Judgement on Applicability of IGST on Ocean Freight by Gujarat high court………Case law:-Mohit Minerals Pvt. Ltd. Vs Union of India

First Let us understand what is Ocean Freight & the case of the Mohit Minerals.

What is Ocean Freight??

Ocean Freight is a method of transporting large quantities of goods through the sea where products are packed in one container which are loaded in vessels.

Entry 10 of Notification 10/2017 under IGST Act, 2017

RCM will be levied on Ocean freight @ 5% for service provided or agreed to provide by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs stations of clearance in India

In the Below example
ABC ltd is: - Mohit Minerals Pvt. Ltd.
XYZ Inc: - Supplier of Mohit Minerals Pvt. Ltd.
MK transports Inc: - Provides Ocean transport service to XYZ Inc

Here is the Situation
ABC ltd (Indian co) order goods from XYZ Inc(US Co) goods worth of Rs.100 Cr and goods to be delivered at customs clearance station ie, Mumbai (India). XYZ Inc has entered into contract with MK transports Inc (US Co) to deliver goods from US to India (Mumbai).
Now government wants ABC ltd to pay IGST on Ocean Freight charges under RCM as both ABC and MK transporter are Person located in Non Taxable territory and Ocean Freight services has been provided.

Fact of the case:-

  • • Mohit Minerals Pvt. Ltd. Use the import coal for its business from various country.
  • • Department started to issue notice for RCM on Ocean freight charges @ 5% on notational price.

So the case went to Gujarat high Court.
The Applicant have challenged the levy of the IGST on the Ocean Freight paid for the transportation.

    1) Ultravires to Act

  • • Applicant states that Sec-5(3) IGST Act which empowers the Government to notify the goods or services upon which tax is liable to be paid by the recipient on reverse charge but has been shifted to importer for Notification 10/2017
    In present case the receipt of the Ocean freight is XYZ Inc. as the contract was entered between XYZ Inc and MK Transport Inc hence Recipient is XYZ Inc so ABC ltd so not be levied under RCM as he is not aware of contract and contract amount involved to pay IGST under RCM.
  • • The transportation of goods by a vessel is done from a place outside India up to the port in India. Such activity takes place outside the territory of India, and thus, it is outside the purview of the tax.
  • 2) Double Taxation

  • • The Applicant has already paid IGST under IGST Act 2017 i.e., IGST is applicable under on CIF basis which includes FOB (i.e., Ocean Freight charges) which is paid at custom clearance.
    In this situation to levy and to collect once again IGST which will leads to double taxation on the goods.
  • 3) Determine Value of Supply

  • • It is difficult for the importer to know the Value charged by transport to Supplier (MK Transporter to XYZ Inc) as he is not aware of contract and amount involve. So it is difficult to arrive a value for ocean charges.
    As GST is applicable on taxable supply as the above said supply does not constitute taxable supply.

Judgement of the above case

Based on the above fact the High court of Gujarat declares entry 10 of Notification 10/2017 of IGST Act, 2017 to be as Ultra vires to IGST Act, 2017 and declares it to be unconstitutional. As the above said Rule is contravening the whole act.

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Prepared By

Umesh B

Date: 19/03/2020