This is the first part of a 2-part write-up, that shall explore the RCM taxation of Ocean freight.

This part -1 shall deal with CIF contracts, in which the freight component is unknown to an importer, followed by FOB.

Part -1 – CIF Contracts of Import of goods, RCM on.

Presently, ocean freight is taxed at the hands of an “Importer” in case of a CIF contract, on RCM basis.

An importer is always unable to understand as to why he is being compelled to make RCM on ocean freight, the amount of which is unknown to him, as he had entered into a CIF contract with the exporter. The amount of freight upto Indian Customs is hence in-built in the price of goods and cannot be segregated.

Also when the Importer files the Bill of Entry with Indian Customs for release of his goods, he has already paid IGST on the intrinsic value of goods imported, i.e. the valuation includes the freight component as well, as this is a CIF contract.

Then from where does the concept of re-taxing a transaction, which has already suffered tax, comes from?

This taxation is by virtue of S.5(3) of the IGST Act, 2017, read with NN 8/2017-IT(Rate) and NN 10/2017-IT (Rate). This issue is usually picked up by the Department at the time of audits u/s 65,66 and an assessee is usually at a loss for explanation. The Department gets away with erroneously taxing the freight transaction.

The Department usually argues that RCM is impact-agnostic to the cash flow, as the assessee gets Input Credit of the RCM instantaneously.

But this reasoning is not acceptable as every tax levy has to be justified and backed by sound legality.


Attempt has been made in the following discourse to resolve the irksome issue and to equip helpless assessees with some ammunition, when it comes to taxing such transactions. Most of the assessees have missed to tax this inwards freight on RCM basis, giving the Department an excuse to charge tax and interest on such transactions.

The issue is rather complex to analyze and is cluttered with numerous pre and post GST events.

Nevertheless, the author hopes that after reading this article, some basic understanding of the issue will be inculcated in the minds of readers. So Good Luck!!!

A bit about the FOB and CIF contracts:-

In international trade, goods are bought and sold by way of two different modes/methods, namely, CIF contract and FOB contract.

FOB (i.e. Free on Board) is a contract of sale between the foreign supplier and the local importer, where the importer would engage the vessel/ship owner or operator for importing goods into India. In FOB contract, the service of transportation of goods by ship or vessel is received by the importer in India, whereas such service is rendered by the owner/operator of the foreign going vessel.

In case of CIF contract, the overseas supplier would engage the vessel owner/operator for transportation of goods to India. The appointment of the vessel/ship and also payment of transportation charges i.e. ocean freight of such vessel owner/operator are made by the overseas supplier in CIF contract. The service of transportation of goods by vessel is thus received by the overseas supplier from the foreign going vessel owner/operator in CIF contract.

Thus, the basic difference between FOB and CIF contract is that the service of transportation of goods by vessel/ship is received by the importer in FOB contract, whereas such service is received by the overseas supplier in case of CIF contract. The transportation charges for transporting goods by vessel or ship are colloquially known or called “ocean freight”, and such ocean freight is paid by the local importer in case of FOB contract whereas ocean freight is paid by the overseas supplier in case of CIF contract.

 History behind RCM on Ocean Freight:-

“History repeats itself, and every time it costs more”

I. Era: Pre-GST- Service Tax Regime

The thought process behind taxing Ocean freight in case of import of goods from outside India was rather a noble one.

What happened was that before 1st June 2016, ocean freight on import of goods was not taxed-neither forward nor reverse charge. Also exports were exempted from Excise and service tax, and so were the outward freight services, and no service tax was levied on freight bill of exports.

The Parliament had put service of transportation of goods by an aircraft or a vessel in Negative List under Section 66D of the Finance Act, 1994 as amended on 1.7.2012, and hence no tax was to be levied on such service.

Consequently, the Indian Shipping lines were not able to avail ITC on their inputs, thereby increasing their cost which made them less competitive compared to foreign shipping companies. As is obvious, Indian importers used to prefer foreign shipping companies more than Indian ones.


The matter was taken up in Budget 2016 and it was decided that there shall be Service Tax on RCM basis (w.e.f. 1st June 2016), on freight service for goods that terminated their voyages on Indian shores i.e. at the Indian Port of Clearance. (so this service of freight carrier from a place outside India to Indian Customs was excluded from the Negative list in Budget 2016, wef 1st June 2016)

This step enabled Indian Shipping lines to avail ITC on their inputs and reduce their costs. The customer was also happy as they used to get Input Tax Credit of the RCM paid to govt. So it was a happy-happy situation for both parties.

