CA Abhishek Chopra- Adv CA-Nipun Singhvi.In this article will shall discuss the legal issues and recent development on issue of GST on Ocean freight in below mention seriatim:

1. Introduction: Economy perspective

2. What is Ocean Freight?

3. Dual taxation

4. Interplay of Reverse charge and Place of provision of Service

5. Valuation of Service

6. Advance Ruling and recent Judicial development:

7. Conclusion and Way forward

1. Introduction: Economy perspective:

As we know that whole world was rushing towards globalization and integration. India aimed to gain a considerable proportion of international business and make its presence felt on the international front. The Indian ports and shipping industry plays a vital role in sustaining growth in the country’s trade and commerce. India is the sixteenth largest maritime country in the world, with a coastline of about 7,517. Undoubtedly these trades has to face tough competition from all the global players. In international trade Government policy plays a vital role, if government overlooks any of the factors then it may prove a disaster or even it may lead to death of that industry.

Currently the import industry apart from global competition is also struggling with a Government policy whereby tax authorities is collecting IGST @5% on value of Ocean freight for import of goods although the IGST tax on such goods has already been paid on total value. Majority of Import in India is made on CIF basis whereby the importer pays to its supplier a single consideration for import of goods, which importer received at Indian custom port. The C.I.F value consist of:

  • I.F. = Value of Goods (+)Marine Insurance (+)Ocean Freight

Further Service tax on Ocean freight was also remained controversial under Service tax regime and detail analysis of same can be seen in our previous article by following the below link:

https://taxguru.in/goods-and-service-tax/service-tax-ocean-freight-pain.html

2. What is Ocean Freight?

In general, Ocean Freight is the consideration paid to shipping line for Transport of commodities and merchandise goods and cargo through vessel/Ship from one port to another through sea/ocean

Generally the supplier of goods take services of shipping line for transportation of goods through sea/ocean and pays the charges which is generally termed as Ocean Freight. The importer in India generally don’t receives any details of freight paid and other terms and conditions agreed between his supplier and Shipping g line. Further there is no direct contract between Shipping line and Indian Importer with respect to this service.

3. Dual Taxation.

  • The importer who files Bill of Entry (BoE) before custom authority pays the IGST on CIF value in terms of Section 14 of Customs Act, 1962 read with Rule 10 of Customs Valuation(Determination of Value of Imported Goods) Rules, 2007.
  • Once the value of freight becomes the part of value of goods then IGST cannot be levied on same value as transaction cannot be both as “Import of goods and Import of service”.
  • The value of Ocean freight service is already included in the CIF value and on such value IGST is already paid. The importer cannot be asked to pay tax on the ocean freight all over again under a different notification Hence, liability of IGST on same value tantamount to dual taxation which is against the basic spirit of law and same is legally incorrect.
  • Further, the Government wants the importer to pay IGST on value of Ocean freight which is otherwise included in the CIF value. Tax on same value cannot be demanded and this contention has been confirmed by Hon’ble Mumbai Tribunal. The relevant extract of said Judgement is as mentioned below:

In the matter of United Shippers Ltd.v/s Commissioner of Central Excise reported at [2015] 57 taxmann.com 429 (Mumbai – CESTAT) wherein

“Section 66, read with section 67, of the Finance Act, 1994 and sections 12 and 14 of the Customs Act, 1962 – Charge/levy – Service Tax – Where a transaction involves a customs transaction and a service transaction, it is necessary to decide where customs transaction ends and service transaction begins – Question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after customs transaction is completed – Therefore, if an activity is part of import transaction leviable to import duty or some charges are includible in customs value, it cannot be charged to service tax [Paras 5.2 and 5.3] [In favour of assessee]”

Further in the matter of Commissioner v/s United Shippers Ltd. Reported at 205(39) S.T.R. J369 (S.C) the Hon’ble Supreme Court has confirmed the view of CESTAT.

Therefore this levy is undoubtedly is a tax on value which has already suffered tax and therefore it amounts to double taxation and same has been held legally incorrect.

