Union Of India vs M/S Mohit Minerals Pvt. Ltd.

Union of India & Anr. ....Appellants

Versus

M/s Mohit Minerals Pvt. Ltd. Through Director .... Respondent

WITH

C.A. No. 1390/2022 With C.A. No. 1394/2022 With C.A. No. 1417/2022 With C.A. No. 1419/2022 With C.A. No. 1445/2022 With C.A. No. 1414/2022 With C.A. No. 1402/2022 Signature Not Verified With Digitally signed by Sanjay Kumar C.A. No. 1412/2022 With Date: 2022.05.19 17:36:53 IST Reason:

C.A. No. 1411/2022 With

1 C.A. No. 1413/2022 With C.A. No. 1415/2022 With C.A. No. 1418/2022 With C.A. No. 1420/2022 With C.A. No. 1446/2022 With C.A. No. 1447/2022 With C.A. No. 1409/2022 With C.A. No. 1416/2022 With C.A. No. 1395/2022 With C.A. No. 1407/2022 With C.A. No. 1406/2022 With C.A. No. 1398/2022 With C.A. No. 1401/2022 With C.A. No. 1391/2022 With C.A. No. 1403/2022 With C.A. No. 1393/2022 With C.A. No. 1410/2022 With C.A. No. 1405/2022 With C.A. No. 1397/2022 With C.A. No. 1404/2022 With C.A. No. 1400/2022 With C.A. No. 1396/2022

2 With C.A. No. 1408/2022 With C.A. No. 1399/2022 And With C.A. No. 1392/2022

3 JUDGMENT

Dr Dhananjaya Y Chandrachud, J

A Introduction ...........................................................................................................5

B Submissions .......................................................................................................12

B.1 Union of India ...............................................................................................12

B.2 Respondent-assessees................................................................................28

C Constitutional Architecture of GST .....................................................................52

C. 1 Legislative History of the Constitution Amendment Act 2016.......................56

C.2 The nature of the recommendations of the GST Council .............................75

D Analysis ..............................................................................................................92

D.1 Statutory Provisions and Scheme of the IGST Act.......................................92

D.2 Do the impugned notifications suffer from excessive delegation? .............104

D.3 Charging Section: taxable person, taxable rate and manner of determining value ...................................................................................................................108

D.4 Taxable event: Is an ocean freight transaction for import of goods a valid category of supply of services under Section 5(3) of IGST Act? .........................114

D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state supply or is it an extra-territorial tax?................................................................115

D.4.(b) Are importers service recipients under CIF contracts? .....................125

D.5 Applicability of Section 5(4) of IGST Act ....................................................135

D.6 Composite Supply and Issues of Double Taxation.....................................141

E Conclusion ........................................................................................................150

4 PART A

A Introduction

1 The Union of India1 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 Tax2 on

the component of ocean freight paid by the foreign seller to a foreign shipping line,

on a reverse charge basis.

2 The respondents import non-coking coal from Indonesia, South Africa and the

U.S. by ocean transport on a ‘Cost-Insurance-Freight’3 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’4 contract. In the case of a high seas sale

transaction, the coal is purchased from the original buyer before it arrives at Indian

ports.

1 “Union Government” or “Central Government” 2 “IGST” 3 “CIF” 4 “FOB”

5 PART A

3 Prior to the enforcement of the Goods and Services Tax5 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 20176 was issued by the Central Government on the

advice of the Goods and Services Tax Council7, in exercise of powers under Section

5(1), Section 6(1) and Section 20(iii)-(iv) of the Integrated Goods and Services Tax

Act 20178, read with Section 15(5) and Section 16(1) of the Central Goods and

Services Act9. 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.

4 On 28 June 2017, the Central Government issued Notification 10/201710.

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.

5 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

5 “GST” 6 “Notification 8/2017” 7 “GST Council” 8 “IGST Act” 9 “CGST Act” 10 “Notification 10/2017”

6 PART A

levied on goods imported into India on the value determined under Section 3 of the

Customs Tariff Act 197511 at the point when customs duties are levied on the goods

under Section 12 of the Customs Act 196212. 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.

6 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-

11 “Customs Tariff Act” 12 “Customs Act” 13 Collectively referred as “impugned notifications”

7 PART A

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.

7 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 credit14 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.

8 Under the existing GST regime (presently under challenge), taxability of

ocean freight under different situations is tabulated below :

Service Availed Shipping Legal Provision Implication

14 Interchangeably referred as “ITC”

8 PART A

Company

Import Indian Section 12(8) of Transaction is

the IGST Act - the liable for tax.

place of supply of Importer can claim

services shall be the amount paid as

the location of the tax as input tax

recipient credit

Export Indian Section 12(8) of Transaction is

the IGST Act - the liable for tax. The

place of supply of exporter can get

services shall be refund of input tax

the location of the credit used for

recipient. export.

Import Foreign Section 13(9) of Transaction is

the IGST Act - the liable for tax as the

place of supply of place of supply is

services of India. Tax will be

transportation of paid under reverse

goods shall be charge and can be

place of destination claimed as input

of such goods. tax credit.

9 PART A

Export Foreign Section 13(9) of Since the place of

the IGST Act - the supply will be

place of supply of outside India, the

services of transaction is not

transportation of liable for tax.

goods shall be

place of destination

of such goods.

9 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;

10 PART A

(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

11 PART B

(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.

B Submissions

B.1 Union of India

10 Mr N Venkataraman, learned Additional Solicitor General15 appearing on

behalf of the appellant – the Union of India – urged the following submissions:

A. Constitutional Architecture of IGST

(i) Under Article 286(2), Parliament is empowered to formulate inter alia the

principles for determining when a supply of goods or services takes place in

any of the ways mentioned in Article 286(1), which includes imports;

(ii) Article 269A enables the Union Government to levy GST on inter-state

supplies. The explanation to Article 269A(1) creates a deeming fiction that a

supply of goods or services in the course of imports is to be considered as a

supply of goods or services or both in the course of interstate trade;

(iii) Article 269A(5) enables Parliament to formulate the principles for determining

the place of supply and when a supply of goods and services or both takes

place in the course of inter-State trade or commerce. This constitutional

mandate finds legislative effect in the IGST Act;

15 “ASG”

12 PART B

(iv) As contemplated in Article 286(2) read with Article 269A(1), the IGST Act

enacts provisions relating to the levy and collection of integrated tax (Section

5(1)), export of goods [Section 2(5)], export of services [Section 2(6)], import

of goods [Section 2(10)], import of services [Section 2(11)], location of

recipient of services [Section 2(14)] and location of supplier of services

[Section 2(15)];

(v) In terms of Article 269A(5), the IGST Act contemplates provisions for

determining the nature of inter-State supply (Section 7), supplies in territorial

waters (Section 9), place of supply of goods imported into or exported out of

India (Section 11), place of supply of services where the location of supplier

and recipient is in India (Section 12) and place of supply of services where the

location of supplier and recipient is outside India (Section 13).

B. Charging Section

(vi) The charge created by Section 5(1) of the IGST Act can extend to an ocean

freight transaction to be taxed in the hands of the importer. This creation of a

charge is in compliance with the essential components of taxation identified

by a Constitution Bench in Mathuram Agrawal v. State of Madhya

Pradesh16 and further elaborated on by this Court in Gobind Saran Ganga

Saran v. Commissioner of Sales Tax17.

16 1999 (8) SCC 667 (“Mathuram Agrawal”) 17 AIR 1985 SC 1041 (“Gobind Saran Ganga Saran”)

13 PART B

(vii) The four fundamental principles of a taxing enactment are: the taxable event,

the person on whom the levy is imposed, the rate at which the levy is imposed

and the measure or the value to which the rate will be applied;

(viii) Section 5(1) fulfils the above components of taxation:

• Taxable event  “There shall be levied a tax called integrated goods

and services tax on all inter-State supplies of goods or services or both

except on the supply of alcoholic liquor for human consumption.”

• Taxable value  “On the value determined under Section 15 of the

CGST Act”

• Taxable rate  “At such rates not exceeding 40% as may be notified

by the Government on the recommendations of the Council and

collected in such manner as may be prescribed”

• Taxable person  “Shall be paid by the taxable person”

C. Concept of Reverse Charge

(ix) Section 2(98) of the CGST Act defines “reverse charge” to mean the liability

to pay tax by the recipient of supply of goods or services or both instead of

the supplier of such goods or services or both under sub-Section (3) or sub-

Section (4) of Section 9 of the CGST Act or under sub-Section (3) or sub-

Section (4) of Section 5 of the IGST Act. The impugned notifications are

issued in exercise of the powers of the Union Government vested by the

aforesaid sections of the IGST Act or the CGST Act;

14 PART B

(x) A person covered by reverse charge becomes a taxable person in terms of

Section 2(107) of the CGST Act read with Section 24(iii) of the CGST Act.

Pertinently, Section 24(iii) of the CGST Act employs the language of “persons

who are required to pay tax under reverse charge” and not “persons who are

recipient of services under Section 2(93) of the CGST Act 2017”;

(xi) Section 5(3) of the IGST Act and Section 9(3) of the CGST Act permit the

Government, on the recommendation of the GST Council, to specify the

categories of goods or services or both, the tax for which shall be paid on

reverse charge basis by the recipient of such goods or services or both;

(xii) Presently, neither the provisions nor the rules have identified the taxable

persons for reverse charge. Hence, the impugned notifications are a

legitimate exercise of delegated legislation. Notification 10/2017 identifies an

importer as a recipient for the purposes of reverse charge. The power to issue

such a notification can be traced back to Sections 5(3) and 5(4) of the IGST

Act;

D. Inter-state supply and Place of Supply

(xiii) The import of service in this case is an inter-state supply in terms of Section

7(4) read with Section 13(1) and 13(9) of the IGST Act. Although the

contracting parties are foreign, the critical limb of the transaction happens in

the taxable territory, namely, India. Hence, the transaction can also fall under

Section 7(5)(c) read with Section 13(1) and Section 13(9) of the IGST Act;

(xiv) Section 13(9) of the IGST Act stipulates that the place of supply of services of

transportation of goods other than by way of mail or courier shall be the place 15 PART B

of destination of such goods. Even though the contracting parties – the

foreign shipping line and the foreign exporter – are outside the territory of

India, the provision of service is for the Indian importer and consequently the

consumption and exhaustion of service which is a critical limb, both

commercially and legally, happens only in the hands of the Indian importer;

E. Time of Supply

(xv) Section 13(5) of the CGST Act contains a residual provision for determining

time of supply to be the date on which the tax is paid. Since the other sub-

sections in Section 13 are not applicable for construing the time of supply,

Section 13(5) of the CGST Act would be applicable;

F. Composite Supply

(xvi) The CIF transaction and IGST on ocean freight are two independent

transactions, entitled to suffer independent levies and do not qualify as a

composite supply under Section 2(30) of the CGST;

(xvii) GST and customs duties are not exclusive means of taxation. GST is a

destination-based tax. The integrated tax is being sought to be imposed on

the supply of service and not on the goods. Separate aspects are being

taxed, hence it cannot be termed as overlapping. Moreover, the tax is on the

value of goods, and not the freight. Tax paid at an anterior stage is not double

taxation if it is included in the overall value;

(xviii) The discharge of reverse charge taxation does not make two independent

contracts as a composite contract. The contract between the foreign shipping

16 PART B

line and the foreign exporter is distinct and independent of the contract

between the foreign exporter and the Indian importer. Their concomitance

does not make them composite;

(xix) What is sought to be taxed on the supply of goods on CIF value basis is

traceable to the proviso to Section 5(1) read with Sections 3(7) and 3(8) of the

Customs Tariff Act. On the other hand, what is sought to be taxed under IGST

on reverse charge basis derives power under Section 5(1) (taxable person)

read with Section 24(iii) of the CGST Act and Section 5(3) of the IGST Act

and the impugned notifications;

(xx) A Constitution Bench of this Court in McDowell and Company Ltd. v.

Commercial Tax Officer18 has held that a single element can constitute the

basis of a levy and can also form part of the value for another transaction.

This cannot be termed as double taxation.

G. Extra-territoriality

(xxi) There is sufficient territorial nexus for the purpose of taxation since the

importer is the final beneficiary of a service provided by a foreign shipping line

by way of transportation up to the customs station of clearance in India. The

transaction between the foreign exporter and the foreign shipping line has a

nexus to the taxable territory of India. The importer is the beneficial owner of

the goods at the time of clearance. The appellant relies on the decisions of

this Court in M/s Electronic Corporation of India v. Commissioner of

18 1985 (3) SCC 230 [“McDowell”]

17 PART B

Income Tax19 and GVK Industries v. Income Tax Officers20 where this

Court has upheld taxing statutes having a territorial nexus to India;

H. Service recipient

(xxii) There are six reasons to term an Indian importer as the recipient of service:

(a) Section 2(93)(c) of the CGST Act envisages a recipient of an intangible

service as one who does not pay consideration. In CIF transactions, the

Indian importer does not pay for ocean freight and yet receives the benefit

of transportation;

(b) Section 2 of the CGST Act is prefaced with “In this Act, unless the context

otherwise requires” which warrants a broad interpretation of statutory

definitions therein;

(c) Section 24(iii) read with Section 2(98) of the CGST Act, read with Section

5(3) of the IGST Act and the impugned notifications issued thereunder,

allow any person to become a taxable person and such a taxable person

becomes the recipient of supply of goods or services or both. Once ‘any

person’ is identified as a taxable person for reverse charge under a

notification issued under 5(3) of IGST Act, by sheer default of the definition

of reverse charge under Section 2(98) of the CGST Act, such a taxable

person on reverse charge becomes a service recipient;

(d) Section 5(3) of the IGST Act clearly enables the identification of service

recipients, and not just categories of goods or services or both. Any

19 1989 Supp 2 SCC 642 20 2011 (4) SCC 36 [“GVK Industries”]

18 PART B

contrary interpretation would be against the legislative intention. On a

conjoint reading of Section 5(3) of the IGST Act read with Section 2(93) of

the CGST Act, a service recipient can be identified through a notification;

(e) The definition of “supply” without consideration under Section 7(c) of the

CGST Act is not an exhaustive definition. Further, Section 2(31) of the

CGST Act defines consideration and does not restrict its payment to only

the owner of such goods and services; and

(f) Section 2(93)(c) of the CGST Act reads “..and any reference to a person to

whom a supply is made, shall be construed as a reference to the recipient

of the supply…”. A supply can be made to ‘a person’, ‘a registered person’

and ‘a taxable person’ and such a supply shall be construed to be a supply

to a recipient. Since the Indian importer would qualify under all the

aforementioned categories, it can be termed as recipient of the service.

I. Applicability of Section 5(4) of the IGST Act

(xxiii) In the alternative, the impugned notifications would be saved by Section 5(4)

of the IGST Act which permits the Union Government, on the

recommendations of the GST Council, to specify a class of registered persons

who shall in respect of specified categories of goods or services or both

received from an unregistered supplier, pay the tax on reverse charge basis

as the recipient and all the provisions of the Act would apply to such a

recipient;

(xxiv) It is admitted that the impugned notifications do not refer to Section 5(4) of the

IGST Act. However, it is settled law that once a power is available to grant or

19 PART B

identify the taxable person, taxable event, rate and measure, non-reference of

the source of power will not vitiate its exercise and application in given facts

and circumstances of the case;

J. Parliamentary legislation v. Excessive delegation

(xxv) This Court in Municipal Corporation of Delhi v. Birla Cotton Spinning and

Weaving Mills21 and Avinder Singh v. State of Punjab22 has held that only

essential legislative functions, such as policy guidelines and framework, need

to be performed by Parliament and the state legislatures. Once these are

made available through the exercise of plenary power, the rest of the details

can always emerge through the exercise of delegated powers;

(xxvi) The constitutional mandate of Articles 269A and 286 finds effect under the

IGST Act. The IGST Act, and specifically Section 5(1) therein, has defined the

subject matter of taxation (inter-state supply of goods and services), the

taxable person under Section 2(107) read with Section 24(iii) of the CGST

Act, a maximum cap of 40 per cent and determination of taxable value in

terms of Section 15 of the CGST Act. Only the identification of the taxable

person is delegated to the Union Government which makes its decisions on

the basis of the recommendations of the GST Council;

K. GST Council recommendations- Cooperative federalism and collaborative

federalism

21 1968 (3) SCR 251 22 1979 (1) SCC 441

20 PART B

(xxvii) GST is a consumption tax and the tax jurisdiction extends to the place the

supply is consumed. Since the foreign shipping line or foreign exporter are

located in a non-taxable territory, the Indian importer has to be taxed on a

reverse charge basis since the service is consumed in India. The purpose is

to make the Indian shipping lines as competitive as foreign shipping lines. ITC

is available to the importer and the tax paid on such a reverse charge can be

offset in the importer’s output tax liability. Therefore, there is no additional

burden on the importer- it is a mere alteration of the mechanism;

(xxviii) The integrated tax was essential to level the playing field between foreign

shipping lines and Indian shipping lines since the former were not required to

charge any tax on the recipient of supply of service;

(xxix) The spirit of the cooperative federalism must guide the functioning of the GST

Council as envisaged in Article 279A(6). This was espoused by this Court in

Union of India v. VKC Footsteps India Private Limited23 where it was held

that there is a need for a harmonised structure of goods and service tax. The

GST Council is empowered to decide on every aspect of the GST law. The

recommendations of the GST Council are binding on the executive and the

legislature-while it frames laws relating to GST by the power under Article

246A;

(xxx) The GST Council recommends the law, rules and notifications through a

voting architecture that is prescribed in Article 279A(6) and quorum

23 (2022) 2 SCC 603 (“VKC Footsteps”)

21 PART B

requirements in Article 279A(7). Every decision flows from one common

source;

(xxxi) The GST Council is the only constitutional body which acts as a converging

point or a platform for both the federal units to work in a harmonious manner

in structuring the goods and service tax, in the process of developing a

harmonised national market for goods and services;

(xxxii) Article 246A states that the power to legislate GST laws is only with the Union

of India and the States. Neither can Article 279A override Article 246A nor can

Article 246A be made subject to Article 279A. Judicial interpretation must

strike a harmony such that Parliament, the state legislatures and the GST

Council work in unison and harmony; and

(xxxiii) The constitutional scheme therefore envisages a two-step process. At the first

level of the GST Council, Article 279A(6) envisages cooperative federalism

and in the absence of either a non obstante clause in Article 279A or a

‘subject to’ clause in Article 246A, the need or requirement is that both the

Union and the States should be supportive of this cooperative federalism

through the process of collaborative federalism; and

(xxxiv) Section 5(1) of the IGST Act, by design, chooses to delegate certain

functions to the GST Council in order to achieve the legislative object. Even

though Article 246A does not subject Article 246A to Article 279A, the Union

and States after exercising their legislative power and discretion under Article

246A(1) have agreed to go by the recommendations of the GST Council in

every aspect of the GST law wherever required. This is the spirit of 22 PART B

collaborative federalism which must be respected by upholding the

constitutional validity of the impugned notifications.