But this happiness was short-lived. The ingenious Indian importers found a way out to avoid this service tax levy, by contracting on CIF terms with their Foreign vendors. This was due to a legal loophole that since both service provider and service recipient in CIF cases were located outside India, tax could not be levied due to extra territoriality test.

As a result, there was no contract of shipping freight was done on Indian soil, nor was there any identifiable freight component, as it was inbuilt in the cost of goods itself.

Again there were representations made to the Govt. that the rationale behind amendment in Budget 2016 was failing due to such CIF contracts.

The Service Tax regime then came up with a Notification through which, the “Importer” was presumed to be the recipient of the CIF based freight contract, thereby creating an overreach via a delegated legislation, whereas the Principal Act itself prohibited this deeming fiction. The Department even assigned 1.40% of CIF value, as the presumptive rate of Service Tax on such importers, to be paid on the freight bill.

This was a clear cut provision of legislative overreach, as follows:-

a) Overreach for taxing a transaction which is extra-territorial;

b) Issue, that a person (i.e. the Importer) who is not privy to a contract (i.e. contract for shipping of goods)be made responsible for paying tax

c) an arbitrary and presumptive rate of Service Tax @1.40% of the CIF value of goods imported(it was an option given to the Importer for valuation of freight component in CIF contracts).

d) That a delegated legislation (i.e. Notification, Rule etc) could override the substantive law(i.e. Service Tax Act) to impute a meaning to charging section, which was never there in the Principal Service Tax Act.

e) That one transaction is taxed twice, first at the time when Customs and Excise was charged on the CIF value of goods (i.e. inclusive of the freight component), and then the same person (the importer) was asked to pay service tax on the freight part again, on RCM basis.

All these issues came up before the H’ble Gujarat HC in Sal Steel V. UOI, and was decided in the year 2019.

The H’ble HC held that this was a case of legislative transgression, and hence struck down the relevant Rules and Notifications that created deeming fictions for taxing an extra territorial transaction, at the hands of a person who was never privy to the contract of freight under the CIF terms, as being Ultra-vires the Finance Act 1994.

2. Present Era- GST Regime

Interestingly the same set of questions pertaining to RCM on Ocean freight under section 5(3) of IGST Act, came up for deliberation before the same Gujarat High Court and the same Bench consisting of H’ble Sh. JB Pardiwala, J. and H’ble Sh. AC Rao, J., who passed quite a copious judgement running into 137 pages, (to decide an already decided matter but which belonged to the predecessor Service Tax regime).

The case was Mohit Minerals P Ltd v. UOI, decided on 23rd Jan., 2020.

The judgement explores NN 8/2017, NN 10/2017 as well as almost all relevant sections of the IGST Act, after delving deep into the history and purpose of  the GST law in India.

But this time, the court not only held these notifications and the impugned Rules under the IGST Act 2017 as ultra vires the provisions of the IGST Act, but declared the impugned provisions even ultra-vires the Constitution of India.

The Gujarat High Court held as follows:-

I. That a delegated legislation in the form of a Notification cannot impute further meaning to S.2(93)-Definition of ‘Recipient’, of the CGST Act, 2017 by holding that the meaning of ‘Recipient’ shall be as given u/s 2(26) of the Customs Act, 1962. Creation of such a deeming fiction overstretches the ambit of a provision which was not intended by the Principal Act.

  • NN 10/2017-IT (Rate) dtd. 26/June/2020 is about the services which need to be taxed on RCM basis, in the hands of its recipient.
  • Recipient is defined not under the IGST Act, but under the CGST Act, vide. S 2(93).

S.2(93) CGST Act: “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;

  • Entry no. 10 of this notification created a fiction by imputing unintended meaning to the definition of a ‘recipient’, and lays down that the ocean freight in case of CIF imports shall be taxed in the hands of the ‘Importer’ on RCM basis, as the transaction is difficult to be taxed in the hands of the actual recipient of the CIF contract, i.e. the foreign exporter in this case.
  • This notification was found to be ultra-vires the IGST Act, as well as unconstitutional. Hence struck down as the Importer is neither the recipient of service, nor is he responsible for paying for the service.

