Introduction:

Freight paid to the shipping liners or shipping companies for the transportation of export goods and imported goods through Sea is called as ocean freight. The levy of tax on Ocean freight is not a new concept. The legacy of tax statute has been continued in the GST regime, on Ocean freight or transportation of goods by sea was a taxable service leviable to Service Tax with effect from 1st March 2016.

The author made an attempt to analyse one of the vital issue of double taxation on ocean freight on account of goods imported on CIF basis. Export of goods or services is Zero rated but import of goods or services is subject to levy of tax as per the provisions of the Customs Act, 1962 and IGST Act’2017 in the GST regime. Further, it is for the benefit of export community, IGST on export Ocean freight has been removed vide Notification No. 2/2018-IGST (Rate), dated 25-1-2018.

Meaning of double taxation:  

Levy of tax twice on the similar item is called as double taxation. Once ocean freight is subjected to levy of IGST on goods imported into India and once again IGST is liable on ocean freight on import of services i.e. freight forwarding services provided by the supplier of imported goods in term of CIF basis of supply.

Meaning of Imported goods

Section 2(10) of the IGST Act,2017 defines “Import of goods “ with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India.

The term ‘brining goods’ in to India means ‘physically’ goods should be brought into India and “import of goods “commences when the goods cross the Customs frontiers of India, it may be land, air and territorial waters of India.  Thus “import of goods’ necessarily implies goods to be brought physically in India.

Levy of tax on imported goods:  

Any goods imported into India are chargeable to duties of Customs under Section 12 of the Customs Act, 1962 at rates specified in the Customs Tariff Act, 1975.

As per Section 5(1) of the IGST Act, 2017, Integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under Section 12 of the Customs Act, 1962.

And as per Section 14 of the Customs Act, 1962, the value of the imported goods shall be the transaction value of such goods for the purpose of levy of Customs duty and such transaction value in the case of imported goods shall include, in addition to price , any amount paid or payable for costs and services, including commissions and brokerage , engineering, design work, royalties and  licence fees, costs of transportation to the place of importation, insurance, loading , unloading and handling charges to the extent as per Rule 10(2) of the Customs valuation (Determination of Value of Imported Goods) Rules, 2007.

Rule 10(2) of the Customs valuation (Determination of Value of Imported Goods) Rules, 2007, prescribed that the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include (a) the cost of transport of the imported goods to the place of importation.

Provided that where the cost of transport is not ascertainable, such cost shall be 20% of the FOB value or CIF value as the case may be. Further, goods imported by sea through stuffed container for clearance at ICD or CFS, then transportation cost from port of delivery to ICD/CFS shall not be considered as cost of transportation to arrive transaction value of imported goods.

Meaning of import of Services:

Section 2(11) of the IGST Act, 2017 defines “import of services” means the supply of any service, where-

(i) the supplier of service is located outside of India;

(ii) the recipient of service is located in India; and

(iii) the place of supply of service is in India.

Levy of tax on import of Services:   

By virtue of Section 5(3) of the IGST Act, 2017 empowered the Government (on recommendation of the GST Council) to issue 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 the recipient of such goods or services or both is liable to pay tax under reverse charge in relation to the supply of such goods or services or both. By exercising power vested under section 5(3) of the IGST Act,2017 , the Government issued Notification No. 10/2017-Integrated Tax ( Rate), dated 28-6-2017 and the relevant entry is reproduced as under :

Sl. No. Category of Supply of Services Supplier of Service Recipient of service
(1) (2) (3) (4)
 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 a non-taxable territory.

 

Importer, as defined in Sec 2(26) of the Customs Act,1962, located in the taxable territory

The cited table is clearly stated that importer is the recipient of services and section 5(3) of the IGST Act, 2017 empowered to levy a tax on recipient and importer is liable to pay tax on services provided by freight forwarder on import of services (under reverse charge mechanism).

Taxable value of Ocean freight:

Where the value of taxable service 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 upto the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods.

Further, Ocean freight is taxable @5% (IGST) under Reverse Charge Mechanism (Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India) vide Notification No. 10/2017-Integrated Tax (Rate), dated 28-6-2017 read with Notification No. 8/2017-Integrated Tax (Rate), dated 28-6-2017.

