Union Of India vs M/S Mohit Minerals Pvt. Ltd. on 19 May, 2022

Outcome
The appeals filed by the Union of India were dismissed**. The Supreme Court upheld the Gujarat High Court's decision to quash the impugned notifications (Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017 and Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017) to the extent that they sought to levy Integrated Goods and Services Tax (IGST) on ocean freight under Cost-Insurance-Freight (CIF) contracts.

2. Core Issue
The core issue was whether an Indian importer could be subjected to the levy of Integrated Goods and Services Tax (IGST) on the ocean freight component paid by a foreign seller (exporter) to a foreign shipping line, on a reverse charge basis, for goods imported under a CIF contract. This involved interpreting the constitutional scheme of GST, the powers of the GST Council, and the specific provisions of the IGST Act and CGST Act relating to 'supply', 'recipient', 'reverse charge', and 'composite supply'.

3. Key Facts
* The respondents (Mohit Minerals Pvt. Ltd. and others) import non-coking coal from outside India on a Cost-Insurance-Freight (CIF) basis.
* Under a CIF contract, the foreign seller (exporter) contracts with and pays the foreign shipping line for the transportation of goods up to the Indian customs station. The Indian importer is not privy to this contract.
* The Indian importer pays customs duties on the imported coal, which includes the value of ocean freight.
* The Central Government, on the recommendation of the GST Council, issued Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017, levying an integrated tax at 5% on the supply of transportation services by a vessel from outside India up to the Indian customs station.
* Concurrently, Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017, issued under Section 5(3) of the IGST Act, specified that the recipient of such transportation services (where the supplier is in a non-taxable territory) would be the Indian importer, making them liable for IGST under the reverse charge mechanism.
* The Gujarat High Court struck down these notifications as unconstitutional, leading to the present appeal by the Union of India.

4. Arguments
Taxpayer (Respondent-assessees):
* Excessive Delegation: Section 5(3) of the IGST Act only allows specifying categories of supply for reverse charge, not who the recipient is. Notification 10/2017 oversteps by deeming the importer as the recipient.
* Definition of 'Recipient': In a CIF contract, the foreign exporter pays the freight, making them the 'recipient' under Section 2(93)(a) of the CGST Act. The Indian importer is not the person liable to pay consideration and thus cannot be deemed the 'recipient' of shipping services under Section 2(93)(c) where no consideration is payable, as the foreign exporter did pay consideration.
* Taxable Event: No valid 'supply' of service from the foreign shipping line to the Indian importer exists in CIF contracts, as there's no privity or consideration paid by the importer. Section 7(1)(b) CGST requires consideration for 'import of services'.
* Extra-territoriality: The service is rendered outside India between two non-taxable entities. Any extra-territorial levy must be by primary legislation, not delegated legislation (notifications).
* Double Taxation: IGST is already paid on the value of imported goods (under Section 5(1) IGST read with Section 3(7) Customs Tariff Act), which includes ocean freight. A separate levy on ocean freight amounts to double taxation on the same value component.
* Composite Supply: CIF contracts represent a 'composite supply' (Section 2(30) CGST) where the 'principal supply' is goods. Under Section 8 CGST, tax is levied only on the principal supply. Segregating and taxing the freight service component separately violates this principle.
* GST Council Recommendations: Recommendations of the GST Council are not binding on Parliament or State Legislatures.

Revenue (Union of India):
* Constitutional Architecture & Delegation: Articles 269A and 286(2) empower Parliament to formulate principles for interstate supply and imports. The IGST Act provides the framework, and notifications fill in details (taxable event, person, rate, value). No excessive delegation.
* Charging Section Valid: Section 5(1) IGST Act satisfies the four canons of taxation (taxable event, person, rate, value). Section 5(3) and 5(4) are machinery provisions tied to 5(1).
* Reverse Charge & Taxable Person: Section 2(98) CGST defines reverse charge. Section 24(iii) CGST mandates compulsory registration for persons liable for reverse charge. Notification 10/2017 validly identifies the importer as the recipient for reverse charge.
* Importer as Service Recipient: Section 2(93) CGST's definition of 'recipient' is flexible ("unless the context otherwise requires"). Section 13(9) IGST deems the 'place of supply' for transportation of goods as the 'destination of goods' (India). Thus, the service is "made to" the Indian importer, making them the recipient under Section 2(93)(c) CGST. The definition of 'consideration' (Section 2(31) CGST) includes payment by "any other person," so foreign exporter paying freight does not negate the importer being a recipient.
* Extra-territorial Nexus: The levy has a real territorial nexus with India as the destination of goods and the benefit accrues to the Indian importer. Parliament can legislate with extra-territorial aspects having a real connection to India (GVK Industries).
* Section 5(4) IGST Act: Even if Section 5(3) is insufficient, the amended Section 5(4) (effective Feb 1, 2019) allows specifying a class of registered persons "as the recipient," broadening the scope. Incorrect source reference doesn't invalidate a valid exercise of power.
* Not Double Taxation: The tax on goods (under Customs) and tax on service (ocean freight under GST) are on different aspects of the transaction. The 'aspect theory' allows this. The objective is to create a level playing field between Indian and foreign shipping lines.
* GST Council Recommendations: Recommendations are binding on the Union and States, given the unique cooperative federalism enshrined in Article 279A.

