RCM on Freight Charges on Import after SC Order in Favour of TP Updated [Find Draft Reply Format Here]

The Supreme Court of India, in the case of Union of India vs Mohit Minerals Pvt. Ltd., has issued a landmark ruling abolishing the levy of Integrated Goods and Services Tax (IGST) under the Reverse Charge Mechanism (RCM) on ocean freight for CIF imports. This decision upholds the Gujarat High Court’s 2020 ruling and provides major relief to importers who were previously subjected to double taxation on ocean freight.

With this ruling, the RCM tax on freight charges in CIF imports is no longer applicable.

Boost Your Business with SME IPO Funding Strategies - Enroll Now

What is RCM on Freight Charges?

Under the previous GST framework, importers were required to pay IGST on the freight component of goods imported into India under Cost-Insurance-Freight (CIF) contracts. The taxation was applied under RCM, even though:

• The contract for freight was between two foreign parties (the seller and the shipping company).
• The importer was not a direct party to this contract.
• The importer already paid IGST as part of the customs duty on the CIF value.

This resulted in double taxation—first, as a component of customs duty on the imported goods (which already included freight charges), and second, as a tax on freight services under RCM.

Boost Your Business with SME IPO Funding Strategies - Enroll Now

Supreme Court’s Decision

The Supreme Court ruled in favor of importers, holding that levying IGST separately on freight in CIF imports is unconstitutional. Key observations by the court include:

• Importers Are Not Recipients of Freight Services: Since the contract exists between the foreign seller and the shipping company, the importer should not be liable to pay GST under RCM.
• IGST Is Already Paid on CIF Value: Since the customs duty and IGST are calculated on the entire CIF value, taxing freight again under RCM results in dual taxation.
• GST Council’s Recommendations Are Not Binding: The court emphasized that the GST Council's recommendations are only advisory, and Parliament or State Legislatures are not legally bound to implement them.

By striking down the double taxation of ocean freight, this ruling aligns the GST law with constitutional principles of fairness and natural justice.

Boost Your Business with SME IPO Funding Strategies - Enroll Now

Who Still Needs to Pay RCM on Freight Charges?

• Importers Using Free on Board (FOB) Contracts: In FOB-based imports, the importer is responsible for arranging and paying for freight separately. Since the importer directly contracts with the shipping line, RCM at 5% GST on ocean freight will still apply.
• Businesses That Hire Indian Shipping Companies: If an importer engages an Indian shipping company to transport goods, GST will be applicable on the freight charges as per standard GST rules.

With the Supreme Court’s landmark ruling in Union of India vs. Mohit Minerals Pvt. Ltd., importers are no longer required to pay IGST under RCM on ocean freight for CIF-based imports. However, many businesses have received Show Cause Notices (SCNs) from tax authorities demanding IGST on ocean freight based on Notifications 08/2017 & 10/2017, which have now been declared ultra vires (beyond legislative authority) and unconstitutional.

Boost Your Business with SME IPO Funding Strategies - Enroll Now

Sample Draft Response for SCN Withdrawal

A well-structured response should:

• Reference to the Supreme Court Judgment: Clearly mention that the Supreme Court has struck down the applicability of IGST on ocean freight in CIF transactions, upholding the Gujarat High Court’s decision.
• Clarification that RCM on Ocean Freight Does Not Apply to CIF Imports: The response should highlight that in CIF contracts, importers do not directly procure freight services, and thus, they are not liable to pay IGST under RCM.
• Formal Request for SCN Withdrawal: The response should formally request the cancellation of the tax demand raised in the SCN, citing the Supreme Court’s ruling as the final authority on the matter.
• Willingness to Provide Additional Clarifications: The response should assure the tax authorities that the importer is open to providing any further clarifications or documentation to substantiate the non-applicability of IGST under RCM.

Click the Blue Button Below to Access a Draft Format for Responding to SCNs on RCM for Ocean Freight in CIF Imports

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates