MARCH 12, 2018

By Ranjani Sivaraman

RECENTLY, the vires of levy of IGST on ocean freight payable on transportation of goods by a vessel has been challenged in the case of Mohit Mineral Pvt Ltd - 2018-TIOL-2749-HC-AHM-GST inter alia on the ground that once the value of ocean freight is included in the ‘transaction value' for the purposes of payment of IGST on import of goods, an assessee cannot be asked to pay GST on ocean freight again as a service.

In other words, the above petition is on the ground that ocean freight cannot be subject to tax twice, once as goods and the second as service. Incidentally, Notice and notice as to interim relief in this case was returnable on 9th March 2018 .

This article seeks to examine whether taxing ocean freight twice once as goods and other as service (specifically in case of CIF imports) is permissible.

The provisions under which ocean freight is taxed in the existing indirect taxation regime can be summarised as follows:

Taxability on import of goods under Customs Law

Any import of goods into India attracts the levy of IGST under Section 3(7) of the Customs Tariff Act, 1975 read with Section 5 of the IGST Act, 2017. The value for the purposes of payment IGST will be the transaction value of imported goods under Section 14 of the Customs Act, 1962 read with duty of customs as per Section 12 of the Customs Act, 1962.

Further, as per Rule 10 of Customs Valuation (Determination of value of imported goods) Rules, 2007, the cost of transportation up to the place of importation should be included in arriving at the transaction value. Therefore, ocean freight paid for transport of goods from exporting country into India will be includible in the value of goods imported for the purposes of payment of customs duties (which entails payment of IGST as well).

Thus, BCD and IGST is levied on the value including ocean freight at the time of import.

Levy of IGST under GST laws as supply of service under RCM

As per Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017, services provided by a person located in non-taxable territory to a person also 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 will be taxable at the rate of 5%. Thus, ocean freight will be taxable at the rate of 5%.

Further, Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 (reverse charge notification) prescribes the services in relation to which the recipient of service is liable to pay service tax under reverse charge. S. No. 10 of the said reverse charge Notification provides that liability to pay GST on services supplied by 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 will be on the importer. Thus, importer will be liable to pay GST on the supply of ocean freight services on reverse charge basis at the rate of 5%.

Where the value of the transportation service is known, GST will have to be paid on such services on the actual value.

Further, it has been provided that where the value of taxable service is not available with the person liable for paying integrated tax (importer), the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods.

Without evaluating the validity of the above provisions which entails a separate analysis in itself (the same is also a subject matter of challenge in the said case), it can be seen that GST is payable by the importer again on the value of ocean freight as the recipient of service.

Having concluded that there is a levy, twice on ocean freight, it is essential to understand whether the same is legally tenable. For this purpose, it is essential to understand the ‘aspect theory' propounded by various judicial precedents.

Aspect theory In Federation of Hotel & Restaurant Association of India v. Union of India - 2002-TIOL-699-SC-MISC-LB, the Hon'ble Apex Court held that:

In Tamil Nadu Kalyana Mandapam v. Union of India - 2004-TIOL-36-SC-ST, the Hon'ble Apex Court was examining whether sales and service tax both can be levied on catering supply.

45. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. Mr. Mohan Parasaran, learned senior counsel for the appellant submitted that the High Court before applying the aspect theory laid down by this Court in the case of Federation of Hotel and Restaurant v. Union of India &Ors. (supra) ought to have appreciated that in that matter Article 366(29A)(f) of the Constitution was not considered which is of vital importance to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paras 31 and 32 of the judgment of the High Court in which service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel and Restaurant (supra) and, in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the contention of the appellant on this aspect is not well founded.

Reliance is also placed on the decision of the Hon'ble Madras High Court in Indian Institute of Architects v. Union of India - 2003-TIOL-120-HC-MAD-ST wherein the assessee was challenging the levy of service tax on professional services when professional tax was being levied by the state governments. The Court relied on the aspect theory test as established in Federation of Hotel case and held that:

30. This decision of the Supreme Court is very clear to support a proposition that even if this service tax was linked with the professional income or the professional services even then, it had a "distinct aspect" of services. The tax was not on the basis that a professional was carrying on his profession like a Chartered Accountant or a Cost Accountant. The tax was, on the other hand, on the "professional services" offered by him to the clients and the service aspect was a distinct aspect and could not be confused with the aspect of a tax which arose only on account of the fact that a professional was having the privilege of carrying on his profession. A tax which the professional had to pay because he has had the privilege to carry on the profession or because he was carrying on the profession in a particular State is totally distinct and separate from the tax which he has to pay on services and which tax he would be able to pass on the customer who has had the advantage of his professional services. A professional tax covered under Entry 60 cannot be transferred in sharp contradistinction with the present service tax, which is capable of being transferred to the customers who has the advantage of enjoying the services. Again, professional tax has to be paid whether a professional actually has given the professional service or not whereas, the service tax will not be payable if a professional like a Chartered Accountant or Cost Accountant has in reality not rendered any professional services to a customer. These aspects are distinct aspects and, therefore, an aspect which entirely depend upon the services offered by the professional though may have a nexus with the profession yet the service becomes a distinct aspect in itself and can be legitimately taxed by the Parliament under Entry 97 of list I as has been done in the present case.

From the above decisions, it can be said that if there are two discernible aspect/taxable events that emerge from the same transaction, the same can be taxed separately.

By applying this aspect theory, it can be argued that even though tax is being paid twice on the value of ocean freight; once as goods and other as service, the same is not unconstitutional as the tax is being paid on two different aspects of the transaction viz. supply of service and import of goods.

Further, generally, the above taxes paid are also available as credit to the recipient. Therefore, it can be argued that even though the same might entail a working capital impact, it cannot be said to be unconstitutional.

It would be interesting to know what transpired in the case during the hearing that was held last week.

(The author is Principal Associate with Lakshmikumaran and Sridharan and the views expressed are strictly personal.)