Bombay High Court Invalidates GST Demand on Ocean Freight

Bombay High Court

M/s. Agarwal Coal Corporation Pvt. Ltd.

Versus

The Assist. Commissioner of State Tax.

Appeal Number : Writ Petition No. 15227 of 2023

Date of Judgement: 05/03/2024

Issue: Whether the GST demand on ocean freight under Notification No. 8/2017-Integrated Tax (Rate) is valid despite being declared ultra vires by the Gujarat High Court and upheld by the Supreme Court?

Background:

In a recent decision of Bombay High Court has invalidated a GST demand on ocean freight, citing lack of jurisdiction. Bombay High Court Invalidates GST Demand on Ocean Freight from outside India Citing Ultra Vires Notification.      This petition under Article 226 of the Constitution of India challenges a show cause notice dated 26 September 2023 issued by the Assistant Commissioner of Sales Tax, “C” Division, Mumbai, primarily on the ground that the same has been issued without jurisdiction. The contention of the petitioner is to the effect that, what has been sought to be invoked by the Designated Officer is the Notification No. 8/2017-Integrated Tax (Rate), dated 28th June, 2017 in issuing the show cause notice which itself has been struck down by the Division Bench of Gujarat High Court in the case Mohit Minerals Pvt. Ltd. Vs. Union of India1 (Ex.D to the petition). The operative portion of the decision is relevant which reads thus:

“254. In view of the aforesaid discussion, we have reached to the conclusion 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                       locate in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto               the customs station of clearance in India and the levy and collection of tax of such ocean freight under the                      impugned Notifications is not permissible in law.

255. In the result, this writ-application along with all other connected writ-applications is allowed. The impugned Notification No. 8/2017-Integrated Tax (Rate), dated 28th June, 2017 and the Entry 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28th June, 2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are hereby declared to be unconstitutional. Civil Application, if any, stands disposed of.”

Important Para

Para:- 6. This Court had an occasion to consider a similar case in Liberty Oil Mills Vs. Union of India, where a challenge akin to the challenge in the present proceedings, was made to the show cause notice dated 31 March 2019 calling upon the petitioner to show cause as to why Integrated Goods and Service Tax may not be recovered under Section 74(1) of the Central Goods and Services Act,2017 (for short ‘CGST Act’) along with interest and penalty on the ocean trade service. This Court following the decision of the High Court of Gujarat in Mohit Minerals (supra) as also the decision of the Supreme Court in “Union of India Vs. Mohit Minerals Pvt. Ltd.”(supra) allowed the petitioner’s proceedings, setting aside the show cause notice. The relevant extract of the said decision reads thus:

“3. The Petitioner is a company who is engaged in manufacture of vegetable edible oil, is registered under the goods and services tax holding a duty registration. A show cause notice issued by the Respondent No.2 dated 31March 2019 to the Petitioner called upon the Petitioner as to why Integrated Goods and Service Tax (IGST) amounting Rs.4,13,47,167/- be not recovered from the Petitioner under Section 74(1) of Central Goods and Services Act, 2017 alongwith interest and penalty as specified. The gist of the allegation against the petitioner is found in paragraph No.2 of the show cause notice which reads thus:

2. During the course of GST audit conducted on the records of the assessee for the period from April 2018 to March 2019, it was observed from their financials that during the audit period, they have imported their major input (vegetable oils) from overseas involving payment of ocean freight. In terms of Notification. No.8/2017- Integrated Tax (Rate), dated 28th June, 2017 & Notification. No. 10/2017-Integrated Tax (Rate), as amended, 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, the person liable to pay the IGST under reverse charge has been specified to be the Imported recipient of the goods, as defined in clause (26) of Section 2 of the Customs Act, 1962, located in the taxable territory. However, it was observed during the audit that the assessee have not discharged the said IGST liability under reverse charge as required.”

4. When this petition was filed on 30 June 2021, the Petitioner had relied upon the decision of the division bench of the Gujarat High Court in the case of Mohit Minerals (P) v. Union of India [2020] 113 taxmann.com 436/78 GST 519/33 GSTL 321 (Guj.) to which response was given by the Respondents by filing reply affidavit on 27 October 2021 contending as follows:

“6. With reference to paragraph 10 of the petition, I say that the Petitioner has submitted its reply to the aforesaid observations vide letter dated 14.07.2020 and have stated that the issue is no longer res integra and has already been settled by the Gujrat High Court in favour of the Petitioner in the case of Mohit Minerals (P) Ltd v. Union of India [2020] 33 GSTL 321 (Gujrat). I say that the said judgment of Gujrat High Court in the Special Civil Application No.726 of 2018 filed by M/ Mohit Minerals Pvt Limited is assailed before Hon’ble Supreme Court in Special Leave Petition (Civil) No.13958 of 2020 and other connected SLPs. The same are likely to be listed for hearing and final disposal on 26.10.2021.                                                                                                                Thus the legal competency or otherwise, as contended by the Petitioner, for levy of tax on the said subject matter in terms of IGST Notification No 8/2017 dated 28.06.2017 and Notification No.10/2017 as amended has not attained finality. Since the matter is still sub-judice, the Petitioners contention that the demand is unsustainable is pre-emptive and not legally correct.

5. Learned counsel for the Petitioner informs that the Hon’ble Supreme Court has now rendered the decision in case of Union of India Mohit Minerals (P.) Ltd. [2022] 138 taxmann.com 331/92 GST 101/(61) GSTL 257 (S.C.) and upheld the judgment of the Gujarat High Court in Mohit Minerals (P.) Ltd. (supra). Learned counsel for the Respondents states that though this position is correct, the Petitioner can point it out to the Commissioner fact in response to the show cause notice.

6. We do not find any purpose in the case, either for the Petitioner or the Commissioner to invest their time and energy on the issue, if the position on which the show cause notice is founded, already stands concluded in the light of the decision of the Hon’ble Supreme Court.

7. Accordingly, writ petition is allowed and the impugned show cause notice dated 31 March 2019 is quashed and set aside.”

Para:- 8. Before parting, we may also note a submission being made on behalf of the respondent namely that the decision in Mohit Minerals (supra) needs to be applied only in respect of the cases which involve the contracts on CIF basis and not FOB contracts. It is submitted that in the present case the show cause notice has been issued referring to Notification No.8/2017-Integrated Tax (Rate) dated 28-6-2017 as the contract was a FOB contract. We find that such argument is totally untenable inasmuch as the case in Mohit Minerals (supra) before the High Court of Gujarat, as observed by us hereinabove, was a case which involved both categories of contract namely CIF and FOB, which was noted in paragraph 57 of the judgment of the High Court of Gujarat. The Court on such facts, declared the revenue’s decision ultra vires of the IGST Act. Once the notification itself has been declared as ultra vires and the same has been upheld by the Supreme Court, in our opinion, following the mandate of the settled principle of law as laid down in “M/s. Kusum Ingots & Alloys Ltd vs Union Of India And Anr.” the notification is no manner was available to the State Authorities to be applied as it would amount to applying an illegal notification. For this reason also, the show cause notice is rendered without jurisdiction.

Para 9. For all these reasons, the petition needs to succeed. It is allowed in terms of the following order:              ORDER

1. The petition is allowed in terms of prayer clauses (A) and (B).
2. No Costs.