Union of India VS Mohit Minerals (P.) Ltd.

The case in question involves an appeal by the Union of India against a judgment from the Gujarat High Court dated January 23, 2020. The High Court had ruled in favor of respondents who had filed a petition under Article 226 challenging the validity of two notifications issued by the Central Government. The crux of the dispute revolves around whether Indian importers can be liable to pay Integrated Goods and Services Tax (IGST) on the ocean freight component paid by foreign sellers to foreign shipping lines, under a reverse charge mechanism.

The respondents in this case import non-coking coal from countries like Indonesia, South Africa, and the U.S. The import is carried out on a ‘Cost-Insurance-Freight’ (CIF) basis, where the freight charges are included in the overall cost paid by the importer. Upon arrival at the Indian customs station, customs duties are levied on the imported coal, which includes the value of the ocean freight. It’s noted that in CIF contracts, the invoice for ocean freight is issued by the foreign shipping line to the foreign exporter, not directly involving the Indian importer. Conversely, under ‘Free-on-Board’ (FOB) contracts, the importer would directly pay the ocean freight.

The transaction complexity is further compounded in cases of high seas sale transactions, where the coal is sold by the original foreign buyer before it reaches Indian ports.

levied on the supply of any goods or services or both where the location of the supplier and the place of supply are in India and the location of the recipient is outside India. Section 6(1) provides that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of the Customs Tariff Act, 1975, and the rules made thereunder, at the time when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.

The case at hand involves an appeal by the Union of India against a judgment from the Gujarat High Court dated January 23, 2020. The High Court had ruled in favor of respondents who had challenged the constitutionality of two notifications issued by the Central Government under Article 226. The main issue revolves around the imposition of Integrated Goods and Services Tax (IGST) on the component of ocean freight paid by foreign sellers to shipping lines, using a reverse charge mechanism.

The respondents import non-coking coal from Indonesia, South Africa, and the U.S. on a Cost-Insurance-Freight (CIF) basis, which includes ocean freight costs. Customs duties are paid on these imports, encompassing the value of ocean freight. Under CIF contracts, the freight invoice is issued to the foreign exporter, and the importer pays the freight only in Free-on-Board (FOB) contracts or in high seas sale transactions, where the goods are purchased before reaching Indian ports.

Prior to the implementation of the Goods and Services Tax (GST) regime, ocean freight was exempt from service tax by Notification No. 25/2012-ST. However, this exemption was revoked by Notification No. 01/2017-ST, which introduced service tax on importers through a reverse charge mechanism. Subsequently, Notification No. 8/2017-Integrated Tax (Rate) under the IGST Act levied a 5% integrated tax on specified services, including transportation of goods by vessel from a place outside India up to the Indian customs station.

Notification 10/2017 further categorized importers as recipients of services for goods supplied from non-taxable territories via vessel. Section 5(1) of the IGST Act authorizes the levy of integrated tax on inter-state supplies of goods and services, including imports, based on the Customs Tariff Act and Customs Act provisions. The place of supply for imported goods under the IGST Act is considered to be the location of the importer.

The respondents contended that the notifications in question lead to double taxation, as ocean freight is included in the customs duty calculation, and imposing IGST on this freight during transportation exacerbates this burden. They argued against the validity of Notifications 8/2017 and 10/2017, asserting that they contravene provisions of the IGST Act and the Central Goods and Services Tax Act. Furthermore, they raised concerns regarding the taxation implications in CIF contracts versus FOB contracts and high seas sales, where the importer’s identity differs.

In response, the Gujarat High Court sided with the respondents, prompting the Union of India to appeal. The core legal issues revolve around the interpretation of statutory provisions under the GST framework, particularly concerning the imposition of taxes on ocean freight in import transactions. The case underscores broader implications for tax policy and the application of GST in international trade contexts, seeking to resolve ambiguities regarding the applicability and scope of tax liabilities under relevant notifications and statutes.

