#TaxmannPPT | Decoding Key Implications of the Recent Supreme Court Decisions on GST on Ocean Freigh by Taxmann

By Sudipta Bhattacharjee, Partner (Indirect Taxes and Customs, Khaitan & Co.)

Supreme Court on GST on ocean freight on CIF contracts Mohit Minerala Private Limited (2022) 138 taxmann.com 331 (SC)

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The relevant provisions Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017 – IGST on ocean freight Issued by the Central Government on the advice of the Goods and Services Tax Council, in exercise of powers under Section 5(1), Section 6(1) and Section 20(iii)-(iv) of the IGST Act, read with Section 15(5) and Section 16(1) of the CGST Act - 5% IGST on transportation of goods, in a vessel from a place outside India up to the customs station of clearance in India

Notification 10/2017 – liability on importer Notification 10/2017 was issued by the Central Government in exercise of powers conferred by Section 5(3) of the IGST Act and specified the importer as the recipient of transportation of service when the supplier is locaed in a non-taxable territory and the service of transportation is supplied by a person in a non-taxable territory

From the IGST legislation •

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

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IGST also 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

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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

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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.

Backdrop On 19 May 2022, SC decided on the challenge to the levy of IGST on ocean freight services apropos imports into India under Cost, Insurance and Freight (CIF) arrangements. In 2020, Gujarat HC had struck down the same, finding that such reverse charge liability of GST was ultra vires the parent legislation, ie. IGST Act; Calcutta HC followed.

Key reasons by Gujarat HC

1. CIF importer in India is not the ‘recipient’ as defined under CGST Act, the foreign exporter is. A recipient-based liability under ‘import of service’ cannot thus be imposed on Indian CIF importer. 2. 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 3. 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 4. No territorial nexus for taxation in India 5. The mere fact that the ocean freight services under CIF terminate in India does not make the said services to be taking place in India. Provisions regarding valuation, time and place of supply apply only vis a vis ‘recipient’ as defined – which is the foreign exporter in a CIF scenario 6. Double taxation, since customs duty is already paid

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Key aspects as analyzed and concluded upon by the Supreme Court – no excessive delegation  Source of power to notify importer as recipient traced to Section 5(4) of the IGST Act - incorrect mentioning of source provision in Notification will not vitiate their exercise and application  Section 5(3) of the IGST Act provides the Government the power to specify categories of supply of goods or services on which tax shall be paid on a reverse charge basis by recipient. Notification 10/2017 issued under Section 5(3) specify the ‘categories of the supply’ which shall be subject to reverse charge. Ocean freight transaction for import of goods a valid category of supply of services under Section 5(3). The notification, besides specifying the criteria, has also mentioned the corresponding recipient in those categories “….the stipulation of the recipient in each of the categories is only clarificatory. The Government by notification did not specify a taxable entity different from that which is prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge” Section 5(4) “The integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both”

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Section 5(3) “The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both”

Key aspects as analyzed and concluded upon by the Supreme Court – CIF importer is ‘taxable person’ and ‘recipient’  Section 24(iii) of the CGST Act mandates persons required to pay tax under reverse charge to be compulsorily registered under the CGST Act. Section 2(107) of the CGST Act defines a “taxable person” to mean a person who is registered or liable to be registered under Section 24 of the CGST Act.  Neither Section 2(107) nor Section 24 of CGST Act qualify imposition of reverse charge on a “recipient of service” and broadly impose it on “the persons who are required to pay tax under reverse charge”.  CIF importer is thus ‘taxable person’ - No failure to identify ‘person liable to tax’  Definition of ‘Recipient’ “recipient” of supply of goods or services or both, means— (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; …… (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply

 Since reference to a person to whom a supply is made is a reference to the recipient, the place of supply is critical. As per Section 13(9) of the IGST Act, place of supply of service of transportation of goods by sea is destination of goods. Sections 2(14) and 2(15) of the IGST Act also define the location of the recipient and supplier of services with respect to the physical location where the supply of services is made or received.  When the place of supply of services is deemed to be the destination of goods under Section 13(9) of the IGST Act, the supply of services would necessarily be “made” to the Indian importer, who would then be considered as a “recipient” under the definition of Section 2(93)(c) of the CGST Act. Privileged & Confidential

Key aspects as analyzed and concluded upon by the Supreme Court – Others  The SC also concluded that the IGST levy on ocean freight is not an 'extra-territorial' levy since the same has sufficient 'nexus' with India.  Further, SC held that the taxpayers' argument that the determination of the value of supply has to be specified only through rules, and not by notification, tantamounts to an 'unduly restrictive' interpretation and must also be rejected.  Thankfully, the SC held that the impugned levy imposed on the ‘service’ aspect of an import of goods transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act “….we are of the opinion that while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.”