Double Tax on ocean freight:

Ocean freight component suffers tax twice; first instance suffers IGST as component of Customs Duty on imported goods on CIF basis ( Cost, insurance and freight) and second time IGST @ 5% in the form of Import of Services ( Uunder Reverse Charge Mechanism)  for payment by the importer. Therefore, IGST payment is levied twice on Ocean freight in the guise as part of transaction value of imported goods. Once IGST is levied as element of Customs duty as goods and another case IGST is liable to pay on import of services.

Advance Rulings:  

In re E-DP Marketing Private Limited (GST AAR Madhya Pradesh); Order no 05/2019; Dated: 02/05/2019

Issue: Applicability of Reverse Charge Mechanism on ocean freight when IGST is paid by the importer on goods imported on CIF basis.

Question raised:  Whether the applicant / importer is again required to pay IGST on the component of ocean freight under RCM mechanism on deemed amount which will amount to double taxation of IGST on the deemed component of ocean freight of the imported goods?

Contention of the Applicant: The requirement to pay IGST on component of ocean freight incurred under Reverse Charge Mechanism as per Notification No. 10/2017-I.T ( Rate) and Notification No.8/2017-I.T(Rate) would amount to double taxation of IGST as the applicant is required to pay IGST on this ocean freight component also along with other duties of customs on CIF value of the imported goods which is considered as an assessable value for the purpose of levying the import duties on such goods and which includes IGST component also. From the facts it is clear that the department will be charging IGST on vessel Ocean freight twice which amounts to double taxation.

Observations and findings of AAR:  In view of above two notifications we do not find any ambiguity, whatsoever, regarding payment of IGST on ocean freight. As per existing law, IGST on ocean freight has to be paid by the importer under reverse charge mechanism, irrespective of the fact that such freight charges are included in the intrinsic CIF Value. As we find the applicant has broadly challenged the validity of levy of IGST on ocean freight under RCM. We observe that any question relating to constitutional validity of the Notification issued is not within the ambit of the jurisdiction of this Authority. It is clear that any notification is issued only as per recommendation of the GST Council, and the law laid down is binding upon the concerned.

Ruling: The Applicant shall be liable to pay IGST on ocean freight paid on imported goods under Reverse Charge Mechanism in terms of Notification No.10/2017-IT (R) and Notification No.8/2017-IT ( R) irrespective of the ocean freight component having been a part of the CIF value of imported goods.

Similar Rulings of AARs: The similar issue was also before the following Advance Ruling Authority (AAR), wherein it was ruled out that the applicant is liable to pay IGST on ocean freight (transportation of imported goods CIF basis by vessel) under RCM vide said Notifications.

Apex court verdict on charging section: It is settled principle of law that charging section should be constructed strictly, clearly and unambiguously for the benefit of the tax payers.

The Supreme Court in case of State of Rajasthan v. Basant Agrotech ( India ) Limited, reported in 2014 (302) E.L.T. 3 ( S.C.), held that “ The rule of construction of a charging section is that before taxing any person , it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be constructed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all”.

The Apex court in the case of Commissioner of Central Excise v. Acer India Limited, reported in 2004 (172) E.L.T. 289 (S.C.), held that “The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic result sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plan, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter”.

In light of the Apex Court verdict, it can be argued that tax law is very clear, unambiguous and charging section cannot be made applicable to a person who is not liable to pay tax or subject to tax twice.

Recent Judgement of Gujarat:

The Hon’ble Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. Vs. Union of India, has sets aside IGST on Ocean Freight and held that no tax is leviable under the 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 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. Therefore, the taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation,” 

Conclusion: Thus, it is pertinent to mention that the contention of the importer with regard to double taxation on ocean freight is a matter of interpretation of tax statute; it is appropriate court to interpret the provision of tax statute and clarify the ambiguity on charging section of tax statute. The various Advance Ruling Authorities across the country have rightly opined that any question relating to constitutional validity of the Notifications issued is not within the ambit of the jurisdiction of the AAR and the Authority does not have the jurisdiction or authority to dwell into this question, in terms of Section 97(2) of the CGST Act, 2017.  Thereby, the litigation of levy of double taxation of ocean freight on imported goods CIF basis and vires of Notifications have been challenged vide writ petition before the various High Courts across the country and the final decision of the Hon’ble High Courts are awaited.

Hope, the litigation of double taxation on ocean freight incurred on imported goods on CIF basis needs to be sorted out by the GST Council and necessary amendment in GST law may be carried by the legislature for the benefit of the importers in the country to avoid unnecessary litigation in the GST regime.

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