In the recent Judgment delivered by Hon’ble Supreme Court of India on 19th May 2022 in the case of Union of India & Anr. v M/s Mohit Minerals Pvt. Ltd. Through Director, Civil Appeal No. 1390 of 2022, wherein the Hon’ble Gujarat High Court allowed a petition under Article 226 relating to Ocean Freight challenging the Notification 8/2017 and Notification 10/2017 levying IGST on the Indian importer under Reverse Charge Basis on the freight component in the CIF Contracts of import of goods.

The Indian importers purchased and import through ocean transport goods from outside India on a ‘Cost-Insurance-Freight’ (CIF) basis which is further supplied to domestic industries. The goods are transported by ship from a place outside India, up-to the customs station in India. The Indian importer pays customs duties as well as IGST on the import of goods, which includes the value of ocean freight. In the case of a CIF contract, the foreign supplier engages the shipping company for transport of goods till Indian Customs and as such the freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of the Indian importer. The consideration for the Ocean Freight is exclusively paid by the foreign supplier. In the other mutually exclusive scenario, the Ocean freight is paid by the Indian importer only when goods are imported under a ‘Free-on-Board’  (FOB) contract.

The following essential points were laid down by the Hon’ble Supreme Court which are as follows:

  1. Ocean freight transaction for Import of Goods under CIF Contracts can be termed as ‘Supply’ under the Indian GST Law

At para 105 of the Judgment it was observed that the Indian importers have contended that the ocean freight transaction cannot be considered as “supply” since Section 7(1)(b) of the IGST Act requires the import of service to be for a “consideration”. The definition of “consideration” in Section 2(31) of the CGST Act is instructive. Thus, Section 2(31) of the CGST Act defines ‘consideration’ to include payment made or to be made, in money or any other form, for the inducement of supply of goods or services to be made by the recipient or by any other person. Thus, in the case of goods imported on a CIF basis, the fact that consideration is paid by the foreign exporter to the foreign shipping line would not stand in the way of it being considered as a “supply of service” under Section 7(4) of the IGST Act which is made for a consideration paid by other person, thereby constituting “supply of service” in the course of inter-state trade or commerce that can be subject to IGST under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act.

  1. Composite ‘Supply of Goods and Services’ cannot be considered as two segregable ‘Supply of Goods’ and ‘Supply of Services’

The provisions of ‘Composite Supply’ in the CGST Act (and the IGST Act) play a very vital and specific role in the levy of GST. The idea of introducing ‘composite supply’ was to ensure that various elements of a transaction may not be dissected or bifurcated and thus the levy is imposed on the bundle of supplies together as also mentioned in the illustration provided under Section 2(30) of CGST Act. The intent of the Parliament was that a transaction which includes different aspects of supply of goods or services and which are naturally bundled together, must be taxed as a ‘composite supply’. As observed by the Hon’ble Supreme Court “It is true that in this case, the first leg of the transaction between the foreign exporter and the Indian importer is a composite supply, while the second leg, between the foreign exporter and the shipping line may, from a perspective, be regarded as a standalone transaction. Both of them are independent transactions and ordinarily, the IGST could be levied on both sets of transactions – one as supply of goods (under the ambit of composite supply) and the other as supply of services.” It has further been mentioned that however, the Notifications 8/2017 and 10/2017 sought to tax the importer as the deemed recipient of the supply of service. The Indian Importers as a matter of fact urged that-

  • the Indian importer is not privy to the contract between the foreign exporter and the foreign shipping line;
  • the Indian importer does not pay consideration to the foreign shipping line; and
  • the Indian importer does not receive any services from the foreign shipping line since the transportation services are provided by the foreign shipping line to the foreign exporter.

The Hon’ble Supreme Court categorically observed that “the Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply. It would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements. In a CIF contract, the supply of goods is accompanied by the supply of services of transportation and insurance, the responsibility for which lies on the seller (the foreign exporter in this case). The supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. To levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation. Based on this reason, it was observed that while Notifications 8/2017 and 10/2017 are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation. As noted earlier, under Section 7(3) of the CGST Act, the Central Government has the power to notify an import of goods as an import of services and vice-versa. No such power can be noticed with respect to interpreting a composite supply of goods and services as two segregable supply of goods and supply of services.

  1. The contextual meaning of ‘RECOMMENDATIONS’ w.r.t. GST Laws

The contention of the Union was that the ‘Recommendations of the GST Council’ are binding since Parliament and the State legislatures have agreed to align themselves with the recommendations as is evident from the provisions of the IGST Act and CGST Act. Certain provisions of the IGST Act, CGST Act and SGST Acts expressly provide that the rule-making power delegated to the Government shall be exercised on the ‘Recommendations of the GST Council’. For instance, Section 5 of the IGST Act provides that the taxable event, taxable rate and taxable value shall be notified by the Government on the ‘Recommendations of the Council’. Similarly, the power of the Central Government to exempt goods or services or both from levy of tax shall be exercised on the ‘Recommendations of the GST Council’ under Section 6 of the IGST Act. Section 22 provides that the Government may exercise its rule making power on the ‘Recommendations of the GST Council’. The CGST Act also provides for similar provisions in Sections 9, 11 and 164.

The provisions of the IGST Act and CGST Act which provide that the Union Government is to act on the ‘Recommendations of the GST Council’ must be interpreted with reference to the purpose of the enactment, which is to create a uniform taxation system – “One Nation One Tax”. The GST was introduced and brought as a new regime of Indirect Tax Laws since different States could earlier provide different tax slabs and different exemptions on the same goods creating unreasonable competition, there was no parity of the provisions from one State to another. The ‘recommendations of the GST Council’ are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. The Council under Article 279A has wide recommendatory powers on matters related to GST where it has the power to make recommendations on subject matters that fall outside the purview of the rule-making power under the provisions of the IGST and CGST Act. The Hon’ble Supreme Court observed that merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council’s recommendations are binding. As a matter of first principle, the provisions of the Constitution, which is the grundnorm of the nation, cannot be interpreted based on the provisions of a primary legislation. It is only the provisions of a primary legislation that can be interpreted with reference to the Constitution. The legislature amends the Constitution by exercising its constituent power and legislates by exercising its legislative power. The constituent power of the legislature is of a higher constitutional order as compared to its legislative power. Even if it is the Parliament that has enacted laws making the ‘recommendations of the GST Council’ binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the ‘recommendations of the Council’ made by virtue of its power under Article 279A have a binding force on the legislature.

Further it was observed by the Hon’ble Supreme Court that the ‘Recommendations of the GST Council’ are not binding on the Union and States for the following reasons:

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;

(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and

(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations.

Conclusion

This recent Judgment of the Hon’ble Supreme Court has opened a pandora box of possible disputes due to deviation from the very basic ethos of the new regime of GST being “One Nation One Tax”. The very basic foundation for formation of GST Council being cooperative federalism is certainly being at stake unless, the executive in different States governed by different political ideologies could restrain themselves and decide similar policies in the larger interest of the Economy of the Country.

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