 SC also gave detailed observations to reject the notion that GST Council decisions are 'binding' and held “...the notion that the recommendations of the GST Council transform into legislation in and of themselves under Article 246A would be farfetched. The recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. Merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council’s recommendations are binding.” Does this dilute the principle of “one nation one tax”?

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Implications/actions points in the aftermath of this Supreme Court judgement  Objections concerning non-payment of IGST on ocean freight services have been raised in various audit inquiries across the country - should now extinguish  Early hearing applications may be filed for matters pending in High Courts, appeal stages  Any amounts collected from CIF importers towards ocean freight services lacks / lacked legal sanction and thus were collected in violation of Article 265 of the Constitution 

Possibility of recouping such amounts via refund claims to the extent not utilized as input credit / reversals  Bharat Oman Refineries Ltd. v. Union of India — [2020] 120 taxmann.com 301 (Gujarat)  Binani Cement Ltd. v. Union of India — 2013 (288) E.L.T. 193 (Guj.)  Gokul Agro Resources Ltd. v. Union of India — [2020] 116 taxmann.com 1 (Gujarat)  Cosmol Energy Pvt. Ltd. v. State of Gujarat - [2021] 127 taxmann.com 736 (Gujarat)

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Especially relevant for CIF importers outside GST credit chain - oil and gas, power generation and alcohol companies

 Refund modalities? 

Mafatlal judgement (“Unconstitutional levy”/ “Illegal levy”/ “Mistake of law” categories) vs other judgments – practical ramifications? 

Refund application under refund provisions of GST laws or refund application through a letter outside GST laws?

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How far back can a CIF importer go to claim refund of IGST paid on ocean freight – 2 years or 3 years?

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Supreme Court on service tax on secondments Northern Operating Systems (P.) Ltd. (2022) 138 taxmann.com 359 (SC)

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Supreme Court in Northern Operating Systems Pvt. Ltd.  This judgment has the potential to re-open the pandoras box of service tax/GST issues on secondment/deputation of manpower, whether from outside India to India or within India  This upsets the previous jurisprudence. Practically, indirect tax authorities had almost given up the fight vis a vis secondment/deputation of manpower; this may reinvigorate them and lead to greater scrutiny of all secondment arrangements during upcoming GST audits  Facts 

The respondent, i.e., Northern Operating Systems Pvt. Ltd. (Assessee), had contracted with its overseas group entities for rendering back-office support and information technology support services wherein the overseas entity was required to second its employees (Seconded Employees) to the Assessee as per the Assessee’s requests.

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The Seconded Employees were required to act under the directions and control of the Assessee.

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However, salary, bonus/incentives, social security and welfare benefits of the Seconded Employees were paid to them by the overseas group entity. Such expenses were subsequently reimbursed by the Assessee to its overseas entity.

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Pre-2012, ‘manpower recruitment or supply agency’ services specifically defined as a taxable service. Thereafter, with negative list regime from 01.07.2012, definition of ‘service’ expanded.

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However, services provided by an employee to an employer were excluded from the definition of ‘service’ under Section 65B (44) (b) of the Finance Act, 1994. This exclusion continues even under GST regime, as per Entry 1 of Schedule III of the Central Goods and Services Tax Act, 2017.

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Supreme Court in Northern Operating Systems Pvt. Ltd. (Cont.)  Approach of the SC 

The framework of analysis adopted by the SC was to identify the “real” employer of the Seconded Employees. 

If Assessee were to qualify as the ”real” employer, there would be no liability of service tax on the Assessee.

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However, if the overseas group entity was held to be the ”real” employer of the Seconded Employees, it would be tantamount to provision of services by the overseas group entity to the Assessee.

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Observing that no singular determinative test, could be laid down to conclude vis a vis employer-employee relationship, the SC held that such examination must be based on a multitude of factors.