11 The learned ASG has urged the following supplementary submissions by way

of rejoinder:

(i) The purpose of the integrated tax is to introduce a level playing field between

foreign shipping lines and Indian shipping lines. It is a settled principle that to

tax one subject, the revenue does not have to tax everything;

(ii) The respondents have contended that the tax on an Indian importer is on a

reverse charge basis, and therefore the importer does not fall under the

definition of a ‘taxable person’. However, Section 2(107) of the CGST Act

defines a taxable person as any person registered or liable to be registered

under Section 22 or Section 24 of the CGST Act. Section 24 classifies

persons liable for compulsory registration, and Section 24(iii) includes persons

governed by the reverse charge mechanism;

(iii) In Laghu Udyog Bharati v. Union of India24, this Court struck down the

imposition of service tax on a reverse charge basis since the legislature had

failed to identify the persons on whom service tax could be imposed, enforced

and collected. However, Section 2(107) read with Section 24(iii) of the CGST

Act specifically identifies the importer as a taxable person who is liable to pay

tax on a reverse charge basis. Section 24(iii) of the CGST Act also defines

persons liable to pay tax on reverse charge as taxable persons;

24 1999 (6) SCC 418 (“Laghu Udyog”)

23 PART B

(iv) The respondents have argued that under Section 5(1) of the IGST Act, the

taxable value can be determined only through Section 15 of the CGST Act

and its corresponding rules. It was contended that Notification 8/2017

prescribes the valuation of 10% of CIF value for the first time, which violates

Section 5(1) of the IGST Act. The appellant submits that in terms of Section

15(4) and Section 15(5) of the CGST Act, Rules 27 to 31 of the Central Goods

and Service Tax Rules 201725 have been formulated. The Revenue can also

assess the transaction by taking aid of a residual method prescribed under

Rule 31 of the CGST Rules. Any discretion vested in quasi-judicial authorities

must be regulated. The corrigendum dated 30 June 2016 amending

Notification 8/2017 and prescribing the methodology for determining valuation

can be read as a guideline for dealing with infirmities in assessment practices.

It is only a reference or a guideline for making assessments. Even if it were to

be held inapplicable, the revenue can assess the transaction under Rule 31 of

the CGST Rules. Thus, Notification 8/2017 does not impinge on Rule 31 of

the CGST Rules but only aids uniformity;

(v) The respondents rely on Section 2(87) of the CGST Act and Section 5 of the

IGST Act to argue that prescription can only be through rules, and not

notifications. However, Section 15(1), (2) and (3) of the IGST Act prescribes

values. Section 15(4) and 15(5) of the IGST Act deals with cases where the

valuation cannot be determined under Section 15(1). Rule 31 of the CGST

25 “CGST Rules”

24 PART B

Rules also enables the valuation to be conducted through “reasonable

means”. Thus, delegation is envisaged in the statutory mechanism;

(vi) If the expression “by the recipient” is to be given a static meaning as those

falling under Section 2(93) of the CGST Act, then one would be denuding the

power to notify persons for reverse charge under Sections 5(1) and 5(3) of the

IGST Act read with Section 24(iii) of the CGST Act.

(vii) Alternatively, the concept of reverse charge and notifying persons liable for

reverse charge is envisaged in the statutory mechanism. Section 2(98) of the

CGST Act defines reverse charge as imposed “only on the recipient”. Section

2(93) of the CGST Act defines a recipient. An Indian importer can be a

recipient in six ways that have been elaborated in the submissions. The Indian

importer does not pay any consideration of service in CIF imports since

consideration is paid by the foreign exporter. Section 2 is illustrative and not

rigid. A “person”, as defined under Section 2(84), is deemed to be the

recipient of a service if such person satisfies the conditions under 2(93) of the

CGST Act. Section 5(3) of the IGST Act contemplates the applicability of all

provisions of the Act to the recipient. The fact that consideration is paid by the

foreign exporter to the foreign shipping line does not vitiate the IGST Act’s

scheme which enables payment of tax on a reverse charge basis;

(viii) Section 13(9) of the IGST Act states that the destination of the goods shall be

the place of supply, which is on Indian territory. This Court in Union of India

25 PART B

v. Jalyan Udyog26 has held that deeming fictions can be created even by the

executive, i.e. through delegated legislation.

(ix) In case of a foreign exporter and a foreign shipping line, there is a nexus with

India since the importer would be Indian. Forward charge taxation is

envisaged in direct tax. Section 9(1)(6) of the Income Tax Act 1961 taxes a

non-resident outside India since the income is generated in India;

(x) The decision of this Court in BSNL v. Union of India27 on double taxation has

no applicability to this case since that was on the question of the overlap of

VAT and service tax in the pre-GST regime and was decided on the ground of

the impingement on the exclusive domain of the Union to impose service tax

under Entry 97, List I;

(xi) In the alternative, the integrated tax derives authority from Section 5(4) of the

IGST Act which permits the government to specify a class of registered

persons who receive goods or supplies from an unregistered supplier, who

shall pay the tax on a reverse charge basis as the recipient. If this section is

deemed applicable, then the importers would be liable for tax with effect from

1 February 2019, though exempted for the period from 13 October 2017 till 31

January 2019;

(xii) The creation of the GST Council under Article 279A embodies the spirit of

collaborative federalism. The GST Council is constitutionally mandated,

26 1994 (1) SCC 318 27 2006 (3) SCC 1 (“BSNL”)

26 PART B

particularly under Article 279A(6), to promote harmony and alignment

amongst the federal partners;

(xiii) Under Article 279A(4), decisions of the GST Council transform into

recommendations to the Unions and the States. The GST Council is the only

constitutional body that acts as a converging space or platform for the federal

units to work in a harmonious matter. The principal function of the GST

Council is to take decisions, which are conveyed as recommendations. These

recommendations have a unique constitutional status and they are overridden

in exceptional circumstances;

(xiv) It was contended by the respondents that instead of course correcting the

input tax mechanism, the revenue has chosen to tax the Indian importer on

reverse charge. This is more a policy than a perceptional issue. As long as

the tax is legal and valid, the manner and mode of taxation need not be

questioned. A better manner and mode would not result in the exercise of

legislative discretion being declared to be invalid or illegal; and

(xv) The integrated tax was introduced to ensure a level playing field between

foreign and Indian shipping lines. This objective must be appreciated while

determining constitutionality.

27 PART B

B.2 Respondent-assessees

12 Mr V Sridharan, learned senior counsel appearing on behalf of the

respondents28 has urged the following submissions:

(i) Under Section 5(4) of the IGST Act, the Government cannot specify the

person liable to pay service tax on a reverse charge basis:

(a) Section 5(3) of the IGST Act provides that the Government may specify

the categories of supply of goods or services or both on which the tax

shall be paid on reverse charge basis by the recipient of the goods or

services. Thus, the power under Section 5(3) is only to specify the

categories of supply, while the liability to pay tax is fixed on the

recipient. The Government cannot specify the person liable to pay tax

on reverse charge basis under Section 5(3);

(b) Notification 10/2017 has been issued under Section 5(3) of the IGST

Act. Since the power flows from Section 5(3), the Government can by a

notification only specify the ‘categories of supply’, as the liability for tax

has been determined by Parliament;

(c) In contrast with Section 5(3), prior to the introduction of GST, Section

68(2) of the Finance Act 1994 provided that the service tax shall be

paid by “such person…as may be prescribed”. In that case, the liability

of tax was not determined by the legislation;

28 In SLP(C) No. 3081 of 2021, SLP(C) No. 1625 of 2021 and SLP(C) No. 3760 of 2021

28 PART B

(d) Under the CGST Act and the IGST Act, the only place where a person

other than a supplier or recipient is made liable to pay tax is under

Section 5(5) of the IGST Act, where an electronic commerce operator

through whom supply is made is taxed; and

(e) In case the Parliament desired the tax to be collected from a person

other than a supplier or recipient, it would have expressly provided so

in the legislation. Since Parliament has specified the person liable for

tax, it is not a matter to be governed by delegated legislation;

(ii) Section 2(98) of the CGST Act defines ‘reverse charge’ as the liability to pay

tax by the recipient of supply of goods or services or both instead of the

supplier of such goods or services or both. In other words, only the recipient

can be made liable to pay tax under reverse charge basis and the reverse

charge cannot be disintegrated from the recipient of supply;

(iii) Section 5(3) clearly stipulates that (i) the tax shall be paid on a reverse charge

basis and (ii) the tax is payable by the recipient;

(iv) GST laws contemplate only one recipient for one supply:

(a) The interpretation of the ASG that the foreign exporter is the recipient

under clause (a) of Section 2(93) of the CGST Act and the Indian

importer is the recipient under clause (c) of Section 2(93) of the CGST

Act leads to absurdity;

(b) Under Section 2(93) of the CGST Act, a ‘recipient’ is defined with

reference to three situations- (a) where consideration is payable for the

supply of goods or services or both, (b) where no consideration is 29 PART B

payable for the supply of goods and (c) where no consideration is

payable for the supply of a service. Clauses (a), (b) and (c) of Section

2(93) are mutually exclusive and cannot apply simultaneously. In case

the supply of goods or services is for consideration, clause (a) applies

and the recipient is the person who is liable to pay the consideration;

(c) The question of who is the beneficiary of the supply or who has

received the supply are irrelevant in determining the ‘recipient’ under

Section 2(93) of the CGST Act;

(d) Whether a supply of service is an ‘inter-state supply’ under Section 7(3)

or ‘intra-state supply’ under Section 8(2) of the IGST Act depends on

the location of the supplier and the place of supply. In case there are

two recipients of a single supply, as argued by the ASG, then the

transaction may become inter-state as well as intra-state supply. Such

a situation has not been envisaged by Parliament;

(e) Only the recipient of the supply is entitled to avail input tax credit. In

case there are two recipients of a single supply, two persons will be

allowed to avail credit of tax by the supplier;

(f) The rate of tax is often dependent on the recipient of the supply. For

instance, services supplied to Government, local authorities or

charitable institutions, are exempted or liable to a lower rate of tax. If

there are two recipients, this would result in an anomaly; and

(g) Even in case of a three-party transaction involving supply of goods,

Section 10(1)(b) of the IGST Act provides that the place of supply of 30 PART B

goods is the principal place of business of the recipient, and not the

person to whom the goods are delivered;

(v) The last leg of Section 2(93) of the CGST Act does not create a separate

category of recipient:

(a) Section 2(93) provides three categories of recipients, namely, where

consideration is payable for supply of goods or services; where no

consideration is payable for supply of goods; and where no

consideration is payable for supply of services;

(b) Section 2(93) also provides that any reference to a person to whom

supply is made shall be construed as a reference to the recipient of

supply and shall include an agent acting on behalf of the recipient; and

(c) The above provision implies that if the Act does not use the term

‘recipient’ but makes a reference to the person to whom supply is

made, then they shall be construed as a ‘recipient’. It does not

however, create a new category of recipient.

(vi) The taxable event for levy of GST is ‘supply’ of goods or service. In the

absence of supply, no tax can be levied under IGST, CGST or State Goods

and Services Tax Act29:

(a) Article 366(12A) of the Constitution defines the ‘goods and services tax’

as the tax on ‘supply’ of goods or services or both;

29 “SGST”

31 PART B

(b) Section 5 of the IGST Act, which is the charging section for levy of tax,

also states that the IGST will be levied on all inter-State ‘supplies’ of

goods or services or both; and

(c) Each transaction has to be evaluated independently to determine its

taxability. The transaction of supply takes place between the

contracting parties, that is, at whose instance the supply is made;

(vii) The CGST Act does not envisage a taxable supply without consideration,

other than those specified in Schedule I:

(a) Clause (a) of Section 7(1) of the CGST Act defines the term ‘supply’ as

all forms of supply of goods or services made for a consideration in the

course of or in furtherance of business. Clause (b) of Section 7(1) of

the CGST Act provides that import of service for a consideration will be

included in the term ‘supply’ even if it is not made in the course or

furtherance of business. Clause (c) provides that activities specified in

Schedule I will be included in the term ‘supply’ even if they are made

without consideration;

(b) Clause (a) requires two conditions to be satisfied: (i) that the activity

has been made in the furtherance of business and (ii) made for a

consideration. In clause (b), the condition of the supply being made in

the course of business is absent. In clause (c), the condition of supply

being made for a consideration has not been incorporated but this only

for activities provided in Schedule I; and

32 PART B

(c) The argument that supplies can be made without consideration for

activities other than those specified in Schedule I would make clause

(c) of Section 7(1) redundant.

(viii) Notification 10/2017 cannot be sustained under Section 5(4) of the IGST Act:

(a) The unamended Section 5(4) of the IGST Act provides that integrated

tax in respect of supplies made by an unregistered supplier to a

registered person shall be paid by such person on reverse charge

basis as a recipient of supply;

(b) The section was a standalone section, operating on its own, and did

not require anything to be specified by way of a notification. Thus,

Notification 10/2017 cannot be sustained under Section 5(4);

(c) Pursuant to the Goods and Services Tax (Amendment) Act 2018,

Section 5(4) was amended w.e.f. 1 February 2019 to provide that the

Government may, based on the recommendations of the GST Council,

by notification, specify a class of registered persons who shall, in

respect of supply of specified categories of goods or services or both

received from an unregistered supplier, pay the tax on reverse charge

basis as the recipient;

(d) The reliance placed by the Government on the amended Section 5(4)

of the IGST Act to justify Notification 10/2017 is erroneous as:

• There was no power to issue a notification specifying the class of

registered person liable to pay tax under reverse charge basis

under Section 5(4) at the time when the impugned notification was 33 PART B

issued on 28 June 2017. The power has been granted by

amendment w.e.f. 1 February 2019;

• Section 2(93) of the CGST Act provides that any reference to a

person to whom supply is made shall be construed as reference to

the recipient of supply. Thus, the person under Section 5(4) who

has received the supply is the recipient of the supply. Even after

the amendment of Section 5(4), only the recipient can be specified

as a person liable to pay tax; and

• Section 2(98) of the CGST Act defines ‘reverse charge’ as the

liability to pay tax by the recipient of the supply instead of the

supplier. Thus, only the recipient can be made liable to pay tax on

a reverse charge basis;

(ix) Section 13(9) of the IGST Act is only relevant to determine the place of

supply and not the recipient of supply. Whether the supply of service is an

export of services under Section 2(6)(a) of the IGST Act or an import of

services under Section 2(11), read with Section 7(4) of the IGST Act; or an

inter-State supply of service, is not determined by Section 13(9);

(x) Notification 10/2017 has been issued on the recommendation of the GST

Council under Section 5(3) of the IGST Act and not under Article 279A of the

Constitution. If the GST Council intended to make a recommendation

deeming the importer as recipient of supply, then the proper course of

34 PART B

implementation would be to make an amendment in the IGST Act and seek

Parliamentary approval;

(xi) The objective of the tax or levy cannot validate an ultra vires levy:

(a) The Government has contended that the levy of tax on services of

transportation of goods into India provided by a person in a non-taxable

territory to a person in a non-taxable territory, has been introduced to

create parity for Indian shipping lines with foreign shippers;

(b) The notification for the levy and reverse charge has been lifted from the

erstwhile service tax regime into the GST regime without considering

the changes in language in Section 5(3) of the IGST Act as opposed to

Section 68(2) of the Finance Act 1994. Thus, the notification is ultra

vires the Act;

(xii) The scheme of IGST Act does not envisage a person other than the supplier

or the recipient as a person liable to pay tax:

(a) The time of supply of services is determined according to Section 20 of

the IGST Act along with Section 12 and 13 of the CGST Act. Section

12 deals with the time of supply of goods and Section 13 deals with the

time of supply of services;

(b) Section 13(1) states that the liability to pay tax on services arises at the

time of supply. Sub-section (2) determines the time of supply on

forward charge basis. Sub-section (3) deals with time of supply when

tax is payable on reverse charge basis. Under this sub-section, time of

supply of services is the earliest date of payment entered in the books 35 PART B

of accounts of the recipient or the date of debit in the bank account or

sixty days from the date of last issue of invoice by the supplier. Thus, a

person other than a recipient cannot determine the time of supply;

(c) Section 13(5) of the CGST Act is only relevant for determining the time

of supply in case of clandestine supply or evasion of tax and cannot be

used to determine time of supply for ocean freight services;

(d) The provisions relating to filing of returns apply whether a person is a

supplier or a recipient of supply, or apply only to an outward supply and

an inward supply. The supply of ocean freight service is neither an

inward supply nor an outward supply;

(xiii) In case of CIF contracts, the customer contracts for a supply of delivered

goods at the port of destination. The contract for transportation of goods is

entered into by the foreign exporter with the foreign shipper. Thus, the person

liable to pay consideration to the foreign shipper is the foreign exporter. The

importer of goods in India is not the person liable to pay the consideration,

and is thus, not the ‘recipient’ of the service;

(xiv) The contract of the Indian importer with the foreign exporter is for supply of

delivered goods. The service of transportation is a component of the supply of

goods similar to raw material, manufacturing cost or employee cost of the

supplier. To contend that the purchaser has received the supply of raw

material or the services of an employee is illogical. Similarly, the argument

that the Indian importer has received transportation services is irrational; and

36 PART B

(xv) Serial No. 9(ii) of Notification 8/2017 read with Para 4 and Serial No. 10 of

Notification No. 9 of 2017-Integrated Tax (Rate) dated 28 June 2019 describe

the services as provided by a person located in a non-taxable territory to a

person located in a non-taxable territory. These notifications recognise the

exporter as the recipient of the service of ocean freight;

(xvi) The argument of the ASG that the IGST paid on goods at the time of import is

a customs duty and not a tax, and thus, there is no dual levy of tax recovered

on ocean freight from the exporter is erroneous:

(a) The present case involves outright purchase of goods and thus, it is a

supply of goods under GST and an import of goods according to

customs law. The issue is whether the transaction is an import of goods

under customs law, but a supply of service under GST law;

(b) Section 5(1) of the IGST Act is the charging section. The proviso to

Section 5(1) states that integrated tax on goods imported into India

shall be levied and collected in accordance with Section 3 of the

Customs Tariff Act on the value as determined under the Customs

Tariff Act and at the point when duties of customs are levied under

Section 12 of the Customs Act;

(c) Section 3(7) of the Customs Tariff Act provides that any article

imported into India shall, in addition, be liable to integrated tax;

(d) Both the proviso to Section 5(1) of the IGST Act and Section 3(7) of the

Customs Tariff Act provide that goods imported into India shall be liable

to integrated tax; 37 PART B

(e) The contention that the proviso to Section 5(1) of the IGST Act does

not contain the word ‘supply’ and thus, the tax is imposed on import of

goods irrespective of whether the transaction is supply or not, is

erroneous;

(f) The absence of the word ‘supply’ in the proviso will not lead to an

extreme result that the transaction of import of goods becomes leviable

to IGST even if it is not supply;

(g) The CGST Act has at various instances, such as Section 11(1), Section

12(1), Section 13(1) and Section 49(9), omitted the word ‘supply’ and

merely mentioned the liability to pay tax on goods or services;

(h) The proviso under Section 5(1) of the IGST Act read with Section 3(7)

of the Customs Tariff Act implies that the tax is leviable only on supply

of goods imported into India;

(i) The amount collected as IGST on import of goods is apportioned

between the Union and States as per Article 269A of the Constitution

which provides for apportionment of GST on inter-state supply of goods

or service. If import IGST was a customs duty, then the revenue

proceeds would be distributed in accordance with Article 270 of the

Constitution;

(j) At the introduction of GST, the understanding of the Government was

in consonance with the above legal position and accordingly, the

Government issued a notification exempting goods and services

imported from an SEZ unit or developer under the IGST Act. 38 PART B

Subsequently, the Government rescinded the above exemption

notifications and issued separate notifications under the Customs Act

and IGST Act; and

(k) The Government has also issued various notifications exempting

payment of IGST in case of import of goods on lease or temporary

import basis. The intention of Government is not to impose IGST in

case of import of goods that do not amount to supply.