5. Court’s Reasoning
The Supreme Court analyzed the judgment on several fronts:

• Nature of GST Council Recommendations: The Court held that the recommendations of the GST Council are not binding on the Union and States. While the Government, when exercising its rule-making power under the CGST Act and IGST Act, is bound by these recommendations, this does not extend to the legislature's power to enact primary legislation. The constitutional scheme, including the deletion of Article 279B (which would have made recommendations binding) and the simultaneous legislative power under Article 246A, points to a persuasive, not mandatory, role for the Council. This approach fosters cooperative federalism and avoids disrupting the fiscal balance.
• Excessive Delegation: The Court found no excessive delegation. The essential legislative functions (subject, taxable person, rate, value) are provided in the IGST Act. The notifications merely provide details or clarify, consistent with the Act.
• Charging Section Validity & Taxable Person: Section 5(1) of the IGST Act validly lays down the four canons of taxation. The importer can be a 'taxable person' as Section 24(iii) of the CGST Act mandates compulsory registration for persons liable to pay tax under reverse charge. Notification 10/2017, in specifying the importer as the recipient, acts as a clarificatory measure consistent with the statutory scheme.
• Taxable Event & Importer as Recipient:
  • Territorial Nexus: The Court held that the levy has a sufficient territorial nexus with India, as the destination of goods is India, and the service benefits the Indian importer. Parliament's power to legislate on extra-territorial aspects with a real connection to India is established (GVK Industries).
  • Importer as Recipient: The Court accepted that Section 13(9) of the IGST Act (which states that the place of supply of transportation services is the destination of goods) read conjointly with Section 2(93)(c) of the CGST Act (defining recipient where no consideration is paid as the person to whom the service is rendered) inherently creates a deeming fiction that the importer of goods is the recipient of the shipping service. This is consistent with GST being a consumption-based tax, where the ultimate beneficiary (importer) at the destination (India) is taxed.
• Applicability of Section 5(4) IGST Act: The Court noted that Section 5(4) (especially post-amendment from Feb 1, 2019) could empower the government to specify a class of registered persons "as the recipient," further supporting the identification of the importer. The principle that incorrect reference to a source of power does not vitiate its exercise if the power exists (Tulsi Ram Patel) was reiterated.
• Composite Supply & Double Taxation (Crucial Point of Contention): This was the point where the Court ruled against the Union.
  • The Court found that a CIF contract constitutes a 'composite supply' under Section 2(30) of the CGST Act, where the supply of goods is the 'principal supply'. The illustration to Section 2(30) explicitly mentions packaging, transport, and insurance bundled with goods as a composite supply.
  • Under Section 8 of the CGST Act, a composite supply comprising two or more supplies (one of which is principal) is to be treated as a supply of such principal supply.
  • Since the Indian importer is already liable to pay IGST on the entire 'composite supply' of imported goods (which inherently includes the value of ocean freight and insurance) under Section 5(1) of the IGST Act read with Customs Tariff Act provisions, a separate levy of IGST on the 'service' component (ocean freight) via the impugned notifications would be a violation of Section 8 of the CGST Act and the fundamental scheme of GST. The Union cannot claim convenience to treat the transactions separately when it benefits their argument (identifying importer as recipient) and then as composite when it needs to avoid double taxation implications.

