DECEMBER 23, 2019

By K Srinivasan

There is a budding morrow in midnight,

There is a triple sight in blindness keen; - [To Homer By John Keats]

THIS write-up has reference to the article Ocean Freight and GST- Are We Missing Something? carried by TIOL recently.

If you ask me, are we still missing something in Ocean freight, the answer would be, yes we are missing the essence of Law.

First of all, Article 245(1)&(2) of the Constitution, at times permit the Parliament to make extra-territorial legislations subject to nexus between the subject and the territory.

It's only so long as the same is confined to interpreting the powers of the Parliament while making such exceptional legislation between the Union and the States, as the very title of the Chapter would imply.

It doesn't mean extra territorial involving another country while making such legislations, in that sense of the Constitution, as far I know. This must be cleared first.

Therefore, let's briefly acquaint ourselves before proceeding further, with the questions referred to the Hon'ble SC and the explanations offered, in the GVK Industries case 2015-TIOL-10-SC-IT.

In  GVK , the following questions were referred to the Constitution bench:

(1) Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians?

(2) Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Court explained the constitutional scheme by holding,  "The grant of the power to legislate, to the Parliament, in Clause (1) of Article 245 comes with a limitation that arises out of the very purpose for which it has been constituted. That purpose is to continuously, and forever be acting in the interests of the people of India. It is a primordial condition and limitation… Clause (2) of Article 245 carves out a specific exception that a law made by Parliament, pursuant to Clause (1) of Article 245, for the whole or any part of the territory of India may not be invalidated on the ground that such a law may need to be operated extraterritorially.

It was specifically held that any laws enacted by Parliament with respect to "extra- territorial aspects or causes" which have " no impact on or nexus with India" would be  ultra vires  Article 245 of the Constitution of India.

GVK Industries case and the decision of the SC, as you could see for yourself, is far from any comparison to the matter on hand as the same was rendered in an Income tax matter.

A consultancy service was rendered by an NRC- a non-resident. The said non-resident had a residence or place of business or business connection in India.

Pursuant to the aforesaid exercises carried out by the NRC, the company was successful in availing loan/financial assistance in India from the Industrial Development Bank of India (IDBI) which acted as a lead financier for the rupee loan requirement. For foreign currency loan requirement, the appellant approached International Finance Corporation, Washington D.C., USA and was successful. In this backdrop, "success fee" of Rs.5.4 crores was paid to the NRC.

Coming to the instant case, it is evident that fee which has been named as "success fee" by the assessee has been paid to the NRC. It is to be seen whether the payment made to the non-resident would be covered under the expression "fee for technical service" as contained in Explanation (2) to  Section 9(1)(vii)  of the Act. 

The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India.

On a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the "source rule", that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The Clause further mandates and requires that the services should be utilized in India.

Hence, the territorial nexus and Indian interest advocated to permit a deviation to make legislation extra-territorial in that sense, appears to be superficially gone into in the above analysis by the Learned Authors.

It is quite apparent that the territorial nexus in that case has the least basis of comparison to the Service tax and GST levy sought to be made for a second time on the Imported goods, by the Government.

While it is clearly beyond all doubt that the said Transportation of goods service said to be rendered to attract Service Tax/GST on RCM basis from the Importer, has neither any territorial nexus nor purportedly any Indian interest.

The said service is supposed to be rendered and received by two individuals, residing outside India having not even non-resident status as in GVK Industries case, that leaves one with the least idea of a taxing jurisdiction existing in India, in this regard.

The Imported goods have such an integral tax liability on the freight and insurance elements sticking to it that the mechanism under the Customs valuation as applicable to Imported goods, until the imported cargo is discharged either on FOB/CIF basis, as the case may be, amply factors in the same in the levy and measure of customs and countervailing duties.

Then where is the question of designating the Importer on RCM basis to pay tax a second time on Ocean Freight which stands already subsumed in the Imports- not to speak of ITC facility being available on the IGST paid a second time.

Also the conclusion arrived at by the Learned Authors that 'aspect theory' has still application as far as the GST law enacted under Article 246A vis-à-vis Customs laws are concerned, is fallacious.

It is stated that Article 246A overrides the classification under List 1 of Seventh Schedule to the Constitution and the aspect of 'supply' covers in its ambit both 'import of goods' and 'provision of services as a part of import of goods'.

The reason why the above observation would appear to lack the constitutional support is the New Article 246A(2), reserving the powers for the Parliament alone to impose a tax in the matters of Interstate trade and commerce, whose limb is imports, tied with sinews and nerves is lent by Article 286.

It has not changed a wee bit since then from the position w.r.t Article 246 and List I of Seventh Schedule, Residuary Entry 97, read with Article 286 i.e. from the old taxation pattern of Customs with countervailing measures as part of Composite supply of goods imported into India.

To claim birth of a new aspect of double taxation in the form of Service Tax/IGST distinct from the subject matter of Imports and more specifically Ocean freight, would be misleading one to imagine of an overriding effect of Article 246/246A(2)over Article 286 to give way for an additional aspect of levy of a Composite transaction of Import of goods.(Illustration to Section 2(30) of the CGST Act,2017, defining ‘Composite Supply' refers).

One is often times reminded of the faux pas committed by the Government in a similar context, in the case of high seas sales until after repeated Notifications and Circulars that it realised its folly of double taxation and the misplaced understanding it held of revenue neutrality in the form of ITC facility being available for each such double payments.

It originally recommended, if you recall the episode, ITC as a remedy that eventually had to be sorted out by a legislative change in 2018 by adding an entry in the Schedule III to the GST Act to keep the transaction out of the scope of Supply of neither Goods nor services, without curtailing the common credits of ITC relatable to such high seas sales, as well.

Whatever be the efficacy of the RCM mechanism and the powers vested in the armour of the Government, to legislate laws to levy a tax on the said service would be way too long a haul of a transaction that both happens outside the territory of India and as well as lacks any territorial nexus as excepted under Article 245((2) of the Constitution.

The Importer, if had not paid the tax on the Ocean freight element on the Goods Imported, then the territorial nexus and the taxation interest of India might be said to be at stake and would be quite justified in coming in, but not when the tax is duly discharged by a comprehensive valuation mechanism on Imports, already well in place.

Hence, all the attempts made in Pre and Post-GST times vide an RCM Notification issued under Section 5(3) of the IGST Act and amending Section 5(4) of the IGST Act by a Notification issued in February 2019- to ratify the action from 1/7/2017 to 31/1/2019 and before, would all appear fallacious.

There appears also simply no scope for such levy whatever may be the legal jugglery done, to override the legislative mandate of Article 245(1) & (2), in the stated circumstances above.

The fact that Customs Valuation instead of FOB if CIF would also hardly make a difference, by mere reason of the fact that the last mile delivery of goods imported is happening in India, as the Import Valuation had since commenced right at the Load port and had well answered the levy on Ocean freight and Insurance on Imports, as a composite levy, is the humble view of the Author in reply to the Article cited above.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)