The appeal before the Supreme Court of India involves a challenge by the Union of India against a decision by the Gujarat High Court dated January 23, 2020. The High Court had ruled in favor of respondents who filed a petition under Article 226, contesting the constitutionality of two notifications issued by the Central Government concerning the levy of Integrated Goods and Services Tax (IGST) on ocean freight.

The dispute centers on whether Indian importers should be liable for IGST on the ocean freight component paid by foreign sellers to foreign shipping lines under a reverse charge mechanism. The respondents, who import non-coking coal from countries like Indonesia, South Africa, and the U.S., do so on a Cost-Insurance-Freight (CIF) basis. In CIF contracts, the importer pays customs duties that include the value of ocean freight, although the freight invoice is typically issued to the foreign exporter by the foreign shipping line.

Historically, prior to the Goods and Services Tax (GST) regime, ocean freight was exempt from service tax. This exemption was withdrawn with the introduction of GST, and subsequent notifications, particularly Notification No. 8/2017-Integrated Tax (Rate), dated June 28, 2017, imposed IGST on specified services including transportation of goods by vessel from a place outside India up to the customs station of clearance in India.

Notification No. 10/2017, issued on the same date, expanded the definition of the recipient of services to include importers under the Customs Act, 1962. The legal basis for these notifications rests on sections of the IGST Act, Customs Act, and related statutes, authorizing the levy of integrated tax on imports and inter-state supplies.

The respondents challenged these notifications primarily on grounds of constitutional validity, alleging that they result in double taxation since ocean freight is already included in the customs valuation and subject to customs duties. They argued that this taxation approach unfairly burdens importers, especially under CIF contracts where the importer does not directly contract for or pay the ocean freight.

In response, the Union of India defended the notifications, asserting that the taxation serves to align treatment between Indian and foreign shipping lines and does not impose additional costs on importers beyond those already incurred. They argued that input tax credits (ITC) available under GST mitigate any additional financial burden on importers, thereby justifying the notifications as a means to remove previous tax distortions.

The High Court’s decision to uphold the petitioners’ challenge was based on multiple grounds, including the interpretation of statutory provisions under the IGST Act and Customs Act, and the alleged creation of a deeming fiction and separate taxable event not supported by law.

The appeal to the Supreme Court seeks to settle these contentious issues of taxation policy, constitutional validity, and the interpretation of GST laws regarding the levy of IGST on ocean freight in import transactions. The outcome will likely have significant implications for the taxation of imports under CIF contracts and the broader application of GST on international transactions involving shipping services.

The case involves an appeal by the Union of India against a Gujarat High Court decision from January 2020, which upheld a petition challenging the constitutionality of two notifications issued by the Central Government. These notifications pertain to the levy of Integrated Goods and Services Tax (IGST) on ocean freight paid by foreign sellers to shipping lines, which is then passed on to Indian importers under a reverse charge mechanism.

The respondents, who import non-coking coal into India, argued that under Cost-Insurance-Freight (CIF) contracts, the ocean freight component, included in the customs value, is subject to IGST. They contended that this leads to double taxation since customs duty already encompasses the value of ocean freight. They further pointed out that prior to GST, service tax exemptions were in place for such ocean freight.

Notification No. 8/2017-Integrated Tax and Notification No. 10/2017 were issued to implement IGST on such imported services. The Union of India defended these notifications, stating they aim to equalize the treatment of Indian and foreign shipping lines regarding input tax credit availability.

The High Court ruled in favor of the respondents, deeming the notifications ultra vires the IGST Act and CGST Act:

1. It held that under CIF contracts, the importer is not the recipient of the transport service under the definitions of the CGST Act.

2. It found that the notifications improperly expanded the scope of taxable events beyond what the IGST Act allows.

3. It noted the lack of territorial nexus for taxation, arguing that the transportation service occurs entirely outside Indian territory up to the customs station, not constituting either an inter-state or intra-state supply under GST laws.

Thus, the High Court concluded that the notifications were unconstitutional and exceeded the powers granted by the relevant GST legislation. This case revolves around the interpretation of GST laws concerning the taxation of ocean freight in CIF contracts, addressing issues of double taxation and the scope of taxable events under Indian tax statutes.