Summary
Importers of coal on CIF terms challenged Notifications 8/2017 and 10/2017-Integrated Tax (Rate), which levied 5% IGST on reverse charge on the Indian importer, as deemed recipient, for ocean freight paid by the foreign exporter to a foreign shipping line; the Gujarat High Court struck them down. Dismissing the Union's appeals, the Supreme Court held that the GST Council's recommendations are not binding on Parliament and the State legislatures, holding simultaneous power under Article 246A, though they bind the Government in framing delegated legislation; that the notifications were otherwise within Sections 5(3) and 5(4) of the IGST Act, the importer being the recipient by the fiction in Section 13(9) read with Section 2(93)(c) CGST Act; but that the levy violates Sections 2(30) and 8 of the CGST Act, a CIF import being a composite supply already taxed as goods.
Issues
- Whether the recommendations of the GST Council under Article 279A are binding on Parliament and the State legislatures, or only on the Government in the exercise of its delegated rule-making power under the CGST and IGST Acts.
- Whether Notification 10/2017, by naming the importer as the recipient liable to pay IGST on reverse charge, exceeds the power under Section 5(3) of the IGST Act to specify only categories of supply, and whether the taxable person, rate and value (10% of CIF) were validly prescribed.
- Whether the supply of transportation by a foreign shipping line to a foreign exporter, with destination in India, is an inter-State supply with sufficient territorial nexus, and whether the Indian importer on a CIF contract can be regarded as the 'recipient' of that service.
- Whether a separate IGST on the ocean freight component of a CIF import, on which IGST is already paid as a supply of goods, violates the principle of composite supply in Sections 2(30) and 8 of the CGST Act.
Provisions considered
- Articles 246A, 269A, 279A and 286, Constitution of IndiaArticle 246A confers simultaneous (not merely concurrent) power on Parliament and the States to legislate on GST with no repugnancy clause; Article 279A neither begins with a non-obstante clause nor makes Article 246A subject to it, and the deletion of the proposed Article 279B dispute-settlement authority shows the GST Council's recommendations were meant to have persuasive value. The Council is a forum of cooperative and 'uncooperative' federalism in which the Union has a one-third vote; reading its recommendations as binding edicts would disrupt fiscal federalism. (¶¶ 30, 43, 44, 46, 48, 49, 50, 51, 54, 56, 59, 148)
- Sections 2(11), 5(1), 5(3), 5(4) (as amended w.e.f. 01.02.2019), 7(4), 13(9) and 20, Integrated Goods and Services Tax Act, 2017Section 5(1) satisfies the four canons of taxation and Sections 5(3)/(4) are machinery inextricably linked with it; Section 5(3) permits specifying only categories of supply, so naming the importer as recipient is merely clarificatory; amended Section 5(4) authorises designating a class of registered persons 'as the recipient'. Section 7(4) treats imported services as inter-State supply and Section 13(9) deems the place of supply of transportation to be the destination of the goods, giving the levy territorial nexus (GVK Industries) and making the import on CIF terms an inter-State supply with the importer as recipient. (¶¶ 84, 85, 86, 89, 90, 91, 94, 101, 103, 104, 105, 108, 109, 118, 123, 124, 126, 128)
- Sections 2(30), 2(31), 2(93), 2(98), 2(107), 7, 8, 13, 15 and 24(iii), Central Goods and Services Tax Act, 2017'Recipient' under Section 2(93) is determined by the Act, not by privity of contract: a person to whom a supply is made is the recipient, and by Section 13(9) IGST Act the supply of shipping is made to the Indian importer under clause (c); 'consideration' includes payment by any other person. A CIF import is a composite supply whose principal supply is goods (illustration to Section 2(30)), taxable only as such under Section 8 and Section 20 IGST Act; Section 7(3) permits notifying a transaction as goods or services but not vivisecting a composite supply, so the separate levy on the freight component is invalid. (¶¶ 85, 91, 93, 94, 105, 112, 118, 119, 122, 123, 134, 135, 136, 137, 143, 144, 145, 147)
Held
- The recommendations of the GST Council are not binding on the Union and the States: the deletion of draft Article 279B and inclusion of Article 279A(11) show Parliament intended them to have only persuasive value; Article 279A has no non-obstante clause and Article 246A is not subject to it; Parliament and the State legislatures possess simultaneous power to legislate on GST without a repugnancy provision, and the recommendations are the product of a collaborative dialogue between federal units. Indian federalism is a dialogue between cooperative and uncooperative federalism in which States may use means ranging from collaboration to contestation. The Government, however, is bound by the recommendations when exercising its rule-making power under the CGST and IGST Acts, which does not make all recommendations binding on the legislatures. (¶¶ 43, 46, 48, 49, 50, 51, 54, 56, 59, 148)
- The impugned notifications do not suffer from excessive delegation: the essential legislative functions — taxable event, taxable person, rate cap of 40% and value under Section 15 — are in the statute, and the IGST and CGST Acts themselves define reverse charge, recipient and taxable person; Section 5(3) empowers specification only of categories of supply, so the mention of the importer as recipient in Notification 10/2017 is clarificatory and does not specify a taxable person different from the statutory recipient. The importer is a taxable person under Sections 2(107) and 24(iii) CGST Act (Laghu Udyog Bharati distinguished), and valuation at 10% of CIF value is sustainable under Sections 15(4)–(5) and Rule 31 of the CGST Rules. (¶¶ 84, 85, 86, 89, 91, 92, 93, 94)
- Transportation of goods by a foreign shipping line to the customs station in India is an inter-State supply with a real territorial nexus — the destination of the goods is India and the service benefits the Indian importer — and Parliament may legislate on extra-territorial aspects having such a nexus (GVK Industries); Section 13(9) itself supplies the deeming fiction, so no separate statutory fiction was required. 'Consideration' under Section 2(31) includes payment by any person, so payment by the foreign exporter does not prevent the transaction being a supply for consideration under Section 7(4) IGST Act. (¶¶ 101, 103, 104, 105, 107, 108, 109)
- Section 5(3) uses 'by the recipient', so the recipient must be identified under Section 2(93) CGST Act and not by whoever is notified as taxable person; Section 24(iii) is a registration consequence, not a source of power, and treating any notified taxable person as the recipient would be judicial legislation. Nevertheless, since Section 2(93) treats a person to whom a supply is made as the recipient and Section 13(9) deems the place of supply to be the destination of the goods, the supply of shipping is 'made' to the Indian importer, who is the recipient under clause (c); this comports with GST as a destination-based consumption tax, and no absurdity of two recipients arises because Section 7(4), not Sections 7(3) or 8(2), governs imported services. Amended Section 5(4) in any event permits designating a class of registered persons 'as the recipient', and wrong citation of the source of power does not vitiate a notification (Tulsi Ram Patel; Titagarh Paper Mills). The desirability of taxing importers to give Indian shipping lines a level playing field is a matter of policy. (¶¶ 112, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 126, 127, 128, 130, 131)
- The levy nonetheless violates the principle of composite supply: in a CIF contract the supply of goods is naturally bundled with transportation and insurance, the principal supply is goods, and under Section 8 CGST Act read with Section 20 IGST Act the whole bundle is taxed as a supply of goods, on which the importer already pays IGST under Section 5(1) and Sections 3(7)–(8) of the Customs Tariff Act. The Union cannot treat the two legs as connected to make the importer the recipient and as independent to escape Section 8; the aspect theory does not permit the value of the service component to be taxed again (BSNL), and Section 7(3) confers no power to vivisect a composite supply. A tax on a service already included in the tax on the composite supply of goods cannot be allowed. (¶¶ 133, 134, 136, 137, 138, 141, 143, 144, 145, 147, 148)
Result
Appeals dismissed; the Gujarat High Court's judgment of 23.01.2020 in R/SCA No. 726 of 2018 striking down the levy of IGST on ocean freight on CIF imports under Notifications 8/2017 and 10/2017-Integrated Tax (Rate) upheld on the ground that the levy on the service component violates Sections 2(30) and 8 of the CGST Act; the recommendations of the GST Council held not binding on Parliament and the State legislatures.