not by way of delegated legislation’, referred to the judgment of this Court in GVK Industries and observed that the decision in GVK Industries (supra) clearly recognises the power of Parliament to legislate over events occurring extra-territorially. The only requirement imposed by the Court is that such an event must have a real connection to India. Thus, in the instant case the transaction does have the nexus with the territory of India as the destination of goods is in India and the services are rendered for the benefit of the Indian Importer.
  • We do not find applicability of the submissions to the facts of the present case as Section 13(9) of IGST recognises the place of supply of services as destination of goods when the supplier is located outside India.
  • The Hon’ble Court while deciding on the issue i.e., ‘Are importers service recipients under CIF’ observed that the respondents are aggrieved of the fact that the categorization as per Notification 8/2017 read with Notification 10/2017, deems the importer of goods as the recipient of the service of shipping, irrespective of whether the import of goods was on the basis of ‘CIF’ or ‘FOB’. Further section 5(3) provides for taxation of the recipients of certain specified categories of supply of services on a reverse charge mechanism, and the tax would be payable by a ‘recipient’ not ‘any person as may be prescribed’.
  • Taking note of law stated in Section 5(3) of IGST Act and Section 2(93) of CGST Act, it was found that where no consideration is paid for the supply of service, Section 2(93) (c) provides that ‘the recipient shall be the person to whom the service is rendered’ and provides ‘any reference to a person to whom supply is made shall be construed as a reference to the recipient’. Hence, where the statute refers to a person to whom a supply is made, it has to be construed as a reference to the recipient of service.
  • The Hon’ble Court considering the argument of Union of India that ’the import of goods on CIF basis would be construed as import of services and would be covered by clause (c ) of Section 2(93) & ’ Section 2 of the CGST Act is prefaced with the term “unless the context otherwise requires”, and hence would enable taxation of the importer on a reverse charge basis as the “recipient” of service under Section 2(93)and the argument advanced on the behalf of the respondents that ‘mere destination of the service of shipping would not convert it into a service vis-à-vis the importer without any elements of a contract.’, found that the contention of the Union of India that Section 2 would enable taxation of importer on reverse charge basis, overlooks Section 5(3) of the IGST Act which reiterates the taxable person to be the recipient of the service and only enables the Union Government to notify categories of inter-State supply of goods and services.
  • It was observed that the argument of Union of India that ‘Section 24(iii) of the CGST Act mandates compulsory registration for persons liable to pay tax on reverse charge, irrespective of their status as either recipient or a supplier of Service, is a far-fetched argument. It cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the ‘recipient’ of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act. As it currently stands, Section 5(3) of the IGST Act enables the delegated legislation to create a deeming fiction on categories of supply of goods/services alone.
  • It was found that the only argument which supports the appellant is perusal of Section 13(9) of IGST Act read with Section 2 (93)(c) of CGST Act which defines recipient. Since as per the explanation to Section 2 (93) (c) ‘a reference to a person to whom a supply is made, is a reference to the recipient’, the place of supply is critical and as per Section 13(9) the place of supply would be the destination of goods, the supply of service would necessarily ‘made’ to Indian Importer, who will be considered as a ‘recipient’ under Section 2 (93) (c).  Thus, the meaning of the term “recipient” in the IGST Act will have to be understood within the context laid down in the taxing statute (IGST and CGST Act) and not by a strict application of commercial principles.
  • It was observed by the Hon’ble Court that it has been argued by some respondents that possibility of two different recipients would create absurdities and two recipients can claim ITC and the transaction may simultaneously become inter-State or intra-State supply. The Hon’ble Court considering the argument took reference of Section 7(3), Section 8(2) of IGST Act, Section 2(93) (a) & (c) of CGST Act, Section 12 & Section 13(9) of IGST Act, and found that the applicable section in this case would be Section 7(4) which clearly stipulates that “Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce”. Thus, no absurdity is created by the deeming fiction argued by the Union Government. In no scenario would the foreign exporter be claiming ITC in India as the foreign exporter is not sought to be taxed in the present case.
  • Further referring to the law stated in Section 2(14) (c) & Section 13 of IGST Act, the Hon’ble Court found that the respondents’ argument for the irrelevance of determining the beneficiary of the supply or who has received the supply in view of the definition of ‘recipient’ of Section 2(93) of the CGST Act mis-reads Section 2(93) which identifies the recipient on the basis of the person to whom “supply is made” , i.e. the place of supply.
  • The Hon’ble Court deciding on the issue of ‘Applicability of Section 5(4) of the IGST Act’ (amended on 29th August, 2018, effective from 1st February 2019), took note of the arguments of Union of India that ‘if the importers do not qualify as service recipients, the impugned notifications would derive their validity from Section 5(4) of the IGST Act, in which case, the importers would be liable to tax with effect from 1 February 2019 though exempted for the period 13 October 2017 – 31 January 2019.
  • Thereafter referring to unamended Section 5(4) and after the amendment it was observed that amended Section 5(4) came into effect on 1 February 2019. Amending Act 32 of 2018 enables the Central Government to create a deeming fiction of declaring a class of registered persons “as the recipient” of the supply of taxable goods or service. Further the effect of the Amending Act 32 of 2018 has been as follows: – (i) the powers of the Central Government to specify through a notification has been clarified; and (ii) the power to specify a class of registered persons as the recipient has been recognised.
  • It was observed that the respondents by arguing ‘that the amended and unamended Section 5(4) do not save the impugned notifications’ miss out that Section 5(4) states ‘as the recipient’, in contradistinction to Section 5(3) of the IGST Act, which states ‘by the recipient’. It was found that as it has already been held that recipient includes ‘importer’, Section 5(4) clarifies that it may designate a class of registered persons as the recipient, thereby broadening the scope of Section 2(93) of the CGST Act, which is anyway an inclusive definition since Section 2 is prefaced with “unless the context otherwise requires”.
