by S. Rahul Jain Meeth Desai
Taxation of a cross-border transaction is one of the most complex and disputed areas of litigation. Further, the recent trade wars between the major economies of the world are adding fuel to the fire. One specific industry which had been largely immune from GST or VAT is the shipping industry undertaking international transportation. Most major economies have chosen not to levy GST or VAT on transactions involving movement of goods internationally. In India also, this position largely existed till 2017. While the value of transportation was required to be included in the landed cost of the goods for payment of customs duty, the transaction as such was not subject to service tax till early 2017. Thereafter, the Government thought it would be fit to levy service tax on transportation charges by way of specific amendments to the Finance Act, 1994 and the rules thereunder and this levy continued well into GST regime as well. Recently, the Gujarat High Court in the case of Mohit Minerals Pvt Ltd v. UOI, struck down the levy of GST on this transaction and the decision forms the bedrock of our article.
How the issue arose?
Just to have a quick recap, from 22 January 2017, the foreign liner or his agent was required to discharge service tax on the freight paid towards transportation of goods from outside India for all kinds of contracts, be it CIF or FOB. After the hullabaloo relating to who would pay the tax, especially for CIF Contracts, the Government was quick to amend the statute with effect from 23 April 2017, and the law deemed that ‘the importer’ as the person liable to discharge service tax on the freight element for all kinds of contracts. This position was challenged by few petitioners and the Gujarat High Court struck down the levy of tax for these periods also . We are not covering this aspect in further detail in this article.
Under GST law also, the Government continued its position of levying tax on the services of transportation of goods from outside India. Under the garb of the Rate Notifications issued under the GST Acts, the Government required the importer of goods to discharge GST separately on the value of the freight component, even in case of CIF transactions. Further, in the name of facilitating computation, an option to pay tax at the rate of 5% of the CIF value of goods was provided to the assessees. Like in Service Tax, many assessees challenged the levy of tax through the rate notification before the various High Courts of the country. The Gujarat High Court has now pronounced its landmark decision in the case of Mohit Minerals Pvt Ltd v. UOI [2020-VIL-36-GUJ] in one such batch of appeals.
In this batch of cases, the importers had challenged the levy of IGST on the payment of ocean freight for transportation of goods by the foreign seller and sought quashing of the impugned notifications on ground of lack of the legislative competency. The High Court held that since the importer is neither supplier nor the recipient of ocean transportation services provided by shipping line outside India, they are not liable to pay IGST on such transactions. Just to summarize, the writ petitions of the assessee were allowed on the following independent propositions:
- Under Section 9(3) of the CGST Act, only a recipient of a service can be vested with the liability to discharge service tax. The term ‘recipient’ has to be interpreted literally. In case of CIF Contracts, importer of goods into India cannot be said to be recipient of ocean freight services. The shipping services has been availed by the exporter (seller outside India) and so importer does not have any role in the play.
- The transaction of ocean freight service by foreign shipping line is neither an inter- State nor intra-State supply as per IGST Act.
- Ocean freight has already suffered IGST as a part of value of goods imported. Dual levy of IGST cannot be imposed treating it as supply of service. Double taxation, through delegated legislation, where statute does not provide, is not permissible.
Have we heard the last word?
Considering the stakes involved, it is certain that the Department would knock the doors of the Supreme Court. Hence, it becomes important to further analyse the impact of the decision and what assessees may have to do. In light of this, some of the practical questions which assessees face are discussed in the paragraphs below.
- a)Should an assessee cease to pay tax on ocean freight - In the authors’ view, the decision of the High Court is binding on all assessees in India and the Department also . Hence, so long as the matter is not stayed by the Supreme Court, the decision of the High Court would be binding. Having said that, the matter would attain finality only after the Supreme Court decides the matter. Accordingly, if the intention is to avoid litigation and credit of tax paid can be taken and utilized, the tax may continue to be paid. On the other hand, if one is willing to take risks or is unable to utilize the credit, may opt to pay GST under protest.
- b)If Tax is paid now, can the Department deny credit – The next question which arises is if an assessee has opted to pay tax, would the Department propose to disallow credit? The answer could unfortunately be ‘yes’. In the past, there have been various instances where taxes paid by the assessee were proposed to be treated as a ‘deposit’ and SCNs were issued seeking reversal of ITC. But in a catena of decisions, courts have held that once tax stands paid, ITC cannot be disallowed.
- c)Can SCN be issued for availment of credit of the past – As stated in answer to query (b), the Department may issue SCN stating that the tax paid is to be treated as deposit and hence, ITC must not be availed. In such a case, the assessees may argue the matter based on the decided cases.
- d)Can an assessee claim refund of GST paid – For the tax paid during the last two years, an assessee may make a claim for refund under Section 54 of the CGST Act as any collection during this period would be a collection of tax without any authority of law. For the period prior to two years, the law laid down by the Supreme Court in the case of M/s Mafatlal Industries Limited (111) STC 467(SC) has to be applied. One of the principal questions raised in this case related to which assessees can claim refund of taxes paid. The Court, in the opinion of the majority, held that the first question which would require consideration is whether the taxes paid erroneously would be due to an unconstitutional levy or an illegal levy.
An unconstitutional levy would be a case where a provision of the Act under which tax is levied is struck down as unconstitutional for transgressing the constitutional limitations. On the other hand, an illegal levy would be a case where the tax is collected by the authorities under the Act by mis-construction or wrong interpretation of the provisions of the Act, Rules and Notifications or by an erroneous determination of the relevant facts. Where the Court holds that levy of tax is unconstitutional, any person who has paid tax can claim a refund under Article 265 of the Constitution. On the other hand, in case where the tax has been paid by an assessee under an illegal levy, only such assessee who have contested the matter would be able to claim a refund of taxes paid. In other words, an assessee who has deposited tax but have not contested the matter would be precluded from staking a claim of refund of tax paid, relying upon the decision of the Higher Courts in someone else’s case. In the present case, the Gujarat High Court has held that the notification levying tax on freight charges is ultra vires the levy contemplated under the CGST Act. In the authors’ view, this interpretation would be a case an illegal levy as tax is collected on misconstruction of the provision. In such a case, only such assessee who have paid the duty under protest and are contesting the matter at any forum would be eligible to claim a refund of the taxes paid by them .
It is to be noted that notwithstanding the above pre-condition, in all cases, the assessee would also be required to satisfy that the test of unjust enrichment i.e. the incidence of this tax has not been passed on to any customer. The Supreme Court has in Solar Pesticide v. UOI 2000 (116) E.L.T. 401 (S.C.) held that if tax or duty has been paid on raw material and such taxes have been added to price of finished goods, incidence of duty shall be considered to have been passed. To summarize, any person who is intending to claim a refund of the taxes paid has to determine his eligibility in light of the above principles.
There is an interesting quote by Mr. Matshona Dhliwayo which reads “If a ship is strong, the ocean’s tide do not bother it”; likewise, though the decision passed by Gujarat High Court is likely to be challenged by the tax department before the Supreme Court, considering that the High Court has struck down the levy on multiple and well- reasoned grounds, it is unlikely that the decision of the High Court is overturned. Nonetheless, each taxpayer would have to re-evaluate its strategy based on numerous factors and decide on his way forward after taking into account commercial factors.
[The authors are Joint Partner and Associate, respectively, in GST practice in Lakshmikumaran and Sridharan, Chennai]