HC strikes down levy of Integrated tax on inbound ocean freight under GST

This Tax Alert summarizes a recent ruling ^[1] of Gujarat High Court (HC). The issue involved was whether Integrated Goods and Services Tax (IGST) can be separately levied and collected from Indian importer on ocean freight paid by the foreign exporter to a foreign shipping line, where Customs duty together with IGST has been already discharged on the value of imported goods.

According to the petitioner, tax liability has been casted on the importer who is neither a supplier nor recipient. Therefore, the Notification specifying payment under reverse charge is ultra-vires.

Revenue contended that importer is a beneficiary on whose behalf transportation service is being availed by foreign exporter from shipping line located outside India. Thus, tax can be collected from end-beneficiary or recipient of such services.

HC observed that importer has neither availed transportation service nor he is liable to pay consideration. Thus, it cannot be required to pay tax on some supposed theory stating that he is directly or indirectly recipient of service.

Basis above, division bench of the HC held that the Rate Notification and Entry No. 10 of Notification relating to Reverse charge are ultra vires the IGST Act as they lack legislative competency.

Gujarat High Court’s ruling seems to put an end to a long-drawn litigation on taxability of ocean freight on the importer in case of CIF imports. The department may however, take the matter to the Supreme Court.

As per the settled principle, the decision of High court, unless overruled or in absence of any contrary rulings, shall have binding effect across jurisdictions in India.

The judgement provides significant relief to the industry, particularly in cases where taxpayers are not able to claim full ITC of tax paid under RCM. On the flip side, department may dispute the eligibility per se of input tax credit in light of the judgement. One will need to evaluate the relevant provisions in this regard.

It will be pertinent to analyse the cases which can be covered under section 7(5)(c) of IGST Act basis this Court’s observation suggesting that supply in taxable territory is not akin to place of supply being in India.

Reading down the provisions prescribing levy in respect of CIF contracts may put the shipping lines registered in India at disadvantageous position from business perspective.