4. Taxability under GST:

  • Under GST taxable event is Supply, further to determine the nature of tax (IGST, CGST and SGST) the Place of provisions of Supply of Service is also notified. Further the Government has power to notify the Goods or services on which recipient of goods or services shall be liable to pay duty.
  • There is no doubt that transportation of goods in a vessel is a services and same is classifies under Service Accounting code 9965 “Goods Transport Service” and the Government vide notification no. 8/2017- Integrated Tax (Rate) dated 28.6.2017 prescribed the rate of GST on Ocean freight along with conditions and relevant entry is reproduced below for ease of reference:
Chapter, Section, Heading, Group or Service Code(Tariff) Description of Service Rate Condition
Heading 9965(Goods transport services) (ii) Transport of goods in a vessel including services provided or agreed to be 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. 5% Provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers and tankers) used in supplying the service has not been taken

Explanation: This condition will not apply where the supplier of service is located in non-taxable territory. [Please refer to Notes 4(iv)]

 

  • Now we need to see Place of provision of Service in terms of Section 13 of IGST Act, 2017 and relevant extract is as mentioned below:

“Section 13: (1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

“(9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.

  • Hence section 13(9) clearly says that if location of supplier or recipient of Service is outside India then Place of provision of such Transport of Goods Service shall be Destination of such goods and in case of Import of goods the destination of goods is in India, therefore the POPS shall be India. It is important to note here that this entry does not deal with a situation where both supplier and receiver of service are located outside India.
  • Now we need to analyse the provision related to Reverse charge mechanism and government vide entry no 10 of notification no. 10/2017- Integrated Tax (Rate) dated 28.6.2017 issued under Section 5(3) of IGST Act, 2017 whereby the importer is made deemed recipient of service and relevant extract is reproduced bellow for ease of reference:
Sl.No Category of supply of service Supplier of Service Recipient of Service
10 Services supplied by 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. A person located in non-taxable territory Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory
  • This notification has created a confusion which says in case of Import of goods the importer shall be deemed to be recipient of service whereas the term recipient of service as defined under Section 2(93) is reproduces below:

(93) “recipient” of supply of goods or services or both, means—

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied

  • The definition of recipient of service is clear and unambiguous which says:
    • In case consideration is payable then person liable to pay consideration shall be recipient of service and
    • In case no consideration is payable then the person to whom service is being rendered shall be recipient of service.

In case of Import of goods the supplier of goods arranges the Transport of goods receives the services from Shipping line and he pays the agreed consideration to Shipping line, the importer is not liable to pay any consideration to Shipping line and nor the shipping line rendered services to Importer. The shipping line is providing services to Supplier of Importer who is located outside India.

Further since the location of Supplier of Service (Shipping Line) and Location of recipient of Service (Supplier of Importer) both are located outside India therefore Place of Supply of Service for is also outside Indian and therefore cannot be taxed in India. In fact there is no levy on such transaction.

5. Valuation of Service

In case of Ocean freight service the value of actual ocean freight charged by Service provider (shipping line) shall be the value of such service. In case the actual value of service is not available then value of Service shall be actual freight paid or 10%of CIF.

The actual service of Ocean freight is received by Supplier of goods and Importer is not aware of any details of actual freight paid to such supplier, to comply with the condition to produce the details of actual freight is almost impossible conditions and therefore cannot be fulfilled. This is settled law that if any condition which imposed to fulfilled for compliance of law and same is impossible then it shall presumed to be fulfilled for the compliance of said law to that extent.

The deemed value of 10% of CIF value is substantially high and therefore it results in higher liability of IGST on importer and resulting in blockage of working capital.

However importer may approach the Shipping line and obtain actual freight value for said Import of goods. The invoice of shipping line or freight certificate from shipping line may be considered as a documents for determination of actual freight value.

6. Advance Ruling and recent Judicial development related to GST on Ocean freight:

a. Advance Ruling:

Government has given their view through Uttrakhand Advance Ruling in matter of M/s Bahl Paper Mills Ltd. The question before the Advance ruling authority and their reply is as mentioned below:

(a) Whether under Reverse Charge Mechanism, IGST should be paid by the importer on ocean freight in case of CIF basis contract, when service provider and service recipient both are outside the territory of India.