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Adopting a “substance over form” approach to identify the “real” employer, the SC undertook a detailed review of – (1) master services agreements between the Assessee and the overseas entities; (2) secondment agreements; and (3) letters of understanding issued to the Seconded Employees by the Assessee

 Judgement 

The SC concluded that the overseas group entities were the “real” employers of the Seconded Employees and that the Assessee was the service recipient of services provided by the overseas entity, vis a vis the employees it seconded to the Assessee, for the duration of their deputation or secondment.

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Goes against previous favorable decisions under Indirect Tax – seems to be influenced by Income Tax cases in the context of ‘Fee for Technical Services’ (FTS)!

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However, a judgment is an authority only vis a vis the facts of that case – key contractual terms relied upon by the SC are discussed subsequently

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Supreme Court in Northern Operating Systems Pvt. Ltd. (Cont.)  Key contractual/factual aspects based on which the Judgement was arrived at 

Lien on employment of Seconded Employees vested with the overseas entity

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Clear right of repatriation of the Seconded Employees back to the overseas entity

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Assessee was required to provide “IT enabled services” supporting back-up and office related operations as well as “general back office and operational support” to the foreign group company which included foreign investment, investment management liaison group cash, evaluations and reporting, IRAS fund accounting, securities, lending operations; tax related operations, including tax reclaimed, etc

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Basically, in the eyes of SC - the overseas employer provided the services of its employees to the Assessee for the performance of agreed services of the Assessee under the services agreements. Seconded Employees possessing specific skill sets were being deployed to the Assessee temporarily for the use of their specific skills - evident from the nature of the perks and salary paid

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Assessee not empowered to terminate the employment of the Seconded Employees or even amend their terms of employment in an adverse manner

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Following aspects were not given importance 

Assessee had control but only temporary operational control which was found to be immaterial

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Assessee deducted Income tax TDS as salary and issued TDS certificates for the Seconded Employees, who file income tax returns and contribute to provident fund in India

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Supreme Court in Northern Operating Systems Pvt. Ltd. (Cont.)  Problems with this judgment 

Goes against previous favorable decisions under Indirect Tax – Refers almost exclusively to Income Tax cases in the context of ‘Fee for Technical Services’ (FTS) and labour law cases – no discussion on borrowing judgments from other laws which goes against various SC decisions

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Assessee had also relied upon the decision in Collector of Central Excise & Service Tax v. Nissin Brake India (P) Ltd 2019 (24) G.S.T.L. 563 (Tri. - Del.) which was affirmed by SC (no detailed order – but noted that no merit found in departmental appeal) – SC failed to deal with this despite recording Assessee’s submission

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Assessee had also argued that the salaries paid to the employees cannot be treated as a consideration for services, being mere reimbursement. While the argument was recorded, SC failed to give any findings on the same even though it is a settled proposition that reimbursement of expenses cannot form part of the value of services.

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No allegation that the secondment agreement was a ‘sham document’ – yet, under the garb of ‘substance over form’, other contracts (signed at different times) referred to the detriment of the Assessee. This goes against earlier SC decisions about giving primacy to contracts (unless ‘sham’ is alleged)

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Aspect of joint/dual employment of Seconded Employees not even analyzed – very pertinent from IDT perspective 

Draft CBIC circular (F. No. 354/127/2012-TRU) stated that where employee is employed by one or more employers who normally share the cost of such employment, the services provided by such employee will be covered by the employeremployee exclusion

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Eli Lily case quoted by Revenue itself notes joint employment

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Similar position in EU VAT too - guidelines issued by the HMRC on the Joint Employment of the employees, Para 3.2 of VAT Notice 700/34/05

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Action points Immediate review of secondment documents

Evaluating factual distinctions

Distinctions like:

 Reviewing inter-company services agreements, staff secondment agreements, assignment/ recommendation letters between seconded employees and the group entities to identify necessary amendments/ additional documentation in light of this judgment

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Clear case of joint employment

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Rights of the India entity to discipline/fire

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Rights of the India entity to select and appoint

Way forward options Advocacy/ representations

Trying for a re-look by a larger bench of SC

 To bring to life a version of the Draft CBIC circular (F. No. 354/127/2012-TRU) on joint employment

 This is clearly a long-shot

 Similar clarificatory circular was issued earlier after Fiat decision of SC to mitigate the width/impact of the decision

 This will be time-consuming

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 The problems highlighted earlier will need to be clearly highlighted to warrant a larger bench review  May be better to file a review petition 14

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