Supreme Court on GST Council & Ocean Freight: Recommendations Not Binding, No IGST on Ocean Freight [2022 INSC 596]

GST Council recommendations not binding – Supreme Court ruling explained with headnote, key holdings, important paragraphs and FAQs.

A three-judge Bench of the Supreme Court has held that recommendations of the GST Council are not binding on the Union and the States. They have persuasive value and are "recommendatory in nature", although the Government is bound by them when it exercises rule-making power under the CGST and IGST Acts. On ocean freight, the Court held that Notifications 8/2017 and 10/2017-Integrated Tax (Rate) were validly issued under Sections 5(3) and 5(4) of the IGST Act. But because a CIF import is a "composite supply" on which the Indian importer already pays IGST, a separate levy on the importer for the shipping service violates Section 8 of the CGST Act. The Court therefore dismissed the Union's appeals against the Gujarat High Court judgment. (paras 44–59, 132–149)

Headnote

Goods and Services Tax — Constitutional scheme — Nature of GST Council recommendations — Articles 246A and 279A — IGST on ocean freight in CIF imports — Reverse charge — Composite supply — IGST Act, 2017, Ss. 5(1), 5(3), 5(4), 13(9) and 20; CGST Act, 2017, Ss. 2(30), 2(93) and 8; Notification Nos. 8/2017 and 10/2017-Integrated Tax (Rate) dated 28.06.2017

The respondents imported coal on a CIF basis. Notification 8/2017 levied 5% IGST on transport of goods by vessel from outside India up to the customs station, and Notification 10/2017 made the importer the recipient liable on reverse charge. The respondents already paid IGST on the imported goods, whose value included ocean freight. The Gujarat High Court struck the notifications down, and the Union appealed. — Held, (i) recommendations of the GST Council are not binding on the Union and the States, since Parliament and the State legislatures have simultaneous power to legislate on GST, but the Government is bound by them when exercising rule-making power under the CGST and IGST Acts; (ii) the notifications do not suffer from excessive delegation, and specifying the importer as recipient is only clarificatory; (iii) read with Section 13(9) of the IGST Act and Section 2(93) of the CGST Act, a CIF import is an inter-State supply on which IGST can be levied, with the importer as recipient of the shipping service; (iv) Section 5(4) also enables the Government to specify a class of registered persons as recipients; (v) a CIF contract is a composite supply whose principal supply is goods, so a separate levy on the importer for the shipping service violates Section 8 of the CGST Act and the scheme of the GST legislation; appeals dismissed.

(Paras 44–59, 80–94, 95–131, 132–149)

Judgment Intelligence

Key Holdings

• Article 246A gives Parliament and the State legislatures simultaneous power to legislate on GST, with no repugnancy provision. Combined with the Union's one-third vote in the GST Council, this means the Council's recommendations cannot be binding (paras 46, 48, 51).
• Article 279A has no non-obstante clause, and Article 246A is not made "subject to" Article 279A. The Council's recommendations are made to "the Union and the States", and the Council is a recommendatory body (paras 54, 56).
• Recommendations bind the Government when it exercises rule-making power under the CGST and IGST Acts. That does not make every recommendation under Article 279A binding on the legislature (paras 59, 148(i)(c)).
• Notification 10/2017 does not suffer from excessive delegation. The Acts themselves define reverse charge, recipient and taxable person, so naming the importer as recipient is only clarificatory. Prescribing 10% of the CIF value as the taxable value is also valid (paras 84–86, 93–94).
• On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act with Section 2(93) of the CGST Act, a CIF import is an inter-State supply on which IGST can be levied, and the importer is the recipient of the shipping service (paras 118–119, 148(ii)).
• Section 5(4) of the IGST Act enables the Government to specify a class of registered persons as recipients, so it confers power on delegated legislation to create a deeming fiction (paras 124–128, 148(iv)).
• A CIF contract is a composite supply in which the principal supply is goods. A separate IGST levy on the importer for the shipping service violates Section 2(30) read with Section 8 of the CGST Act (paras 133–147, 148(v)).

Brief Facts

The respondents import non-coking coal from Indonesia, South Africa and the U.S. by sea on a CIF basis. Under a CIF contract, the foreign exporter engages and pays the foreign shipping line, and the freight invoice is issued to the exporter without the importer's involvement. The importer pays customs duties, and IGST on the imported goods, on a value that includes ocean freight. On the GST Council's advice, the Central Government issued Notification 8/2017 dated 28.06.2017, whose Entry 9(ii) levied 5% IGST on transport of goods by vessel from a place outside India up to the customs station of clearance in India. Notification 10/2017, issued under Section 5(3) of the IGST Act, made the importer the recipient liable to pay this tax on reverse charge (paras 2–5, 65–66).

