The saga of GST on Ocean Freight… Vaster than the Ocean itself!

Top Stories The saga of GST on Ocean Freight… Vaster than the Ocean itself! By Jigar Doshi – On April 22, 2024 6:26 pm – 7 mins readBy Swapnil Kolte – On 6:26 pm – 7 mins read It appears as if the taxability of Ocean Freight is a magnet of litigation under the Indian Indirect tax regime. Initially under Service Tax, ocean freight was exempt. However, the same was made subject to tax with effect from 1 June 2016 under forward charge mechanism. This led to a situation where the domestic freight services were being subjected to tax as against foreign freight services leading to a disadvantageous situation for domestic service providers. Hence, with effect from January 2017, ocean freight was subject to Service tax under Reverse Charge Mechanism (RCM) in the hands of the importer.

Here, it is imperative to note that the Gujarat High Court has already held the levy of Service tax under RCM for CIF contracts as ultra vires in the case of SAL Steels Ltd. Vs UOI [2020(37) G.S.T.L. 3 (Guj.)]. The revenue has approached the Apex Court against the decision but the same is still pending for hearing. Recap….. Now, as it is quite apparent that the GST law is influenced significantly from Service Tax regime, the taxability of ocean freight was also borrowed as-is without any changes. However, the levy of GST on ocean freight was challenged in the case of Mohit Minerals vs. UOI. The petitioner, Mohit Minerals P. Ltd. filed a petition with the Hon’ble Gujarat HC on the following grounds: Notification no. 8/2017-IGST (Rate) and Notification No. 10/2017-IGST (Rate) are ultra vires the GST law. In case of CIF contracts, the value of goods when imported into India include the value for freight and insurance. Therefore, at the time of clearance of such goods, the importer pays Basic Customs Duty and IGST on the entire value (including freight). Hence, paying IGST again under RCM separately on freight is leading to double taxation. The service of freight is being rendered by a foreign shipping line to an exporter who is located in non-taxable territory. Hence, levying tax on this service is outside the ambit of GST as the same is an extra territorial levy.

The Hon’ble Gujarat HC accepted the views of the petitioner and struck down the relevant entries of the aforementioned notifications. However, as expected the Revenue knocked the doors of the Hon’ble Apex Court with the following rebuttal arguments: Although tax is being paid twice on the value of ocean freight, it is not unconstitutional as the tax is on two different aspects of the transaction, namely, the supply of service and import of goods. The objective of the RCM levy is to create a level playing field for Indian Shipping line and freight service providers. Levy of tax on ocean freight shall not increase cost of the importer as ITC can be claimed of the tax paid. The Apex Court apart from providing its view on the core matter, interestingly also commented on the legislative History of the Constitution Amendment Act, 2016 – significance while interpreting provisions, role of the GST Council, GST Council’s recommendation – whether binding or not with great profundity. On the fundamental issue, the Apex Court held the following, hence deciding in favor of the Company

The assessee is liable to pay IGST on the ‘composite supply’, comprising the supply of goods and supply of services of transportation, insurance, etc., in a CIF contract. If there is a separate levy on the assessee for the supply of services by the shipping line, then, it would be in violation of Section 8 of the CGST Act and would amount to double taxation. Hence, there cannot be a separate levy of IGST on the component of ocean freight paid by the foreign exporter to the foreign shipping line in the CIF contract. With this backdrop, the CBIC vide Notification no. 11/2023-IGST dated 26 September 2023 amended Notifications 10/2017 and 8/2017 thus removing levy of IGST under RCM on ocean freight. Post these notifications while the industry was quite relieved, a question which usually crossed the mind was that can the Apex Court’s ruling be made applicable on IGST paid on ocean freight in case of FOB contracts as well. Back to present It seems that the wish of the taxpayers has been answered. Recently, the Bombay HC in the case of M/s Agarwal Coal Corporation Pvt. Ltd. vs The Asstt. Commissioner of State Tax [WRIT PETITION NO. 15227 OF 2023] evaluated the levy of IGST under RCM on ocean freight in case of FOB contracts.