13 Mr Harish Salve, learned senior counsel, appearing on behalf of the

respondent30 has submitted:

(i) A CIF contract is an inclusive price covering cost of goods, insurance and

freight payable for carriage of goods to the destination specified in the

contract. The essence of the contract is that a seller having shipped the

goods in accordance with the contract, can fulfil his part of the bargain by

tendering to the buyer the proper shipping documents. If he does this, he is

not in breach even if the goods are lost before such tender. In the event of a

loss, the buyer must pay the price on tender of documents and his remedies

lie against the carrier but not the seller;

(ii) A CIF contract has two components: (i) price is paid for the freight, and (ii) the

buyer is never obligated to pay it. The owner of the vessel who enters into a

contract of affreightment has a privity of contract with the supplier of goods

30 CA No. 13958 of 2020

39 PART B

and is rendering a service to the supplier. If the service is not received, then

the question of reverse charge does not arise;

(iii) Sections 5(3) and 5(4) of the IGST Act are merely machinery provisions for

collection of tax, and not the charging provision:

(a) Section 5(1) is the charging section which levies IGST. Since there is

no separate levy under Section 5(1) on ocean freight, as it is an import

of goods which already suffers IGST on CIF value, the question of

reverse charge does not arise;

(b) The proviso to Section 5(1) clarifies that the ‘value as determined’ is

only the measure of tax and not the subject of tax; and

(c) Section 5(3) cannot be treated as the charging section as it would

make it possible for the Government to impose separate taxes under

Sections 5(1) and 5(3) and charge for the services at both ends;

(iv) There must be a taxable event in the CIF contract of the kind contemplated

under the IGST Act. In case there is no such event, it cannot be created

through delegated legislation by the GST Council. There is an absence of a

statutory fiction by which a CIF contract can be split into a contract for supply

of goods and services, and creating a second layer of fiction by which the

shipper is rendering a service to the supplier of goods. Thus, the question of

levy of tax by the GST Council does not arise;

(v) In the transaction of import of coal on CIF basis in the present case, the

recipient will fall under clause (a) of Section 2(93) of the CGST Act as

consideration is payable for the service of shipping. The mere fact that an 40 PART B

Indian is the recipient will not lead to the Indian recipient making the payment

separately under the contract of affreightment. The Indian recipient is only a

recipient of goods, not of service;

(vi) The law recognises and maintains the integrity of a CIF contract under

Section 2(30) read with Section 2(93), and Section 8. These sections maintain

the integrity of a composite contract by providing that where the goods come

with insurance and freight, the tax is imposed only on supply of goods;

(vii) The High Court has held that that the notifications under challenge were ultra

vires. The Government has not urged that any of these findings are incorrect

and has only contended that Section 5(1) of the IGST Act satisfies all

ingredients of a valid tax law;

(viii) Notification 8/2017 is ultra vires the IGST Act. Section 5(1) of the IGST Act

only empowers the issuance of notifications for rates and requires other

provisions to be prescribed. Section 5(1) does not empower the Government

to define ‘description of service’ which is an essential legislative function;

(ix) Entry 9(ii) of Notification 8/2017 imposes a tax on ocean freight in import of

goods. Such a power however, has not been provided in the statute;

(x) Para 4 of Notification 8/2017 determines the ‘value of service’ as 10% of the

CIF value, which is contrary to Section 15(1) of the CGST Act which says

‘transaction value’;

(xi) Article 366(12A) defines goods and services tax as involving only supply of

goods or services or both. Section 7 of the IGST Act has made a clear

distinction between standalone supply of goods, standalone supply of 41 PART B

services and standalone supply of ‘goods or services or both’. Section 7(4)

treats standalone services imported into India as inter-State supply and does

not artificially bifurcate by assuming ocean freight in the transaction of import

of goods;

(xii) Section 13 of the IGST Act has no application in the case which relates to

import of goods and not services standalone. Section 13 applies to place of

supply of services, referring to standalone services, and does not use the

term ‘both’ to apply to supply of goods or services; and

(xiii) IGST Act has no extra-territorial application as the Act extends to the whole of

India. Under Section 2(109) of the CGST Act, taxable territory means the

territory to which the Act applies. Further, GVK Industries (supra) states that

Parliament may exercise its powers with respect to an extra-territorial aspect

when it has a nexus with India. It does not however empower delegated

legislation to exercise such power. Thus, the activity brought within the tax net

by the impugned notifications is contrary to the IGST Act.

14 Mr Arvind Datar, learned senior counsel, appearing on behalf of the

respondent31 has submitted:

(i) The levy of IGST on ocean freight by way of Notification No. 10/2017-

Integrated Tax (Rate) is extra-territorial and ultra vires Section 1 read with

Section 2(22) of the IGST Act:

31 SLP (C) No. 3462 of 2021

42 PART B

(a) The levy imposed is on the service of transportation of goods rendered

by the shipping line to the foreign vendor/exporter, occurring outside

the territory of India, that is outside the taxable territory;

(b) The only nexus of the service with India is that the service results in the

import of goods into India. However, this activity is already subject to

IGST under the IGST Act and customs duty under the Customs Act;

(c) For a levy to be imposed under the IGST Act, the service must be a

‘supply’ under the provisions of IGST Act read with Section 7 of the

CGST Act. However, Section 1 of the CGST Act and IGST Act are

limited to the territory of India. Thus, any service received outside the

territory of India cannot be considered to be ‘supply’ under the IGST

Act or the CGST Act;

(d) To impose a levy on a service that is extra-territorial, there has to be a

deeming fiction in the form of a statutory provision which deems the

supply of transportation by a vessel to a non-resident exporter. In this

case, such a deeming fiction does not exist. Thus, the transportation

service cannot be deemed as a ‘supply’ under the IGST Act;

(e) Only once the service provided outside the territory of India is deemed

as a ‘supply’ by way of statute, can there be a determination of the

supplier and the recipient;

(f) By way of the impugned notification, the freight charges incurred

abroad are sought to be taxed in India on the ground that the service

recipient is in India. If this argument is accepted, then any service (such 43 PART B

as insurance or incidental services) rendered abroad can be taxed in

India on the ground that the recipient is in India. This practice is in

contrast with international taxation laws and will lead to hardship for

Indian importers;

(g) Article 245(2) of the Constitution states that a law made by the

Parliament will not be invalid on the ground that it has extra-territorial

operation. However, the expression ‘law made by the Parliament’ does

not include executive notifications, even if made on the

recommendations of the GST Council; and

(h) Tax can be levied outside the territory of India by way of primary

legislation. For instance, under Sections 6 and 7 of the Territorial

Waters, Continental Shelf, Exclusive Economic Zone and Other

Maritime Zones Act 1976, a legal fiction is created by which India has

the power to levy tax in the Exclusive Economic Zone and Continental

Shelf. Pursuant to this fiction, notifications levying customs duty on

supplies made to oil drilling rigs in the Continental Shelf have been

issued. In the absence of a primary legislation or statutory provision to

this effect, notifications cannot impose duties on activities occurring

outside India;

(ii) The value of a CIF contract is indivisible, making the computation of tax on

such a contract impossible:

(a) The only way to artificially dissect the value of a CIF contract is by way

of statute, which is absent in this case; 44 PART B

(b) If such a division is allowed, then the Government will be able to tax not

just ocean freight, but also insurance services; and

(c) Levy on contracts on a CIF basis will lead to hardships for the Indian

recipients. The advantage of entering into CIF contracts is to ensure

that the foreign supplier is responsible for arranging transportation and

insurance. However, if a CIF contract is made subject to GST, then the

Indian importers will have to make their own arrangements to transport

the goods, book an insurance policy and arrange for shipping;

(iii) The ASG’s reliance on the nexus theory to justify the levy of GST on ocean

freight, by equating it to the imposition of income tax on income accruing in

India or customs duty imposed on goods imported into India- is erroneous:

(a) In case of imposition of income tax, the nexus is provided by way of a

deeming fiction under Section 5(2) of the Income Tax Act 1961, where

a non-resident is liable to tax only if the income is deemed to accrue or

arises in India;

(b) In case of customs duty, the taxing event is the goods entering the

territory of India; and

(c) In the absence of such a provision, the freight services rendered

outside India cannot be deemed to be received in India merely because

the recipient is in India.

(iv) The importer is not the ‘recipient’ of services under Section 2(93) of the CGST

Act:

45 PART B

(a) Under clause (c) of Section 2(93), when there is no consideration

payable for the supply of services, then the person to whom the

services are rendered is the service recipient. However, in this case,

the importer is not the service recipient as the importer does not pay

the consideration or receive the services;

(b) The argument of the ASG that the importer is a ‘recipient’ as they are

the ultimate beneficiary enlarges the scope of Section 2(93) by adding

words that are absent in the statute;

(c) Even if the ultimate beneficiary is considered to be the recipient, the

importer is not the beneficiary of the service of transportation of goods.

Under the terms of a CIF contract, the foreign vendor is obligated to

arrange for transportation of goods for which he engages the services

of a shipping line. Thus, the foreign vendor is the ultimate beneficiary;

(d) The importer is only the beneficiary of the imported goods, whose value

is taxable as customs duty under the Customs Tariff Act as well as

under the IGST Act; and

(e) Additionally, reliance cannot be placed on clause(c) of Section 2(93) as

it only refers to those supplies for which consideration is not paid as

mentioned in Schedule I of the CGST Act. This schedule enumerates

the activities deemed as supplies without consideration.

(v) Imposition of IGST on ocean freight will lead to double taxation:

(a) Section 3(7) of the Customs Tariff Act states that goods imported into

India will be subject to IGST under Section 5 of the IGST Act, on the 46 PART B

value as determined by Section 3(8) and Section 3(8)(a). Under

Section 3(8), the value includes value of freight; and

(b) Rule 10 of the Customs Valuation (Determination of Value of Imported

Goods) Rules 2007 includes cost of transportation and insurance in the

value of goods, which forms the basis of the levy of IGST under the

proviso to Section 5 of the IGST Act. The impugned levy of IGST on

ocean freight would thus amount to double taxation on the same

transaction;

(vi) The ASG’s reliance on ‘aspect theory’ to justify the impugned levy is

erroneous:

(a) The ASG relied on the ‘aspect theory’ and submitted that the impugned

notification taxes the ‘service’ element of ocean freight, while the

‘goods’ element is taxed under the proviso to Section 5 of the IGST

Act. However, such an approach is impermissible according to the

decision of this Court in BSNL (supra);

(b) The aspect theory is inapplicable as the freight element is included by

levying IGST; and

(c) The aspect theory in India permits taxation of two different aspects or

features of a transaction. For instance, in a catering contract, supply of

food was subject to value added tax and the service aspect was

subject to service tax. However, the aspect theory does not permit

double taxation of the same amount or value

47 PART B

(vii) The GST Council which has been created by Article 279A of the Constitution

is a recommendatory body, whose recommendations can be implemented by

either amending the CGST Act or the IGST Act or by issuing a notification.

However, notifications issued cannot be ultra vires the parent legislation;

(viii) The principles of cooperative federalism are not relevant in this case as they

were not adjudicated before the High Court. The appeal must test the

correctness of the impugned judgment without expanding its scope; and

(ix) Interpretation of Article 279A of the Constitution was not an issue before the

High Court and the present appeal should be restricted to the validity of the

impugned notification.

15 In addition to the above, Mr Vikram Nankani, learned senior counsel,

appearing on behalf of the respondent32 urged the following submissions:

(i) Section 7(4) of the IGST Act provides that supply of services imported into the

territory of India shall be treated as a supply of services in the course of inter-

state trade or commerce. Section 2(11) of the IGST Act defines “import of

services” when 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. When

these provisions are read together, it implies that in case of import of services

into the territory of India, the location of the supplier of services is outside

India and the location of the recipient is in India. Thus the IGST Act covers

32 SLP(C) No. 843/2021

48 PART B

either import of goods or import of services and not services subsumed into

the value of goods imported into India;

(ii) The IGST Act was never intended to apply to the importer of goods on a CIF

basis as the services are provided and consumed before the goods reach

India and have no nexus with the Indian importer;

(iii) The transaction between two persons located outside India is not chargeable

under Section 5(1) read with the proviso and Section 7(4) read with Section

2(11) of the IGST Act. Thus, Notification 8/2017 is ultra vires and Notification

10/2017, providing for reverse charge is also ultra vires the IGST Act;

(iv) Section 13(9) of the IGST Act, which states that the place of supply of

services of transportation of goods is the destination of the goods, cannot be

read in isolation. Read with Section 7(4) of the IGST Act, it implies that in

case of import of services, the supplier must be outside India while recipient

must be in India; and

(v) The test of ‘ultimate beneficiary’ relied upon by the ASG does not have

statutory backing since the charging section, that is Section 5, makes the

recipient of the services liable to pay tax. The Indian importer is not a party to

the CIF contract between the foreign exporter and the shipping line.

16 Mr Uchit Sheth, counsel appearing on behalf of the respondents33 submitted:

(i) The importers in a CIF contract do not have any privity of contract with the

supplier of the transportation service since they neither make payment of 33 In SLP(C) No. 3540/2021, SLP(C) No. 1281/2021, SLP(C) No. 1277/2021, SLP(C) No. 2242/2021, SLP(C) No. 2198/2021, SLP(C) No. 2736/2021

49 PART B

consideration to the service provider, nor avail any service. The importers

only purchase and import goods;

(ii) The impugned levy is contrary to the object and purpose of the IGST Act.

Section 5 of the IGST Act clarifies that so far as imported goods are

concerned, IGST is levied at the point of clearance of goods for home

consumption and on the total value (including value additions till that point).

This was also clarified by Circular no. 3/1/2018-IGST dated 25 May 2018

issued by the Central Board of Indirect Taxes and Customs. The impugned

levy of IGST on the freight element of CIF contracts and high seas purchase

contracts is ultra vires as IGST is paid on the total value of goods;

(iii) In Ispat Industries Ltd. v. Commissioner of Customs34, in the context of

imposition of customs duty, it was held that in a CIF contract, the freight is

part of the price paid to the seller and further addition of transportation

charges is contrary to the statutory provisions; and

(iv) The judgment of this Court in Union of India v. Jalyan Udyog35 which states

that a legal fiction can be created even by delegated legislation, is

inapplicable as in that case, the fiction created was within the parameters of

the parent provision. In this case, the fiction violates Section 5(3) of the IGST

Act.

34 (2006) 12 SCC 583 35 (1994) 1 SCC 318

50 PART B

17 Mr Rajesh Kumar Gautam, learned counsel appearing on behalf of the

intervenor36 in SLP(C) No. 13958/2020, has submitted that the argument of the ASG

that the levy has been introduced to create a level playing field is fallacious as:

(i) Prior to 2016, all import transportation, whether undertaken by Indian or

foreign shipping lines was outside the scope of levy. Service tax was imposed

on import transactions undertaken by Indian shipping lines only to allow them

to avail CENVAT credit. This credit was protected even though no service tax

was payable on export transportation. Further, Indian importers availing

services of foreign shipping lines were liable to pay service tax under reverse

charge. This position continued under the GST regime and the only

transaction outside the ambit was when the foreign exporter availed the

services of a foreign shipping line to transport goods to India; and

(ii) The introduction of levy of service tax or GST on import transactions was by

way of an incentive to Indian shipping lines. Thus, it cannot now be contended

that the level playing field has been affected because of this levy.

18 Similar submissions have been addressed by Dr C Manickam37, Mr Rajat

Mittal38and Mr Abhishek A Rastogi39, which we have not recorded separately for the

sake of brevity.

19 The rival submissions will now be analysed.

36 IA No. 118754/2021 in SLP(C) No. 37 Appearing for the respondent in SLP(C) No. 3680/2021 38 Appearing for the respondent in SLP(C) No. 1798/2021 39 Appearing on behalf of the intervenor in IA No. 74108/2021 in SLP(C) No. 13958/2020

51 PART C

C Constitutional Architecture of GST

20 Before we proceed to analyse the vires of the impugned notifications, it is

pertinent to contextualize the constitutional architecture of the GST. The Constitution

(One Hundred and First Amendment Act) 201640 was enacted on 8 September 2016

introducing Article 246A and 279A. Article 246A stipulates that both the Parliament

and the State legislatures have the power to legislate on GST:

“246A. Special provisions with respect to goods and services tax (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. Explanation: The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of Article 279A, take effect from the date recommended by the Goods and Services Tax Council.”

