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Union of India Vs Mohit Minerals Pvt. Ltd. (Supreme Court of India); Civil Appeal No. 1390 of 2022; 19/05/2022

A. Transaction

In the case of a CIF contract, the freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of the importer. Ocean freight is paid by the importer only when goods are imported under a ‘Free-on-Board’ contract.

B. Background

The vires of the following notifications was challenged –

a) SL. No. 9(ii) of Notification No. 8/2017 – Integrated Tax (Rate) dated 28-06-2017 (“Notification 8/2017”); and

b) SL. No. 10 of Notification No. 10/2017 – Integrated Tax (Rate) dated 28-06-2017 (“Notification 10/2017”)

A joint reading of these notifications sought to levy integrated tax on supply of transport services on import of goods under a CIF basis. The tax was sought to be collected from the importer ‘service recipient’ on a reverse charge basis.

This matter was on appeal from the judgment of a Division Bench of the Gujarat High Court held the said notifications to be unconstitutional for exceeding the mandate of the CGST and IGST Acts.

Arguments Advanced and Court’s Findings

Arguments advanced can be categorised under the following heads:

Excessive Delegation

Union of India

Assessee
Only essential legislative functions, such as policy guidelines and framework, need to be performed by Parliament and State Legislatures; the rest can always emerge through the exercise through exercise of delegated powers

S.5(3) of the IGST Act and S.9(3) of the CGST Act permit the Government (on the recommendation of the GST Council) to specify categories of goods or services or both, the tax for which shall be paid on reverse charge basis by the recipient of such goods or services or both

The impugned notifications can be traced to these sections and are legitimate exercise of delegated legislation

S.5(3) of the IGST Act only delegates the power to identify the categories of goods or services on which the tax shall be paid on reverse charge basis.

The notifications identify an importer as a service recipient. This is ultra vires the scope of delegation.

Supreme Court:

– The enactment of the IGST Act can be traced to the Parliament’s powers under A.269A(5) and A.286(2).

– S. 2(98) of the CGST Act defines “reverse charge”. S.2(93) of the CGST Act defines “recipient”. S.2(84) of the CGST Act defines “person”, and S.2(107) of the CGST Act defines “taxable person” as anyone who is registered or liable to be registered under Sections 22 and 24 of the CGST Act. Sections 22 and 24 enumerate various categories of such persons. Thus, the Parliament has not abdicated its essential legislative function.

– S. 5(3) of the IGST Act permits the Government to specify categories of supply of goods or services or both on which tax shall be paid on a reverse charge basis by the recipient. The notification, besides specifying categories of goods or services or both, has also mentioned the corresponding recipient in those categories. The IGST Act and the CGST Act already define reverse charge and prescribe the entity that is to be taxed for these purposes. The Notification is merely clarificatory; it does not specify a taxable entity different from what has already been prescribed.

b. Charging Section

Union of India

Assessee
Charge created by S.5(1) of the IGST Act can extend to ocean freight transaction to be taxed in the hands of the importer.

Taxable Person: A person becomes a “taxable person” in terms of S.2(107) read with S.24(iii) of the CGST Act.  S.24(iii) of the CGST Act employs the language of “persons who are required to pay tax under reverse charge” and not “persons who are recipient of services under Section 2(93) of the CGST Act 2017”. Notification 10/2017 identifies the importer as the one who is liable to pay.

Taxable Value: 10% CIF value has been prescribed through Notification 8/2017. This finds backing in Sections 15(4) and 15(5) of the CGST Act and Rules 27-31 of the CGST Rules. The Revenue can also assess value of the supply using residuary method prescribed under Rule 31, which empowers it to use reasonable means.

The corrigendum dated 30 June 2016 which amended Notification 8/2017, prescribes the methodology for determining valuation. This can be read as a guideline for dealing with infirmities in assessment practices. Notification 8/2017 does not impinge on Rule 31 of the CGST Rules but only aids uniformity.

S.5(1) of the IGST Act is a charging provision; Sections 5(3) and 5(4) of the IGST Act are machinery provisions and cannot independently create a charge.

Taxable Person: S.5 of the IGST Act makes the recipient of the services liable to pay tax. The Indian importer is not a party to the CIF contract between the foreign exporter and the shipping line. The “ultimate beneficiary” argument does not have statutory backing.

Taxable Value: Determination of value of supply must happen only through rules, and not by notification.

Supreme Court:

– Found favour in the arguments propounded by the Union of India.

– Notifications are not vague; Taxable Person and Taxable Value have been identified clearly.

