While importing goods in India on CIF (Cost, Insurance & Freight) basis, the supplier / exporter located in the foreign country is liable to engage and bear the cost of transportation of goods, from the respective country up to Indian ports. Hence, for the transportation of the goods, the supplier / exporter avails the services of such transportation of goods from a foreign shipping company, for bringing the said goods to India in a vessel. Needless, to mention here that on importation of goods, the importer is paying customs duty & IGST on CIF Value as per the applicable provisions of the Customs Act.
The services by the foreign shipping entity, by way of transportation of goods in a vessel to a port in India are an ‘Inter-state supply’ in terms of section 7 of the IGST Act, 2017. Hence, IGST is leviable on the same under Section 5 of the IGST Act. As per the charging section i.e. section 5, IGST has to be paid by the taxable person. However, as per the provisions of section 5(3), the government by notification may specify certain categories of supply of services on which tax will be paid by the recipient of the service on reverse charge basis.
Accordingly, in exercise of the powers conferred by sub-section (3) of section 5 of the IGST Act, 2017, the Government has issued Notification No. 10/2017 – Integrated Tax (Rate) dated 28.06.2017 (hereinafter referred to as the ‘RCM Notification’). The relevant entry in the said Notification is entry no. 10 which is reproduced hereunder :
|Category of Supply of Services
|Supplier of Service
|Recipient of Service
|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.
With this background, the important issue involved is –
“Whether in the case of import of goods on CIF basis, Is the Importer liable to pay GST on the component of Ocean Freight paid by the foreign supplier of goods to the shipping company, as consideration, for availing the service of transportation of goods by sea? despite the fact that the Importer has already paid IGST at the time of importation of goods.”
In this respect, it is worthwhile here to reproduce the starting para. of the Notification No. 10/2017 dated 28.06.2017 :
“—— In exercise of the powers conferred by sub-section (3) of section 5 of the IGST 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 IGST Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table.”
So, from reading of the above, two terms are important – (a) Supplier of Service in column 3 and (b) Recipient of Service in Column (4).
In the case of the Importer, the supplier of service is the shipping company and the recipient of service is the exporter of goods.
Let us also examine the same with regard to definitions of “supplier” and “recipient” given in sub-sections (105) and (93) of Section 2 of the CGST Act, 2017 respectively.
“(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied.”
(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,
In the present case, since the goods are imported on CIF basis, the transaction is between the Importer and exporter on principal to principal basis. Accordingly, the transportation agency is hired by the exporter and hence he is liable to pay the consideration. The services are provided by the transportation agency to the exporter and both are located in non-taxable territory (i.e. outside India). The consideration is paid by the exporter to the transportation agency.
Hence, in the present case the supplier of service as mentioned in column (3) is the shipping company and not the exporter. Further, the recipient of service (as per column 4 of the Table) is the exporter and not the Importer (as mentioned in the said column).
It is also important to note here that the said Notification also gives reference of “supplier” and “recipient” of service as defined in the CGST Act, since explanation (d) appended at the end of the Notification specifies as under :
“(d) the words and expressions used and not defined in this notification but defined in the CGST Act, the IGST Act, and the UTGST Act shall have the same meaning as assigned to them in those Acts.”
In view of discussions hereinabove, it appears that the notification was intended to pertain to the situation where the importer is engaging the transporter of the goods who is located in the non-taxable territory, however, if it is not the case then the Notification appears to be ultra-vires to the provisions of the Act and as such the person (simply because an “Importer”) is not liable to pay IGST on transportation of goods by vessel under reverse charge mechanism (RCM).
However, in following cases, AAR (Authority for Advance Ruling) has ruled that the applicant is liable to pay IGST on transportation of goods by vessel under RCM under said Notification :
However, a writ petition (SCP No. 726 of 2018) has already been filed before Hon’ble the High Court of Gujarat on 09.02.2018 by M/s. Mohit Minerals Pvt. Ltd. challenging Entry No. 10 of Notification No. 10/2017 dated 28.06.2017.
Under the present circumstances, if one wants to avoid litigation, he may opt to pay IGST under RCM on transportation of goods by vessel and take full credit of tax paid in the same month against the output liability, which, time being, affect the cash flows and also increases the compliance burden.