Article 279A constitutes the GST Council which shall make recommendations to the

Union and the States on a wide range of subjects relating to GST:

‘‘279A. (1) The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council. (2) The Goods and Services Tax Council shall consist of the following members, namely:— (a) the Union Finance Minister...................... Chairperson; (b) the Union Minister of State in charge of Revenue or Finance................................................................ Member; (c) the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government........................................................Members. (3) The Members of the Goods and Services Tax Council referred to in sub-clause (c) of clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice-

40 “Constitution Amendment Act 2016”

52 PART C

Chairperson of the Council for such period as they may decide. (4) The Goods and Services Tax Council shall make recommendations to the Union and the States on— (a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to, or exempted from the goods and services tax; (c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply; (d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax; (e) the rates including floor rates with bands of goods and services tax; (f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster; (g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (h) any other matter relating to the goods and services tax, as the Council may decide. (5) The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel. (6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services. (7) One-half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings. (8) The Goods and Services Tax Council shall determine the procedure in the performance of its functions. (9) Every decision of the Goods and Services Tax Council shall be taken at a meeting, by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:— (a) the vote of the Central Government shall have a weightage of one third of the total votes cast, and (b) the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting. (10) No act or proceedings of the Goods and Services Tax Council shall be invalid merely by reason of— (a) any vacancy in, or any defect in, the constitution of the Council; or

53 PART C

(b) any defect in the appointment of a person as a Member of the Council; or (c) any procedural irregularity of the Council not affecting the merits of the case. (11)The Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute — (a) between the Government of India and one or more States; or (b) between the Government of India and any State or States on one side and one or more other States on the other side; or (c) between two or more States, arising out of the recommendations of the Council or implementation thereof.’’

21 The Union Government has contended that the recommendations of the GST

Council are binding on the legislature and the executive. It was submitted that since

the recommendations are binding, the rule making power of the Government under

the provisions of the IGST Act and CGST Act, exercisable on the ‘recommendations’

of the GST Council, are also very wide. The arguments of the Union Government

are as follows:

(i) A combined reading of Articles 246A and 279A elucidates that the GST

Council is the ultimate decision-making body in framing the GST law since it

is a constitutional body that acts as a converging platform for both the Union

and the States;

(ii) The functions and role of the GST Council are unique and incomparable to

other constitutional bodies. Therefore, interpretations of other provisions of

the Constitution do not have precedential value while interpreting the role of

the GST Council;

54 PART C

(iii) The power of the Parliament and the State Legislature under Article 246A and

the power of the GST Council under Article 279A must be balanced and

harmonised, such that neither overrides the other:

(a) Though Article 279A does not begin with a non-obstante clause

overriding Article 246A, the latter would not override the former. The

core theme of GST law – as it emanates from Article 279(6) – is

cooperation and harmony. A system premised on cooperation cannot

provide inter se supremacy. Therefore, Article 279A has rightly not

been given an overriding effect over Article 246A; and

(b) Article 246A vests the Parliament and the State legislatures with the

power to enact laws on GST. This function, if delegated would amount

to abdication of the Parliament’s constitutional function. Therefore,

Article 246A cannot be made subject to Article 279A.

(iv) The ordinary legislative process for enacting a statute is that bills are

introduced and voted on by the legislature. However, Article 264A departs

from this as the framing of the policy, discussion on the policy, and decision

making are vested with the GST Council. The Parliament or the State

Legislature cannot legislate a law on GST under Article 246A independent of

the recommendations of the GST Council. A reading of Sections 5, 6 and 22

of the IGST Act indicates that the legislature and the executive are bound by

the recommendations of the GST Council on three preliminary provisions,

namely charge, exemption and rule-making power. Therefore, Parliament

55 PART C

bound itself to the recommendations of the GST Council by enacting the IGST

Act and CGST Act; and

(v) The recommendations by the GST Council are transformed into legislation on

a combined reading of Article 279A and Sections 5,6, and 22 of the IGST Act

2017 and Sections 9,11, and 164 of the CGST Act.

C. 1 Legislative History of the Constitution Amendment Act 2016

Statement of Objects and Reasons 22 As early as in 2004, the Task Force on implementation of the Fiscal

Responsibility and Budget Management Act 2003 had recommended a shift to

consumption taxes to increase efficiency in production and enhance international

competitiveness of Indian goods and services. The need for such an enormous

change in the tax regime arose out of the distortions in the then existing indirect tax

regime which suffered from the drawback of multiplicity of taxes, taxable events,

compliances, and authorities. For instance, the rate of the sales tax and value added

tax on the same goods would differ across India. Several states would impose entry

taxes on goods before the goods entered their boundaries. The First Discussion

Paper on Goods and Services Tax in India released by the Empowered Committee

in November 2009 explained the rationale for introducing the GST regime in the

following terms:41

“The introduction of GST at the Central level will not only include comprehensively more indirect Central Taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre

41 Empowered Committee, First Discussion Paper on Goods and Services Tax, (2009) Pars 1.13-1.14

56 PART C

through widening of the dealer base by capturing value added addition in the distributive trade and increased compliance. In the existing State-level VAT structure there are also certain short comings as follows. There are, for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed n the VAT. Moreover, in the present State- level VAT scheme, CENVAT load on the goods remains included in the value to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. This CENVAT load needs to be removed.

[…]

However, for this GST to be introduced at the State-level, it is essential that the States should be given the power of levy of taxation of all services. This power of levy of service taxes has so long been only with Centre. A Constitutional Amendment will be made for giving this power also to the States. Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be removed. The GST at the State-level is, therefore, justified for (a) additional power of levy of taxation of services for the States, (b) system of comprehensive set-off relief, including set-off for cascading burden of CENVAT and services taxes, (c) subsuming of several taxes in the GST and (d) removal of burden for CST. Because of the removal of taxes in the GST, the burden of tax under GST on goods will, in general, fall.”

23 Parliament introduced the Constitution (One Hundred and Fifteenth

Amendment) Bill 201142 which sought to amend the provisions of the Constitution to

introduce the GST regime. The Speaker of the Lok Sabha referred the 2011

Amendment Bill to the Parliamentary Standing Committee on Finance. The

Constitution (One Hundred and Twenty-Second Amendment) Bill 201443 was

introduced after incorporating the recommendations of the Standing Committee. The

2014 Amendment Bill was introduced to replace almost all the indirect taxes that

were levied by the State Governments and the Union Government, with a singular

tax system to eliminate the cascading effect of multiple taxes and to provide for a

42 “2011 Amendment Bill” 43 “2014 Amendment Bill”

57 PART C

common national market. The Statement of Objects and Reasons of the 2014

Amendment Bill reads as follows:

“The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax.” (emphasis supplied)

24 The Finance Minister while introducing the 2014 Amendment Bill in

Parliament noted that the object of the constitutional amendment is to bring about a

“certain amount of convergence between these taxes so that the taxation

mechanism becomes extremely simple”.44 He also highlighted the fact that there

was no uniformity in the tax rates and structure across the States. The Statement of

Objects and Reasons and the debates and speeches in the legislature indicate the

intent behind the introduction of the Bill.45 The legislative history, the statement of

objects and reasons of the Bill and the speech made when the bill was introduced

indicate the mischief that Articles 246A and 279A to the Constitution sought to

remedy, which is to simplify the indirect tax regime to prevent the complexities

inherent in and the cascading effect of a multiplicity of taxes.

Simultaneous Legislative distribution

44 Speech by Arun Jaitley in Lok Sabha on 24.4.2015; Tarun Jain, Goods and Services Tax: Constitutional Law and Policy (EBC 2018) 16 45 Abhiram Singh v. CD Commachen, (2017) 2 SCC 629

58 PART C

25 Article 246 read with the Seventh Schedule vests Parliament and the State

Legislatures with the power to make laws on subject matters listed in the Seventh

Schedule of the Constitution. Before the introduction of Articles 246A and 279A by

the Constitution Amendment Act 2016, the legislative powers of the Union and the

States on taxation were exclusive. The general subjects of legislation constitute one

group in the Union List (entries 1 to 81) and the State List (entries 1 to 44). The

subject heads related to taxation are clubbed together in both the Union and the

State lists (entries 82 to 92B in the Union list and entries 45 to 63 in the State list).

The concurrent list does not include any entry related to taxation.46 For example,

while the Union primarily has the power to impose income taxes, except from

agriculture47, the State has the power to impose tax on agricultural income48.

Therefore, both the Union and the States had a separate and an exclusive domain

over specific heads of taxation. The Union and the State could not impose tax under

the same head since the concurrent list did not include an entry for taxes. This

Court, in its decision in Hoecst Pharmaceuticals Ltd. v. State of Bihar49,

recognised the exclusive powers held by the Union and the State on taxation. The

three-Judge Bench observed that:

“75. Legislative relations between the Union and the States inter se with reference to the three Lists in Schedule VII cannot be understood fully without examining the general features disclosed by the entries contained in those Lists” : Seervai in his Constitutional Law of India, 3rd Edn., Vol. 1 at pp. 81-82. A scrutiny of Lists I and II of the Seventh Schedule

46 Entry 47 of the concurrent list mentions that “fees in respect of any of the matters in this List, but not including fees taken in any court.” 47 Entry 82 of List I 48 Entry 46 of List II 49 (1983) 4 SCC 45

59 PART C

would show that there is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. Following the scheme of the Government of India Act, 1935, the Constitution has made the taxing power of the Union and of the States mutually exclusive and thus avoided the difficulties which have arisen in some other Federal Constitutions from overlapping powers of taxation.

76. It would therefore appear that there is a distinction made between general subjects of legislation and taxation. The general subjects of legislation arc dealt with in one group of entries and power of taxation in a separate group. In M.P.V. Sundararamier & Co. v. State of A.P. [AIR 1958 SC 468 : 1958 SCR 1422 : (1958) 9 STC 298] this court dealt with the scheme of the separation of taxation powers between the Union and the States by mutually exclusive lists. In List I, Entries 1 to 81 deal with general subjects of legislation; Entries 82 to 92-A deal with taxes. In List II, Entries 1 to 44 deal with general subjects of legislation; Entries 45 to 63 deal with taxes. This mutual exclusiveness is also brought out by the fact that in List III, the Concurrent Legislative List, there is no entry relating to a tax, but it only contains an entry relating to levy of fees in respect of matters given in that list other than court-fees. Thus, in our Constitution, a conflict of the taxing power of the Union and of the States cannot arise. That being so, it is difficult to comprehend the submission that there can be intrusion by a law made by Parliament under Entry 33 of List III into a forbidden field viz. the State's exclusive power to make a law with respect to the levy and imposition of a tax on sale or purchase of goods relatable to Entry 54 of List II of the Seventh Schedule. It follows that the two laws viz. sub-section (3) of Section 5 of the Act and para 21 of the Control Order issued by the Central Government under sub-section (1) of Section 3 of the Essential Commodities Act, operate on two separate and distinct fields and both are capable of being obeyed. There is no question of any clash between the two laws and the question of repugnancy does not come into play.”

26 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

60 PART C

by the Constitution Amendment Act 2016 vests the Parliament and the State

legislatures with the concurrent power to make laws with respect to GST.

27 The distribution of legislative power between federating units- the Union and

the States, is among the paramount features of a federal Constitution.50 Articles 246

and 254 have been central to the debate on the federal nature of the Indian

Constitution. Article 246A, is a ‘special provision with respect to goods and service

tax,’ and begins with a non-obstante clause overriding Articles 246 and 254. Article

246 sets down the constitutional framework defining the legislative competence of

Parliament and the State legislatures. Article 254 provides the framework for

addressing inconsistency between central and state laws on matters in the

Concurrent list. Article 246A entrusts Parliament and State legislatures the power to

legislate on the goods and services tax. The power of the States is however subject

to the conferment of an exclusive domain to Parliament to levy the goods and

services tax where the supply of goods or services takes place in the course of inter-

state trade and commerce.

28 In Union of India v. Mohit Mineral Pvt. Ltd.51, this Court while deciding the

constitutional validity of the GST (Compensation to States) Act 2017 noted that the

Constitution Amendment Act 2016 introduced changes in the legislative powers of

the Parliament and State legislature relating to indirect taxation. It observed that the

amendment “confers concurrent taxing powers on the Union as well as the States

50 th H.M Seervai, Constitutional Law of India, (NM Tripati Private Limited, 4 Edition, vol 1) 289; SR Bommai v. Union of India, (1994) 3 SCC 1 51 (2019) 2 SCC 599

61 PART C

for levying GST on transactions of supply of goods or services or both”. In Baiku v.

State Tax Officer, GST52, a writ petition was filed challenging the legality of the

notices and assessment orders issued under the Kerala Value Added Tax Act

200353 for the assessment years 2010-11 and 2011-12. The notices and orders

were challenged on the ground that the authorities did not have the jurisdiction to

issue them since the amendments introduced to Section 25(1) of the KVAT Act

through the Kerala Finance Acts 2017 and 2018 did not operate retrospectively. The

Kerala High Court had to decide whether the Kerala State legislature had the

legislative competence to amend the KVAT Act after the introduction of Article 246A

to the Constitution, and the repeal of KVAT pursuant to the amendment. The Court

noted that the special power introduced by Article 246A allows Parliament and the

State legislatures to ‘simultaneously’ make laws.54 Subsequently, while explaining

the ‘simultaneous’ nature of power held by Parliament and State legislature, it was

observed that the power under Article 246A can be exercised simultaneously by the

State legislature and Parliament and none hold any ‘unilateral or exclusive’

legislative power55.

29 In its decision in VKC Footsteps (supra), this Court noticed the changes in

the constitutional scheme introduced by Article 246A. One of us (Dr DY

Chandrachud) writing for the two-judge Bench observed:

52 2019 SCC OnLine Ker 5362 53 “KVAT Act” 54 Paragraph 19 of the judgement. 55 Paragraph 22 of the judgment.

62 PART C

“52. Article 246-A has brought about several changes in the constitutional scheme: 52.1.Firstly, Article 246-A defines the source of power as well as the field of legislation (with respect to goods and services tax) obviating the need to travel to the Seventh Schedule. 52.2.Secondly, the provisions of Article 246-A are available both to Parliament and the State Legislatures, save and except for the exclusive power of Parliament to enact GST legislation where the supply of goods or services takes place in the course of inter-State trade or commerce. 52.3.Thirdly, Article 246-A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. Concurrence, which operated within the fold of the Concurrent List, was regulated by Article 254.” (emphasis supplied)

30 Article 246A provides Parliament and the State legislature with the concurrent

power to legislate on GST. Article 246A has a non-obstante provision which

overrides Article 254. Article 246 A does not provide a repugnancy clause. Unlike

Article 254 which stipulates that the law made by Parliament on a subject in the

Concurrent list shall prevail over conflicting laws made by the State legislature, the

constitutional design of Article 246A does not stipulate the manner in which such

inconsistency between the laws made by Parliament and the State legislature on

GST can be resolved. The concurrent power exercised by the legislatures under

Article 246A is termed as a ‘simultaneous power’ to differentiate it from the

constitutional design on exercise of concurrent power under Article 246, the latter

being subject to the repugnancy clause under Article 254. The constitutional role

and functions of the GST Council must be understood in the context of the

simultaneous legislative power conferred on Parliament and the State legislatures. It

is from that perspective that the role of the GST Council becomes relevant.

63 PART C

Role of the GST Council

31 The Thirteenth Finance Commission set up the Task Force on GST. The Task

Force recommended that the Empowered Committee of State Finance Ministers

may, upon the introduction of GST, be transformed into a permanent constitutional

body known as the ‘Council of Finance Ministers’. The Task Force had

recommended that:

(i) The Council would be responsible for modification in the design of dual GST

regulating the indirect tax system;

(ii) The Council would make decisions on the principle of majority and not

unanimity. The initial decision would be approved by the Union and three-

fourths of the States. The subsequent changes to the decision could be made

upon an agreement of the Union and two-third of the States;

(iii) The body would maintain the ‘existing balance of federal fiscal powers’ since

both the Union and the States would surrender their fiscal autonomy to

change to the GST regime;56

(iv) The basis for levy should be common for both the Union and the States upon

agreement. This could be on the lines of the GST law in Australia, where both

the Union and the States will have to agree before any change in the rate or

base of GST could be implemented;57 and

56 Tarun Jain, Goods and Services Tax: Constitutional Law and Policy (EBC 2018) 117 57 Thirteenth Finance Commission, Report of the Task Force on GST (2009) Para 10.5

64 PART C

(v) If the States deviate from the collectively agreed position on GST rates, a

mechanism ought to be established by which the defaulting State pays

penalty58.

32 The 2011 Amendment Bill sought to include Article 279A in the Constitution

which constituted the GST Council. The provision stipulated the constitution of the

Council, the role of the Council and the quorum necessary for making decisions:

“279-A. Goods and Services Tax Council.— (1) The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council. (2) The Goods and Services Tax Council shall consist of the following members, namely:— (a) the Union Finance Minister – Chairperson; (b) the Union Minister of State in charge of Revenue or Finance – Member; (c) the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government- Members. (3) The Members of the Goods and Services Tax Council referred to in sub-clause (c) of clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice- Chairperson of the Council for such period as they may decide. (4) The Goods and Services Tax Council shall make recommendations to the Union and the States on— (a) the taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to or exempted from the goods and services tax; (c) the threshold limit of turnover below which goods and services tax may be exempted; (d) the rates of goods and services tax; and (e) any other matter relating to the goods and services tax, as the Council may decide. (5) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services

58 Ibid, paragraph 9.8

65 PART C

tax and for the development of a harmonised national market for goods and services. (6) One-third of the total number of members of the Goods and Services Tax Council shall constitute the quorum at its meetings. (7) The Goods and Services Tax Council shall determine the procedure in the performance of its functions. (8) Every decision of the Goods and Services Tax Council taken at a meeting shall be with the consensus of all the members present at the meeting. (9) No act or proceedings of the Goods and Services Tax Council shall be invalid merely by reason of— (a) any vacancy in, or any defect in, the constitution of the Council; or (b) any defect in the appointment of a person as a Member of the Council; or (c) any irregularity in the procedure of the Council not affecting the merits of the case. Explanation.—For the purposes of this article, “State’’ includes a Union territory with Legislature.”