6. Statutory References
* Constitution of India: Articles 3, 109, 111, 113, 117, 203, 207, 245, 246, 246A, 248, 254, 255, 263, 269A, 270, 274, 275, 279A, 279A(4)(h), 279A(6), 279A(7), 279A(11), 280, 281, 286, 286(1), 286(2), 311(2), 320(3), 338, 338A, 338B, 340, 344, 349, 353, 366(12A), 371A.
* Integrated Goods and Services Tax Act, 2017 (IGST Act): Sections 1, 2(5), 2(6), 2(10), 2(11), 2(14), 2(15), 2(21), 2(22), 5, 5(1), 5(3), 5(4), 5(5), 6(1), 7, 7(1), 7(3), 7(4), 8, 9, 11, 12, 13, 13(1), 13(2), 13(3), 13(4), 13(5), 13(6), 13(9), 13(10), 13(12), 13(13), 20, 22, 24.
* Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2, 2(30), 2(31), 2(84), 2(87), 2(93), 2(93)(a), 2(93)(b), 2(93)(c), 2(98), 2(105), 2(107), 2(109), 7, 7(1), 7(1)(a), 7(1)(b), 7(1)(c), 7(3), 8, 9, 9(3), 9(4), 11, 12, 13, 13(1), 13(2), 13(3), 13(5), 15, 15(1), 15(4), 15(5), 16(1), 22, 24, 24(iii), 49(9), 164, 166.
* Customs Act, 1962: Sections 2(26), 12.
* Customs Tariff Act, 1975: Sections 3, 3(7), 3(8), 3(8)(a).
* Finance Act, 1994: Sections 66, 68(1)(a), 68(1A), 68(2), 98(2).
* Central Goods and Service Tax Rules, 2017: Rules 27, 28, 29, 30, 31.
* Customs Valuation (Determination of Value of Imported Goods) Rules, 2007: Rule 10.
* Notifications: Notification No. 8/2017- Integrated Tax (Rate) dated 28 June 2017, Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017, Notification No. G.S.R. 67(E) dated 29 January 2019.

7. Precedents Cited
* Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667
* Gobind Saran Ganga Saran v. Commissioner of Sales Tax AIR 1985 SC 1041
* McDowell and Company Ltd. v. Commercial Tax Officer (1985) 3 SCC 230
* M/s Electronic Corporation of India v. Commissioner of Income Tax 1989 Supp 2 SCC 642
* GVK Industries v. Income Tax Officers (2011) 4 SCC 36
* Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills (1968) 3 SCR 251
* Avinder Singh v. State of Punjab (1979) 1 SCC 441
* Laghu Udyog Bharati v. Union of India (1999) 6 SCC 418
* Union of India v. Jalyan Udyog (1994) 1 SCC 318
* BSNL v. Union of India (2006) 3 SCC 1
* Union of India v. Mohit Mineral Pvt. Ltd. (2019) 2 SCC 599
* Baiku v. State Tax Officer, GST 2019 SCC OnLine Ker 5362
* Hoecst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC 45
* M.P.V. Sundararamier & Co. v. State of A.P. AIR 1958 SC 468
* Abhiram Singh v. CD Commachen (2017) 2 SCC 629
* K.P Varghese v. ITO (1981) 4 SCC 173
* Kalpana Mehta v. Union of India (2017) 7 SCC 295
* State (NCT of Delhi) v. Union of India (2018) 8 SCC 501
* Manohar v. State of Maharashtra (2012) 13 SCC 14
* Naraindas Indurkhya v. State of Madhya Pradesh (1974) 4 SCC 788
* Union of India v. Pradip Kumar Dey (2000) 8 SCC 580
* Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 2 SCR 688
* Som Mittal v. Government of Karnataka (2008) 3 SCC 753
* State of AP v. T. Gopalakrishnan Murthi (1976) 2 SCC 883
* CIT v. B C Srinivas Setty AIR 1981 SC 972
* Union of India v. Tulsi Ram Patel (1985) 3 SCC 398
* Municipal Corporation of the City of Ahmedabad v. Ben Hiraben Manilal (1983) 2 SCC 422
* Titagarh Paper Mills v. Orissa State Electricity Board (1975) 2 SCC 436
* Federation of Hotels & Restaurant Association of India v. Union of India (1989) 3 SCC 634
* Governor General-in-Council v. Province of Madras AIR 1945 PC 98
* Ispat Industries Ltd. v. Commissioner of Customs (2006) 12 SCC 583