23 May 2022
The Supreme Court, in a much-awaited judgement, has held
that Integrated Goods and
Service Tax is not separately
leviable on importers in respect
of ocean freight services under
Cost Insurance Freight
contracts.
On 28 June 2017, the tax department issued two notifications (Notification No. 8/2017- Integrated Tax (Rate) (Notification No. 08/2017) and Notification No. 10/2017- Integrated Tax (Rate) (Notification No. 10/2017)) that deemed an importer of goods to be the ‘recipient‘ of freight services provided by foreign shipper in respect of Cost Insurance Freight (CIF) imports. Consequently, the importers became liable to pay Integrated Goods and Service Tax (IGST) on the ocean freight services on reverse charge basis. Due to this, the cost of import for the importers increased by half a percent of the CIF value of the import. Consequently, the importers became liable to pay Integrated Goods and Service Tax (IGST) on the ocean freight services on reverse charge basis. Due to this, the cost of import for the importers increased by half a percent of the CIF value of the import.
The Notifications were challenged before the Gujarat High Court which held them to be unconstitutional. The High Court held that the importers under CIF contracts were not the recipients of ocean freight services which were rendered by the foreign shipper to the foreign exporter. The scope of the word ‘recipient’ cannot be extended to mean something that has not been statutorily provided in the statute. The Court further held that the attempt to tax ocean freight separately despite having levied and collected the integrated tax on import of goods (the value of which included value of the ocean freight) was against the concept of composite supply under the Goods and Service Tax (GST) laws and thus, impermissible.
The tax department approached the Supreme Court against the decision of the Gujarat High Court in a batch of petitions.
The Supreme Court concluded that the supply of service of transportation by the foreign shipper forms a part of the bundle of supplies, i.e., composite supplies by the foreign exporter to the Indian importer. The Court held that the levy of IGST separately on the services provided by the foreign shipper would be violative of the principle of composite supplies under Section 8 of the Central Goods and Services Tax Act (CGST Act) and antithetical to the very scheme of the CGST Act. However, contrary to the ruling by Gujarat High Court, the Supreme Court held that the importers were the ‘recipients’ in CIF contracts. It held that the mention of importers as recipients under Notification No. 10/2017 was only clarificatory in nature and that the Government by notification had not specified a taxable person different from recipient for the purposes of reverse charge. On the issue of the nature of supply, the Supreme Court held that such an import constitutes an ‘inter-state’ supply and would thus be exigible to IGST.
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