The Bombay HC while quashing the SCN and disposing the writ noted the following important highlights: The argument of the revenue that the Supreme Court’s decision in the case of Mohit Minerals is only applicable to CIF contracts and not FOB contracts is completely untenable as Mohit Minerals case when presented before Gujarat HC was a case which involved both FOB and CIF contracts. The Court on the facts of Mohit Minerals held the underlying entries in notifications as ultra vires. The SCN issued is without jurisdiction as once the Notification is rendered as ultra vires, the same is not available to revenue to issue SCNs. The Bombay HC ordered a refund of tax paid under protest by the petitioner along with interest @ 7%. Author’s view The key difference between CIF and FOB contracts is that in case of CIF contracts the seller or the exporter appoints a freight service provider and bears the cost of the same. Therefore, the value of goods to the buyer or importer is including the freight cost. Once such goods are imported, the importer pays BCD and IGST at the port of clearance on the entire value (including freight). In such cases, the freight forwarder raises an invoice on the exporter and the exporter becomes the recipient. Therefore, both the service provider (foreign freight forwarder) and the service recipient (exporter) both are outside India. Hence, the freight service is rendered outside India. However, in case of FOB contracts, the importer appoints a freight forwarder and bears the cost and risk of bringing the goods to the port of import. The freight forwarder in this case raises an invoice on the importer and the Indian importer becomes the service recipient. Now the interesting part to observe here is that what happens in case of FOB contracts? First of all, lets understand that the IGST levy on import of goods comes from the proviso to Section 5(1) of the IGST Act, 2017 which directs one to go to Section 3 of the Customs Tariff Act, 1975 (CTA). Section 3 of the CTA defines the levy of additional duty on import of goods. Section 3(7) prescribes a levy of IGST on any imported article into India as is leviable on supply of like article in India on the value as determined u/s 3(8) of CTA. Further, Section 3(8) of CTA lays down such value to be as determined u/s 14 of the Custom Act, 1962 plus the Customs duty as levied u/s 12 of the Customs Act, 1962.

Furthermore, Section 14 of the Customs Act, 1962 clearly includes freight in the assessable/ transaction value, thus making freight subject to IGST at the time of import of goods into India irrespective of whether it is a CIF or a FOB transaction. Now, separately if such freight charges are paid to a supplier outside India by the Indian importer, the same is currently subject to GST under RCM as per Entry 1 of the Notification no. 10/2017-IGST (Rate) akin to any other import of service. It must be noted here, that such taxability does not come from Entry no. 10 which has been omitted in 2023 by the CBIC as a result of Mohit Minerals case. Therefore, this is where the distinction between IGST paid on freight in case of FOB vs CIF comes. Even after omission of the freight CIF entry in case of CIF, the freight in case of FOB still gets covered in the general import of service entry. Therefore, to put it simply, even in case of FOB transactions, an importer is currently paying IGST twice on the freight component – Once at the time of clearance of goods at the port and secondly at the time of receipt of freight services from foreign shipping lines. One may also note here that in cases where the freight service provider is an Indian Company, in such cases, GST is paid under forward charge mechanism by the service provider resulting in the same situation of double tax being levied on same component. Now that we have established that ocean freight is subject to GST twice in a FOB transaction, lets evaluate whether the decision of Mohit Minerals becomes applicable in case of FOB transaction or not.

The main argument in the Mohit Minerals case which stood out was that the import transaction is a composite supply under the IGST Act, 2017 which includes supply of goods and supply of freight as a service. An additional taxability on freight would lead to double taxation. As against this argument, the revenue rebutted to say that as per the judgment given by the Apex Court in the case of BSNL v. Union of India, and the aspect theory as explained therein, different aspects of same transaction can be taxed differently. However, the SC distinguished this argument stating that the case of BSNL was on overlap of Service tax and VAT and the same cannot be made applicable to the current scenario. With this context, can one also say that the dual levy of tax in case of FOB transaction can fall under the aspect theory? Ideally not because from a wider angle, if one has to see, in both cases, IGST is levied at the time of import of goods and both can easily fall under composite supply. Similarly, the other levy of tax comes from the RCM notification in both cases.

Therefore, principally it appears that even FOB transactions are being subjected to IGST twice and the concept of double taxation also applies hitherto. However, the underlying principle that the HC has mentioned in the ruling viz. there is no Notification in place to levy IGST again under RCM post the omission of Entry no. 10 from NN 10/2017-IGST (Rate) may not hold water. This is because FOB transactions were any which ways not getting taxed under that specific entry; it was being covered under the general import of service entry i.e., Entry no. 1 of NN 10/2017-IGST (Rate). Hence, it becomes almost imminent that the Revenue would again knock the doors of the Apex Court and the litigation on this point will reach its climax. Until then, the questions that is on the table to be answered are –: Can the importers in the state Maharashtra start applying for refund of tax paid on freight in case of FOB contracts? Will they be eligible to claim interest similar to this case? Will the other HCs follow suit

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