33 According to the draft of Article 279A, as it found place in the 2011

Amendment Bill, every decision of the GST Council had to be taken with the

consensus of all the members present at the meeting. The Bill also provided for the

establishment of a GST Dispute Settlement Authority to adjudicate on any complaint

referred to it by a State Government or the Union Government, arising out of

deviation from any recommendations of the Council that resulted in the loss of

revenue or which affected the harmonised structure of the GST. The draft provision

also provided that Parliament may by law provide that no Court other than the

Supreme Court shall exercise jurisdiction in respect of the dispute. The draft of

Article 279B, as in the 2011 Amendment Bill, reads as follows:

“279B. (1) Parliament may, by law, provide for the establishment of a Goods and Services Tax Dispute Settlement Authority to adjudicate any dispute or complaint referred to it by a State Government or the Government of India arising out of a deviation from any of the recommendations of the Goods and Services Tax Council constituted under article 279A that results in a loss of revenue to a State Government or the Government of India or affects the harmonised structure of the goods and services tax.

66 PART C

(2) The Goods and Services Tax Dispute Settlement Authority shall consist of a Chairperson and two other members. (3) The Chairperson of the Goods and Services Tax Dispute Settlement Authority shall be a person who has been a Judge of the Supreme Court or Chief Justice of a High Court to be appointed by the President on the recommendation of the Chief Justice of India. (4) The two other members of the Goods and Services Tax Dispute Settlement Authority shall be persons of proven capacity and expertise in the field of law, economics or public affairs to be appointed by the President on the recommendation of the Goods and Services Tax Council. (5) The Goods and Services Tax Dispute Settlement Authority shall pass suitable orders including interim orders. (6) A law made under clause (1) may specify the powers which may be exercised by the Goods and Services Tax Dispute Settlement Authority and provide for the procedure to be followed by it. (7) Notwithstanding anything in this Constitution, Parliament may by law provide that no Court other than the Supreme Court shall exercise jurisdiction in respect of any such adjudication or dispute or complaint as is referred to in clause (1). Explanation.— For the purpose of this article, “State’’ includes a Union territory with Legislature.”

34 The Standing Committee on Finance, Ministry of Finance in its 73rd report on

the 2011 Amendment Bill explained the salient features of the Amendment Bill

introducing the GST regime.59 It was noted that the GST Council will be a joint forum

for the Union and the States to discuss issues on GST and the recommendations of

the GST Council will be a benchmark and guiding force for the Union and State

Governments.60 In the same vein, it was observed that the legislature will be free to

exercise its power on all issues recommended by the Council:61

“(c) A Goods and Services Tax Council (Article 279A) will be created, which will be a joint forum for the Centre and the States to discuss important issues relating to GST so that the objective of having a harmonized structure for GST and a

59 rd Standing Committee on Finance, The Constitution (One Hundred and Fifteenth Amendment) 2011 (73 report, 2013) 60 Ibid, paragraph 12 61 Ibid

67 PART C

harmonized national market can be achieved. This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States and UTs with legislatures, as members. The Council will make recommendations to the Union and the States on important parameters like rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments. The Parliament and well as State Legislatures will be free to exercise their power on all issues recommended by the Council. One-third of the total number of Members of the Council will constitute the quorum of GST council. It is further provided that the decisions of the GST Council shall be with the consensus of all members present at the meeting. This is to protect the interests of each State and the Centre when the Council takes a decision. (d)In exercise of their powers, these legislative bodies may deviate from the recommendations of the Council and may act in a manner which is prejudicial to the harmonious working of GST or which adversely impacts the revenue of some other State/Central Government. Such deviations or actions are required to be kept to the minimum, if the objective of having a common national market and smooth working of GST is to be achieved. It is accordingly proposed to set up Goods & Services Tax Dispute Settlement Authority (Article 279B), which may be approached by the affected Government (whether the Centre or the States) seeking redressal for any loss caused by any action due to a deviation from the recommendations made by the Goods & Services Tax Council or for adversely affecting the harmonious structure and implementation of the GST.” (emphasis supplied)

35 The Committee also sought the opinion of the Attorney General through the

Department of Legal Affairs on whether the recommendations of the GST Council

would undermine the power of the legislature. In response, the Attorney General

stated that though the GST Council has the power to make recommendations, both

Parliament and State legislatures, have the power to either accept or reject those

recommendations.62 The Attorney General stated:

“This is an important point which has been raised and the short answer to it is that it is certainly open to Parliament to

62 Ibid, paragraph 63

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approve any recommendation. However, this does not mean that the GSTC recommendations will have no value. Having regarding to the nature of the Constitution of GSTC, the Council would have performed useful role in making recommendations but the ultimate authority whether to accept such recommendations can and must rest only in the Legislatures, namely, Parliament and the State Legislatures. In this view of the matter, the setting up of the GSTC does not strike at the root of the legislative powers over Finance. The powers of the legislature over Finance are sacrosanct and are not affected by the setting up of the GSTC.”

36 The States raised concerns over the establishment of the GST Dispute

Settlement Authority on the ground that such authority would have the power to

override the supremacy of Parliament and the State Legislatures since a legislation,

though constitutional, could be struck down if it deviated from the recommendations

of the GST Council. The Committee, while addressing the concerns raised by the

States recommended that the provision establishing the GST Dispute Settlement

Authority be omitted since it would affect the fiscal autonomy of the States. It was

further recommended that a provision be made in Article 279A itself empowering the

GST Council to resolve disputes arising out of its recommendations:

“60. On the GST Dispute Settlement Authority, the Chairman, Empowered Committee of State Finance Ministers stated that most of the States have expressed the view that the provision pertaining to the GST Dispute Settlement Authority should be omitted as this authority shall have powers of overriding the supremacy of the Parliament and the State Legislatures. It shall affect the fiscal autonomy of the States.

61. The Constitution confers autonomy on the Parliament and the State Legislatures to legislate within the respective fields assigned to them and the fact that a statute enacted by a competent Legislative body can be called into question on grounds of deviations from the recommendations of an essentially executive body, albeit Constitutional, is being construed as undermining the supremacy of the Legislature. Keeping in view the concerns expressed by the States, and the fact that the proposed provision of GST Dispute Settlement Authority will affect the fiscal autonomy of the Parliament and the State Legislatures, the proposed Article 279B providing

69 PART C

for GST Dispute Settlement Authority may be omitted. However, any dispensation involving multiple partners does require a mechanism to resolve disputes. A provision can be made in Article 279A itself empowering the GST Council to decide about the mechanism to resolve the disputes arising out of its recommendations.” (emphasis supplied)

37 The Committee reiterated in its conclusion that the GST Council would only

play a ‘constructive and enabling role’ vis-à-vis the legislature and would not

override the role of the legislature63:

“The Committee would thus expect the proposed GST Council to follow the principles of cooperative federalism and democratic governance. As this will be a political and a recommendatory body, it would be in a position to play a constructive and enabling role vis-à-vis the Legislature, which needless to emphasise, would remain supreme in matters of legislation including taxation. In the Committee’s view the mandate entrusted to the GST Council under the proposed Article 279A of the Constitution (Amendment) Bill does not in any way alter the existing constitutional scheme in so far as the Legislature, both Union and State, is concerned.”

38 Taking into account the recommendations of the Standing Committee,

Parliament introduced the 2014 Amendment Bill in which Article 279B was deleted

and the GST Council was given the power under Article 279A(11) to devise a

mechanism of dispute resolution. The GST Council consists of the Union Finance

Minister as the Chairperson, the Union Minister of State in charge of Revenue or

Finance and the Minister in charge of Finance or Taxation or any other Minister

nominated by the State Government. The role of the GST Council is to make

recommendations to the Union and the States on seven specific categories

revolving around GST including principles of levy and apportionment of GST. Clause

(h) of Article 279A(1) also provides the Council with plenary power by which it can

63 Ibid, paragraph 15

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make recommendations with respect to ‘any other matter relating to GST’, as the

Council may decide. Clause (6) stipulates that the recommendations of the GST

Council shall be guided by the ‘need for a harmonised structure of goods and

services tax’. One half of the total number of members of the Council shall constitute

the quorum for meetings. Clause (9) provides that the Council shall take a decision

with three-fourths majority of the members present and voting. The vote of the Union

Government is given the weightage of one-third of the total votes cast, and the votes

of the State Governments are given a weightage of two-thirds of the total votes.

Parliamentary Debates 39 The inclusion of Article 279A in the 2014 Amendment Bill raised two important

concerns in Parliament: first, the GST Council could effectively override the

legislative sovereignty of Parliament and the State legislatures; and second, the

fiscal autonomy of the States would be diminished since the Centre has the power to

stall a consensus reached by all the States. On 5 May 2015, a Member of

Parliament from the State of Tamil Nadu raised the concern that the GST Council

would diminish the role of the States in fiscal policy:64

“The GST Council as proposed in the Amendment will make recommendations on a whole range of issues relating to subsuming of taxes, cesses and surcharges under GST, exemption for goods and services, model GST laws, etc. This will override the supremacy of the legislature both at the Centre and the States in taxation matters. In the GST Council, the Union Government has one-third weightage in vote and only two-third of the weightage in vote is given to States and Union Territories. Voting rights of States and Union Territories are equal irrespective of their size. We, are therefore, opposed to the idea of GST Council as a

64 Speech of T.G Venkatesh Babu in Lok Sabha on 05.05.2015

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constitutional body as it compromises the autonomy of the States including in fiscal matters.”

In response, the Finance Minister had said65:

“Once you get into the GST pipeline, the States and the Centre will have to interact together; and once they interact together, the State of Tamil Nadu will be involved in determining and taking decisions relating to the States. So, none of us is going to be surrendering his or her authority or autonomy. We are both going to be pooling our sovereignty together so that we are able to create a new taxation mechanism.”

40 A Select Committee of the Rajya Sabha examined proposed Article 279A. It

was suggested before the Select Committee that a ‘dispute settlement body’ to

adjudicate on disputes arising from the non-compliance of recommendations of the

GST Council should be constituted.66 There was, in other words, a suggestion to

reintroduce Article 279B as it found place in the 2011 Amendment Bill. The

Government submitted that Article 279A(11) provides the GST Council with the

power to decide the ‘modalities’ of dispute resolution, which may range from

mediation, arbitration or even judicial adjudication depending on the nature of

dispute:

“2.71 It may further be mentioned that Article 279A (11) only provides that GST Council may decide the ‘modalities’ to resolve disputes arising out of its recommendations. The ‘modalities’ could include any dispute resolution mechanism which could be inter-alia negotiation, mediation, arbitration or even a judicial authority as deemed appropriate by the GST Council depending on the nature of dispute before it. Thus, as per the proposed Bill, the GST Council shall, by itself, not be resolving the disputes but decide on the modalities for resolving the disputes.”

65 Speech of Mr. Arun Jaitley in Lok Sabha on 08.08.2016 66 Select Committee, Report on the Constitution (One Hundred and Twenty Second Amendment) Bill , 2014, (Submitted to the Rajya Sabha, 2015)

72 PART C

41 The Government also submitted that the voting pattern between the Union

and the States does not provide unequal power to any one of the constituent units:

“2.68 The structure of GST Council represents the federal nature of governance in this country. This has been done as per the recommendations of the Empowered Committee after their meeting in Bhubaneswar in January 2013, and also the recommendations of the Parliamentary Standing Committee. This provision has been consciously adopted to ensure the federal balance in the functioning of the GST Council, and also to enhance co-operative federalism. The existing pattern of vote-share in the GST Council ensures that no decision can be taken by the Council either by the Centre or the States acting on their own. Hence, neither the States nor the Centre alone can take a decision in the Council. Providing 3/4th weightage to the States would upset the federal balance between the Centre and the States. Presently, in the concurrent list, in case of any difference between Central and State legislation, the Central legislation prevails. The present weightage of votes in the GST Council would ensure that neither the Centre nor the States are able to take a decision without the support of the other. In other words both would enjoy a veto.

2.69 Further, with Centre holding only 1/3rd of the votes, the Centre would require support of 20 States/Union Territories to get a resolution passed. This shows that Centre would need co-operation of States to get any decision taken at the GST Council.”

42 Though the traditional view of interpretation of statutes is that legislative

history is not readily used in interpreting a law, the modern trend of thinking on the

subject has enabled courts to look into the history of a legislation to understand the

full purport of the words used and the mischief sought to be remedied by the law. In

K.P Varghese v. ITO67, this Court held that the “speech made by the mover of the

Bill explaining the reason for the introduction of the Bill can certainly be referred to

for the purpose of ascertaining the mischief sought to be remedied by the legislation

and the object and purpose for which the legislation is enacted.” In Kalpana Mehta

67 (1981) 4 SCC 173.

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v. Union of India68, Chief Justice Dipak Misra held that reports of the Parliamentary

Committees and the speeches made in the Parliament can be referred to identify the

circumstances that led to the enactment of the legislation along with the intention of

the legislature:

“129. We have referred to these authorities to highlight that the reports or speeches have been referred to or not referred to for the purposes indicated therein and when the meaning of a statue is not clear or ambiguous, the circumstances that led to the passing of the legislation can be looked into in order to ascertain the intention of the legislature. It is because the reports assume significance and become relevant because they precede the formative process of a legislation.”

43 The parliamentary debates and the legislative history of the constitutional

amendment, and the committee reports on Articles 246A and 279A indicate that:

(i) The draft of Article 279B, in the 2011 Amendment Bill, which sought to

introduce a GST Dispute Settlement Authority to adjudicate on any dispute

‘arising out of deviation’ from the recommendations of the GST Council was

deleted. The current Article 279A(11) provides that the GST Council shall

devise a mechanism to adjudicate on any dispute that ‘arises out’ of the

recommendations of the Council. The deletion of Article 279B while

introducing the 2014 Amendment Bill and the inclusion of Article 279(11) in

the text of the Constitution has brought about two substantial changes: one,

that instead of the creation of a dispute settlement authority, the Council is

vested with the power to decide on ‘modalities’ of dispute resolution; and

second, while Article 279B stipulated that the authority shall adjudicate on

‘disputes arising out of the deviation from the recommendations’, Article 68 (2017) 7 SCC 295

74 PART C

279(11) states that the disputes arising out of recommendations shall be

resolved. The phrase ‘deviation’ has been omitted. Before the Select

Committee of the Rajya Sabha, the Government had stated that disputes

shall be resolved by modalities including mediation and arbitration. The

Standing Committee of Finance in its report specifically recommended the

deletion of Article 279B due to the concerns raised by the States; and

(ii) Under the 2011 Amendment Bill, the GST Council could recommend only

when a unanimous decision would be reached. However, the Standing

Committee of Finance had recommended that since it would be difficult to

arrive at a consensus due to the socio-economic diversity amongst the

States, the recommendations be made with a majority instead of unanimity.

While making this recommendation, it was observed that if the GST Council

functions like the present Empowered Committee where the differences are

resolved amicably in an institutional mode, it would foster the spirit of

cooperative federalism.

C.2 The nature of the recommendations of the GST Council

Indian federalism: Dialogue of cooperative federalism 44 The arguments in favour of reading the ‘recommendations’ of the GST

Council as binding are two-fold69: first, if the GST Council cannot make binding

recommendations, the entire structure of GST will collapse as each State would then

levy a conflicting tax and collection mechanism; and second, if the recommendations 69 Alok Prasanna, ‘For a mess of Potage: The GST’s promise of increased revenue to states comes at the cost of the federal structure of the Constitution’ National Law School of India Review. Vol. 28, No. 2(2016), pp-97-113.

75 PART C

are non-binding, then there would be no dispute to be resolved under Article 279(11)

as the States would be free to disregard the recommendations. The arguments

against interpreting the ‘recommendations’ of the GST Council as binding on the

Union and the States are two-fold70: first, it would violate the supremacy of

Parliament and State legislatures since both have a simultaneous power to legislate

on GST; and second, it would violate the fiscal federalism of the States since the

Centre has a one-third vote share and the States collectively have a two-third vote

share. Therefore, no recommendation on a three-fourths majority can be passed

without the consent of the Centre.

45 One of the important characteristics of a federal polity is the distribution of

legislative power between the Union and the States. Mr H M Seervai while arguing

that India is a federal nation, referred to the exclusive power of taxation held by the

States to establish that the States were not merely given the power to legislate on

‘subordinate’ matters:

“If by ‘subordinate’ is meant ‘not important’, then, with respect, the present writer does not agree with Prof. Wheare’s assessment of the exclusive State List. Public order, the police, administration of justice, local government, public health and sanitation, to mention but a few, are matters of great importance; and so are agriculture, water (subject to Union control of the waters of inter-State rivers), land, and fisheries. Again, the allocation of taxes between the Union and the States is mutually exclusive, and the taxes allotted exclusively to the States are not negligible. Thus sales tax is an expanding source of revenue in India as it becomes increasingly industrialized under the successive five year plans. In the industrialized State of Maharashtra, the yield from Sales Tax was about Rs. 1,580 million for the year of

70 Ajitesh Kir, ‘India’s Goods and Services Tax: A Unique Experiment in Cooperative Federalism and a Constitutional Crisis in Waiting’ Canadian Tax Journal (2021) 69:2, 391-445.

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1971-72, and the estimate for the year 1972-3 was about Rs. 1,780 million. […] (k) The view that unimportant matters were assigned to the States cannot be sustained in face of the very important subjects assigned to the States in List II, and the same applies to taxing powers of the States which are made mutually exclusive of the taxing powers of the Union so that ordinarily the States have independent source of revenue of their own. The legislative entries relating to taxes in List II show that the sources of revenue available to the States are substantial and would increasingly become more substantial. In addition to the exclusive taxing powers of the States, the States become entitled either to appropriate taxes collected by the Union or to a share in the taxes collected by the Union.”

Justice PB Sawant writing for himself and Justice Kuldip Singh in SR Bommai v.

Union of India71, referred to the exclusive and equal legislative distribution of heads

of taxation to establish the federal nature of the Indian Constitution.72 Therefore, the

exclusive powers held by the States and the Centre on matters of taxation was

regarded as an important feature of India’s federal polity. The Constitution

Amendment Act 2016 alters the legislative distribution between the Centre and the

State on indirect taxation by providing Parliament and State legislatures with

‘simultaneous powers’ and no provision for repugnancy. Therefore, according to

Article 246A, both Parliament and the State Legislature possess equal power to

legislate on aspects of GST. It is the contention of the Union that the

recommendation of the GST Council should be binding on Parliament and the State

Legislatures precisely because equal power is granted to both the federal units. The

Union has argued that if the recommendations are not binding, then it would lead to

71 (1994) 3 SCC 1 72 Prasanna (n 69)

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an impasse where different Central and State legislations could be guiding the same

field.

