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Indian Supreme Court Finds Taxation of Ocean Freight Unconstitutional

Aug. 10, 2022, 7:00 AM

A recent decision in Union of India v Mohit Minerals Pvt. Ltd by a three-judge bench of the Indian Supreme Court, led by Justice DY Chandrachud, has laid to rest a highly contested tax issue—whether Indian importers are liable to pay integrated goods and services tax (IGST) on the component of ocean freight paid for by the foreign seller to the foreign shipping line in a cost, insurance and freight (CIF) contract.

For the last two years, this ruling was highly anticipated, given that it inevitably has ramifications for businesses across sectors involved in importation. The matter was heard at length by the bench. Just as the Revenue vociferously defended the levy and powers of the GST Council, the taxpayers through their counsel mounted a robust challenge to the constitutionality of the levy. In the course of the hearings, no stone was left unturned, and no legal avenue for challenging the levy left unconsidered.

Background to the Dispute

Soon after GST was implemented, the central government, through two notifications dated June 28, 2017, prescribed a rate of 5% IGST on transportation of goods by a vessel from a place outside India up to the customs stations. It was further prescribed that the tax would be payable on a reverse charge basis by the importer on a portion of the value of the CIF contract (deemed value of freight service).

These notifications were immediately mired in controversy. CIF contracts are entered into by importers with foreign exporters. The onus of arranging freight and paying charges rests entirely with the foreign exporter. It is only the foreign exporter who contracts with the foreign shipping line. In fact, the importer is ordinarily unaware of even the price charged by the shipping line to the foreign exporter. In such a case, the importer has nothing to do with the freight service.

Hence, to be treated as a “recipient of a service” liable to pay tax did not sit well with the importers, and the notifications were challenged before various High Courts.

On Jan. 23, 2020, the High Court of Gujarat held the notifications and the levy to be unconstitutional primarily on the ground that the government could not, through a notification, impose a tax on a person who was neither the supplier nor the recipient of a service. Similar decisions soon followed from other benches of the Gujarat High Court and from other High Courts, all eventually leading to a voluminous batch of matters before the Supreme Court.

At the heart of the Revenue’s arguments was that the object of the levy was only to provide a level playing field to Indian shipping lines with regard to foreign shipping lines—since it is only the Indian shipping lines which pay taxes on CIF contracts, making them uncompetitive. In order to buttress its argument qua the validity of the notifications, the Revenue further argued that the government (upon recommendations made by the GST Council) has the inherent power to notify who is a recipient of a service—in this case, the importer and not the foreign exporter who in the traditional sense receives ocean freight service from the foreign shipping line.

Against this background, the bench examined the validity of the notifications. In order to do so, one of the key questions the bench examined was whether the realignment of constitutional provisions and the introduction of GST, whereby the central and the state governments for the first time were given a simultaneous power to legislate, has in any way led to a shift in the concept of “cooperative federalism” regarding taxation as enshrined in the Indian Constitution.

The Decision

The Supreme Court has found the levy of IGST on ocean freight to be unconstitutional. The ultimate verdict on the (un)constitutionality of the levy rests quite heavily on the finding that a CIF contract is a “composite supply” that is separately taxed under the Act. As such, one leg of the transaction cannot be taken apart to be taxed again.

However, equally key questions of whether the importer is the recipient of a service (notwithstanding its lack of a contract with the foreign shipping line), and whether the Union of India has the power to notify “recipients of a service” (for which, read “taxpayers on a reverse charge basis”) have been decided in favor of the Union.

Undoubtedly, the decision came as a much-needed relief for importers. IGST on ocean freight no longer being a cost, one can expect a modest reduction in the price of goods imported under CIF contracts. The impact of the judgment, however, is anything but modest.

Apart from the taxability of ocean freight, the judgment contains a detailed analysis on the nature of recommendations made by the GST Council. On the one hand, the court has stated that where the provisions of the GST laws clearly indicate that a particular action is to be taken “on the recommendation of the Council”, the recommendations are binding on the executive (such as those pertaining to rate of tax, exemption, etc.). On the other hand, the court has clarified that the recommendations cannot be considered to be binding on the legislatures, since the ordinary legislative powers of Parliament and the state legislatures have not been made subject to the recommendations in any manner.

Be that as it may, it has been clear since the time the Constitution was amended (in order to introduce GST) that even though a novel “simultaneous” power had been envisioned qua the central and state governments, and a forum for dialogue between those bodies and the GST Council set up, the ultimate authority to frame and amend legislation was always retained by the legislatures. As such, the opportunity for one state to deviate from the rest had also always existed. And yet, in terms of achieving a uniform indirect tax law across India, GST has been largely successful over the last five years.

If the foundation of trust on which the system rests has not been broken thus far, there is hope that the judgment (which has only revealed such a foundation) will have no impact. Only time will tell whether the states share this view. Notably, the Kerala government has recently found the withdrawal of certain exemptions (as recommended by the GST Council) to be non-negotiable and has declared that it will deviate from the same. Should the Kerala government go through with this promise, the question of how such a deviation can be effected—with the state executive still bound by the GST Council recommendations—will be another one for the courts to answer.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kumar Visalaksh is Partner and Ajitesh Dayal Singh is Associate with Economic Laws Practice.

The authors may be contacted at: and