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GST Applicability on Freight Paid on FOB under Import of Crude (Non-GST product) and LPG (GST Product)

The Goods and Service Tax (GST) regime in India introduced a comprehensive tax structure that impacts various aspects of business transactions, including imports. Under the GST regime, Article 269A constitutionally mandates that supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or Of services, or both in the course of inter-State trade or commerce.

In accordance with Section 7(2) of the IGST Act, 2017, the supply of goods imported into the territory of India, till they cross the Customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce. So, import of goods or services will be treated as deemed inter-State supplies and would be subject to Integrated tax. While IGST on import of services would be leviable under the IGST Act, the levy of the IGST on import of goods would be levied under the Customs Act, 1962 read with the Custom Tariff Act, 1975.

Section 2(11) of the IGST Act, 2017 defines import of services as the supply of services where-

  1. the supplier of service is located outside India
  2. the recipient of service is located in India; and
  3. the place of supply of service is in India.

Further, as per Sr. No. 01 of NN 10/2017-ITR Dated 28th June, 2017, the import of services fall under the category of RCM and hence the importer of such services is liable to discharge liability under RCM with respect to the said import.

Ocean freight is a method of transport by which goods and cargo is transported by ships via shipping lines. Over 90% of all the world’s trade is carried by sea, and even more in some countries. Vide entry no. 9(ii) of NN 08/2017-ITR Dated 28th June, 2017, the rate at the rate of 5% is applicable on ocean freight.

The freight expenses borne in case of international trade can be categorised in the following two types as given below on the basis of transaction value:

  1. Based on CIF [Cash, Insurance and Freight] Value: No separate transportation charges are imposed on the importer by the supplier, then the value charged on the goods is called CIF value. The recipient of goods pays the amount mentioned in the invoice raised by the exporter.
  1. Based on FOB [Free on Board] value at the loading port: In case of FOB, the importer is responsible for paying the ocean freight cost separately once the goods are loaded into the ship at the seller’s designated port.

Further, clause (a) of Section 2(93) of the CGST Act, 2017 defines recipient as, “the person who is liable to pay the consideration, where such consideration is payable for the supply of goods or services or both.”

Upon reading the above, it is evident that in case of CIF transaction, the exporter who has entered into an agreement with the shipping line for transportation of goods and accordingly pays the freight is the recipient of services of such transportation of goods. Whereas, in case of FOB transaction, the importer who has on-boarded the ocean freight service provider and makes the payment for such transportation of goods to the service provider is the recipient of services under GST.

Sr. No. 10 of the NN 10/2017-ITR Dated 28th June, 2017 notified that with respect to services provided by a person located in the non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the Customs station of clearance in India, the tax would be payable by the importer on reverse charge basis. However, the said entry no. 10 has been omitted by NN 13/2023-ITR Dated 26.09.2023 w.e.f. 01.10.2023.

As already mentioned above, vide entry no. 01 of NN 10/2017-ITR Dated 28th June, 2017 that importer of services is liable to discharge taxes under RCM on the import of services. Thus, even after omission of Entry No. 10 of NN 10/2017-ITR Dated 28th June, 2017 , it can be said that the importer is liable to discharge taxes under RCM on FOB transaction vide Entry No. 01 of NN 10/2017-ITR Dated 28th June, 2017.

However, in case of CIF transaction, the contract is between the foreign supplier and the foreign shipping line. Indian importer is not a part of the transaction between the foreign shipping line and the foreign supplier. Further, the importer is liable to pay customs duty on the CIF value including the freight component of the imported goods. Therefore, levy of RCM on the CIF value would lead to double taxation on the freight element i.e., the first being IGST on a “service” under the reverse charge and second as customs duty on ‘goods’ imported.

Upon reading the entry no. 9(ii) of NN 08/2017-ITR Dated 28th June, 2017 with Sr. No. 01 of NN 10/2017-ITR Dated 28th June, 2017, it prima facie appears that can be inferred that RCM at the rate of 5% is applicable on ocean freight to be payable by the importer of such services.

Several important judgments have been delivered on the issue of the applicability of RCM on ocean freight, particularly in the context of imports on Cost, Insurance, and Freight (CIF) and Free on Board (FOB) terms. Let us now have a look at these judgements:

In the judgement of Hon’ble Supreme Court in the case of Union of India vs Mohit Minerals Pvt. Ltd. striked down the applicability of GST reverse charge on ocean freight in CIF imports. The Supreme Court of India ruled (Union of India vs Mohit Minerals Pvt. Ltd.) on 19 May 2022 that an Indian importer is not subject to reverse charge Integrated Goods and Services Tax (IGST) on payments for ocean freight made by a foreign seller to a foreign shipping line, since the importer already is required to pay IGST as a component customs duty, on the “Cost-Insurance-Freight” (CIF) value of the imported goods. The court upheld a 2020 decision of the Gujarat High Court.

