GST on ocean freight and scope of delegated legislation
(This article focuses only a limited aspect; “Delegated legislation can be held to be invalid when it is inconsistent with the parent Act.”)
“No, Executives. You can’t overstep”.
Perhaps, this is the single most essence of the judgement of the Hon’ble Gujarat High Court in Mohit Minerals Vs. UOI & Others , when a plethora of writ-applications has been filed to challenge the validity of levying IGST on the estimated component of the Ocean Freight, paid for the transportation of the goods by the foreign seller and collected from the importer of the goods.
The Hon’ble Court has invalidated the leviability of IGST on ocean freight under sub-section (3) of section 5 of the Integrated Goods and Services Tax Act, 2017, declaring it ultra-virus and not permissible under law, since IGST can be levied either on the service provider or on the service-recipient, and not on the importers who pay customs duty.
Applicability of GST on ocean freight – before the judgement
One of the controversial issues under GST is the applicability of GST ocean freight under reverse charge mechanism.
Section 5(3) of the IGST Act, 2017 authorizes the Central Government, on the recommendation of the GST Council, to notify the supplies which are liable for payment of GST under Reverse Charge Mechanism (RCM) by the recipient of Goods or Service.
Section 5(3)of IGST ACT,2017
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.
By exercising the power conferred under section 5(3), the Government issued Notification No. 10/2017- Integrated Tax (Rate) Dated: 28th June, 2017 notifying the categories of supplies which are liable for payment of GST under Reverse Charge Mechanism (RCM).
The entry number 10 of the said notification, providing payment of GST on ocean freight by the importer, is under the scanner of judicial examination.
|Notification No. 10/2017- Integrated Tax (Rate) Dated: 28th June, 2017|
|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 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.
The Government has specified ‘importer’, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), in this entry no. 10 of above notification No. 10/2017- Integrated Tax (Rate) as the recipient of service.
Entry No. 10 of notification 10/2017-IT (Rate) was challenged on the ground that it is ultra-virus of section 5 of IGST Act.
Finally, the Hon’ble Court has declared that 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 ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are thereby declared to be unconstitutional.
But, what is the main reason for such conclusion? What prompted the Court to reach such a decision? Apart from determining the issue of actual recipient of service in case of import of goods under CIF contract, the other vital issue is the scope of delegated legislation.
Here comes the question of legislative competency; the scope of delegated legislation.
There is no challenge to the competence of the Legislature in enacting Section 5(3) of the IGST Act which empowers the Government to notify the goods or services upon which tax is liable to be paid by the recipients. The issue in the present case is, 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 question is whether the delegated legislation can travel beyond the scope of the powers conferred by the parent legislation.
One of the advances in the realm of administrative process is the rapid growth of administrative legislation. According to the traditional theory, the function of the executive is to administer the law enacted by the legislature, and in the ideal State, the legislative power must be exercised exclusively by the legislators who are directly responsible to the electorate. But, in truth, apart from ‘pure’ administrative functions, the executive performs many legislative and judicial functions also. It has, therefore, been rightly said that the delegated legislation is so multitudinous that a statute book would not only be incomplete but misleading unless it be read along with delegated legislation which amplifies and supplements the law of the land.
It is very difficult to give any precise definition of the expression ‘delegated legislation.’ It is equally difficult to state with certainty the scope of such delegated legislation. According to Salmond, legislation is either supreme or subordinate. Whereas the former proceeds from sovereign or supreme power, the latter flow from any authority other than the sovereign power, and is, therefore, dependent for its existence and continuance on superior or supreme authority. Delegated legislation thus is a legislation made by a body or person other than the Sovereign in Parliament by virtue of powers conferred by such sovereign under the statute.
A simple definition of the expression ‘delegated legislation’ may be given as: ‘When the function of legislation is entrusted to organs other than the legislature by the legislature itself, the legislation made by such organs is called delegated legislation.’
