OCTOBER 10, 2017

By L S Karthikeyan, Advocate

1. COST of transport along with Insurance / loading-unloading charges etc. incurred in the course of import of goods are includible in the value of imported goods in terms of Section 14 of the Customs Act read with Rule 10(2) of the Customs Valuation Rules.

2. In most of the cases, the freight charged by the shipping line is different from the amount charged on the importer by the freight forwarder / Customs Brokers (CHA). The Department had sought to bring such difference into the Service Tax net, even though the freight amount charged by the freight forwarder / CHA had been subject to Customs duties.

3. For the period upto 30.6.2012, transportation of goods by ocean was not taxable and transportation of goods by air was exempted. From 1.7.2012, transportation of goods by an aircraft or a vessel from a place outside India to the customs station of clearance in India was placed in the negative list under clause (p)(ii) of Section 66D of the Finance Act, 1994.

4. Rule 10 of the Place of Provision of Services Rules, 2012 provided that POP of services of transportation of goods, other than by way of mail or courier, shall be the destination of goods. Therefore, transportation of goods by ocean / air, in the course of exports was also not taxable.

5. However, various kinds of Service Tax demands were raised on the forwarders / CHAs. Some formations took the stand that the difference in freight amount constitutes part of the service charges and Service Tax was sought to be levied only on such difference. Whereas in some other instances, it was contended by the Department that the forwarder / agent does not fulfill the conditions of a pure agent and hence the entire amount charged towards freight has to be included in their taxable value.

6. While such demands were pending in various forum, by Finance Act, 2016, sub-clause (ii) of clause (p) of Section 66D was omitted and exemption in respect of transportation of goods by air from outside India upto to the customs station was provided through Notification No.25/2012-ST. Hence, ocean freight in the course of imports became taxable under Service Tax provisions.

7. In a further development, Notification No. 2/2017-ST introduced clause (EEC) under Rule 2(1)(d) as per which 'in relation to services provided by a person located in a non-taxable territory to a person location in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India' the person complying with sections 29, 30 or 38 read with Section 148 (i.e. the Agent) was made the person liable to pay Service Tax. Notification No.30/2012-ST (reverse charge) was also accordingly amended.

8. On a rethink on making the Agent liable to pay the Service Tax, clause (EEC) and Notification No.30/2012-ST were amended from 23rd April 2017 to make the 'importer as the person liable to pay Service Tax' instead of the agent.

9. The basic issue as to whether service provided by a person in a non-taxable territory to another person who is also in a non-taxable territory could be subject to levy of Service Tax under Section 66B, only because the 'place of destination of goods' is in the taxable territory in terms of POP Rules, is itself subject to challenge.

10. While so, the question whether the service 'supplied' by a person in a non-taxable territory to another person, also in the non-taxable territory is taxable under GST regime crops up.

11. Supply of services where the location of the supplier and the place of supply are in the same State or same UT shall be an intra-State supply (Section 8 of IGST Act). Where the location of the supplier and the POS are in two different States / UTs or a State and a UT, such supply is an inter-State supply (Section 7). IGST is applicable on inter-State supplies as per Section 5 of the IGST Act and C&SGST is applicable on intra-State supplies as per Section 9 of the CGST Act / SGST Acts.

12. Supply of services imported into the territory of India shall be treated to be supply of service in the course of inter-State trade or commerce [Section 7 (4)]. As per Section 2(11), 'import of service' means supply of any service, where the supplier is located outside India / the recipient is located in India and the POS is in India.

13. Section 12 provides for determination of 'Place of supply of services' where location of supplier and recipient is in India'. Section 13 provides for determination of 'Place of supply of services' where location of supplier or location of recipient is outside India'. There is no provision to determine the POS when both the supplier and recipient are outside India. Even if available, the provision will not be relevant (if not ultra vires) as a supply happening outside India is not subject to either IGST or C&SGST.

14. In the backdrop of the above legal position it is interesting to note the following:

15. The GST Council (in its meeting on 19th May 2017) decided to 'continue exemption' in respect of certain services; one of them being 'services received from a provider of service located in a non-taxable territory by a person located in a non-taxable territory' [Sl.No.29(c)].

16. However, no such exemption was provided in the CGST or IGST Notifications. Notification No. 8/2017-Integrated Tax (Rate) prescribes rate of 5% for Transport of goods by vessel including services 'by a person located in non-taxable territory to a person located in non-taxable territory' by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India [Sl.No.9(ii)].Sl.No.9(ii) of Notification No. 11/2017-Central Tax (Rate) however does not have the 'inclusive clause'.

17. By way of a corrigendum, it was explained that "4. Where the value of taxable service provided by a person located in non-taxable territory to a person located in 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 is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods."

18. The Reverse Charge Notification No. 10/2017-Integrated Tax (Rate ) includes the following:

19. A question arises as to what is the difference between Sl.No.1 and Sl.No.10. Sl.No.1 takes care of 'any service' provided by a person located in a non-taxable territory by making the recipient in the taxable territory to pay the GST. Therefore, the service of transportation of goods by vessel from outside India will also be covered by Sl.No.1.

20. Then what is the relevance or at least the purpose of Sl.No.10? Is it meant to cover services supplied by a person in non-taxable territory to a person, also, in non-taxable territory a-la sub-clause (EEC) of the Service Tax Rules?

21. However, on a careful reading, it can be noticed that Sl.No.10in Col.2 only mentions services supplied by a person located in a non-taxable territory by way of transportation of goods by a vessel, but the expression ' to a person in non-taxable territory' is conspicuously absent .

22. This takes us to the question as to why the Notification No. 9/2017-Integrated Tax seeks to include 'services supplied by a person in non-taxable territory to a person in non-taxable territory' and why Sl.No.10 in Notification No.10/2017 has been inserted in the above said manner, when there is no legal sanction to levy GST on such a supply of service.

23. There is an ancient metaphor - 'RajjuSarpavatta' which roughly means that the rope (when seen in dim light) looks like a serpent.

24. With utmost reverence to all the great 'masters' who have used the metaphor to explain high philosophical concepts, and with due apologies for tweaking the metaphor, it is felt that Sl.No.10 in Notification No. 9/2017-Integrated Tax (Rate) is only a 'rajju' thrown into the crowd and the explanation to the value of such supplies in Notification No. 8/2017-Integrated Tax (Rate) is only creating a commotion to make people believe the rope to be a serpent.

25. The author is of the view that,whatever may be the purpose / objective of the above Notifications, there is no requirement to pay GST on ocean freight when the supply is made by a person in non-taxable territory to a person in non-taxable territory (i.e. when the supplier of goods in foreign country pays freight to the foreign shipping line).

(The views expressed are strictly personal.)