In a well-articulated, well-drafted, well-substantiated and well-analysed judgment titled Union of India and Anr vs M/s Mohit Minerals Through Director in Civil Appeal No. 1390 of 2022 with Ors and cited in 2022 LiveLaw (SC) 500 that was pronounced finally on May 19, 2022,the Apex Court held that the recommendations of the GST council are not binding on the Union and the State Governments. It must be mentioned here that a Bench of Apex Court led by Justice Dr DY Chandrachud held that the Parliament intended that the recommendations of the GST Council will have persuasive value. Significantly, the Apex Court held that both the Parliament and the State Legislatures can equally legislate on matters of Goods and Service Tax.
To start with, this extremely laudable, learned, landmark and latest judgment authored by Justice Dr Dhananjaya Yashwant Chandrachud for a Bench of Apex Court comprising of himself, Justice Surya Kant and Justice Vikram Nath sets the ball rolling by first and foremost putting forth in para 1 that, “The Union of India (“Union Government” or “Central Government”) is in appeal against a judgment of a Division Bench of the Gujarat High Court dated 23 January 2020. The High Court allowed a petition instituted by the respondents under Article 226 for challenging the constitutionality of two notifications of the Central Government. The bone of contention is whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax (“IGST”) on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis.”
While elaborating, the Bench then narrates in para 2 that, “The respondents import non-coking coal from Indonesia, South Africa and the U.S. by ocean transport on a ‘Cost-Insurance-Freight’ (“CIF”) basis which is supplied to domestic industries. The goods are transported from a place outside India, up-to the customs station in India. The respondent pays customs duties on the import of coal, which includes the value of ocean freight. In the case of a CIF contract, the freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of the importer. Ocean freight is paid by the importer only when goods are imported under a ‘Free-on-Board’ (“FOB”) contract. In the case of a high seas sale transaction, the coal is purchased from the original buyer before it arrives at Indian ports.”
In hindsight, the Bench then recalls in para 3 that, “Prior to the enforcement of the Goods and Services Tax (“GST”) regime, service tax on ocean freight was exempted by Notification No. 25/2012-ST (Serial No. 34) dated 20 June 2012. This exemption was withdrawn by Notification No. 01/2017-ST dated 12 January 2017 which levied service tax on the importer, by a reverse charge mechanism. With the advent of the GST regime, Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017 (“Notification 8/2017”) was issued by the Central Government on the advice of the Goods and Services Tax Council (“GST Council”), in exercise of powers under Section 5(1), Section 6(1) and Section 20(iii)-(iv) of the Integrated Goods and Services Tax Act 2017 (“IGST Act”), read with Section 15(5) and Section 16(1) of the Central Goods and Services Act (“CGST Act”). Entry 9 of Notification 8/2017, effective from 1 July 2017, levied an integrated tax at the rate of 5 per cent on the supply of specified services, including transportation of goods, in a vessel from a place outside India up to the customs station of clearance in India.”
Of course, the Bench then notes in para 4 that, “On 28 June 2017, the Central Government issued Notification 10/2017. Serial 10 of Notification 10/2017 categorized the recipient of services of supply of goods by a person in a non-taxable territory by a vessel to include an importer under Section 2(26) of the Customs Act 1962.”
To put things in perspective, the Bench then envisages in para 5 that, “Section 5(1) of the IGST Act authorises the levy of an integrated tax on all inter-state supplies of goods and services or both. The integrated tax can also be levied on goods imported into India on the value determined under Section 3 of the Customs Tariff Act 1975 at the point when customs duties are levied on the goods under Section 12 of the Customs Act 1962. Section 11 of the IGST Act stipulates that the place of supply of goods in the case of goods imported into India shall be the place of the importer. Section 13(9) of the IGST Act contemplates that the place of supply of services, in the case of transportation of goods shall be the destination of the goods. The respondent alleges that the impugned notifications create an element of double taxation, as ocean freight is included in the value of goods for the purpose of customs duty which the importer is liable to pay. The respondent does not dispute the liability of integrated tax on supply of service of transportation when it imports goods on an FOB basis.”
As it turned out, the Bench then observes in para 6 that, “The respondent filed a writ petition before the Gujarat High Court challenging Notification 8/2017 and Notification 10/201713 on the grounds that: (i) the notifications are ultra vires the IGST Act and CGST Act; (ii) customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation; (iii) though in the case of high sea sales, the importer is a different entity yet this regime would tax the respondent as the importer and the recipient of service; (iv) in the case of a CIF contract, the supply of service of transport of goods in a vessel is by a foreign shipping line located in a non-taxable territory to an exporter located in a non-taxable territory by a vessel outside the territory of India which cannot be subject to tax under the IGST Act; (v) Notification 10/2017 transgresses the provisions of Section 5(3) of the IGST Act as instead of the “recipient” mentioned therein, the “importer” as defined in section 2(26) of the Customs Act, is made liable to pay tax; and (vi) Entry 9(ii) and para 2 of Notification 8/2017, read with Notification 10/2017, creates a deeming fiction and a separate taxable event which is not permissible in law.”
As anticipated, the Bench then reveals in para 7 that, “The Union of India urged before the High Court that although tax is being paid twice on the value of ocean freight, it is not unconstitutional as the tax is on two different aspects of the transaction, namely, the supply of service and import of goods. The rationale for the impugned notifications, according to the Union Government, is to remove the disparity between Indian and foreign shipping lines, as the former are unable to claim input tax credit (Interchangeably referred as “ITC”) that forms a part of their transportation costs, since supply of goods was hitherto exempt from service tax. The levy of the integrated tax does not, according to the Union of India, impose an additional cost on importers as the cost paid on inward transportation of goods and import freight services is available to them as ITC.”
