MAY 22, 2018

By K Srinivasan, IRS

IT is right that one understands the history of tax on ocean freight from early days of its taxation under Service Tax, perhaps right from 1998-99.

Ocean freight at the very beginning was exempted under the nomenclature Sea freight, as it was felt there was no service involved in pure freight charges - both by air and sea.

But, later on it was perceived that when logistics supporters and freight forwarders and CHA's acted as intermediaries in buying and selling space both at the time of imports and exports, there was element of service involved therein.

As everyone knows, Export of goods is always exempt from taxation and even services were covered under export of service rules and later on under the direct provisions of the Finance Act and Service Tax rules.

The point in issue is about the import of goods and services. Import of goods is well taken care by well calibrated custom laws and procedures that are long been in place, doing a fairly good job of it.

But coming to Import of services, it was a new subject and therefore even to bring it into tax net, the legislation needed some tweaking of changes and thus taxation on reverse charge basis was introduced by making a new provision 66A in the Finance Act, to take care of the above situation, even though in case of GTA, a mere service tax rule was substituting for ratifying the reverse charge function of tax on GTA in the hands of the recipient under the erstwhile Rule 2 (1)(d)(i) of the Service Tax Rules, 1994 read with Sec.68(2) of the Finance Act, 1994.

However with the introduction of Sec 66A, sanction for charging Service tax on import of services in the hands of recipient of service was already in place.

In terms of the above sanction, the department in its anxiety to bring the freight margins under Service tax wronged the taxation by taxing the import freight itself.

To legitimize the same, it had to do several doing & undoing of the Act and rules that it led to a spate of litigation, getting caught often awkwardly on the wrong foot.

Taxation of Ocean freight in full is one such awkward moment, when the entire value was grossed up under section 67(1) and charged to tax.

Further, to overcome the folly, the government had to introduce an abatement of 70 percent on the Ocean freight at first, in line with the inland water freight and GTA.

However, it had to exclude it by exception from taxation when it was at arm's length by Multimodal transport operators acted under cover of a registration of MMT registration with the shipping Ministry.

But the long and short of it is this; freight can't be charged to tax in full but freight margin can be, to the extent of service element contained in it.

In fact, the introduction of pure agency concept in 2002 through Service Tax (Determination of Value) Rules 2002 was itself a veiled attempt to tax all margins/expenses though reimbursable, keeping in view issues like the above.

The Government found itself erring in taxing an activity which had only some element of service in it and it was none when the entire service charges was reimbursable in the end.

This left the Government with no scope of taxing certain expenses and costs incurred but reimbursed during the course of carrying out certain transactions like procuring freight, for a principle in the capacity of an agent.

The much famed Intercontinental Consultants (P) Ltd case is a Classical example of failure of Revenue in appeal before the Supreme court, when the Revenue persisted with the folly that even expenses and costs incurred by an agent on behalf of the principal is includible in taxable value.

To top off the error in judgment, the Government brought about legislative changes in the Finance Bill, 2015, so as to even include expenses and costs under the scope of taxable value defined under section 67(1) of the Act.

Post this change, no doubt Government was on firm ground, though not on the basis of equity but on the basis of legislative authority, a bit misplaced earlier to save face in the above case.

Reconciling the irreconcilables is not worth the time and energy of the Government, whatever may be the gains which is devoid of merit and equity.

Turning now to the subject of taxation of Ocean freight, a brief historical account will help put matters in perspective.

From times of yonder, Goods when imported are factored in with its costs of freight and insurance called CIF value for charging customs duty and Countervailing duties of excise, to provide a level playing field for the domestic players.

When elements of freight and insurance are excluded from price as per contractual terms, an estimated equivalent of 20 percent is added to the cost automatically to bring it abreast With CIF contract prices for computing the right measure of taxes both of Import duties and countervailing duties of excise.

When taxation of services was introduced, the same principles were followed, except when intermediaries like Freight Forwarders, Logistics Supporters and CHA's dealt in freight business of buying and selling it.

When they marked up the value by a small margin for the service of facilitation, the same was sought to be charged to tax.

Distinct from the freight charges, when an additional service is visibly done by a service provider, naturally it is a service activity done in the country.

The said value needs to be captured in the economic activity for GDP purposes and a tax on such activity becomes thus inevitable. Hence Ocean freight margins, called for the levy of an indirect tax.

Freight margins, if any at all times from 1998-99 were a legitimate subject matter of indirect taxation and it will continue to be at all times under GST as well to reiterate the above principle.

Coming to the matter of double taxation now, in this litigation of ocean freight matters, a dozen cases where demands were issued including IATA freight agent's case where Government slapped huge demands to book the entire freight to taxation, were all uniformly lost.

Wherever some prudent officers have restricted the demands to freight margins and agency commission alone in the original proceedings, have managed to pull it off well even at the First Appellate or Second Appellate levels. They all had the cake and ate it too.

