Supreme Court Upholds IGST on Ocean Freight Paid by Foreign Exporters but Strikes Down Double Taxation in CIF Imports

SC rules GST Council recommendations are recommendatory, not binding; Indian importers liable to IGST on composite supply of goods including freight, but separate levy on freight service violates composite supply principle.

In a landmark judgment delivered on May 19, 2022, the Supreme Court of India in Union of India v. M/s Mohit Minerals Pvt. Ltd. dismissed appeals filed by the Union of India challenging the Gujarat High Court’s decision that struck down notifications imposing Integrated Goods and Services Tax (IGST) on the ocean freight component paid by foreign sellers to foreign shipping lines in Cost-Insurance-Freight (CIF) contracts.

The core issue before the Court was whether an Indian importer can be subjected to IGST on the ocean freight component paid by a foreign exporter to a foreign shipping line on a reverse charge basis, when the importer neither contracts with nor pays the shipping line directly. The GST Council had recommended levying IGST on such freight services to level the playing field between Indian and foreign shipping lines, with the tax to be borne by the importer under reverse charge.

The Court held that while IGST can be levied on the composite supply of goods imported on CIF basis, which includes transportation and insurance services, imposing an additional separate IGST on the freight service as a standalone supply violates the principle of composite supply enshrined under Section 2(30) read with Section 8 of the Central Goods and Services Tax (CGST) Act, 2017. This separate levy amounted to impermissible double taxation.

Significantly, the Court clarified that the recommendations of the GST Council under Article 279A of the Constitution are recommendatory and not binding on the Union and the States. The deletion of Article 279B and inclusion of Article 279(1) in the Constitution Amendment Act, 2016, indicate Parliament’s intent that the GST Council’s recommendations have persuasive value to foster cooperative federalism and harmony between the Union and States. The Court emphasized that both Parliament and State Legislatures possess simultaneous legislative power under Article 246A to enact GST laws, and the GST Council’s recommendations do not override this legislative sovereignty.

The Court further analyzed the IGST Act, Customs Act, and CGST Act provisions and held:

- Import of goods under a CIF contract constitutes an inter-state supply where the Indian importer is deemed the recipient of the shipping service under Section 2(93)(c) of the CGST Act and Section 13(9) of the IGST Act, which fixes the place of supply of transportation services as the place of destination of goods.

- The specification of the importer as the recipient of the transportation service in Notification No.10/2017 is clarificatory and within the powers delegated under Sections 5(3) and 5(4) of the IGST Act.

- While the Indian importer can be liable to pay IGST on the composite supply (goods including freight and insurance), a separate levy of IGST on the freight service paid abroad by the foreign exporter to the foreign shipping line would amount to double taxation and is impermissible under the GST law.

- The concept of reverse charge is valid, and importers are taxable persons liable to pay IGST under reverse charge as per Section 24(iii) of the CGST Act, which mandates compulsory registration of persons liable to pay tax on reverse charge basis.

The decision maintains the constitutional balance of cooperative federalism, recognizing the GST Council as a forum for harmonizing indirect tax laws but respecting the legislative autonomy of Parliament and States. It also underscores the importance of the composite supply principle in GST to avoid multiplicity and cascading of taxes.

This verdict is expected to bring clarity on IGST liability in CIF imports, ensuring Indian importers are not unfairly burdened with double taxation, while also upholding the legal framework governing the GST regime and the role of the GST Council.

Statutory provisions

Constitution of India Articles 246A, 279A; Integrated Goods and Services Tax Act, 2017 Sections 2(11), 2(14), 2(15), 2(26), 2(93), 5(1), 5(3), 5(4), 6(1), 7(3), 7(4), 8, 9, 11, 12, 13(9), 15, 16, 20; Central Goods and Services Tax Act, 2017 Sections 2(31), 2(84), 2(93), 2(98), 2(107), 7, 8, 13, 15, 16, 24(iii); Customs Act, 1962 Section 2(26), 12; Customs Tariff Act, 1975 Section 3(7), 3(8).

Union of India v. M/s Mohit Minerals Pvt. Ltd. (SC) : Law Finder Doc Id # 1989001