SUPREME COURT FINDINGS ON THE LEVY OF GST ON OCEAN FREIGHT: GST COUNCIL RECOMENDATIONS

SUPREME COURT FINDINGS ON THE LEVY OF GST ON OCEAN FREIGHT: GST COUNCIL RECOMMENDATIONS

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Union of India & Anr.

Versus

             M/s Mohit Minerals Pvt. Ltd. Through Director

Date of Judgment-19th May 2022

Civil Appeal No. 1390 of 2022

HEADNOTE-

The Union of India has preferred this appeal against a judgment of a Division Bench of the Gujarat High Court dated 23 January 2020. The High Court allowed a petition instituted by the respondents under Article 226 for challenging the constitutionality of two notifications of the Central Government. HELD-Appeals are dismissed.

IMPORTANT PARAS-

3.2 Do the impugned notifications suffer from excessive delegation?

82. Articles 269A stipulates that Parliament may by law formulate principles for determining: (a) the place of supply and; (b) when the supply of goods or services or both takes place in the course of inter- State trade or commerce. Article 286(1) empowers Parliament to formulate the principles by law for determining when a supply of goods or services, or both, takes place (a) outside the state; and (b) in the course of import into or export outside the territory of India. Parliament enacted the IGST Act prescribing the principles as required under Articles 269A and 286(1). The provisions of the IGST Act deal with the levy and collection of tax (Section 5(1)), export of goods and services (Section
2(5) and 2(6)), import of goods and services (Section 2(10) and 2(11)), identification of the location of the supplier and recipient of services (Sections 2(14) and 2(15)), determination of the nature of inter-State supply (Section 7), supplies in territorial waters (Section 9), place of supply with respect to import to India and export from India (Section 11), and place of supply of services where the location of the supplier and recipient is in India and outside India (Sections 12 and 13). [Para 80-82]

D.3 Charging Section: taxable person, taxable rate and manner of determining value

87. In determining the vires of the impugned notifications, a few preliminary contentions raised by the respondents would have to be addressed. The respondents have argued that no charge has been created for the ocean freight transaction to be taxed in the hands of the importer. It has been alleged that only Section 5(1) is a charging provision and Sections 5(3) and 5(4) cannot independently create a charge. 

D.4 Taxable event: Is an ocean freight transaction for import of goods a valid category of supply of services under Section 5(3) of IGST Act?
95. The other limb for contesting the validity of the impugned notification is with respect to its identification of a “taxable event”. The question that falls for the determination is whether the impugned notifications issued in 2017, under Section 5(3) of the IGST Act, validly prescribe a taxable event that constitutes an inter-State supply of goods and services with the importer being a recipient of shipping services in CIF transactions. 

96. The analysis of whether import of goods under CIF contracts constitutes a valid import of service has to be answered on two prongs: (i) whether classification of imports as a specific category of supply of shipping service is valid under Section 5(3) read with Section 5(1) of the IGST Act; and (ii) whether the recipient of the imported goods is also a recipient of shipping services in CIF transactions under Section 5(3).

CONCLUSION-

PARA 148.  Based on the above discussion, we have reached the following conclusion:

1. The recommendations of the GST Council are not binding on the Union and States for the following reasons:

• The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;
• Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and
• The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations;

2. 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; 

3. 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;

4.  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;

5. 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.