2. NN 8/2017-IT(Rate) dtd. 26/Jun/2020, entry no.9 was also held to be ultra vires, as it intended to trancscend the territorial boundaries of a legislation. Vide this entry, it was sought to tax a transaction in which both Supplier and the Recipient were located in a NTT(Non-Tax Territory), as happens in a CIF contract of import of goods.

  • This entry no.9 again created a fiction whereby Transportation charged paid under a contract of transportation done in NTT, could also be taxed in India, if that shipment terminated at the Customs Station of India.
  • The court held that mere location of termination of a voyage is not good enough to tax and otherwise non-taxable transaction. Struck down too.

3. The court further examined provisions of 7 IGST Act,2017-Inter-State Supply, more particularly S 7(5)( c), which defines residuary cases when a transaction shall be deemed to be Inter-State, i.e all supplies which are not intra-State and not covered elsewhere, shall be treated as Inter-State only.

  • The Court held that the meaning of S. 7(5)( c) cannot be so much overstretched that a domestic law becomes applicable to foreign territories. S 7(5)( c) doesn’t therefore empower the legislature to tax an extra-territorial transaction in a CIF contract of import.
  • Hence the extended meaning of this S. 7(5)( c) has to be read down to match the legal intent and reasonability.

4. That the transportation service in CIF contracts cannot be given an arbitrary valuation of 10% of CIF value of goods imported, as is given by corrigendum to NN 8/2017. This Corrigendum was also held to be ultra-vires.

  • Since the freight component in case of CIF contracts is unknown, in order to tax it in the hands of the Importer, the Corrigendum gave a notional value of 10% CIF to freight component. This was also held to be unconstitutional.


Closing remarks:-

This GST RCM case was decided in the State of Gujarat by the State’s High Court.

So as per Article 226 of our Constitution, the decision cannot spill over to other States.

But considering the Obiter Dicta of the H/ble Supreme Court in Kusum Ingots and Alloys v. UOI [2004 6 SCC 254], when a State Court decides on the Constitutionality of a Law, albeit a Central Act, it has effect in the entire country. We already know now that the Notifications were held to be unconstitutional by the h’ble Gujarat HC.

Even if some feel that the A.226 cannot be flouted, still the H’ble SC’s obiter has substantial force that can impact other States too. This obiter can therefore be used in the writs to State HC’s.

P.S.– The author may not be blamed for an effusive over analysis, as it cannot be helped in the matter at hands.

Also the GST law has already evolved into a Mammoth, which will need such effort going forward.

Every care was taken to make this discourse readable and comprehensible.

Part II to follow soon…………..

Disclaimer: For information only, and personal opinion of the author.


1. 5(3) IGST Act 2017- Charging Section

2. 2(93)- CGST Act 2017-Definition of Recipient

3. NN 8/2017-IT(Rate) dated 28/Jun/2017 (With 2 Corrigenda)- IGST Tax rates on services- Entry No. 9

4. NN 10/2017-IT(Rate) dated 28/Jun/2017 -IGST RCM-Entry No.10

5. 2(11) IGST Act- Definition of “Import of Services”

6. 2(26) Customs Act 1962– Definition of ‘Recipient’

Section 5 IGST Act 2017 is the charging section which lsts various cases for “Levy and Collection” of Integrated Tax, through its 5 sub sections.

Section 5(3) IGST Act 2017.- The RCM Section

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.

NN 8/2017-Intergrated Tax(Rate) dtd 26/6/2017– Excerpt of entry 9

S no. Chapter, Section or Heading Description of Service Rate % Condition
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 (i.e the Foreign Shipping line)

to a person located in non-taxable territory (i.e. the Exporter of goods/recipient of Goods Transport service)

-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.

Corrigendum to NN 8/2017 states:-

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 up

-to 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.”;

Notification No. 10/2017-IT (Rate), also dated 28/6/2017, sates the services that shall be subject to RCM in the hands of the Recipient.

S 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.

As can be seen above, NN 10/2017 created a deeming fiction when it overstretches the meaning of Recipient, and declares that the ‘Importer’, who has neither contracted with the Shipper, nor has he paid to him for the service of transportation.

Also Read- RCM on Ocean freight- A contentious issue- Part 2- FOB contracts of Import: Double Taxation v. Unjust Enrichment.

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April 2021