GST on ocean freight - The way forward for businesses
MAY 31, 2022
By S Rahul Jain, Director & Balaji Sai Krishnan, Senior Associate, Lakshmikumaran & Sridharan
THE levy of tax on ocean freight in respect of CIF import contracts has been a subject matter of dispute since its levy under the Finance Act, 1994. This dispute has continued under the GST regime as well. Recently, the three-judge bench of the Hon'ble Supreme Court in Union of India v. Mohit Minerals, 1 settled the dispute in favour of the assessee by holding that IGST is not payable by the importer on the ocean freight component when goods are being imported on CIF basis. The levy of IGST has been set aside by the Hon'ble Apex Court on the ground that such levy violates the tenets of composite supply under GST. Such supply of service of transportation by the foreign shipper forms part of the bundle of supplies between the foreign exporter and the Indian importer.
Through this article, the authors would focus on the way forward and strategies which can be adopted by businesses for the past and future periods.
Way forward
Period from July 2017 to May 2022
For the past periods, for the sake of our discussion, assessees can be categorised into the following three buckets: -
a. Assessee who did not pay IGST on ocean freight under RCM.
b. Assessee who paid IGST on ocean freight and availed input tax credit.
c. Assessee who paid IGST on ocean freight but did not avail input tax credit.
a. Assessee who did not pay IGST on ocean freight under RCM
In the author's view, the decision of the Hon'ble Court being rendered by a three-judge bench is binding on the assessees and well as the Department. Hence, the decision is the law of the land, and such importer-assessees need not change their present practise. Having said that, it is necessary for businesses to undertake a thread bare analysis of all relevant contracts entered in the past period to ensure that the said contracts were entered on CIF incoterms.
b. Assessee who paid IGST on ocean freight and availed input tax credit
At the outset, where assessees have already paid tax and taken ITC, they can maintain status quo for the past and need not alter the positions taken by them.
At the same time, can litigation be completely ruled out? The answer is in the negative. The Department in similar set of circumstances in the past, have proposed to disallow credit; on the allegation that since the tax was not payable at the first place, the amounts paid assumes the character of deposit, and the question of availing credit on such deposits does not arise. However, it is relevant to note that in a plethora of decisions 2 the Tribunals and High Courts have consistently held that once tax stands paid, credit cannot be disallowed. Therefore, if the Departmental Authorities initiate proceedings to disallow the input tax credit so availed, the assessees can have to argue the matter based on the decisions cited above.
c. Assessee who paid IGST on ocean freight and did not avail input tax credit
In case where the assessee has not taken ITC, such assessee is to explore the possibility of seeking a refund of the tax paid by them. Under the CGST Act, refund under Section 54 can be claimed for excess tax paid subject to the conditions prescribed under the Section. Generally, the two major tests required to be satisfied for refund claims are the tests of unjust enrichment and limitation. Having broadly outlined the position, the claim of refund can be further sub-divided into the following two categories: -
- IGST paid by the assessee under protest.
- IGST paid by the assessee, but no protest lodged.
IGST paid by the assessee under protest.
When the importers have paid the entire amount for the past period under protest, the importers in pursuance of the decision of the Hon'ble Supreme Court discussed above can claim refund of the said amount.
Test of Unjust enrichment
It is relevant to mention that the courts have consistently held that the test of unjust enrichment is not applicable to amounts paid under protest. 3 A doubt which arises is whether the concept of protest is inbuilt under the GST Act also when there is no specific and express provision to this extent in the GST Act (in contradistinction to the Excise Act) and further, no specific form is prescribed under the Act to intimate payment protest. In the author's view, protest is a judicially recognized concept and is inherently present in all tax matters. Under Article 265, the Government cannot realise any money not due to it. So, once tax has been deposited without acceptance of the liability, the same assumes the character of deposit and will be refundable. As regards form, the Hon'ble Apex Court in India Cements 4 held that intimation to Department with the view to litigate the matter itself is deemed to be a conveyance of protest and no specific format is required.
Period of limitation
Under Section 54, the time limit for claiming refund is two years from the relevant date.
Under proviso to Section 11B (1) of the erstwhile Central Excise Act, 1944, the time limit of one year was not applicable for payments made under protest. Such a proviso is missing under the GST Act.
Therefore, when the importer files for the refund of the amount which was paid under protest, the Department might take a stand that for the period beyond 2 years from the date of payment of tax, the refund claim is time barred.
In such a scenario, assessees might have to litigate the said matter basis the jurisprudence evolved under the erstwhile Central Excise regime and argue that amount paid under protest does not take the character of tax and is only in the nature of deposit. This proposition is detailed in the next part of the Article. Therefore, the time limit prescribed under Section 54 of the CGST Act, 2017 would not apply.
IGST paid by the assessee, but no protest lodged.
Unjust Enrichment
Assessees falling under this bucket would be required to satisfy that the test of unjust enrichment i.e . the importers would have to prove that the incidence of this tax has not been passed on to any customer.
Reference is made to the decision of the Hon'ble Supreme Court has in Solar Pesticide v. UOI 5 held that if tax or duty has been paid on raw material and such taxes have been added to price of finished goods, incidence of duty shall be considered to have been passed. Unless this litmus test is satisfied, refund may not be admissible to the assessee.
Limitation period
Assessees falling under the said bucket can claim the refund of the amount paid in the following manner: -
- Firstly, the assessees can claim refund for the period of 2 years from the relevant date under Section 54 of the CGST Act, 2017 as tax was not payable at the first place.
- Claiming refund for a period beyond two years may be difficult and highly litigative. In this regard, the difference between an unconstitutional levy, illegal levy and tax paid under mistake of law, as espoused in the Landmark decision of the Hon'ble Supreme Court in M/s Mafatlal Industries, becomes very crucial.
- As the provision of the Act has not been struck down, the payment of tax cannot be construed as a payment towards an unconstitutional levy.
- The Assessee may argue that they levy of tax was illegal and hence only a deposit. However, Courts have held that in such a case, only such assessees who were litigating the matter will be entitled to refund of the tax paid beyond the limitation period. Other assessees, who were not a party to the litigation, may not be entitled to claim refund beyond two years.
- This entire issue is, therefore, prone to intense litigation and assessees may have to take a call based on the facts of their case.
Thus, the assessee claiming the refund would have to rely on the above-discussed decision of the Hon'ble Supreme Court and seek refund of the amount.
Therefore, any person who intends to claim refund of the taxes paid has to determine his eligibility in light of the above discussed points.
Period from June 2022
Going forward, the authors are of the view that the assessee can take a commercial call not to discharge IGST on ocean freight. It is also advised to wait and see the Government's approach to the said issue.
Conclusion
The decision of the Hon'ble Supreme Court is a great relief to the assessee. Assessee who had discharged tax can review the positions adopted by them basis the above discussion. Various strategies like periodicity of the refund claim is to be determined considering the impeding litigation which may arise due to the interpretation of limitation for refund claims. Hence, a thorough analysis of the factual matrix in each case is required.
[The views expressed are strictly personal.]
12022-VIL-30-SC - 2022-TIOL-49-SC-GST-LB
2 Geeta Industries, 2010 (1) TMI 715 CESTAT DELHI - 2009-TIOL-2450-CESTAT-DEL, Modular Auto Limited, 2018 (8) TMI 1691 Madras HC.
3 Suvidhe Ltd., 1997 (94) ELT A159 (SC),
4 1989 (41) E.L.T. 358 (S.C.) - 2002-TIOL-433-SC-CX
5 2000 (116) E.L.T. 401 (S.C.) - 2002-TIOL-57-SC-CX-LB
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