As we see, the Bench then also discloses in para 9 that, “The Division Bench of the Gujarat High Court held that the impugned notifications are unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act. The High Court held:(i) The importer of goods on a CIF basis is not the recipient of the transport services as Section 2(93) of the CGST Act defines a recipient of services to mean someone who pays consideration for the service, which is the foreign exporter in this case;
(ii) Section 5(3) of the IGST Act enables the Government to stipulate categories of supply, not specify a third-party as a recipient of such supply;
(iii) There is no territorial nexus for taxation since the supply of service of transportation of goods is by a person in a non-taxable territory to another person in a non-taxable territory from a place outside India up to the Indian customs clearance station and this is neither an inter-state nor an intra-state supply;
(iv) Section 2(11) of the IGST Act defines “import of service” to mean the supply of service where the supplier of service is located outside India, the recipient of service is located in India and the place of supply of service is in India;
(v) In this case, since the goods are transported on a CIF basis, the recipient of service is the foreign exporter who is outside India;
(vi) Section 7(5)(c) of the IGST Act dealing with intra-state supply cannot be read so extensively that it conflates the “supply of goods or services or both in the taxable territory” to “place of supply”;
(vii) Sections 12 and 13 of the IGST Act deal with determining the place of supply. Neither of them will apply if both the supplier and recipient of service are based outside India. The mere fact that the service terminates at India does not make the service of supply of transportation to be taking place in India;
(viii) The provisions regarding time of supply, as contemplated in Section 20 of the IGST Act and applicable to Section 13 of the IGST Act dealing with supply of services, are applicable only vis-à-vis the actual recipient of the supply of service, which is the foreign exporter in this case;
(ix) Section 15(1) of the CGST Act enables the determination of the value of the supply, only between the actual supplier and actual recipient of the service;
(x) Since the importer is not the “recipient” of the service under Section 2(93) of the CGST Act, it will not be in a position to avail ITC under Section 16(1) of the CGST Act; and
(xi) Since the importer pays customs duties on the goods which include the value of ocean freight, the impugned notifications impose double taxation through a delegated legislation, which is impermissible.”
It is worth paying attention that the Bench then notes in para 46 that, “Article 246A vests Parliament and the State Legislatures with a unique, simultaneous law-making power on GST. It is in this context that the role of the GST Council gains significance. The recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the States’ votes have a weightage of two-thirds of the total votes cast. There are two significant attributions of the voting system in the GST Council. First, the GST Council has an unequal voting structure, where the States collectively have a two-third voting share and the Union has a one-third voting share; and second, since India has a multi-party system, it is possible that the party in power at the Centre may or may not be in power in various States. Therefore, the GST Council is not only an avenue for the exercise of cooperative federalism but also for political contestation across party lines. Thus, the discussions in the GST Council impact both federalism and democracy. The constitutional design of the Constitution Amendment Act 2016 is sui generis since it introduces unique features of federalism. Article 246A treats the Centre and States as equal units by conferring a simultaneous power of enacting law on GST.. Article 279A in constituting the GST Council envisions that neither the Centre nor the States can act independent of the other.”
Be it noted, the Bench then observes in para 54 that, “The GST Council which is a constitutional body is entrusted with the duty to make recommendations on a wide range of areas concerning GST. The GST Council has plenary powers under Article 279A (4)(h) where it could make recommendations on ‘any other matter’ related to GST as the Council may decide. The GST Council has to arrive at its recommendations through harmonized deliberation between the federal units as provided in clause 6 of Article 279A. Unlike the other provisions of the Constitution which provide that recommendations shall be made to the President or the Governor, Article 279A states that the recommendations shall be made to the ‘Union and the States’. The recommendation of the GST Council made under Article 279A is non-qualified. That is, there is no explanation on the value of such a recommendation. Yet the notion that the recommendations of the GST Council transform into legislation in and of themselves under Article 246A would be farfetched. If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is ‘subject to’ Article 279A.”
It would be instructive to note that the Bench then postulates in para 56 that, “If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act (Section 166 of the CGST Act) and IGST Act (Section 24 of the IGST Act) is mandated to be tabled before the Houses of the Parliament. The use of the phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST.”
To be sure, the Bench then enunciates in para 147 that, “We are in agreement with the High Court to the extent that a tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.”
Conclusion
Finally and far most significantly, the Bench then minces no words to hold in para 148 what forms the cornerstone of this learned judgment that, “Based on the above discussion, we have reached the following conclusion:(i) The recommendations of the GST Council are not binding on the Union and States for the following reasons:
(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;
(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and
(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations;
(ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;
(iii) The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;
(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;
(v) 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.”
In conclusion, the Apex Court has not left even an iota of doubt to linger in our mind on the moot question of whether GST Council recommendations are binding on Centre and States or not. It has been made as clear as broad daylight that GST Council recommendations are not binding on Centre and States. It is made indubitably clear that the ineluctable conclusion is that both Parliament and State Legislatures can legislate on GST. It is made amply clear in para 26 that, “In the pre-GST regime, the Union had the exclusive power to impose indirect taxes, that is, on inter-state sale of goods, customs duty, service tax, and excise duty. The States had the exclusive power to impose tax on intra-State sale of goods, luxury tax, entertainment tax, purchase tax, and taxes on gambling and betting. The GST regime has subsumed all the indirect taxes. Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the concurrent power to make laws with respect to GST.” It is also made amply clear that there would have been express provision in Constitution if GST Council recommendations were meant to be binding. No denying it!Sanjeev Sirohi