Further, in case of Agarwal Coal Corporation (P.) Ltd. v. Assistant Commissioner of State Tax - [2024], it was the case of the Petitioner that was engaged in importing coal from various countries on FOB (Free on Board) and CIF (Cost, Insurance and Freight) basis. A show cause notice was issued by the department primarily relying on Notification No. 8/2017-Integrated Tax (Rate) dated 28-6-2017 levying IGST along with interest and penalty on the ocean trade service on FOB contracts.

It filed writ petition to challenge the show cause notice on the ground that the said notification was struck down by Division Bench of Gujarat High Court in case of Mohit Minerals (P.) Ltd. v. Union of India. The department contended that the said decision needed to be applied only in respect of cases involving contracts on CIF basis and not on FOB contracts.

The Hon’ble High Court noted that the case of Mohit Minerals (P.) Ltd. involved both categories of contract namely CIF and FOB and the said notification itself had been declared ultra vires and the same was also upheld by Supreme Court. Therefore, following the mandate of the settled principle of law, the notification was no manner available to the State Authorities to be applied as it would amount to applying an illegal notification. Thus, the Court held that the impugned notice was to be quashed and striking down of the notification would be applicable on FOB contracts.

In the matter of BLA COKE PVT. LTD. VERSUS UNION OF INDIA & ORS. – 2024 GUJARAT HIGH COURT, the Hon'ble Gujarat High Court has held that when the notification is invalidated, the authorities cannot enforce the levy of IGST on the ocean freight for transactions conducted on an FOB basis.

Thus, these judgements provide ample clarity to the importers that they are not liable to pay IGST on ocean freight under either CIF or FOB arrangements. The Hon’ble Supreme Court and High Court in their judgements have reinforced that, once a notification is declared ultra vires, it cannot be enforced, ensuring that laws are applied in accordance with judicial interpretations.

In light of the above legal provisions, explanations, notifications and judgements, let us now delve into the GST Applicability on Freight Paid on FOB under Import of Crude (Non-GST product) and LPG (GST Product):

Section 9 of the CGST Act, 2017 has elucidated the provisions for levy and collection under GST. As per sub-section (2) of Section 9 of the CGST Act, 2017,  the central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.

Hence, till now petroleum crude has been kept outside the ambit of GST and hence, it does not attract any GST implications. However, vide NN 1/2017-CTR Dated 28th June 2017, LPG has been made taxable under GST at 5% for domestic use and 18% for commercial use. Even though crude oil itself is exempt from GST, the freight charges for its import are subject to GST. Further, LPG is a taxable product under GST, and the freight charges on the import of LPG are subject to GST.

However, the decision of Gujarat High Court in the case of Agarwal Coal Corporation (P.) Ltd. v. Assistant Commissioner of State Tax and BLA COKE PVT. LTD. VERSUS UNION OF INDIA & ORS, points that no RCM is required to be paid on Freight Paid on FOB under Import of Crude (Non-GST product) and LPG (GST Product).

The rulings of Gujarat High Court have made it clear that importers are not liable to pay IGST on ocean freight under either CIF or FOB contracts. While crude oil remains outside the scope of GST and exempt from taxes, LPG is a taxable product, subject to IGST at 5% or 18%, depending on the use. However, irrespective of whether the goods are non-GST products like crude oil or GST products like LPG, the judgments clarify that reverse charge mechanism (RCM) does not apply to freight paid on FOB imports.

Author’s Comment:

The author holds the perspective that despite the omission of Entry No. 10 from Notification No. 10/2017-ITR, dated 28th June 2017, as well as the judgment by the Gujarat High Court in the case of Agarwal Coal Corporation (P.) Ltd. v. Assistant Commissioner of State Tax and BLA Coke Pvt. Ltd. v. Union of India & Ors., the importer remains liable to discharge the tax liability under the Reverse Charge Mechanism (RCM) on Free On Board (FOB) transactions, as per Sr. No. 01 of NN 10/2017-ITR Dated 28th June, 2017.

It is also anticipated that this issue is likely to lead to protracted litigation, given that the tax authorities are expected to continue insisting on the discharge of RCM liability in the case of FOB transactions. Given the ambiguity surrounding the application of RCM post the Gujarat High Court judgment, there is a high probability of further legal challenges and disputes regarding the enforcement of RCM liability.

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