In a landmark judgment in the case of Mohit Mineral Pvt. Ltd. v. UOI [Special Civil Application No. 726/2018 decided on January 23, 2020], the Hon’ble Gujarat HC has declared levy of Integrated Goods and Services Tax (“IGST”) on ocean freight & corresponding notifications as ultra-vires the IGST Act, 2017 for lacking legislative competence and also declared these notifications as unconstitutional. It is concluded that no IGST is leviable on the ocean freight for the services 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.
The present case relates to numerous writ petitions filed with the Hon’ble Gujarat High Court (“Gujarat HC”) challenging the levy of IGST paid on Ocean Freight for the transportation of the goods by the foreign seller to the writ applicants as importers of the goods.
The Central Government had introduced Notification No. 8/2017 – Integrated Tax (Rate) dated June 28th, 2017, wherein vide Entry No.9, the Central Government had notified IGST at the rate of 5% being leviable on the service of transport of goods in a vessel including the services provided or agreed to be 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 stations of clearance in India.
The Central Government, thereafter, issued Notification No. 10/2017 – Integrated Tax (Rate) dated June 28th, 2017, by which the Central Government had notified that for the particular category of service provided at Serial No. 10 in the given Notification, the importer as defined in clause 2(26) of the Customs Act located in the taxable territory shall be the recipient of service.
In nutshell, in case of 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, importer is considered as the deemed recipient of the services and is made liable to pay IGST under reverse charge (“RCM”).
[The above-mentioned Notification No. 8/2017 & Notification No. 10/2017 – Integrated Tax (Rate) dated June 28th, 2017 are hereinafter collectively referred to as the “impugned notifications”].
Whether the levy of IGST on importer under RCM on ocean freight services for transportation of goods is valid?
The Hon’ble Gujarat HC passed the following order in the matter of Special Civil Application No. 726/2018 dated January 23rd, 2020:
- In the present case, the writ-applicant is importing goods on the CIF basis, i.e. the contract is for supply of goods delivered at the Indian port. Thus, the transportation of goods in a vessel is the obligation of the foreign exporter. The foreign exporter enters into contract with the shipping line for availing the services of transportation of goods in a vessel. The obligation to pay consideration is also of the foreign exporter. The writ-applicant is not at all concerned with how the foreign exporter delivers the goods at the Indian port or whether the consideration of the shipping line has been paid by the foreign exporter or not. Even in a case of non-payment of the consideration of the freight by the foreign exporter, the shipping line cannot recover the consideration from the writ-applicant.
- The writ-applicant cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service. The term ‘recipient’ has to be read in the sense in which it has been defined under the Act. There is no room for any interference or logic in the tax laws. If the definition of the term ‘recipient’ is overlooked or ignored, then the writ-applicant would become the recipient of all the goods which goes into the manufacture/production of goods and all the services which have been availed by the foreign exporter for such purposes. Such reasoning which leads to harsh and arbitrary results has to be avoided, particularly when the term has been expressly defined by the legislature. Thus, the writ-applicant cannot be said to be the recipient of the supply of the ocean freight service and no tax can be collected from the writ-applicant.
- It is a settled principle of law that if a delegated legislation goes beyond the power conferred by the statute, such delegated legislation has to be declared ultra vires. The delegated legislation derives power from the parent statute and not without it. The delegated legislation is to supplant the statute and not to supplement it. In the aforesaid view of the matter, the impugned notifications levying tax on supply of service of transportation of goods by a person in a non-taxable territory to a person in a non-taxable territory from a place outside India up to the customs station of clearance in India and making the petitioner, i.e. the importer, liable for paying such tax, are ultra vires the provisions of the IGST Act.
- In the present case, the entire transaction takes place outside the taxable territory, i.e. outside India. The supplier is located outside India, the recipient of the supply is located outside India, the contract for the supply has been entered into outside India, the payment for the supply has been made outside India, the goods have been handed over to the supplier outside India and the transportation, for the most part, takes place outside India. The mere fact that the transportation of goods terminates in India, will not make such supply of transportation of goods as taking place in India.
- In the case of ocean freight services, the importer of goods is not the recipient of supply of ocean freight services and may not be able to avail the input tax credit, which is sought to be recovered under the impugned notifications. Thus, the impugned notifications are also not in conformity with the object of laws relating to the Goods and Services Tax, i.e. credit shall be available at each stage and the burden of tax shall only be on the customer.
- In a fiscal matter, it is not proper to hold that even in the absence of express provision, a delegated authority can impose tax or fee. Such power of imposition of tax and/or fee by a delegated authority must be very specific and there is no scope of implied authority for imposition of such tax or fee. The delegated authority must act strictly within the parameters of the authority delegated to it under the Act and it will not be proper to bring the theory of implied intent or the concept of incidental and ancillary power in the matter of exercise of fiscal power. Thus, the impugned notifications levying the tax on supply of ocean freight service and making the importer of goods as the person liable for paying the tax are also unconstitutional as there is no statutory sanction for levy and collection of such tax.
Thus, the Hon’ble Gujarat HC conclusively allowed the numerous writ petitions filed by the aggrieved Petitioners and held decisively that –
“No tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned notifications is not permissible in law.”
The impugned notifications (supra) are declared as ultra vires the IGST Act, 2017, as they lacked legislative competence, and hence the same are declared unconstitutional.
Remarks by A2Z:
The Hon’ble Gujarat HC in the case of M/s SAL STEEL LTD. v. Union of India vide Special Civil Application No. 20785 of 2018 dated September 6th, 2019 had also quashed the demand of Service Tax on Sea Transportation Service from importers in CIF based Contracts and struck down Notification No. 15/2017 – ST and 16/2017 – ST, making Rule 2(1)(d)(EEC) & Rule 6(7CA) of the Service Tax Rules, 1994 and inserting explanation-V to reverse charge Notification No. 30/2012 – ST as being ultra vires of Section 64, 66B, 67 and 94 of the Finance Act, 1994.