(Controls and safeguards)
In St. John Teachers Training Institute vs. National Council for Teacher Education [2003; 3; SCC; 321], the Hon’ble Supreme Court emphasised on the need and necessity of delegated legislation. It was observed that the legislature cannot possibly foresee ever administrative difficulty that may arise in operating a statute. Delegated legislation fills those gaps and details. Rules framed by the executive in exercise of delegated power, however, cannot supplant the law enacted by the legislature but can supplement it. Delegated legislation made in exercise of power under the parent Act is supporting legislation and has the force and effect, if validly made, as the Act itself.
It is well settled that essential and primary legislative function should be and must be performed by the legislative body itself and they cannot be delegated to any sub-ordinate body. Essential legislative functions consist of determination of legislative policy and its formulation as a rule of conduct. Once legislative powers are exercised by the legislature, all ancillary and incidental functions can be delegated to the executive within permissible limits.
As the committee on Ministers’ powers stated, though the practice of delegated legislation is not bad, “risks of abuse are incidental to it” and therefore safeguards are required. Delegated legislation has become inevitable but the question of control is crucial.
Control over the delegated legislation may be divided mainly into two classes:-
Under parliamentary democracy it is a function of the legislature to legislate, and it’s not only the right but the duty of the legislature to look upon its agent, how they are working. If parliament delegates legislative power to any other authority e.g. to the executive, it must also ensure that those power are properly exercised by the administration and there is no misuse of authority by the executive.
The underlying objective of parliamentary control is to keep watch over the rule making authorities and also to provide an opportunity to criticise them if there is abuse of power on their part. This mechanism is described as “legislative veto”.
Legislative control can be effectively exercised by
Delegated legislation is not immune from judicial review. A piece of delegated legislation is void and becomes unenforceable when it is declared to be ultra vires. The doctrine of ultra vires envisages that an authority can exercise only so much power as is conferred on it by law. An action of the authority is intra vires when it falls within the limits of the power conferred on it but ultra vires if it goes outside this limit.
The Court can decide the validity of delegated legislation mainly applying two tests:
When a subordinate legislation goes beyond what the delegate is authorised to enact, it acts ultra vires and this is known as Substantive ultra vires.
And when a subordinate fails to comply with procedural requirements prescribed by the parent Act, it is known as Procedural ultra vires.
Delegated legislation may be held invalid on the several grounds of Substantive ultra vires and one of the grounds is “Delegated legislation is inconsistent with the parent Act”.
Delegated legislation is inconsistent with the parent Act
The validity of delegated legislation can be challenged on the ground that it ultra vires the parent act or enabling statute. It is an accepted principle that delegated authority must be exercised strictly within the authority of law. Delegated legislation can be held valid only if it conforms to the power granted.
The rule making power conferred by the parent Act does not enable the rule-making authority to travel beyond the scope of the Act or to make a rule that may be inconsistent with or repugnant to the enabling Act. If the rule cannot be reconciled with the parent Act, it must be struck down. And this is what the Hon’ble Gujarat High Court has opined.
“ In the case on hand, there is no challenge to the competence of the Legislature in enacting Section 5(3) of the IGST Act which empowers the Government to notify the goods or services upon which tax is liable to be paid by the recipients. The issue in the present case is, 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 ( Para- 248)
Applying the “Johnson” formula [Johnson v. Taylor Brothers and Company Limited, 1920 AC 144 (HL)] in the present case, the Hon’ble Court observed that “… in a case of CIF contract, the contract for transportation is entered into 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. (Para – 253)
The Court also concluded that “In view of the aforesaid discussion, we have reached to the conclusion that no tax is leviable under the Integrated Goods
and Services Tax Act, 2007, 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 a place outside India up-to the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in law (Para 254).
Even when the power to make delegated legislation is in subjective terms and allows the administrative agency to make rules “as appear to it to be necessary or expedient for giving effect to the provisions of the Act”, the discretion is neither unfettered nor beyond judicial scrutiny. The court has power to decide the validity or vires of such provision.
Cooley Constitutional Law 4th Edition.
Takwani, lectures on administrative law.
Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.