The Supreme Court in a significant ruling in Union of India v. Mohit Minerals, held that the margins arising out of taxation from GST would not create a level playing field and drive the Indian shipping lines out of business.
A division bench of the Supreme Court comprising Justice Dr Dhananjaya Y Chandrachud, Justice Surya Kant and Justice Vikram Nath was considering a petition filed by Mohit Minerals Pvt Ltd challenged vires of the CBIC notification. The petition has principally three elements. First, having paid the tax under IGST Act on the entire value of imports (inclusive of the ocean freight), the petitioner cannot be asked to pay tax on the ocean freight all over again under a different notification. Secondly, in case of CIF (Cost, Insurance and Freight) contracts, the service provider and service recipient both are outside the territory of India. No tax on such service can be collected even on reverse charge mechanism. And thirdly, in case of High Sea sales, the burden is cast on the petitioner as an importer whereas, the petitioner is not the recipient of the service at all. It is the petitioner’s seller of goods on high sea basis who has received the services from the exporter/ transporter.
Mr Arvind Datar and Mr Harish Salve, appeared for the Assessee, urged that the service of transportation occurs outside India, that is outside the taxable territory and bears a nexus with India only as the destination of goods is India. However, it was submitted that since the import of goods is taxed under Section 5(1) as ‘supply of goods’, there remains no territorial nexus of the transportation service with the Indian territory.
The bench observed that “it is important to contextualize the purpose of GST and the constitutional amendment to effect it. In modern commerce, the distinction between goods and services is increasingly becoming a matter of degree than substance. GST seeks to focus on the taxation of “supply” of goods or services. The provisions of the IGST and CGST Act focus on implementing a workable machinery to adequately capture the complexities of supply in a global and digital age.”
Earlier, the High Court held that the GST law specifically provides that the importers are required to discharge IGST at the rate of 5 percent on ocean freight services under the Reverse Charge Mechanism (RCM) under which, the duty of importer have to pay IGST on behalf of the foreign buyer. However, at the same time, customs duty on the CIF value (which includes the component of freight as well) of the goods imported into India is also paid by the importer. As a result, there is double taxation on the component of ocean freight under GST law which is an impediment and has bloated the cost of imports.
Concurring with the above view of the High Court, the Apex Court observed that “the impugned notifications were issued after the GST Council took note of the fact that since transport of imported goods by Indian shipping lines to India is not treated as export of service, the Indian shipping lines pay IGST on the same on a forward charge basis. On the other hand, on the same transportation service, the foreign shipping lines are not required to pay tax as they are not taxable persons in India. Therefore, to provide a level playing field to Indian shipping lines, the importer in India has been made liable to pay IGST on transportation of goods by foreign shipping lines on a reverse charge basis. If Indian shipping lines continue to be taxed and not their competitors, namely, the foreign shipping lines, the margins arising out of taxation from GST would not create a level playing field and drive the Indian shipping lines out of business.”
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