MAY 21, 2022

By R K Singh

SUPREME Court in its judgement in the case of Mohit M inerals - 2022-TIOL-49-SC-GST-LB inter alia held as under:

"The impugned levy imposed on the 'service' aspect of the transaction is in violation of the principle of 'composite supply' enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the 'composite supply', comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the 'supply of services' by the shipping line would be in violation of Section 8 of the CGST Act."

2. The order may apply to the facts of the case inasmuch as here the composite supply under a CIF contract tantamount to supply of goods and, therefore, duty thereon under s. 3(7) of the Customs Tariff Act (CTA) having been paid, no separate IGST on freight needs to be paid. But the ratio of the judgement is problematic.

3. To be able to appreciate the 'problematic' aspect of the judgement, it is necessary to first appreciate the following :-

(a) In a CIF contract for import of goods, duty component  equal to IGST under s. 3(7) of CTA is being levied  under the Customs Tariff Act (not under IGST Act) on 'goods' and not on 'composite supply' ; (b) Addition of freight to the price of goods is only a legally sanctioned method of valuation of imported 'goods' and not of 'composite supply' to charge ad valorem customs duty on imported "goods" under CA/CTA and not on composite supply,  (c)   The concept of composite supply does not exist in Customs  Act or Customs Tariff Act, (d) Even if IGST on freight was not payable, say, by virtue of its inclusion in Schedule- III (being neither supply of goods or supply of service), even then the ad valorem customs component of duty equal to IGST under s. 3(7) of CTA would be leviable on goods by adding  freight to the price of goods, (e)  if the imported goods were fully exempt from IGST, no duty under s. 3(7) of CTA would have been charged on freight component even if the freight was not exempt from IGST, and (f) duty equal to IGST on goods under s. 3(7) of CTA would be leviable even if the proviso to s. 5 of IGST Act did not exist or was omitted.

4. What if a rich man's lucky but worn out suit of value Rs.100 was airlifted from USA to India paying freight of say Rs.10000/. Actually, one can think of several similar but better examples where composite supply of goods and services would have service as principal supply making it supply of service. In that case, while under s.3(7) of CTA duty on goods (coat) inclusive of freight will still be payable, it being a composite supply tantamounting to supply of service, IGST will also be payable on this composite supply as supply of service under s.5 of IGST Act.  Remember the said proviso to said s. 5 of IGST Act only speaks of imported goods and not of imported services. The judgement, unfortunately, fails to appreciate this nuance.

5. Of course, the judgement being only in respect of CIF contracts, it's ratio will not apply in a case of FOB contract where the importer arranges transport and pays the freight. In such a case, although such freight will be includible in the assessable value of the goods, IGST on such freight will still be payable under s. 5 of IGST Act.

6. The said judgement also holds that the recommendations of GST Council regarding rules and notifications are binding on the government. That is rather superficial because each rule or notification is laid on the table of the Assembly/Parliament which can either modify or even annul the same.

7. To paraphrase Justice Hughes, it would be '…an appeal to the brooding spirit of law, to the intelligence of a future day when a later decision may possibly correct the error'.

[The author is former Member CESTAT and Sr. Partner, TLC Legal Advocates. The views expressed are strictly personal.]