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


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

Kindly go through the first part for before this write-up for sake of understanding this matter.

Part -1 had dealt with CIF contracts, in which the freight component is unknown to an importer. Read Part-1 RCM on Ocean freight- A contentious issue- Part 1- CIF contracts of Import

This part 2 will deal with FOB contracts of import, in which Freight component is separate and identifiable, as it is not included in the value of goods. The Importer pays the freight to the Shipping Line either directly or through his appointed CHA (Clearing House Agent), which is subject to RCM u/s 5(3) of the IGST Act, 2017.

Is the Department right in taxing the transportation charges in case of FOB contracts of import, on RCM basis u/s 5(3)?



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.

Taxability of freight charges paid by an importer under an FOB contract is governed by Section 5(3) IGST Act,2017, which makes it incumbent upon a ‘Recipient’ of a Supply to pay the RCM.

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.

In case of Mohit Minerals P Ltd. V. UOI, the h’ble Gujarat HC decided against the RCM taxability of a CIF contract only, leaving the space for the Department to tax freight paid on an FOB contract, in the hands of an Importer, who, in this case, becomes the bona fide Recipient of the Supply of freight services, in terms of S.2(93) of the CGST Act, 2017.

Discussion No. 1:-

1. Attention is re-invited to NN 10/2017-IT(Rate) dtd. 28/6/2017, entry or S.No. 1. This is the Principal notification concerning the RCM cases w.r.t. supply of Service.

S No. Category of Supply of Services Supplier of Service Recipient of Service
1. Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. Any person located in a non-taxable territory


Any person located in the taxable territory (other than non-taxable online recipient).

When we apply this delegated legislation to FOB cases, it is clear and unambiguous that in case of FOB, the Supplier is located in NTT(Non-Taxable Territory), while the Recipient is in TT(Taxable Territory). Loud and clear!!

There are no deeming fictions created here, as we saw in Part-1 of this discussion. We saw there that Entry no. 10 of this notification deemed the poor “importer” as the recipient of a service contract he wasn’t privy to.

2. Attention is invited now to 14 of the Customs Act, 1962- ‘Valuation’

14. Valuation of goods. —(EXCERPT) 

(1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be

the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf:

– Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid,

– 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 and in the manner specified in the rules made in this behalf:

– Provided further …………….

It is evident that the Assessable Value(AV) for calculation of Customs tariff is an inclusive one. It includes all costs of commission, brokerage, transportation etc.

It may also be noted that S.14 doesn’t differentiate between CIF or FOB contracts, and the Rule of valuation for both CIF and FOB is the same, i.e. inclusive of Transportation costs.

3. Let’s also check S. 5 (1) IGST Act, 2017, particularly first proviso:

Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Provided that the 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.

The above proviso to S 5(1) IGST Act states that GST levy on imports is governed by S.3 of the Customs Act, 1962, and the valuation shall be done as per the Customs Act only.

{Customs Act S.3 provides for “Levy of additional Duty equal to Excise Duty”. Although this section needs to be amended after GST Law came into force, it states clear formula for calculation of an Additional Duty (i.e. GST) in section 3(2). S.3(2) states that for calculation of an Additional Duty (i.e. IGST), valuation u/s 14 of Customs Act shall be taken cumulatively, i.e.

1. Transaction Value of Goods(TV)

2. Add: Cost of insurance, freight, commission and incidental charges

3. Assessable value(AV) of goods as per S.14 Customs Act

4. Add: Customs Duty u/s 12 of Customs Act on AV ( As per Customs Tariff Act,1975)

5. = Aggregate Value

6. Add: IGST, as calculated on Agg. Value}


Referring to above, we can deduce that the valuation for the purpose of taxing goods imported into India, is inclusive of all transportation etc., and the aggregated value finally suffers the IGST.

Now comes NN 10/2017, which inflicts the vice of Double Taxation on the Freight paid under such FOB contracts, vide its S.No. 1.