  • The Hon’ble Court observing that the impugned notifications have not been issued under Section 5(4) of the IGST act, referred to the decisions in Union of India v. Tulsi Ram Patel and in Titagarh Paper Mills v. Orissa State Electricity Board, found that as long as a source of power to legislate or issue a notification is available, the lack of a mention, an incorrect reference or mistake does not vitiate the exercise of such power.
  • Thereafter it was observed that the impugned notifications were issued with the intention of creating a level playing field between the Indian and Foreign shipping lines in the Eighteenth GST Council Meeting held on 31st June 2017. The impugned notifications were issued after the GST Council took note of the fact that since transport of imported goods by Indian shipping lines to India is not treated as export of service, the Indian shipping lines pay IGST on the same on a forward charge basis. On the other hand, on the same transportation service, the foreign shipping lines are not required to pay tax as they are not taxable persons in India. Therefore, to provide a level playing field to Indian shipping lines, the importer in India has been made liable to pay IGST on transportation of goods by foreign shipping lines on a reverse charge basis. If Indian shipping lines continue to be taxed and not their competitors, namely, the foreign shipping lines, the margins arising out of taxation from GST would not create a level playing field and drive the Indian shipping lines out of business.
  • Lastly the Hon’ble Court deciding on the issue of ‘Composite Supply and Double Taxation’ noted that ‘it has been argued by the respondents that the transaction between the foreign exporter and respondents is already subject to IGST under Section 5 of the IGST Act read with Section 3(7) and Section 3(8) of the Customs Tariff Act as “supply of goods”. Therefore, taxing it again considering it to be a supply of transportation service would amount to double taxation.’.
  • That considering the above argument it was observed that the transaction involves three parties – the foreign exporter, the Indian Importer and the shipping line. First leg of the transaction is the sale of goods by the foreign exporter to the Indian importer through CIF contract which includes cost of insurance and freight, second leg is the agreement between the foreign exporter and shipping line, for export of goods to India.
  • Further on the first leg the Indian importer is liable to pay IGST under Section 5(1) of the IGST Act, read with Section 3(7) & 3(8) of the Customs Tariff Act. Although the transaction in the present case is a ‘composite supply’ as it involves the provision of service like insurance and freight, and the same fact has been admitted by Union of India in their submissions, that the value of transaction involves insurance and freight.
  • The Hon’ble Court referring to Section 2(30) (Composite Supply) of CGST Act, found that the illustration to Section 2(30) very clearly clarifies that transactions like CIF contract for supply of goods reflects a composite supply under the CGST Act, where the principal supply is the supply of goods. Further after perusal of Section 8 (Tax liability on Composite and mixed supply) of CGST Act, it was observed that Section 8 provides for levy of tax on principal supply, in case composite supply comprises of two or more supplies.  Thus, in CIF contract tax would be levied on ‘Supply of goods’ which as per Section 2(30) is a principal supply.
  • It was observed by the Hon’ble Court that the respondents have urged that the impugned levy of IGST on ‘service’ aspect of the transaction is in violation of the principal of ‘Composite Supply’ under Section 2(30) read with Section 8 of the CGST Act. However, the contention of Union of India is that the impugned levy is on the second leg, which a standalone contract between the foreign exporter and the foreign shipping line, and cannot be considered as ‘Composite supply’. The Union relied on the decision of McDowell to contend that a single element can constitute a levy and a part of the value for another transaction.
  • The Hon’ble Court considering the above arguments regarding first & second leg of the transaction and taking reference of the decisions in Federation of Hotels & Restaurant Association of India v. Union of India and BSNL held that we are unable to agree with the above contention of Union of India.
  • The Hon’ble court observing that ‘the intent of the Parliament was that a transaction which includes different aspects of supply of goods or services and which are naturally bundled together, must be taxed as a composite supply’ found that the first leg of the transaction between the foreign exporter and the Indian importer is a composite supply, while the second leg, between the foreign exporter and the shipping line may be regarded as standalone transaction. Both of them are independent transactions and IGST could be levied on both sets of transaction, one for the supply of goods and other as supply of service.
  • It was observed that Union has urged that this Court must look beyond the text of the contract between the foreign shipping line and the foreign exporter to identify the Indian importer as the recipient of the services. This Court has upheld the validity of the impugned notifications on this ground and now the Union Government is contradicting its submissions by contending that the two legs of the transaction are separate standalone agreements.
  • That considering the above, it was held by the Hon’ble Court that the Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply.
  • The Hon’ble Court further taking reference of Section 20 of the IGST Act, Section 8 & Section 2(30) of the CGST Act found that to levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation.
  • Lastly, the Hon’ble Court taking note of the observations of the High Court with respect to ‘Composite Supply’ and Section 7 (Scope of Supply) of the CGST Act, held that ‘while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.’ Further ‘We are in agreement with the High Court to the extent that a tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.’

Conclusion: –

  • The recommendations of the GST Council are not binding on the Union and States.
  • On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service
  • The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge.
  • Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation.
  • The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act. 

The Hon’ble Supreme Court with the above findings dismissed the appeal filed by Union of India.

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