Ocean freight under CIF contract – Relief under GST by High Court

As per GST laws in India, importers are required to pay five percent of IGST on ocean freight services under reverse charge mechanism.

Taxability of ocean freight has been subject matter of dispute in India for some time now. As per GST laws in India, importers are required to pay five percent of IGST on ocean freight services under reverse charge mechanism. Apart from this, the importer also pays customs duty on the cost, insurance, and freight (CIF) value of the product being imported via the ocean. This lead to double tax on the amount of ocean freight.
 
The GST authorities has given their view through advance ruling sought by M/s Bahl Paper Mills Ltd. [2018] and M/s Chambal Fertilizers and Chemicals Ltd [2018] that even if importer has already paid IGST on CIF value of goods imported, the importer is still required to pay IGST on ocean fright.
 
However, writ applications were being filed in the Gujrat High Court challenging the levy of the IGST on the estimated component of the Ocean Freight paid for the transportation of the goods by the foreign seller as sought to be levied and collected from the importer of the goods.
 
In landmark judgment passed this year in the matter of Mohit Minerals Pvt. Ltd. Vs Union of India [2020], Gujrat High Court set aside leviability of IGST on ocean freight declaring it ultra-virus and not permissible under law since IGST can be levied either on the service provider or service recipient, and not on the importers who pay customs duty.
 
This judgment has brought substantial relief to the importers. The readers can refer below on further details in this respect.
 
Ocean Freight – Issue explained

In case of import of goods in India on Cost, Insurance and Freight (CIF) basis, the foreign supplier located outside India engages foreign shipping agency for transportation of goods from foreign origin country to destination port in India. In such case, freight is directly paid by such foreign exporter to the shipping agency. Accordingly, the foreign supplier avails the service of transportation of goods from foreign shipping agency.
 
Though in such case, foreign supplier is the recipient of service with respect to transportation of goods, however, the Government of India vide Notification 10/ 2017-IGST (Rate) dated 28.06.2017 specified Importer of goods in India being the recipient of such transport service and is liable to discharge IGST on ocean freight under reverse charge mechanism. Relevant entry from said notification is reproduced hereunder for ready reference of readers.
 

S No.

Category of Supply of Services

Supplier of Service

Recipient of Service

1

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.

 
Apart from above, the importer of goods in India is also subject to Basic Custom duty (BCD) and IGST on CIF Value of goods imported in terms of the relevant provisions of the Customs Act, 1962.
 
Consequently, the importer is subject to double taxation as far as the amount of ocean freight on CIF contract basis is concerned.
 
Though the above mentioned notification appeared to be ultra-vires to the provisions of the GST Act in India pertaining to liability of Importer on amount of ocean freight on CIF basis contract, however, the GST advance rulings authorities in Rajasthan and Uttarakhand confirmed the liability on Importer in such case. This resulted in perplexities in the industry among importers in India and therefore writ petition was filed in Gujrat High Court challenging entry no 10 of Notification No. 10/2017 by M/s Mohit Minerals Pvt Ltd.
 
Observations and ruling of the Gujrat High Court – M/s Mohit Minerals Pvt. Ltd.

The Court observed as under: -

  • In CIF contract, the seller is obliged to procure a contract of affreightment under which the goods would be delivered at their destination.
  • The contract for transportation is entered into by the seller, i.e. the foreign exporter, and not the buyer, i.e. the importer, and the importer is not the recipient of the service of transportation of the goods.
  • The importer in India is not liable to pay consideration to foreign shipping company and hence does not fall under the statutory definition of “recipient”. [As per Section 2(93) of the CGST Act, recipient of supply of goods or services means “where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration”]
  • The Notifications making the importer liable for paying IGST on ocean freight with respect to supply of service of transportation of goods by a person in a non-taxable territory to a person in a non-taxable territory from a place outside India upto the customs station of clearance in India, are ultra vires the provisions of the IGST Act.
  • Levy of the integrated tax again on the Ocean Freight in such situation amounts to double taxation i.e. under IGST and also under Custom act. Double taxation, by way of delegated legislation, when the statute does not expressly provide, is not permissible.
  • No tax is leviable under the Integrated Goods and Services Tax Act, 2007, 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 upto 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.

Steps to be taken by Indian Importers

The landmark judgment has no doubt rest the contentious issue by providing relief to importers in India with respect to leviability of GST on ocean freight on CIF contracts. However, the importers may take below steps with respect to applicability of said ruling:-
 
  • The taxpayer may take benefit of the judgment in case litigation is pending before GST authorities on said matter.
  • The importer may also evaluate the option of refund of GST already paid on ocean freight on CIF basis. In this respect proper analysis of facts of case with judgment and law is required.
  • The taxpayers are suggested to analyse the judgment basis the facts and circumstances of their case in practically applying the judgment to mitigate the hitches for future transactions.
At this point, it would not be out of context to mention here that said issue is also pending before High Courts of other states. Though the Gujrat High Court would certainly pave way to such pending matters in those states, however, the outcome of judgment in such states may have to be watched along with any step of revenue in approaching the Supreme Court of India against such order.