46 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.

47 The dual federalism model or the autonomy model views the constituting units

of the Centre and States as autonomous, independent and competing units. This

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model is also termed as competitive federalism, where the constituent units

‘compete’ with each other. Proponents of the cooperative federalism model argue

that it is a mistake to view each unit as a separate autonomous entity. According to

the theory of cooperative federalism, integration and not autonomy is the objective

that federalism seeks to achieve.73 While dual federalism is termed as ‘layer cake

federalism’ due to the delineation of the structures of power, cooperative federalism

is known as ‘marble cake federalism’ due to the integrated approach of the federal

units.74 This Court in State (NCT of Delhi) v. Union of India75, has observed that

India follows the model of cooperative federalism where the Union and the State

Governments need to iron out the differences that arise in the course of the path of

development. Chief Justice Dipak Mishra elucidated on the concept of cooperative

federalism:

“119. Thus, the idea behind the concept of collaborative federalism is negotiation and coordination so as to iron out the differences which may arise between the Union and the State Governments in their respective pursuits of development. The Union Government and the State Governments should endeavour to address the common problems with the intention to arrive at a solution by showing statesmanship, combined action and sincere cooperation. In collaborative federalism, the Union and the State Governments should express their readiness to achieve the common objective and work together for achieving it. In a functional Constitution, the authorities should exhibit sincere concern to avoid any conflict. This concept has to be borne in mind when both intend to rely on the constitutional provision as the source of authority. We are absolutely unequivocal that both the Centre and the States must work within their spheres and not think of any encroachment. But in the context of exercise of authority within their spheres, there should be perception of mature statesmanship so that the

73 Robert A. Schapiro, ‘Justice Steven’s theory of Interactive Federalism’ 74 Fordham L. Rev. 2133 (2006) 74 Jessica Bulman-Pozen and Heather K. Gerken, ‘Uncooperative Federalism’ Yale Law Journal, Vol. 118. No. 7 (May, 2009), pp. 1256-1310 75 (2018) 8 SCC 501

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constitutionally bestowed responsibilities are shared by them. Such an approach requires continuous and seamless interaction between the Union and the State Governments.”

48 The Indian Constitution has sometimes been described as quasi-federal or a

Constitution with a ‘centralising drift’. This is because when the Constitution is read

as a whole, the Union is granted a larger share of the power. Instances of this

centralising drift can be traced to Articles 254, 248, and 353. However, there are

instances such as Article 246A, where the Centre and the States are conferred

equal power. Merely because a few provisions of the Constitution provide the Union

with a greater share of power, the provisions in which the federal units are

envisaged to possess equal power cannot be construed in favour of the Union. The

Union and the States have a simultaneous power to legislate on GST. The GST

Council has the power to make recommendations on a wide range of subjects

relating to GST. Since the Constitution does not envisage a repugnancy provision to

resolve inconsistencies between the Central and State laws on GST, the GST

Council must ideally function, as provided by Article 279A(6), in a harmonised

manner to reach a workable fiscal model through cooperation and collaboration.

49 The federal system is a means to accommodate the needs of a pluralistic

society to function in a democratic manner. It attempts to reconcile the desire of

unity and commonality along with the desire for diversity and autonomy. Democracy

and federalism are interdependent on each other for their survival such that

federalism would only be stable in well-functioning democracies. Additionally, the

constituent units in a federal polity check the exercise of power of one another to

80 PART C

prevent one group from exercising dominant power. The Indian Constitution, though

necessarily federal does confer the Union with a higher share of power in certain

situations to prevent chaos and provide security.76 However, even if the federal units

are not entirely autonomous as in the traditional federal system, the units still wield

power. The relationship between two constituent units that are not autonomous but

rely on each other for their functioning is not in practice always collaborative or

cooperative. If the States have been conferred lesser power they can still resist the

mandates of the Union by using different forms of political contestation as permitted

by constitutional design. Such contestation furthers both the principle of federalism

and democracy. When the federal units are vested with unequal power, the

collaboration between them is not necessarily cooperative. Harmonised decision

thrives not just on cooperation but also on contestation. Indian federalism is a

dialogue in which the States and the Centre constantly engage in conversations.

Such dialogues can be placed on two ends of the spectrum - collaborative

discussions that cooperative federalism fosters at one end of the spectrum and

interstitial contestation at the other end. Jessica Bulman and Heather K, in their

essay connote interstitial contestation as ‘uncooperative federalism’.77 They argue

that the States which possess lesser power could use licenced dissent, dissent by

using regulatory gaps or by civil disobedience such as passing a resolution against

the decision of the Central Government as means of contestation. Differentiating the

76 Seervai (n 50) 77 Bulman-Pozen and K. Gerken (n 74)

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forms of cooperative federalism from the dissent in uncooperative federalism, the

authors state:

“We think the best proxy for distinguishing dissent from routine negotiations is whether the state’s action can be fairly understood as an effort to change national policy. An attempt to obtain an accommodation or modification of federal policy within the state should usually be understood as an example of cooperative bargaining. An attempt to contest and alter national policy is rightly understood as dissent.”

50 Such form of contestation or as the authors term it, ‘uncooperative federalism’

is valuable since “it is desirable to have some level of friction, some amount of state

contestation, some deliberation-generating froth in our democratic system.”78

Therefore, the States can use various forms of contestation if they disagree with the

decision of the Centre. Such forms of contestation are also within the framework of

Indian federalism. The GST Council is not merely a constitutional body restricted to

the indirect tax system in India but is also an important focal point to foster

federalism and democracy.

51 One of the important features of Indian federalism is ‘fiscal federalism’. A

reading of the Statement of Objects and Reasons of the 2014 Amendment Bill, the

Parliamentary reports and speeches indicate that Articles 246A and 279A were

introduced with the objective of enhancing cooperative federalism and harmony

between the States and the Centre. However, the Centre has a one-third vote share

in the GST Council. This coupled with the absence of the repugnancy provision in

Article 246A indicates that recommendations of the GST Council cannot be binding.

Such an interpretation would be contrary to the objective of introducing the GST 78 Ibid, page 1284

82 PART C

regime and would also dislodge the fine balance on which Indian federalism rests.

Therefore, the argument that if the recommendations of the GST Council are not

binding, then the entire structure of GST would crumble does not hold water. Such a

reading of the provisions of the Constitution diminishes the role of the GST Council

as a constitutional body formed to arrive at decisions by collaboration and

contestation of ideas.

The contextual meaning of ‘recommendations’ 52 The phrase ‘recommendation’ is used in numerous provisions in the

Constitution but the import of the phrase differs contextually. Based on the

submission of the Union Government, there are five categories into which the

phrase ‘recommendation’ has been deployed in the Constitution:

(i) Category 1: Recommendation by the President prior to laying before the

Parliament for voting: Articles 3, 109, 111, 113, 117, 203, 207, 255 and 274

discuss the recommendations of the President or the Governor. Here the

authority recommending the initiation of the discussion and the decision-

making authority are different.

(ii) Category 2: Recommendation followed by consultation: Article 233 uses the

phrases ‘consultation’ and ‘recommendation’. Article 233(1) states that the

district judge shall be appointed by the Governor in ‘consultation’ with the

High Court. Clause 2 states that the criteria for the appointment of a person

who is not already in the service of the Union or the State is that he should

have been a pleader or an advocate for at least seven years and he should

83 PART C

be recommended by the High Court for the appointment to the post of a

District Judge. There is a two-step process for appointment, first, the

candidature must be recommended by the High Court; and second, the

recommended candidate is appointed by the Governor in ‘consultation’ with

the High Court.

(iii) Category 3: Recommendation with accountability: Articles 243I, 243Y, 280,

281, 338, 338B and 340. Articles 243I and 243Y stipulate that the Finance

Commission shall make ‘recommendations’ to the Governor on apportionment

of taxes to the Panchayats and Municipalities. Article 280 states that it “shall

be the duty of the Commission to make recommendations to the President”

on the principles governing distribution of taxes between the Union and the

States. Article 281 fosters accountability by providing that every

recommendation made by the Finance Commission shall be laid before the

House together with an explanatory memorandum on the action taken on

such recommendations. Article 338(5)(e) states that the National Commission

for Scheduled Castes shall present a report to the President annually listing

the measures that should be taken to enhance the protection and

development of the Scheduled Caste. Article 338(6) states that the President

shall cause the report to be laid before the Parliament along with a

memorandum explaining the action taken on the recommendations or the

reason for non-acceptance, if any. Article 338A is a similar provision on the

recommendatory nature of the National Commission for Scheduled Tribes.

The President has the power to appoint a Commission to investigate the 84 PART C

conditions of Backward Classes. The Commission is required to investigate

the matters referred to them and present a report along with

recommendations to the President which shall be laid before the Parliament

along with an explanation memorandum.

(iv) Category 4: Non-qualifying recommendation: The Presidential Order to

establish an Inter State Council dated 28 May 1990 issued by the Ministry of

Home Affairs, and Article 263. Article 263 provides that the President may, in

public interest, establish an Inter-State Council which shall make

recommendations for better coordination of policy and action. The Inter-State

Council was constituted by the Inter-State Council Order 1990 consisting of

the Prime Minister, Chief Ministers of all States, Chief Ministers of Union

Territories and six Ministers of Cabinet rank.

(v) Category 5: Recommendations which are obligatory in nature: Articles 270,

275, 344, 349 and 371A: Article 344 establishes the Commission and

Committee of Parliament on Official Languages. Article 344(2) states that it

shall be the duty of the Commission to make recommendations to the

President on the usage of official languages. Clause 3 states that

recommendations shall be made having due regard to the industrial, cultural

and scientific advancement of India and the claim of non-Hindi speaking

persons. Article 344(4) constitutes a Committee of the members of the Lok

Sabha and Rajya Sabha. The Committee will have to examine the

recommendations of the Commission and report its opinion to the President.

The President after considering the report, shall issue directions in 85 PART C

accordance with the whole or any part of the report. Article 349 deals with the

special procedure for enactment of law relating to language in the first fifteen

years from the commencement of the Constitution. Articles 270 and 275

stipulate that the percentage of tax apportionment and fixation of the grants

for the States from the Consolidated Fund of India shall be ordered by the

President on the recommendation of the Finance Commission.

53 A survey the above provisions indicates that the nature and meaning of the

term ‘recommendation’ differs contextually. All the provisions qualify the nature of

recommendation. For instance, in category one, the recommendation of the

President is for the initiation of the discussion; in category two, a decision on the

recommendation is arrived upon ‘consultation’; in category three, the decision-

making authority has to submit an explanatory note on the action or inaction taken

on the recommendations.; in category four, the recommendations are not qualified.

Article 263 only states that the Inter-State Council has a duty to recommend. There

is no further explanation on whether the recommendation ought to be mandatorily

accepted, or deliberated upon; in category five, the recommendations of the

authority are expressly stated to be ‘binding’ on the decision-making authority.

54 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 harmonised

86 PART C

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.

55 The Constitution employs the phrase ‘consultation’ in certain contexts. For

example, Article 320(3) states that the Public Service Commission shall be

‘consulted’ on matters relating to civil posts. Article 320(3) reads as follows:

“(3) The Union Public Service Commission or the State Public Service Commission, as the case may be, shall be consulted— (a) on all matters relating to methods of recruitment to civil services and for civil posts; (b) on the principles to be followed in making appointments to civil services and posts and in making promotions and transfers from one service to another and on the suitability of candidates for such appointments, promotions or transfers; […]” (emphasis supplied)

56 If the GST Council were intended to be a constitutional body whose

recommendations transform into legislation without any intervening act, there would

87 PART C

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 Act79 and

IGST Act80 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.

57 In Manohar v. State of Maharashtra81, a two-judge Bench of this Court while

interpreting Section 20(2) of the Right to Information Act 2005 observed that the

phrase ‘recommendation’ must be interpreted in contradistinction to ‘direction’ or

‘mandate’. It was observed as follows:

“22. We may notice that proviso to Section 20(1) specifically contemplates that before imposing the penalty contemplated under Section 20(1), the Commission shall give a reasonable opportunity of being heard to the officer concerned. However, there is no such specific provision in relation to the matters covered under Section 20(2). Section 20(2) empowers the Central or the State Information Commission, as the case may be, at the time of deciding a complaint or appeal for the reasons stated in that section, to recommend for disciplinary action to be taken against the Central Public Information Officer or the State Public Information Officer, as the case may be, under the relevant service rules. Power to recommend disciplinary action is a power exercise of which may impose penal consequences. When such a recommendation is received, the disciplinary authority would conduct the disciplinary proceedings in accordance with law and subject to satisfaction of the requirements of law. It is a 79 Section 166 of the CGST Act 80 Section 24 of the IGST Act 81 (2012) 13 SCC 14

88 PART C

“recommendation” and not a “mandate” to conduct an enquiry. “Recommendation” must be seen in contradistinction to “direction” or “mandate”. But recommendation itself vests the delinquent Public Information Officer or State Public Information Officer with consequences which are of serious nature and can ultimately produce prejudicial results including misconduct within the relevant service rules and invite minor and/or major penalty.”

In Naraindas Indurkhya v. State of Madhya Pradesh82, a Constitution Bench

observed that a ‘recommendation’ has persuasive value. In this case, this Court was

dealing with the question of whether textbooks ‘recommended’ by the Board could

be held to be in effect immediately. The Court observed:

“15. … there is a basic distinction between recommendation and prescription of a text book. When a text book is prescribed by an appropriate authority having legal power to do so, it has to be followed by the schools. Prescription of a text book carries with it a binding obligation to follow the text book. There is no such obligation when a text book is merely recommended. Recommendation has merely a persuasive effect, it being open to the schools to accept the recommendation or to reject it as they think fit. The schools may use the recommended text book or they may not according as the Principals choose. That is why no conferment of statutory power is needed to enable the Board to recommend text books and no question of ultra vires can arise in such a case. Now the text books which formed the subject matter of the notifications dated April 5, 1972, April 25, 1972, April 26 and May 17, 1972 were merely recommended and not prescribed by the Board and being only recommended text books as distinguished from prescribed text books, they obviously could not be said to be ‘in force’ immediately before the appointed day. Section 4, sub-section (2) did not, therefore, apply in respect of these text books and they could not be regarded as text books prescribed under Section 4, sub-section (2).”

In numerous cases, this Court has reiterated that recommendations cannot create

binding and enforceable rights, in contradistinction to a ‘direction’ or ‘mandate’.83

82 (1974) 4 SCC 788 83 Union of India v. Pradip Kumar Dey, (2000) 8 SCC 580; Kesoram Industries and Cotton Mills Ltd. v. CWT, (1966) 2 SCR 688; Som Mittal v. Government of Karnataka, (2008) 3 SCC 753; State of AP v. T. Gopalakrishnan Murthi, (1976) 2 SCC 883.

89 PART C

Interpretation of ‘recommendation’ vis-à-vis the provisions of IGST Act and CGST

Act

58 The contention of the Union is that the recommendations of the GST Council

are binding since Parliament and the State legislatures have agreed to align

themselves with the recommendations as is evident from the provisions of the IGST

Act and CGST Act. Certain provisions of the IGST Act, CGST Act and SGST Acts

expressly provide that the rule-making power delegated to the Government shall be

exercised on the recommendations of the GST Council. For instance, Section 5 of

the IGST Act provides that the taxable event, taxable rate and taxable value shall be

notified by the government on the “recommendations of the Council”. Similarly, the

power of the Central Government to exempt goods or services or both from levy of

tax shall be exercised on the recommendations of the GST Council under Section 6

of the IGST Act. Section 22 provides that the Government may exercise its rule

making power on the recommendations of the GST Council. The CGST Act also

provides for similar provisions in Sections 9, 11 and 164.

59 The provisions of the IGST Act and CGST Act which provide that the Union

Government is to act on the recommendations of the GST Council must be

interpreted with reference to the purpose of the enactment, which is to create a

uniform taxation system. The GST was introduced since different States could

earlier provide different tax slabs and different exemptions. 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. The

90 PART C

Council under Article 279A has wide recommendatory powers on matters related to

GST where it has the power to make recommendations on subject matters that fall

outside the purview of the rule-making power under the provisions of the IGST and

CGST Act. 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. As a

matter of first principle, the provisions of the Constitution, which is the grundnorm of

the nation, cannot be interpreted based on the provisions of a primary legislation. It

is only the provisions of a primary legislation that can be interpreted with reference

to the Constitution. The legislature amends the Constitution by exercising its

constituent power and legislates by exercising its legislative power. The constituent

power of the legislature is of a higher constitutional order as compared to its

legislative power. Even if it is Parliament that has enacted laws making the

recommendations of the GST Council binding on the Central Government for the

purpose of notifying secondary legislations, it would not mean that all the

recommendations of the Council made by virtue of its power under Article 279A

have a binding force on the legislature.

60 With this background and context, we shall now proceed to analyse the

scheme of the GST legislation and whether the impugned levy, imposed on the

recommendations of the GST Council, is valid and permissible under law.

91 PART D

D Analysis

D.1 Statutory Provisions and Scheme of the IGST Act84

61 The IGST Act enables the Central Government to impose IGST on inter-state

supply of goods and services. The Preamble to the IGST Act describes it as:

“An Act to make a provision for levy and collection of tax on inter- State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.”

In aiding the levy and collection of IGST, the IGST Act provides for a comprehensive

scheme for determining the nature of supply, time of supply and place of supply.

62 Statutory interpretation will determine whether the IGST Act confers the

powers on the Central Government, in consultation with the GST Council, to

designate imports as a supply of services under Section 5(3) of the IGST and

whether the importer can be considered as the recipient of such supply, liable to pay

tax on a reverse charge basis. Further, it will determine if the Central Government, in

consultation with the GST Council, has the powers to designate the importer as a

recipient of a service under 5(4) of the IGST Act, when goods are imported on a CIF

basis. The critical fact in this case is that the service of shipping in these CIF

contracts is availed by the non-taxable exporter who engages and pays a foreign

shipping line of their choice, without the involvement of the importer. In contrast, in

FOB contracts, the Indian importer pays for the services of shipping and directly

84 Note: In order to facilitate convenience while reading the judgment, some of the statutory provisions are reflected in more than one place in the judgment.

92 PART D

deals with the shipping line. The respondents herein are importers of non-coking

coal on a CIF basis.