The respondents argued that the notifications were ultra vires, taxed an extra-territorial transaction, wrongly treated the importer as "recipient", and taxed ocean freight twice. The Union argued that the levy was on a different aspect of the transaction and that it created a level playing field for Indian shipping lines, which paid IGST on forward charge. The Gujarat High Court held the notifications unconstitutional for exceeding the powers conferred by the IGST and CGST Acts, and the Union appealed (paras 6–9, 129–130).

Issue (para 67)

1. Are the recommendations of the GST Council binding on the Union and the States (paras 44–59)?
2. Do Notifications 8/2017 and 10/2017 suffer from excessive delegation, and do they validly identify the taxable person and taxable value (paras 80–94)?
3. Is ocean freight in a CIF import a taxable inter-State supply, and is the Indian importer the "recipient" of the shipping service (paras 95–123)?
4. Can the notifications be sustained under Section 5(4) of the IGST Act (paras 124–131)?
5. Does a separate levy on the service component of a CIF import violate the composite supply principle in Section 8 of the CGST Act (paras 132–147)?

Court's Findings

GST Council recommendations are persuasive, not binding: The Court described Indian federalism as a dialogue that ranges from cooperation to contestation. Article 246A treats the Centre and the States as equal units with simultaneous power to make GST laws, and there is no repugnancy provision to resolve conflicts. The Union has a one-third vote share in the Council. Read together, these features show that the Council's recommendations cannot be binding. Article 279A has no non-obstante clause, Article 246A is not made subject to it, and recommendations are made to "the Union and the States". The Court relied on Naraindas Indurkhya and Manohar for the point that a recommendation has persuasive, not mandatory, force. The Government is bound by recommendations when the CGST and IGST Acts tie its rule-making power to them. But the Constitution cannot be interpreted by reference to primary legislation, so not all recommendations bind the legislature (paras 44–59, 148(i)).

No excessive delegation: The essential legislative functions, namely levy, subject matter, taxable person, rate and value, are found in the IGST and CGST Acts. Reverse charge, recipient and taxable person are defined in the statute, so naming the importer in Notification 10/2017 is only clarificatory. Laghu Udyog was distinguished because Parliament has itself provided for reverse charge in Sections 5(3) and 5(4). Sections 15(4) and 15(5) of the CGST Act and Rule 31 of the CGST Rules support valuation at 10% of the CIF value (paras 84–94).

The importer is the recipient and the supply is inter-State: Section 13(9) of the IGST Act deems the place of supply of transportation services to be the destination of the goods. Read with Section 2(93)(c) of the CGST Act, the shipping service is "made" to the Indian importer, who is the recipient. This fits GST as a consumption- and destination-based tax: the freight is built into the price, and the importer is the ultimate beneficiary of the shipping service. Section 5(4), which uses the words "as the recipient", also supports the notifications, and mislabelling the source of power does not invalidate its exercise. Whether the tax is desirable is a matter of policy (paras 118–131).

Composite supply bars the separate levy: In a CIF contract, the importer already pays IGST on the transaction value of the goods under Section 5(1) of the IGST Act read with Sections 3(7) and 3(8) of the Customs Tariff Act. That transaction includes freight and insurance and is a "composite supply" under Section 2(30) of the CGST Act. Under Section 8, it is taxed as a supply of its principal supply, goods, and Section 20 of the IGST Act applies these provisions to IGST. The Union argued that the shipping contract was a standalone transaction, while also relying on the link between the two contracts to treat the importer as recipient. The Court rejected this as "arguments of convenience". Section 7(3) of the CGST Act allows the Government to treat a transaction as a supply of goods or of services, but it gives no power to split a composite supply into two. The Court agreed with the High Court that a service already taxed as part of a composite supply of goods cannot be taxed again (paras 132–147).

Final Outcome / Directions (paras 148–150)

• The conclusions in para 148(i)–(v) were recorded: Council recommendations are not binding, except that they bind the Government's rule-making under the GST statutes; a CIF import is an inter-State supply with the importer as recipient; Notification 10/2017's specification of the recipient is clarificatory; Section 5(4) permits a deeming fiction; and the levy on the service aspect violates Sections 2(30) and 8 of the CGST Act.
• The appeals of the Union of India were dismissed.
• Pending applications, if any, were disposed of.

