This is in reference to recent Gujarat High Court ruling in the number of writ petitions filed before the court on the issue related to ocean freight under GST under reverse charge mechanism. The lead petition has been taken into consideration i.e. Mohit Minerals Pvt Ltd vs UOI.
“No tax is leviable under IGST Act 2017, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from place outside India upto the custom station of clearance in India”.
“Notification no.8/2017 – IT(R) and the Entry 10 of the Notification No.10/2017 – IT(R) both dated 28th June 2017 are declared as ultra vires the IGST Act, 2017 and unconstitutional as they lack legislative competency”
Brief facts of the case
Relevant legal provisions
“Section 2(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.”
3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
In exercise of the powers conferred by sub-section (1) of section 5, subsection (1) of section 6 and clause (iii) and clause (iv) of section 20 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017) read with sub-section (5) of section 15 and sub-section (1) of section 16 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, and on being satisfied that it is necessary in the public interest so to do, hereby notifies that the integrated tax, on the inter-State supply of services of description as specified in column (3) of the Table below, falling under Chapter, Section or Heading of scheme of classification of services as specified in column (2), shall be levied at the rate as specified in the corresponding entry in column (4), subject to the conditions as specified in the corresponding entry in column (5) of the said Table:-
|Description of Service||Rate
|9||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 nontaxable territory. [Please refer to Explanation no. (iv)]
In exercise of the powers conferred by sub-section (3) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of integrated tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-
|Sl.no||Category of Supply of Services||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 nontaxable territory||Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.|
Question of law
When the statutory provision empowers collection of tax from the recipient of goods or services, then whether the delegated legislation by way of notification can stipulate imposition of tax on a person who is neither the supplier nor the recipient of service?
♦ The court analyzed the types of importation of goods i.e. CIF contract and FOB contract. In case of CIF contract, the contract for transportation is entered by the seller, i.e. the foreign exporter, and not the buyer, i.e. the importer, and the importer is not the recipient of the service of transportation of the goods whereas in case of FOB contract importer avails transportation service from foreign shipping line located outside India for transporting goods until clearance till custom frontiers of India ;
♦ Under the IGST Act, the tax is levied by virtue of section 5 on the inter-state supplies made or agreed to be made. However, in the current case of ocean freight , the supply of services is happening between a person located in a non-taxable territory to a person in a non-taxable territory by way of transportation of goods in a vessel from a place outside India to the place of customs station of clearance in India. Hence, the same fails to qualify as an “inter-state supply” as per the provisions of Section 7 of the IGST Act;
♦ Further, tax under reverse charge is levied vide section 5(3) whereby Government is authorized to specify the categories of supply on which tax is to be paid by the recipient of supply. Hence, the tax cannot be levied on a person who is not a recipient;
♦ The court observed that no tax is leviable under the IGST Act, 2017, on the ocean freight for the transportation services provided by a person located in a non-taxable territory from a place outside India upto the customs station of clearance in India. The tax has been levied and collected by way of impugned Notifications i.e. 08/2017 and 10/2017 dated 28th June 2017. Accordingly, held that it is not permissible under law;
♦ The court held vide para 240,
“There is no doubt that in the taxing legislation, the legislature deserves the greater latitude and the greater play in joints. This principle, however, cannot be extended so as to validate a levy by a subordinate legislation which has no sanction of law, however, laudable may have been the object to introduce it”
♦ The court emphasized that while designing the IGST law, the lawmakers were well aware about the wide provisions existing under Finance Act 1994 whereby same concept of taxing under reverse charge also exists. Therefore, legislature has deliberately curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply;
♦ The court also discussed the alternate views which may been explored by the legislature as mentioned below:-
“242. If the intention of the Government was to allow the credit of the taxes paid on the goods and services used for providing the supply of the inward transportation, the same could have been made a zero-rated supply. A zero-rated supply is provided under Section 16 of the IGST Act, wherein it is provided that zero-rated supply can be made either without the payment of tax or with payment of tax along with an option to claim refund of tax later. Further, the person making the zero-rated supply will be eligible to avail the input tax credit and claim refund if the same remains unutilized. The same approach has been adopted even internationally.”
♦ The court have placed strong reliance in the case of Indian Association of Tour Operators v. Union of India and others, reported in 2017 (5) GSTL 4 (Del.) (paras 5, 18, 19, 26, 48) = 2017-TIOL-1715-HC-DEL-ST, having the similar issue under Section 64 of the said Act, wherein the Act was applied to the whole of India except the State of Jammu & Kashmir and the taxable territory was defined as the territory to which the provisions of the said Act was applicable. . Reliance is also placed on a decision of the Delhi High Court, wherein it was held that the services rendered outside India cannot be brought to tax by a delegated legislation by fixing a deeming provision without amending Section 64 of the Finance Act, 1994. It is an essential legislative function. The same analogy is sought to be extended in the present case also.
♦ The court finally held the relevant notification as ultra vires lacking legislative competency. The extract of relevant para 255 is laid down below,
“In the result, this writ-application along with all other connected writ-applications is allowed. The impugned Notification No.8/2017–Integrated Tax (Rate) dated 28th June 2017 and the Entry 10 of the Notification No.10/2017–Integrated Tax (Rate) dated 28th June 2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are hereby declared to be unconstitutional. Civil Application, if any, stands disposed of.”
This is a landmark judgment wherein legislative power of taxing under IGST Act is being challenged. Since, in case of Ocean freight service recipient in not India. Hence, tax cannot be levied vide sub-ordinate legislation i.e. Notification when charging section itself does not borrow power to tax. It is quite imperative that similar view may be adopted by other High courts and advance ruling authorities as well.
Case laws relied upon
– Indian Association of Tour Operators v. Union of India and others 2017-TIOL-1715-HC-DEL-ST
Similar rulings under GST– “Ocean freight”
√ Advance rulings
– Andhra Pradesh AAR- Indian Potash Ltd. (2019-TIOL-472-AAR-GST) Negative
√ High court rulings
– Gujarat HC – Essar Power Gujarat Limited (2020-TIOL-203-HC-AHM-GST) relying Mohit Minerals case Positive
– Gujarat HC – India Coke and Power Pvt. Ltd. (2019-TIOL-2154-HC-AHM-GST) relying Mohit Minerals case (Interim benefit) Positive