The Supreme Court has held when the Indian importer is liable to pay Integrated Goods and Services Tax (IGST) on the 'composite supply', which includes supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on them for the 'supply of services' by the shipping line would be in violation of Section 8 of the CGST Act(Union of India versus Mohit Minerals).
A Bench comprising Justices D.Y. Chandrachud, Surya Kant and Vikram Nath passed the judgment in a plea by the Union Government assailing the order of the Gujarat High Court wherein constitutionality of two notifications issued by the Central Government was held to be unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act. The issue for consideration before the Apex Court was whether an Indian importer can be subject to the levy of IGST on ocean freight paid by the foreign seller to a foreign shipping line on a reverse charge basis.
The bench said that the separate levy of IGST on ocean freight charges violates the concept of "composite supply".
"The provisions of composite supply in the CGST Act (and the IGST Act) play a specific role in the levy of GST. The idea of introducing 'composite supply' was to ensure that various elements of a transaction are not dissected and the levy is imposed on the bundle of supplies altogether. This finds specific mention in the illustration provided under Section 2(30) of CGST Act, where the principal supply is that of goods. Thus, 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".
The respondent company imports non-coking coal for domestic industries from Indonesia, South Africa and the U.S. by ocean on a 'Cost-Insurance Freight' (CIF) basis. The non-coking coal is transported from outside India to the customs station in India. The custom duty paid on import of coal includes the value of ocean freight. It is pertinent to mention herein that for only 'Free-on-Board' the ocean freight is paid by the importer. In the case of CIF contract the invoice is sent by the foreign shipping line to the foreign exporter.
Prior to the GST regime, a notification dated 20.06.2012 exempted service tax on ocean freight, which was withdrawn by notification dated 12.01.2017 and the service tax was levied on the importer by a reverse charge mechanism. After the GST regime was put in place, an integrated tax at the rate of 5% was levied, inter alia, on the transportation of goods in vessels from a place outside India to the customs station of clearance in India. Another notification categorised the recipient of services of supply of goods by a person in a non-taxable territory by a vessel to include an importer under Section 2(26) of the Customs Act 1962. The respondent company contended that the Union Government's notifications imposed double taxation as the ocean freight is included in the value of the goods for which the importer is liable to pay customs duty.
Analysis by the Supreme Court
The Court noted that the first leg of the transaction at hand involves a CIF contract, wherein the foreign exporter is liable to ensure that the goods reach their destination and the Indian importer pays the transaction value to the exporter. The Indian importer is liable to pay IGST on the transaction value of goods under Section 5(1) of the IGST Act and Section 3(7) and 3(8) of the Customs Tariff Act. The second leg of the transaction involves agreement between foreign exporters and the shipping line for transporting goods to India.
A CIF transaction would fall under the ambit of 'composite supply'. Section 2(30) of the CGST Act defines 'composite supply' as under -
"(30) "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
It observed that Section 8 of the CGST Act contemplates that the tax liability on a composite supply would be only levied on the 'principle supply'. According to Section 2(30) of the CGST Act, the principal supply for CIF transactions is supply of goods. As the provisions pertaining to composite supply under CGST Act apply mutatis mutandis under the IGST Act, the IGST would also be levied on 'principal supply of goods'.
The respondent company had argued that the levy imposing IGST on 'service' is in violation of the principle of 'composite supply' under Section 2(30) read with Section 8 of the CGST Act. The Union Government had argued that the concerned levy was on the second leg of the transaction, which does not involve the Indian importer and would be an independent transaction and not constitute 'composite supply'.
Taking note of the contrary submissions of the Union Government on the issue of the two legs being treated as separate transactions, operating in silos, the Court stated -
"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."
The Court further noted -
"This Court is bound by the confines of the IGST and CGST Act to determine if this is a 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."
It held that the levy of IGST on supply of services is in the teeth of Section 8 and the whole scheme of the GST legislation. Though the Union Government has the power to notify an 'import of goods' as an 'import of services' under Section 7(3) of the CGST Act, it cannot interpret a composite supply of goods and services to mean segregable supply of goods and supply of services. The Apex Court upheld the portion of the Gujarat High Court judgment which stated that as IGST is already paid on the amount of freight which is included in the value of imported goods, the notifications levying tax again on supply of service, are to be struck down.
"The impugned levy imposed on the 'service' aspect of the transaction is in violation of the principle of 'composite supply' enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the 'composite supply', comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the 'supply of services' by the shipping line would be in violation of Section 8 of the CGST Act", the bench held.
Case Name: Union of India And Anr. v. M/s. Mohit Minerals Through Director
Citation: 2022 LiveLaw (SC) 500