Legal Principle

Under the constitutional scheme of GST, Parliament and the State legislatures have simultaneous and equal law-making power under Article 246A. GST Council recommendations under Article 279A come out of a collaborative dialogue and have persuasive value. They bind the executive only where the GST statutes require delegated legislation to be made on the Council's recommendations. On the statutory side, a CIF import is a composite supply whose principal supply is goods. Section 8 of the CGST Act, applied to IGST through Section 20 of the IGST Act, requires the whole bundle to be taxed as a supply of goods. Delegated legislation cannot split out a component such as ocean freight and tax it again in the hands of the same importer as a separate supply of services, even if it validly identifies the importer as a reverse-charge recipient.

Precedents Relied Upon

• Naraindas Indurkhya v. State of Madhya Pradesh, (1974) 4 SCC 788 – Relied upon · Discussed at para 57: a recommendation has merely persuasive effect, unlike a prescription.
• Manohar v. State of Maharashtra, (2012) 13 SCC 14 – Relied upon · Discussed at para 57: "recommendation" is to be read in contradistinction to "direction" or "mandate".
• State (NCT of Delhi) v. Union of India, (2018) 8 SCC 501 – Relied upon · Discussed at para 47: collaborative federalism through negotiation and coordination.
• SR Bommai v. Union of India, (1994) 3 SCC 1 – Referred to · Discussed at para 45: distribution of taxing heads as a federal feature.
• Mathuram Agrawal v. State of Madhya Pradesh, (1999) 8 SCC 667 – Relied upon · Discussed at para 88: essential elements of a tax.
• CIT v. B C Srinivas Setty, AIR 1981 SC 972 – Relied upon · Discussed at para 90: charging and machinery provisions form an integrated code.
• Laghu Udyog Bharati v. Union of India, (1999) 6 SCC 418 – Distinguished · Discussed at para 92: the GST statute itself provides for reverse charge.
• Federation of Hotels & Restaurant Association of India v. Union of India, (1989) 3 SCC 634, and BSNL v. Union of India, (2006) 3 SCC 1 – Referred to · Discussed at paras 140–141: aspect theory; per BSNL, the value of goods cannot be included in services and vice versa.

Important Paragraphs of the Judgment

Para 51: "… 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."

Para 59: "Merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council's recommendations are binding."

Para 145: "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."

Para 147: "… 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."

Para 148(i)(b): "The 'recommendations' of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature."

What the Ruling Means: Practical Impact

• No IGST on ocean freight in CIF imports: Importers who import goods on a CIF basis are not separately liable to IGST on reverse charge for ocean freight, because the freight is part of the composite supply of goods on which IGST is already paid.
• Reverse-charge recipient reasoning still stands: The Court upheld the Government's power to name the importer as recipient through Sections 5(3)/5(4) and 13(9). The levy failed only because of the composite supply principle, so similar notifications should be tested against Section 8.
• Council recommendations and legislatures: Parliament and the State legislatures are not constitutionally obliged to enact every Council recommendation. Notifications and rules that the GST Acts require to be made on Council recommendations still have to follow them.
• Limits on splitting composite supplies: Delegated legislation cannot split a naturally bundled supply to tax a component such as freight, insurance or packaging a second time. Section 7(3) of the CGST Act does not confer such a power.

Frequently Asked Questions

Are GST Council recommendations binding on Parliament and the States?

No. They are recommendatory and have persuasive value. Article 246A gives Parliament and the State legislatures simultaneous power with no repugnancy provision, and Article 279A has no non-obstante clause (paras 51, 54, 148(i)).

Is the Government ever bound by Council recommendations?

Yes. When it exercises rule-making or notification powers that the CGST and IGST Acts require to be exercised on the Council's recommendations, the Government is bound by them (paras 59, 148(i)(c)).

Can an Indian importer be treated as the recipient of shipping services under a CIF contract?

Yes. Reading Section 13(9) of the IGST Act with Section 2(93)(c) of the CGST Act, the service is made to the importer, who is the recipient, and the transaction is an inter-State supply (paras 118–119, 148(ii)).

Why was IGST on ocean freight still struck down?

Because the CIF import is a composite supply on which the importer already pays IGST as a supply of goods. A separate levy on the freight component violates Section 8 of the CGST Act (paras 144–147, 148(v)).

Did the Court find excessive delegation in the notifications?

No. The essential legislative functions are in the statute. Naming the importer as recipient was clarificatory, and valuation at 10% of the CIF value was permissible under Section 15 and Rule 31 (paras 84–94).

Judgment Copy

Judgment PDF: 2022 INSC 596 – Union of India v. M/s Mohit Minerals Pvt. Ltd. (official copy, sci.gov.in)

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