“In this regard it is observed that vide notification no. 8/2017- Integrated Tax (Rate) dated 28.6.2017 and notification no. 10/2017- Integrated Tax (Rate) dated 28.6.2017 an importer is required to pay IGST on the ocean freight. Therefore as on date, even if the importer has already paid IGST on CIF value imported goods, he is still required to pay IGST on ocean fright. Authority also observe that the applicant has also submitted, a copy of Special Civil Application No. 726 of 2018 filed by Mohit Minerals (P) Ltd. before Hon’ble High Court of Gujarat in this regard. Authority observes that mere filing of an application before the Hon’ble High Court does not render a notification issued by the Central Government ultra vires until or unless the same is turned down by the competent court”

The advance ruling view is binding on applicant and department only, it is not binding on importer at large. However it gives the indication regarding the view of department on subject matter.

b. Recent Judicial development:

Recently In the matter of Ghanshyamlal Badrilal Somani v/s Union of India, Hon’ble Gujarat High Court has granted interim relief to the petitioner. The interim relief has been granted by way of stay on order dated 27.04.2019. Kindly note this is not the general stay to all the importer at large the Hon’ble High court has granted the stay on order issued to petitioner. The next hearing for the matter is on 19.06.2019. A similar petition was filed in matter of Mohit minerals Pvt. Ltd.Vs Union of India before Hon’ble Gujarat High Court.

The Hon’ble High Court may decide the matter which involve question of Dual taxation, Place of provision of supply of service, Importer is a recipient of service or not.

Since the Government is intent to charge GST on Ocean freight the Importer is left with no choice except to approach the Hon’Ble court and seek relief.

7. Conclusion and way forward

Investigations is being conducted by department across the country on Importers based contradictory provision mentioned above, which appears to be baseless and legally not sustainable.

  • Author is of the strong view that there should not be any liability of IGST on Ocean freight as same amounts to double taxation and said issue is squarely covered by Hon’ble Supreme Court Judgement.
  • The ITC of such amount paid if available to assesse in terms of provision of Input tax credit then this results in revenue situation and therefore not extra burden.
  • In case due to this liability the ITC got accumulated or feasibility of business comes in questions then the said importer may approach Hon’ble court to seek relief and since the matter is pending before Hon’ble High Court as mentioned above it is expected that same shall be decided in due course. If same is decided in favour of assessee then the amount paid if any is eligible for refund.
  • Further, since the matter involve the question of law and interpretation issues therefore penalty should not be imposable and demand can be contested before authority.

The author CA Abhishek Chopra is practising chartered accountant in area of Indirect tax having experience of over 10 years. The author can be reached at abhishekrchopra@gmail.com

Adv.(CA) Nipun Singhvi is practising Advocate before High Court and Supreme Court.

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5 Comments

  1. Abhishek says:

    Dear sir
    We can discuss this over email. My mail I’d is already mentioned above. Pls share your email ID to discuss further

  2. rani says:

    sir
    We have received demand notice under service tax to pay ocean friegt @1.4%.

    can i take the supreme court judgement for not to pay the demand bcz it satisfies the dual taxation

    Kindly advise

  3. Vinay Sonpal says:

    Hearing on the subject matter challenging GST on Ocean Freight on CIF value is chaellenged and arguments were heard on 7.06.2019 before bench Comprising of Mr Justice M A Sanklecha and Mr Justice Sonak and matter is adjourned for further directions. It was at Sr No. 1 1. WP/2362/2017 VICTORY VENTURES AND ANR v/s UOI

  4. KS says:

    Can i claim refund of excess credit into my credit ledger due to RCM on Ocean freight?

    Curerntly my Input is @5% and output is also at 5% due to which my balance in credit ledger increasing every month …

    1. Abhishek Chopra says:

      Dear sir
      The refund of said accumulated ITC cannot be claimed since there is no inverted duty structure in terms of section 54 of CGST act 2017. However if said goods are further used for zero rated supply then refund can be claimed.

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