So we can say that since Double Taxation is unjustifiable, the Department cannot charge RCM, right !?

NOT SO FAST!! This is just beginning now…………

Lets dive deeper now, Shall we !?

1. Is Double Taxation legal?

2. Can the Department enrich itself unduly?

3. Can we refuse to pay tax on RCM basis pursuant to NN 10/2017-IT (Rate)?

Answer to all above questions is both Yes and No!!

Sad story already, eh?!

The truth is that the answer to above questions, in either affirmative or negative, is not straight forward in law. It never has been!


Discussion No. 2 : Lets examine the legality and reasonability part of “Double Taxation”.

“Dura Lex, Sed Lex”Latin Maxim

Meaning: Law is harsh, but it is Law.

Bitter Truth – Double Taxation is NOT PROHIBITED under the Constitution of India!

Article 265 (Tax not to be imposed save by authority of Law)– does not prohibit multiple taxation of a transaction, if the legislative intent is clear.


Apex Court’s decisions on double taxation :

1. M/s Jain Bros. And Ors v. UOI and Ors. (AIR 1970 SC 778)

The H’ble SC’s Constitution Bench observed, in unmistaken terms, in favour of Double Taxation.

“It is not disputed that there can be double taxation if the legislature has distinctly enacted it.”

“The Constitution does not contain any prohibition against double taxation…..”

“If any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over.”

“Bad Economics may be good Law and vice-versa!”

“There is nothing in A.265 from which one can spin-out the Constitutional vice called double taxation”.

2. Jayalakshmi Coelho v. Oswald Joseph Coelho, H’ble SC on 28/Feb,2001

“There is no warrant or justification in law for the High Court proceeding on an assumption that permitting the levy even as octroi twice over would suffer the vice of double taxation and therefore bad in law, unmindful of the well settled position of law in this regard, also.”

“If any double taxation is involved the legislature itself has, in express words, sanctioned it, it is not open to any one thereafter to involve the general principles that the subject cannot be taxed twice over.”

3. Avinder Singh v. State of Punjab and anr. (AIR 1979 SC 321)

“A feeble plea that the tax is bad because of the vice of double taxation and is unreasonable because there are heavy prior levies was also voiced. Some of these contentions hardly merit consideration, but have been mentioned out of courtesy to counsel.”

“There is nothing in Art.265 of the Constitution from which one can spin out the constitutional vice called double taxation. (Bad economics may be good law and vice versa).”

“Dealing with a somewhat similar argument, the Bombay High Court gave short shrift to it in Western India Theatres, AIR 1954 Bom. 261. Some undeserving contentions die hard, rather survive after death. The only epitaph we may inscribe is: Rest in peace and dont be re-born!

“If on the same subject-matter the legislature chooses to levy tax twice over, there is no inherent invalidity in the fiscal adventure save where other prohibitions exist.”

4. In Sri Krishna Das vs Town Area Committee, Chirgaon[1990 (3) SCC 645] and Radhakishan Rathi vs Additional Collector, Durg & Ors. [1995 (4) SCC 309] the same position is found reiterated. 

“Though taxation of the same thing under different names is nonetheless double taxation in popular sense, the expertise exposition of the topic seem to also lean in favour of the revenue, in that the legislature has been considered to possess the power to levy one or more tax or rates of tax on the same taxable event and since in these areas large latitude and wide discretion has always been allowed to the State to choose its own method or kind of tax or mode and purpose of levy and recovery, unless there is any prohibition in the Constitution or the very law enacted by the legislature itself prevents such a thing happening no infirmity can be said to vitiate such a levy.

Further the H’ble Judges say:-

“Wherever the taxes are imposed by different legislatures or authorities or where one of the two alone is a tax or where it is for altogether different purposes or when it is indirect rather than direct, there is no scope even for making any grievance of double taxation, at all.”