63 Section 5 of the IGST Act provides for the levy and collection of tax on inter-

State supplies of goods or services. The power to impose such tax is derived from

Article 286(2) read with Article 269A(1). Sub-Section (1) of Section 5 provides for the

levy of the integrated goods and services tax on all inter-State supplies of goods or

services or both. Section 5 reads as follows:

“5. Levy and collection.— (1) Subject to the provisions of sub- section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.”

The proviso to Section 5(1) of the IGST Act clarifies that the tax is levied on goods

imported into India, in accordance with Section 3 of the Customs Tariff Act 1975.

The value is determined under the Customs Tariff Act at the point when the customs

duties are levied in accordance with the Customs Act.

64 The payment of IGST on a reverse-charge basis is contemplated in sub-

sections (3) and (4) of Section 5. Sub-section (3) provides that IGST may be paid on

a reverse charge basis on specified categories of supply of goods or services or

93 PART D

both. The Central Government is empowered to specify these categories on the

recommendations of the GST Council. Hence, on its plain terms, the payment of

IGST on a reverse charge basis is envisaged on specific categories of supply of

goods or services, or both as notified by the Central Government. The tax on a

reverse charge basis is payable by the recipient of such goods or services, or both.

The power, in other words, is to specify categories of goods or services (or both).

The provision does not empower the government to specify the recipient of the

supply of goods or services. The unamended Sub-section (4) of Section 585 provided

that the tax in respect of the supply of goods or services by an unregistered supplier,

shall be paid on a reverse charge basis by a specified registered person, as the

recipient of such supply of goods or services. The above provisions read as follows:

“(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.

(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.”

85 Sub-Section 4 of Section 5 was amended by The Integrated Goods and Services Tax (Amendment) Act 2018 w.e.f. 1 February 2019 and reads as follows:

“(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.”

94 PART D

65 On 28 June 2017, the Central Government issued Notification 8/2017, in

exercise of its powers under Section 5(1), Section 6(1) and Section 20 of the IGST

Act, read with Section 15(5) and Section 16(1) of the CGST Act. Entry 9(ii) of

Notification 8/2017 reads as follows:

SI Chapter, Description of Service Rate (per Condition No. Section or cent) Heading Heading […] […] […] 9 9965 (ii) Transport of goods in a 5 Provided that (Goods vessel including services provided credit of input transport or agreed to be provided by a tax charged on services) person located in non-taxable goods (other territory to a person located in than on ships, non-taxable territory by way of vessels transportation of goods by a including bulk vessel from a place outside India carriers, tankers) up to the customs station of used in clearance in India up to the supplying the customs stations of clearance in service has not India. been taken Explanation: This condition will not apply where the supplier of service is located in non- taxable territory. [Please refer to Explanation no. (iv)]

By Entry 9(ii) of Notification 8/2017, an integrated tax of 5 per cent was levied on

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.

95 PART D

66 On 28 June 2017, Notification 10/2017 was issued by the Central

Government in exercise of powers conferred by Section 5(3) of the IGST Act.

Notification 10/2017 specified the importer as the recipient of transportation of

service when the supplier is location in a non-taxable territory and the service of

transportation is supplied by a person in a non-taxable territory. Entry 10 of

Notification 10/2017 states the following:

SI Category of Supply of Supplier of Recipient of Service No. Services (2) (3) (4) 0) Services supplied by a person A person Importer, as defined in clause (26) 10 located in non-taxable territory located in non- of section 2 of the Customs Act by way of transportation of taxable territory 1962 (52 of 1962), located in the goods by a vessel from a place taxable territory outside India up to the customs station of clearance in India

Thus, Entry 10 of Notification 10/2017 deems an importer of goods as the ‘recipient

of service’ of transportation of goods by a foreign shipping line.

67 Both the impugned notifications, Notification 8/2017 and Notification 10/2017,

have been challenged as ultra vires the IGST Act. Before adverting to the

challenges raised by the parties, it becomes necessary to advert to some of the key

provisions contained in the CGST Act, IGST Act and Customs Act. These provisions

are necessary to respond to several contentions raised by the respondents,

including: (i) whether the taxable event stipulated by the impugned notifications

constitutes a ‘supply’ under the IGST Act; (ii) whether the importer of goods on a CIF

basis can be deemed to be the ‘recipient’ of shipping services when they do not pay

96 PART D

the consideration; and (iii) whether the import of goods constitutes a composite

supply, among others.

68 The provisions of the IGST Act apply to the whole of India as provided under

Section 1. Section 5 of the IGST Act is the charging section. Sub-section (1) of

Section 5 provides that the levy of IGST shall be paid by the taxable person. The

term ‘taxable person’ is defined in Section 2(107) of the CGST Act:

“(107) “taxable person” means a person who is registered or liable to be registered under section 22 or section 24”

69 Section 2(98) of the CGST Act defines ‘reverse charge’:

“(98) “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub- section (4) of section 5 of the Integrated Goods and Services Tax Act;”

As defined in the above clause, under the reverse charge mechanism, the liability to

pay is on the recipient of the supply of goods or services, as opposed to the supplier

of goods or services. Section 24(iii) of the CGST Act provides for compulsory

registration of “persons who are required to pay tax under the reverse charge”.

“24. Compulsory registration in certain cases.—Notwithstanding anything contained in sub-section (1) of Section 22, the following categories of persons shall be required to be registered under this Act,— (i) persons making any inter-State taxable supply; (ii) casual taxable persons making taxable supply; (iii) persons who are required to pay tax under reverse charge;

[…..]

97 PART D

(xii) such other person or class of persons as may be notified by the Government on the recommendations of the Council.” (emphasis supplied)

70 Section 2 (105) of the CGST Act defines the ‘supplier’ in relation to goods or

services as:

“(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied;”

71 Section 2(93) of the CGST Act defines the ‘recipient’ of supply of goods or

services or both and provides:

“(93) “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;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(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 and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;”

72 Sections 2(14) and 2(15) of the IGST Act define the location of the recipient of

services and the supplier of services as follows:

“(14) “location of the recipient of services” means,–– (a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business; (b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed

98 PART D

establishment elsewhere), the location of such fixed establishment; (c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and (d) in absence of such places, the location of the usual place of residence of the recipient;

(15) “location of the supplier of services” means,–– (a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business; (b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment; (c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and (d) in absence of such places, the location of the usual place of residence of the supplier;”

73 Chapter IV of the IGST Act determines the nature of the supply. Section 7 of

the IGST Act determines the nature of supply as inter-State supply, Section 8

provides for intra-State supply and Section 9 provides for supplies in territorial

waters.

74 Section 7 of the IGST Act lay down the conditions for a supply to be

construed as an “inter-State supply”. The relevant provisions, particularly sub-

Sections (3) and (4) of Section 7 are as follows:

“7. Inter-State supply.—(1) Subject to the provisions of Section 10, supply of goods, where the location of the supplier and the place of supply are in— (a) two different States; (b) two different Union territories; or (c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce.

99 PART D

[…..] (3) Subject to the provisions of Section 12, supply of services, where the location of the supplier and the place of supply are in— (a) two different States; (b) two different Union territories; or (c) a State and a Union territory, shall be treated as a supply of services in the course of inter- State trade or commerce.

(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.” (emphasis supplied)

75 The term ‘supply’ has been defined in the IGST Act with reference to the

CGST Act. Section 2(21) of the IGST Act provides that:

“(21) “supply” shall have the same meaning as assigned to it in section 7 of the Central Goods and Services Tax Act”

Section 7(1) of the CGST Act provides that:

“7. Scope of supply. (1) For the purposes of this Act, the expression "supply" includes- -

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

[(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;]

[(b) import of services for a consideration whether or not in the course or furtherance of business; [and]

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;” (emphasis supplied)

100 PART D

The term ‘taxable territory’ is defined in Section 2(22) of the IGST Act to mean the

“territory to which the provisions of this Act [IGST Act] apply”.

76 Section 13 of the IGST Act deals with determining the place of supply of

services where the location of supplier or location of recipient is outside India:

“13. Place of supply of services where location of supplier or location of recipient is outside India.—

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.

(3) The place of supply of the following services shall be the location where the services are actually performed, namely:—

[…..]

(6) Where any services referred to in sub-section (3) or sub-

section (4) or sub-section (5) is supplied at more than one location, including a location in the taxable territory, its place of supply shall be the location in the taxable territory.

[….]

(9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.

(10) The place of supply in respect of passenger transportation services shall be the place where the passenger embarks on the conveyance for a continuous journey.

(12) The place of supply of online information and database access or retrieval services shall be the location of the recipient of services.

Explanation.—For the purposes of this sub-section, person receiving such services shall be deemed to be located in the taxable territory, if any two of the following non-contradictory conditions are satisfied, namely:—

101 PART D

(a) the location of address presented by the recipient of services through internet is in the taxable territory;

(b) the credit card or debit card or store value card or charge card or smart card or any other card by which the recipient of services settles payment has been issued in the taxable territory;

(c) the billing address of the recipient of services is in the taxable territory;

(d) the internet protocol address of the device used by the recipient of services is in the taxable territory;

(e) the bank of the recipient of services in which the account used for payment is maintained is in the taxable territory;

(f) the country code of the subscriber identity module card used by the recipient of services is of taxable territory;

(g) the location of the fixed land line through which the service is received by the recipient is in the taxable territory.

(13) In order to prevent double taxation or non-taxation of the supply of a service, or for the uniform application of rules, the Government shall have the power to notify any description of services or circumstances in which the place of supply shall be the place of effective use and enjoyment of a service.” (emphasis supplied)

77 Chapter IX of the IGST Act contains miscellaneous provisions, under which

Section 20 of the IGST Act provides that the provisions in the CGST Act relating to

the scope of supply, composite or mixed supply, time and value of supply, shall

apply mutatis mutandis to integrated tax. In this regard, the time of supply of

services is provided in Section 13 of the CGST Act, while the value of taxable supply

is determined under Section 15 of the CGST Act.

78 Section 13 of the CGST Act states that the liability to pay tax on services

arises at the time of supply. Sub-section (3) of Section 13 provides for the time of

supply when tax is paid on a reverse charge basis:

“13. Time of supply of services.

[…] (3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:--

102 PART D

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.”

Sub-section (5) of Section 13 provides for the time of supply when it cannot be

determined under sub-Section (2), (3) or (4):

“(5) Where it is not possible to determine the time of supply under the provisions of sub-section (2) or sub-section (3) or sub-section (4), the time of supply shall—

(a) in a case where a periodical return has to be filed, be the date on which such return is to be filed; or

(b) in any other case, be the date on which the tax is paid.”

79 Section 15 of the CGST Act provides for the determination of the value of

taxable supply. Sub-section (1) provides that the value of supply of goods or

services shall be the transaction value; sub-section (2) provides that the value of

supply shall include taxes, duties, fees etc. charged separately under the goods and

services tax regime, incidental expenses, interest, late fee penalty, etc. Sub-sections

(4) and (5) provide for the value of the supply of goods or services if it cannot be

determined under sub-section (1).

“15. Value of taxable supply.—(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or

103 PART D

services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

[….] (4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub- section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.”

D.2 Do the impugned notifications suffer from excessive delegation?

80 Article 286(1) stipulates that the State shall not levy tax when the supply of

goods or services takes place outside the State or in the course of import or export

of goods or services from the territory of India. Clause (2) of Article 286 states that

Parliament may by law formulate principles for determining when there is a supply of

goods or services as prescribed by clause (1):

“286(1): No law of a State shall impose, or authorize the imposition of, a tax, or authorize the imposition of, a tax on the supply of goods or services or both, where such supply takes place

a) outside the State; or

b) in the course of import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).”

81 Article 269A provides that GST on supplies in the course of inter-state trade

or commerce shall be levied and collected by the Union Government. The manner of

apportionment between the Union and the States has to be provided by Parliament

on the recommendations of the GST Council. The explanation to Article 269A(1)

states that supply of goods or services in the course of import shall be deemed to be

104 PART D

supply in the course of inter-State trade or commerce. Clause (5) provides that

Parliament may by law formulate principles for determining the place of supply and

when the supply of goods or services takes place in the course of inter-state trade or

commerce:

“269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council. Explanation — For the purposes of this clause, 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.

[…] (5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.” (emphasis supplied)

82 Articles 269A stipulates that Parliament may by law formulate principles for

determining: (a) the place of supply and; (b) when the supply of goods or services or

both takes place in the course of inter-State trade or commerce. Article 286(1)

empowers Parliament to formulate the principles by law for determining when a

supply of goods or services, or both, takes place (a) outside the state; and (b) in the

course of import into or export outside the territory of India. Parliament enacted the

IGST Act prescribing the principles as required under Articles 269A and 286(1). The

provisions of the IGST Act deal with the levy and collection of tax (Section 5(1)),

export of goods and services (Section 2(5) and 2(6)), import of goods and services

(Section 2(10) and 2(11)), identification of the location of the supplier and recipient

of services (Sections 2(14) and 2(15)), determination of the nature of inter-State

105 PART D

supply (Section 7), supplies in territorial waters (Section 9), place of supply with

respect to import to India and export from India (Section 11), and place of supply of

services where the location of the supplier and recipient is in India and outside India

(Sections 12 and 13).

83 The contention of the respondents is that Section 5(3) of the IGST Act only

delegates the power to identify the categories of goods or services on which the tax

shall be paid on reverse charge basis. It is contended that since Notification 10/2017

identifies an importer as a service recipient for the purposes of Section 5(3), it is

ultra vires the parent Act on the ground of excessive delegation.

84 The legislature is required to perform its essential legislative functions. Once

the skeletal structure of the policy is framed by the legislature, the details can

emerge through delegated legislations.86 It is a settled position that the legislature

cannot delegate its ‘essential legislative functions’.87 The essential legislative

functions with respect to the GST law are the levy of tax, subject matter of tax,

taxable person, rate of taxation and value for the purpose of taxation. The principles

governing these essential aspects of taxation find place in the IGST Act: Section

5(1) identifies the subject matter of taxation as inter-State supplies of goods,

services or both; Section 2(107) of the CGST Act identifies a taxable person;

Section 5(1) provides a maximum cap of 40% as the rate of taxation; and Section

86 Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills, AIR 1968 SC 1232; Avinder Singh v. State of Punjab, 1979 1 SCC 137 87 In re Delhi Laws Act 1912, AIR 1951 SC 332; Edward Mills Co. Ltd. v. State of Ajmer, AIR 1955 SC 25; A.N Parasaran v. State of Tamil Nadu, (1989) 4 SCC 683

106 PART D

5(1) stipulates that the value of taxation be determined under Section 15 of the

CGST Act.

85 Section 2(98) of the CGST Act defines “reverse charge” as the liability of the

recipient of the supply of goods or services or both to pay tax instead of the supplier.

Section 2(93) of the CGST Act defines “recipient” with reference to three situations

(i) when consideration is payable for the supply of goods or services or both; (ii)

when no consideration is payable for the supply of goods; and (iii) when no

consideration is payable for the supply of services. In the first situation, the recipient

is the person by whom consideration is payable. In the second situation, the

recipient is the person to whom (a) the goods are delivered or made available; or (b)

possession or the use of the goods is given or made available. The CGST Act also

stipulates a two-fold requirement for a recipient to be taxed on reverse charge basis-

the recipient must be a ‘person’ as defined under Section 2(84) of the CGST; and

the person is a “taxable person” only if registered or is liable to be registered under

Section 22 or Section 24. Section 24(iii) of the CGST Act states that persons who

are required to pay tax under reverse charge must be registered. Therefore, both the

IGST and CGST Act clearly define reverse charge, recipient and taxable persons.

Thus, the essential legislative functions vis-à-vis reverse charge have not been

delegated.

86 Section 5(3) of the IGST Act provides the Government the power to specify

categories of supply of goods or services or both on which tax shall be paid on a

reverse charge basis by the recipient. The Government is to exercise this power on

107 PART D

the recommendation of the GST Council. The Government in exercise of its power

under Section 5(3) of the IGST Act issued the impugned Notification 10/2017

specifying the ‘categories of the supply’ which shall be subject to reverse charge.

The notification, besides specifying the criteria, has also mentioned the

corresponding recipient in those categories. As discussed above, the IGST Act and

the CGST Act define reverse charge and prescribe the entity that is to be taxed for

these purposes. Therefore, 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.

D.3 Charging Section: taxable person, taxable rate and manner of

determining value

87 In determining the vires of the impugned notifications, a few preliminary

contentions raised by the respondents would have to be addressed. The

respondents have argued that no charge has been created for the ocean freight

transaction to be taxed in the hands of the importer. It has been alleged that only

Section 5(1) is a charging provision and Sections 5(3) and 5(4) cannot

independently create a charge.

88 In assessing this claim, this Court is bound by a decision of the Constitution

Bench in Mathuram Agrawal (supra) which has identified three essential elements

of taxation:

108

PART D

(i) The subject of the tax;

(ii) The person who is liable to pay the tax; and

(iii) The rate at which the tax is to be paid.

This test has been further elaborated by a two-judge Bench of this Court in Gobind

Saran Ganga Saran (supra) by further requiring the designation of the measure or

the value to which the rate of the tax will be applied. Thus, the four canons of

taxation are as follows:

(i) The taxable event;

(ii) The person on whom the levy is imposed;

(iii) The rate at which the levy is imposed; and

(iv) The measure or the value to which the rate will be applied.

89 Section 5(1) of the IGST Act specifically identifies the four canons of taxation:

(i) the inter-State supply of goods and services as the taxable event; (ii) the “taxable

person” as the person on whom the levy is imposed; (iii) the taxable rate as such a

rate notified by the Union Government on the recommendation of the GST Council,

capped at forty per cent; and (iv) the taxable value as the value determined under

Section 15 of the CGST Act.

90 Section 5(3) and Section 5(4) of the IGST Act are inextricably linked with

Section 5(1) of the IGST Act which is the charging provision. They must be

109 PART D

construed together in determining the vires of the taxation. In CIT v. B C Srinivas

Setty88, a three-judge Bench of this Court has held that the machinery provisions of

an Act and the charging sections are inextricably linked. The Court observed:

“A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions of the Income Tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.” (emphasis supplied)

Taxable person

91 The respondents have alleged that the importer cannot be validly termed as a

taxable person. However, this argument has to fail on a close reading of the

impugned notifications alongside Sections 2(107) and 24 of the CGST Act. 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 the CGST Act qualify the 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”. Since the impugned notification 10/2017 identifies the importer as the

recipient liable to pay tax on a reverse charge basis under Section 5(3) of the IGST 88 AIR 1981 SC 972

110 PART D

Act, the argument of the failure to identify a specific person who is liable to pay tax

does not stand.