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? –

(i) Do imported goods procured on a CIF basis constitute an inter-state supply or is it an extra-territorial tax?

(ii) Are importers service recipients under CIF contracts?

Union of India

Assessee
Definition of “supply” under S.7 of the CGST Act is not exhaustive. S.2(31) of the recognises that consideration can be paid by “any other person”.

As per S.2(93)(c) of the CGST Act, a supply can be made to ‘a person’, ‘a registered person’ and ‘a taxable person’ and such a supply shall be construed to be a supply to a recipient. An Indian importer fulfils all these conditions, and hence can be said to be the service recipient.

Once ‘any person’ is identified as a taxable person for reverse charge under a notification issued under S.5(3) of IGST Act, by sheer default of the definition of reverse charge under S.2(98) of the CGST Act, such a taxable person on reverse charge becomes a service recipient. On a conjoint reading of S.5(3) of the IGST Act read with S.2(93) of the CGST Act, a service recipient can be identified through a notification.

S.7(5)(c) read with S.13(9) of the IGST Act suggests that import of goods into India pursuant to a CIF contract, results in an inter-state supply.

Even though the contracting parties – the foreign shipping line and the foreign exporter – are outside the territory of India, the provision of service is for the Indian importer. The consumption and exhaustion of service, which is a critical limb, both commercially and legally, happens only in the hands of the Indian importer.

In CIF transactions, the Indian importer does not pay for ocean freight and yet receives the benefit of transportation.

Ocean freight transaction cannot be considered as “supply” since Section 7(1)(b) of the IGST act requires the import of service to be for a “consideration”.

The supply of service of shipping in a CIF contract is from the foreign shipping line to the foreign exporter. Levy of tax on such a transaction, amounts to extra-territorial application of the IGST Act.

Arguendo – even if extra-territorial application is permitted, this cannot be prescribed by notification; it must be prescribed by statute

This transaction has no territorial nexus to India and does not constitute “supply” that can be taxed within the meaning of the CGST Act and IGST Act.

An Indian importer in a CIF contract can be considered as a recipient of the service only in a colloquial sense. The mere destination of the service of shipping would not convert it into a service vis-à-vis the importer without any elements of a contract. In the absence of specific deeming provisions in the statute, overarching principles of privity of contract are relevant for interpreting the term “recipient” as used in S.5(3) of the IGST Act.

Supreme Court:

Supply

– Sections 7(1)(b) and 7(1)(c) of the CGST Act and S.7(4) of the IGST Act are relevant in the present case to determine if the instant transaction amounts to “supply”.

– S. 7(4) of the IGST Act states that import of services is to be treated as inter-state supply. An Indian importer can thus be considered importer of service.

– S. 2(26) of the Customs Act defines “importer” in relation to goods, and “includes any owner and beneficial owner or any other person holding out to be the importer”.

– S. 2(11) of the CGST Act lists 3 elements to be fulfilled for “import of services”, viz., (1) supplier located outside India, (2) recipient of service located in India, and (3) place of supply of service is in India.

– Only non-fulfilment of elements (2) and (3) are contested. The 3rd element can be immediately addressed by reference to S.13(9) of the IGST Act, which is creates a deeming fiction that when services of transportation of goods are availed (other than by mail or courier), the place of supply is the destination of the goods being transported. Since the goods being transported are destined towards India, the place of supply of transportation services in India.

– S. 2(31) suggests that consideration includes payments made by the recipient or by any other person. Thus, the fact that consideration is paid by the foreign exporter to the foreign shipping line would not stand in the way of it being considered as a “supply of service” under Section 7(4) of the IGST Act, and subject to levy of integrated tax under Section 5(1) of the IGST Act.

Extra-territoriality

– Placing reliance on GVK Industries vs ITO 2011 (4) SCC 36, the Court noted that Parliament may exercise powers with respect to territorial aspects “when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.”. The only requirement is that such an event must have a real connection to India.

– The present case, there is clear territorial nexus, as the goods are India bound and the service is rendered for the benefit of the Indian importer.

– 13(9) of the IGST Act is broad enough to cover to cover a taxable event that has extra-territorial aspects, bearing nexus to India, because it envisages a supplier of such services located abroad.

→ Recipient

– The Supreme Court rejected the Union’s argument that S.24(iii) of the CGST Act, which mandates compulsory registration for persons liable to pay tax on reverse charge mechanism, extends to designating any person to pay tax on a reverse charge basis irrespective of their status as either service supplier or recipient.