N.B.However, a slight change of stance is seen below:-

“In the absence of any impediment specifically created in the Constitution of a country or the legislative enactment itself, the desirability or need otherwise to avoid such levies has been held to pertain to areas of political wisdom of policy making and adjusting of public finances of the State, and not for the Law Courts, though Courts would, unless there is clear and specific mandate of law in favour of such multiple levies more than once, in construing general statutory provisions, lean in favour of an interpretation to avoid double taxation. So much are the principles or statement of law governing a challenge to any levy on the ground of Double Taxation.”

There are many more such decisions by the Apex court that lean in favour of State when it comes to double taxation, as there is apparently no express prohibition in our Constitution.


Does this make situation clear w.r.t. Double Taxation?

A. Well Almost !!

As we saw above, there is no bar on double taxation, as per numerous Apex Court decisions:-

a) if the legislative intent is clear, and

b) there is no Constitutional Prohibition or a bar in the Principal Act of Law itself.

Q. Does it mean there are no fetters on the Legislature when it comes to taxing a transaction twice, or thrice, or multiple times?

A. No! As if this were the case, there would have been a civil war already.

H’ble SC in Shri Krishna Das v. Town Area Committee, Chirgaon, as quoted above, also gave a test to examine if a case falls under Double Taxation, which is prohibited, while also clearly stating that “Courts tend to lean in favour of an interpretation that avoids Double Taxation”:-

“To constitute Double Taxation, two or more taxes must have been:-

i. levied on the same property or subject matter;

ii. by the same Government or Authority;

iii. during the same taxing period; and

iv. for the same purpose.”


Closing Remarks:-

1. Applying the above laid down principles, we can see that in the case of FOB Contracts too, once the transaction has suffered GST u/s 5(1) IGST Act, the same transaction cannot be subject to RCM again u/s 5(3) of the same Act, just because there was a delegated legislation in the form of NN 10/2017-IT (Rate) S.No. 1.

2. Also there are limits up to which a Delegated Legislation (Notification, Rule etc) can legislate.

RCM mechanism was brought-in for the cases where either Government could not collect tax directly, for either economic (e.g. RCM u/s 9(4) CGST Act 2017, on unregistered persons-not in force since 2017 October) or political reasons (e.g. RCM on Advocates, Goods Transport). There cannot be  a case where an honest importer should be taxed twice by giving an excuse that he will anyways get Input Credit of the tax paid.

This provision was probably taken straight from the Service Tax era by the Taxman, without considering the context or relevance in the current GST era.

3. RCM, albeit with full Input Tax Credit, is a burden on the cash flow of an assessee. Also in the case of Exporters, this burden keeps adding up and has to be carried till the time Govt. chooses to grant  refunds of the inverted tax.

4. Lets also consider the Doctrine of Unjust Enrichment, whereby no one can unjustly benefit at the expense of another.

In Mafatlat Industries and Others v. UOI and Others, CJ AM Ahmadi of the H’ble SC examined in depth, the Doctrine of Unjust Enrichment considering both Indian as well as International cases of UK, Canada and several other countries.

It was observed by the Court that:

“Social Justice clauses are integrally connected with the Taxing provision and cannot be viewed as mere devices”.

Then the SC went on to quote the decision in Shiv Shankar Dal Mills v. State of Haryana 1980 1 SCR 1170 as well as Kewal Krishna Puri v. State of Punjab 1980 1 SCC 416.

It was held in these cases that the State had to refund the excess market fee collected from the traders thereby nullifying the unjust enrichment.

Thus the Principle of Restitution of unjust impoverishment applies to State as much as it does to an assessee, which is nothing but the flip side of Unjust Enrichment.

5. State cannot transgress Art. 265 which states that there can be no imposition of tax without the authority of law.

6. Fiscal mis-adventurism has to be culled before it goes out of control.

Disclaimer: Personal views and opinion. To be used with discretion considering the entrepreneurial risk.

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April 2021