Facts of the case:
The Gujarat High Court has ruled that the notification demanding Integrated Goods and Services Tax (IGST) on Ocean Freight is ultra vires.
A bunch of petitioners has challenged the levy of the IGST on the estimated component of the Ocean Freight paid for the transportation of the goods by the foreign seller as sought to be levied and collected from the writ-applicants as the importer of the goods.
Interpretation of law:
The Central Government has introduced the Notification No.8 of 2017 – Integrated Tax (Rate) dated 28th June 2017, wherein vide Entry No.9, the Central Government has notified that the IGST at the rate of 5% will be leviable on the service of transport of goods in a vessel including the services provided or agreed to be provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs stations of clearance in India.
The Central Government, thereafter, issued the Notification No.10 of 2017 – Integrated Tax (Rate) dated 28th June 2017, by which the Central Government has notified that for the said category of service provided at Serial No.10 to the said Notification, the importer as defined in clause 2(26) of the Customs Act located in the taxable territory shall be the recipient of service.
The division bench comprising of Justice J.B Pardiwala and Justice A.C Rao observed that the writ-applicant cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service. The term ‘recipient’ has to be read in the sense in which it has been defined under the Act. There is no room for any interference or logic in the tax laws.
If the definition of the term ‘recipient’ is overlooked or ignored, then the writ-applicant would become the recipient of all the goods which goes into the manufacture/production of goods and all the services which have been availed by the foreign exporter for such purposes. Such reasoning which leads to harsh and arbitrary result has to be avoided, particularly when the term has been expressly defined by the legislature. Thus, the writ-applicant cannot be said to be the recipient of the supply of the ocean freight service and no tax can be collected from the writ-applicant.
The Court observed that “It is a settled principle of law that if a delegated legislation goes beyond the power conferred by the statute, such delegated legislation has to be declared ultra vires. The delegated legislation derives power from the parent statute and not without it. The delegated legislation is to supplant the statute and not to supplement it”.
The Court also ruled that “notifications levying tax on supply of service of transportation of goods by a person in a non-taxable territory to a person in a non-taxable territory from a place outside India up to the customs station of clearance in India and making the petitioner i.e. the importer, liable for paying such tax, are ultra vires the provisions of the IGST Act”.
The supply of service of transportation of goods by a person in non-taxable territory to another person in a non-taxable territory from a place outside India up to the customs station of clearance in India is neither an inter-state supply nor an intra-state supply. Thus, no tax can be levied and collected from the writ-applicant”, the Court also said.
While striking the Notification, the Gujarat High Court also said that “in a case of CIF contract, the contract for transportation is entered into by the seller, i.e. the foreign exporter, and not the buyer, i.e. the importer, and the importer is not the recipient of the service of transportation of the goods, hence no tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in law”.+