– The power to designate persons and categories of supply for reverse charge derives from Sections 5(3) and 5(4) of the IGST Act and not Section 24(iii) of the CGST Act which mandates the compulsorily registration as a logical corollary to ensure tax collection. S.5(3) of the IGST Act only delegated identification of categories of goods or services or both, for taxation through reverse charge basis.

– Interpreting the term “by the recipient” with respect to the categories of goods and services identified in Section 5(3) of the IGST Act would be governed by the definition of “recipient” under Section 2(93) of the CGST Act.

– S. 2(93) of the CGST Act states that “any reference to whom a supply is made shall be construed as a reference to recipient of the supply” and S.2(14) of the IGST Act defines “location of the recipient of service”.

Analysis - Union of India Vs Mohit Minerals Pvt. Ltd. (Supreme Court)

– When the place of supply of services is deemed to be the destination of goods under Section 13(9) of the IGST Act, the supply of services would necessarily be “made” to the Indian importer, who would then be considered as a “recipient” under the definition of Section 2(93)(c) of the CGST Act.

– Thus, while S.5(3) Act does not confer powers to create a deeming fiction vis-à-vis who constitutes the recipient, Section 13(9) of the IGST Act read with Section 2(93)(c) of the CGST Act inherently create a deeming fiction of the importer of goods to be the recipient of shipping service.

– This was in-line with the fact that GST was envisioned as a destination based consumption tax.

d. Application of S.5(4) of the IGST Act

Union of India

Assessee
In any case, the notifications would be saved by S.5(4) of the IGST Act, as it provides wide powers to the Government to specify a class of registered persons who shall in respect of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient.

That a lack of any explicit reference does not vitiate exercise of vested is a settled principle of law.

S.5(4) of the IGST Act in its original and amended forms, do not save the notifications as both make reference to recipient.

Supreme Court:

– Section 5(4) of the IGST Act employs the language “as the recipient”, in contradistinction to Section 5(3) of the IGST Act which uses “by the recipient”.

– The amendment empowered the Government to specify through notification classes of registered persons as recipients. This serves to broaden the scope of S.2(93) of the CGST Act, which is anyways an inclusive definition since S.2 is prefaced with “unless the context otherwise requires”.

e. Composite Supply and Double Taxation

Union of India

Assessee
The CIF transaction and IGST on ocean freight are two independent transactions, entitled to suffer independent levies and do not qualify as a composite supply under S.2(30) of the CGST.

Separate aspects are being taxed, hence it cannot be termed as overlapping. Moreover, the tax is on the value of goods, and not the freight.

The discharge of reverse charge taxation does not make two independent contracts as a composite contract. The contract between the foreign shipping line and the foreign exporter is distinct and independent of the contract between the foreign exporter and the Indian importer. Their concomitance does not make them composite.

A single element can constitute the basis of a levy and can also form part of the value for another transaction. This cannot be termed as double taxation.

The law recognises and maintains the integrity of a CIF contract under Section 2(30) read with Section 2(93), and Section 8. These sections maintain the integrity of a composite contract by providing that where the goods come with insurance and freight, the tax is imposed only on supply of goods.

Section 3(7) of the Customs Tariff Act states that goods imported into India will be subject to IGST under Section 5 of the IGST Act, on the value as determined by Section 3(8). Under Section 3(8), the value includes value of freight. Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 includes cost of transportation and insurance in the value of goods, which forms the basis of the levy of IGST under the proviso to Section 5 of the IGST Act. The levy of IGST on ocean freight amounts to double taxation on the same transaction.

Supreme Court:

– S. 2(30) of the CGST Act defines composite, and S.8(a) of the CGST Act states that in case of a composite supply, the supply shall be treated as a supply of the principal supply.

– While there is no doubt that different aspects of a transaction can be taxed through separate provisions, the Supreme Court placed reliance on BSNL vs Union of India 2006 (3) SCC 1 to observe “the aspect theory does not allow the value of goods to be included in services and vice versa”.

– The idea on introducing the concept of composite supply was to ensure that various elements of the transaction are not dissected, and that a simplified tax structure is achieved. 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.

– Thus, the Supreme Court observed that the notifications run afoul of S.8 of the CGST Act.

D. Other Landmark Observations

After undertaking a detailed analysis of the constitutional history and the scheme of the GST framework and federalism, and upon a detailed analysis of the various contexts that “recommendation” appears in the constitution, the Supreme Court made the following pertinent observations:

– The Recommendations of the GST Council are not binding on the Union and State Government’s powers to enact primary legislation.

– However, the Recommendations of the GST Council are binding on the Government while exercising its rule-making powers under the provisions of the CGST and IGST Acts.

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