But those who saw a bright and ambitious prospect of winning a lot of revenue for the Government by booking off the entire freight value to tax, all lost their battles of waterloo and all the revenue was lost in a series of cases and the following are to cite a few examples;

1. DHL Lemuir Logistics Pvt. Ltd. - 2016-TIOL-1455-CESTAT-MUM

2. Greenwich Meridian Logistics (India) Pvt. Ltd. - 2016-TIOL-869-CESTAT-MUM

This much must be remembered. There can be no levy any duties on composite supply of imported goods with services until they reach the port of entry i.e. the customs station of clearance which is the point of all taxation whether custom, excise, service tax or GST.

As all duties of customs are to be charged on goods imported treating it a composite supply of Goods and services meaning freight, insurance, handling, delivery etc. at a value prescribed including the above incidentals as per the Customs Act, 1962 r/w Customs Tariff Act, 1975. (CA for the incidence of levy and the extent of levy; Section 12 of CA and Section 14 of CTA respectively refers)

Similarly attendant local levies equivalent to excise, service tax or GST can be charged only as part of the landed cost + customs duties at the time of payment of import duties or filing of an Ex-Bond Bill of entry, on releasing the goods out of the holds of customs bond neither before or after.

There are some unorthodox and extra legislative measures to gross up margins earned on high seas transactions by traders before the cargo reaches the custom station but till date there is no way such levies could have been legitimized until perhaps some core changes made in the customs law itself in the budget 2018.

To this effect that such margins can be factored for valuation purposes under section 14 and as also for purposes customs duties and local taxes such as IGST, changes were brought about vide clause 100 of the Finance Bill,2018 by inserting a new Section 3(8A) in the Customs Tariff Act, 1975.

Accordingly, the value at which the warehoused goods are sold, or the transaction value determined as per Section 14 of the CA including customs duty, shall be the value on which IGST will be charged.

In case where the whole of warehoused goods or any part thereof are sold more than once before such clearance for home consumption, then the transaction value for the purpose tax shall be the value at which such warehoused goods are, last sold.

Turning to now GST legislation, IGST Act in principle needs to levy and collect IGST on imports where Goods come within the territorial water of Indian i.e. within 12 nautical miles before entering into the customs station.

But Section 5(1) of CGST Act which for all practical purposes regulates IGST Act, confines such levy to a point in time when duties of customs become due and payable i.e the incidence stands shifted by the above basic CGST law from the territorial waters to the customs station.

Thus at the customs station including high seas sales margins, the goods imported and cleared on filing of an Ex Bond B/E shall suffer CD+ Cess+ IGST once only whether imported by the importers directly or through an agent or F/F.

As for the agent/ F/F's margins are concerned, if they are not back to back reimbursements permitted under the pure agency concept both post and pre GST, shall be subject to appropriate Service Tax/ GST as the case may be.

Let us turn to the GST regime and the present position in Law with regard to the Ocean freight and its taxability, the point of taxation and extent.

Importation of Goods into India attracts in addition of Customs duties IGST on or at the time of de bonding of the said goods.

The point of taxation of IGST here is on filing of ex bond Bill of entry while the custom duties are paid under Section 5(1) of IGST Act refers.

The incidence of IGST levy is on the valuation acceptable under the Customs Act r/w Customs Tariff Act, which is inclusive of cost of transportation which in the case of sea imports, is inclusive of sea freight. Please note air freight on air importation has never been of any dispute both before pre negative list and post negative list time and as well as under the CGST regime.

It is frankly not understood in terms of taxation, what could be the great nature of difference between the two except for the mode of transportation, a different genre but subject matter the same.

Given, that the said supply of goods for import is a composite supply comprising the goods per Se and Services namely insurance and freight are naturally bundled into the supply of imported goods, then the incidence of GST levy is on the CIF value + custom duties and the point of taxation is when customs duties are due.

Where is the question of the common levying provision under Sec 5 of the CGST Act made applicable to IGST Act and sec 20 of IGST Act, being applied when once the ocean freight is taxed as part of the composite supply of imported goods and again as a distinct service of Ocean Freight under various subordinate notification issued under the IGST Act.

Sec 20(1)(2)of the IGST Act clearly limits the scope of IGST levy to the scope of supply as defined under sec 7 & 8 of the Act.

As per sec 7/8 of CGST Act, once a supply is defined a composite supply in namely imports of goods, one can't set about separating a service distinct as Ocean Freight which has already been naturally bundled and subjected to levy.

To tax it again in terms of some entry 10 of notification 10/2017-IT(R) dated 28.06.2017 is both otiose and ultra vires the taxing statute and its jurisprudence as well.

One will appreciate this better by going through the dispensation set out under sec 21 of IGST Act, in respect of supply affected wholly under the old regime but tax paid partially under old law; then the balance tax on the imported goods are to be paid under the new dispensation to the extent tax not paid under the old law.

It can be clued out reasonably from the above bridging provision of the old and new Law that maintaining parity in legal status in all matters is the prime intention of the Legislature.

Ocean Freight, as air freight was never intended to be taxed with regard to imported goods, distinct from it after especially having been included in its value as applicable to a composite supply, when appropriate duties of customs and attendant local levies such as IGST are fully discharged at ex bond stage.

By going over and over it again, one can't make the tax any better than a fly by the wall that can never sit on it or settle on it, at any time eventually - is the humble view of the author.

(The author is Assistant Commissioner, GST, Chennai & Master Trainer, GST.  The views expressed are strictly personal.)