92 The decision in Laghu Udyog (supra), rendered by a two-judge Bench of this

Court, invalidated certain service tax rules formulated under the Finance Act 1997 to

give effect to the collection of service tax. Section 66 read with Section 68(1)(a) of

the Finance Act 1997 specifically identified the taxable person to include only those

persons responsible for collecting the service tax. The rules had sought to effect a

reverse charge by identifying the customers of goods transport operators and of

clearing and forwarding agents as the assessee, even though they were not

responsible for collecting the service tax. The basis for nullifying the rules was that

the Finance Act 1997 did not enable the imposition of such a reverse charge on the

person who is not supplying the service. The Court held:

“9. Section 68(1-A) is a special provision which has been inserted by the Finance Act, 1997. According to Section 68(1) “every person who was providing the taxable service is the one who is required to collect the service tax at the rate specified in Section 66”. With respect to the taxable services referred in Items

(g) to (r) of clause (41) of Section 65, Section 68(1-A) provides that the service tax for such service shall be collected from such person and in such manner as may be prescribed and to such person all the provisions shall apply as if he is the person responsible for collecting the service tax in relation to such service. As we read Section 68 it does not in any way seek to alter or change the charge of service tax levied under Section 66, which is on the person responsible for collecting the service tax.

It also does not to our mind, in any way, amend any of the clauses of Section 65 which contain the definitions of different expressions. All that Section 68(1-A) enables to be done is that with regard to the assessees or the persons who are responsible for collecting the service tax, the individual or the officer concerned can be identified and it is that person who would be a person responsible for collecting the service tax. In other words this provision, namely, Section 68(1-A) cannot be so interpreted as to make a person an assessee even though he may not be responsible for collecting the service tax. The service tax is levied by reason of the services which are

111 PART D

offered. The imposition is on the person rendering the service. Of course, it may be an indirect tax; it may be possible that the same is passed on to the customer but as far as the levy and assessment are concerned it is the person rendering the service who alone can be regarded as an assessee and not the customer. This is the only way in which the provisions can be read harmoniously.

[…]

10. By amending the definition of “person responsible for collecting of service tax” in the impugned rules with regard to services provided by the clearing and forwarding agents and the goods transport operator a person responsible is said to be the client or the customer of the clearing and forwarding agents and the goods transporter. In relation to the services provided by others and referred to in sub-rules (i) to (xi) and (xiii) to (xvi) of Rule 2(d), the definition of the person responsible is in consonance with the definition of that expression occurring in Section 65 of the Act. However, with regard to the services rendered by the clearing and forwarding agents and the goods transport operator the definitions contained in Rule 2(d)(xii) and (xvii), which seek to make the customers or the clients as the assessee, are clearly in conflict with Sections 65 and 66 of the Act.” (emphasis supplied)

The decision in Laghu Udyog (supra) has no applicability to the facts of the present

case since Parliament has statutorily incorporated the concept of a reverse charge

under Sections 5(3) and 5(4) of the IGST Act. The impugned notification 10/2017

clearly specifies a taxable person who is liable to pay a reverse charge that is

envisaged in the statute. Thus, the impugned notifications cannot be invalidated for

an alleged failure to identify a taxable person.

Taxable value

93 By a corrigendum dated 8 June 2016, Notification 8/2017 was amended to

include the measure of taxable value to be ten per cent of the CIF value. Section

5(1) of the IGST Act enables the taxable value to be determined under Section 15 of

112 PART D

the CGST Act. The respondents have argued that the value has to be strictly

determined by Section 15(1)89 of the CGST Act and not by way of delegated

legislation. However, Sections 15(4) and 15(5) enable delegated legislation to

prescribe methods for determination of value, on the recommendations of the GST

Council. Section 15 is extracted below :

“Section 15- Value of Taxable Supply:

[…]

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-

section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.”

Rules 27 to 31 of Chapter IV of the CGST Rules 2017, prescribe the manner of

determining value of supply. Rule 31 also provides for residual powers to the GST

Council for prescribing modes of valuation.

“31. Residual method for determination of value of supply of goods or services or both.— Where the value of supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of Section 15 and the provisions of this Chapter:

Provided that in the case of supply of services, the supplier may opt for this rule, ignoring Rule 30.”

94 The respondents have urged that the determination of the value of supply has

to be specified only through rules, and not by notification. However, this would be an

unduly restrictive interpretation. Parliament has provided the basic framework and 89 “Section 15: Value of Taxable Supply- (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”

113 PART D

delegated legislation provides necessary supplements to create a workable

mechanism. Rule 31 of the CGST Rules 2017 specifically provides for a residual

power to determine valuation in specific cases, using reasonable means that are

consistent with the principles of Section 15 of the CGST Act. This is where the value

of the supply of goods cannot be determined in accordance with Rules 27 to 30 of

the CGST Rules 2017. Thus, the impugned notification 8/2017 cannot be struck

down for excessive delegation when it prescribes 10 per cent of the CIF value as the

mechanism for imposing tax on a reverse charge basis.

D.4 Taxable event: Is an ocean freight transaction for import of goods a

valid category of supply of services under Section 5(3) of IGST Act?

95 The other limb for contesting the validity of the impugned notification is with

respect to its identification of a “taxable event”. The question that falls for the

determination is whether the impugned notifications issued in 2017, under Section

5(3) of the IGST Act, validly prescribe a taxable event that constitutes an inter-State

supply of goods and services with the importer being a recipient of shipping services

in CIF transactions.

96 The analysis of whether import of goods under CIF contracts constitutes a

valid import of service has to be answered on two prongs: (i) whether classification

of imports as a specific category of supply of shipping service is valid under Section

5(3) read with Section 5(1) of the IGST Act; and (ii) whether the recipient of the

114 PART D

imported goods is also a recipient of shipping services in CIF transactions under

Section 5(3).

D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state

supply or is it an extra-territorial tax?

97 Notification 8/2017 specifically delineates the service that is accompanied

with the transportation of goods from a non-taxable territory as a specified category

of service under Section 5(3) of the IGST Act. This categorization taxes the recipient

of such transportation service on a reverse charge basis. The respondents have

argued that the supply of service of shipping in a CIF contract is from the foreign

shipping line to the foreign exporter. It is alleged that this transaction has no

territorial nexus to India and does not constitute “supply” that can be taxed within the

meaning of the CGST Act and IGST Act.

98 We shall now advert to certain key provisions relevant to determine whether

the taxable event in the present case that is, “services supplied by 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 station of clearance in India” constitutes an ‘inter-

State supply’ for the purposes of the charging Section 5(1) of the IGST Act, read

with Sections 5(3) and the unamended Section 5(4).

99 Section 5(1) levies IGST on all “inter-state supplies” of goods or services or

both. Section 5(3) of the IGST Act confers power on the Central Government, on the

recommendation of the GST Council, to specify categories of supply of goods or

115 PART D

services or both where the tax shall be paid on a reverse charge basis by the

recipient. While analysing the respondents’ contention, it is important to

contextualize the purpose of GST and the constitutional amendment to effect it. In

modern commerce, the distinction between goods and services is increasingly

becoming a matter of degree than substance. GST seeks to focus on the taxation of

“supply” of goods or services. The provisions of the IGST and CGST Act focus on

implementing a workable machinery to adequately capture the complexities of

supply in a global and digital age.

100 The term ‘supply’ has been defined in the IGST Act with reference to the

CGST Act. Section 2(21) of the IGST Act provides that:

“(21) “supply” shall have the same meaning as assigned to it in section 7 of the Central Goods and Services Tax Act”

Section 7(1) of the CGST Act provides thus:

“7. Scope of supply.

(1) For the purposes of this Act, the expression "supply" includes-

-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

[(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of

116 PART D

activities or transactions inter se shall be deemed to take place from one such person to another;]

[(b) import of services for a consideration whether or not in the course or furtherance of business; [and]

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

[….]

(3) Subject to the provisions of sub-sections (1), (1-A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.”

(emphasis supplied)

Further, Section 7 of the IGST Act defines the scope of inter-State supply. Section

7(4) of the IGST Act states that “supply of services imported into the territory of India

shall be treated to be a supply of services in the course of inter-State trade or

commerce”:

“7. Inter-State supply.—

(1) Subject to the provisions of Section 10, supply of goods, where the location of the supplier and the place of supply are in—

(a) two different States;

(b) two different Union territories; or

(c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce.

(2) 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.

(3) Subject to the provisions of Section 12, supply of services, where the location of the supplier and the place of supply are in—

(a) two different States;

117 PART D

(b) two different Union territories; or

(c) a State and a Union territory, shall be treated as a supply of services in the course of inter- State trade or commerce.

(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.

[…]” (emphasis supplied)

101 Section 7 of the CGST Act defines the term “supply” with a broad brush and

provides for an inclusive definition. Section 7(1)(b) of the CGST Act considers import

of services for a consideration to constitute “supply”. Section 7(1)(c) of the CGST

Act captures any and all activities in Schedule 1 of the CGST Act, irrespective of

whether they are made for a consideration. Additionally, Section 7(3) confers the

power on the Central Government to specify which transactions are to be treated as

a supply of goods and not a supply of services, and vice-versa. Section 7(4) of the

IGST Act states that supply of services imported into India would be considered as a

supply of services in the course of “inter-State trade or commerce”. Thus, an Indian

importer could also be considered as an importer of the service of shipping which is

liable to IGST on inter-state supply, if the activity falls within the definition of “import

of service” for the IGST Act and CGST Act.

102 The term ‘importer’ is not defined in the IGST Act or the CGST Act. Section

2(26) of the Customs Act defines an ‘importer’ as:

“(26) "importer", in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes [any owner, beneficial owner] or any person holding himself out to be the importer”

The term ‘import of goods’ is defined in Section 2(10) of the CGST Act as:

118 PART D

“(10) “import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India”

“Import of services” is defined in Section 2(11) of the CGST Act as:

“(11) ‘‘import of services” means the supply of any service, where––

(i) the supplier of service is located outside India;

(ii) the recipient of service is located in India; and

(iii) the place of supply of service is in India;”

The conditions for an “import of service” would entail three aspects: (i) the supplier

of service must be located outside India; (ii) the recipient of the service must be

located in India; and (iii) the place of supply of service ought to be in India. The

respondents have argued that conditions (ii) and (iii) are not satisfied in the case of

CIF contracts since the recipient of shipping services would be the foreign exporter

and the place of supply would be the place of business of such foreign exporter.

However, in interpreting the expressions “recipient” and “place of supply”, this Court

would have to analyse these terms vis-à-vis the IGST Act and the CGST Act and not

exclusively from the provisions of the contract between the foreign exporter and the

foreign shipping line.

103 Chapter V of the IGST Act provides for methodologies to determine the place

of supply of goods or services or both. Section 13 of the IGST Act provides the place

of supply of services where the location of the supplier or location of recipient is

outside India:

“13. Place of supply of services where location of supplier or location of recipient is outside India—

119 PART D

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services. […]

(9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.” (emphasis supplied)

Section 13(9) of the IGST Act appears to create a deeming fiction, where in case of

supply of services of transportation of goods by a supplier located outside India, the

place of supply would be the place of destination of such goods. The supplier, the

foreign shipping line, in this case would be a non-taxable person. However, its

services in a CIF contract for transport of goods would enter Indian taxable territory

as the destination of such goods. The place of supply of shipping service by a

foreign shipping line, would thus be India.

104 The respondents argued that since Section 7(1)(b) of the CGST Act does not

define “supply” of import of service without consideration, other than the ones

specified in Schedule 1, this would be inapplicable to importers with CIF contracts as

the consideration is paid by the exporter. Thus, the importer of goods cannot be said

to be an importer of shipping service since the latter is not an import of service for a

consideration under Section 7(1)(b) of the CGST Act. However, this argument

120 PART D

misses out on some crucial definitions. The term ‘supply’ has been defined in the

IGST Act with reference to the CGST Act. Thus, the three conditions for “import of

services” under Section 2(11)(iii) must be understood with reference to the

provisions of the CGST and IGST Acts, including the provisions for determination of

place of supply under Section 13(9) of the IGST Act. As mentioned previously,

Section 13(9) of the IGST Act creates a deeming fiction of place of supply of

transportation services to be in India when the destination of goods is in India. In this

case, it is clear the supplier of service- the foreign shipping line - is located outside

India; and the place of supply is India. Accordingly, Section 13 of the CGST Act

would be applicable to determine the time of such supply.

105 The respondents have argued that the ocean freight transaction cannot be

considered as “supply” since Section 7(1)(b) of the IGST act requires the import of

service to be for a “consideration”. The definition of “consideration” in Section 2(31)

of the CGST Act is instructive:

“(31) “consideration” in relation to the supply of goods or services or both includes—

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for

121 PART D

such supply unless the supplier applies such deposit as consideration for the said supply;” (emphasis supplied)

Thus, Section 2(31) of the CGST Act defines ‘consideration’ to include payment

made or to be made, in money or any other form, for the inducement of supply of

goods or services to be made by the recipient or by any other person. Thus, in the

case of goods imported on a CIF basis, the fact that consideration is paid by the

foreign exporter to the foreign shipping line would not stand in the way of it being

considered as a “supply of service” under Section 7(4) of the IGST Act which is

made for a consideration, thereby constituting “supply of service” in the course of

inter-state trade or commerce that can be subject to IGST under Section 5(1) of the

IGST Act.

106 At this stage, we note that the respondents have also challenged the

impugned levy on the ground that the transaction takes place beyond the territory of

India and is thus, extra territorial in nature. Mr Arvind Datar and Mr Harish Salve,

learned senior counsel have urged that the service of transportation occurs outside

India, that is outside the taxable territory and bears a nexus with India only as the

destination of goods is India. However, the submission is that since the import of

goods is taxed under Section 5(1) as ‘supply of goods’, there remains no territorial

nexus of the transportation service with the Indian territory. An extension of this

argument is that in case Parliament seeks to levy a tax outside its territory, it makes

a deeming fiction in the statute and not by way of delegated legislation.

122 PART D

107 A Constitution Bench in GVK Industries (supra), considered the question

whether Parliament is competent to enact legislation with regard to extra-territorial

aspects of certain events. Answering the question in affirmative, Justice B

Sudarshan Reddy, speaking for the Constitution Bench, held:

“124. […] The answer to the above would be yes. However, Parliament may exercise its legislative powers with respect to extra- territorial aspects or causes—events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like—that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra- territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well- being of, or security of inhabitants of India, and Indians.

125. It is important for us to state and hold here that the powers of legislation of Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ought not to be subjected to some a priori quantitative tests, such as “sufficiency” or “significance” or in any other manner requiring a predetermined degree of strength. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful.

126. Whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where

123 PART D

Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Constitution:” (emphasis supplied)

The decision in GVK Industries (supra) clearly recognises the power of Parliament

to legislate over events occurring extra-territorially. The only requirement imposed

by the Court is that such an event must have a real connection to India.

108 The impugned levy on the supply of transportation service by the shipping

line to the foreign exporter to import goods into India has a two-fold connection: first,

the destination of the goods is India and thus, a clear territorial nexus is established

with the event occurring outside the territory; and second, the services are rendered

for the benefit of the Indian importer. Thus, the transaction does have a nexus with

the territory of India.

109 As an alternative, the respondents submitted that though the levy may have a

nexus with the Indian territory, the levy of tax extra-territorially must be provided by

Parliament through statute and not by the Union Government through delegated

legislation. We do not find any applicability of this submission to the facts at hand.

As stated above, the IGST Act under Section 13(9) recognises the place of supply of

services as the destination of goods when the supplier is located outside India.

Since the destination of goods is India, the statute itself is broad enough to cover a

taxable event that has extra-territorial aspects, which bears a nexus to India.

124 PART D

110 In determining the vires of the impugned notifications, the only question that

falls for determination is whether the importer of goods can be considered as the

recipient of the service of shipping in CIF contracts.

D.4.(b) Are importers service recipients under CIF contracts?

111 The impugned notification 8/2017, inter alia, identifies several categories of

supply of services such as hotels, restaurants, transportation by rail/road/air and

legal and accounting services. The respondents, as importers of goods under CIF

transactions, are aggrieved by the following categorization:

“Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to person located in 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 up to the customs station of clearance in India.”

The respondents are aggrieved by the fact that this categorization, coupled with

impugned notification 10/2017, deems the importer of goods as the recipient of the

service of shipping, irrespective of whether the import of goods was on the basis of a

CIF or FOB contract.

112 Section 5(3) of the IGST Act enables taxation of the recipients of certain

specified categories of supply of services on a reverse charge basis. It is pertinent to

note that the tax is payable “by the recipient” of such services, in contradistinction to

broad language such as “any person as may be prescribed” which was otherwise

used in Section 98(2) of the Finance Act 1994 which taxed services. Section 5(3)

states:

125

PART D

“(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…” (emphasis supplied)

The term “recipient” of a supply of service has been exhaustively defined by Section

2(93) of the CGST Act:

“(93) “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;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available;

and

(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 and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;” (emphasis supplied)

Thus, the language employed in Section 2(93)(a) of the CGST Act clearly stipulates

that when a consideration is payable for the supply of services, the recipient would

mean the person who is liable to pay that consideration. However, when no

consideration is payable for the supply of a service, Section 2(93)(c) states that the

recipient shall be the person to whom the service is rendered. Further, Section 2(93)

provides that “any reference to a person to whom supply is made shall be construed

as a reference to the recipient”. Hence, where the statute refers to a person to whom

a supply is made, it has to be construed as a reference to the recipient of service.

126 PART D

113 In a CIF transaction, the foreign exporter contracts with a foreign shipping

line. The service of shipping is rendered by the foreign shipping line to the foreign

exporter and the consideration is accordingly payable by the latter to the former. The

cost of such shipping may form a component of the price that is eventually charged

to the importer, based on the negotiated terms. If an FOB contract were to be

negotiated, the importer would independently avail of the service of shipping and

pay for the consideration. The Union Government has argued that import of goods

on a CIF basis would be construed as import of services where sub-clause (c) of

Section 2(93) applies to determine the recipient. The respondents have argued that

the importer in a CIF contract can be considered as a recipient of the service only in

a colloquial sense. The mere destination of the service of shipping would not convert

it into a service vis-à-vis the importer without any elements of a contract. Hence,

they urge that in the absence of specific deeming provisions in the statute, over-

arching principles of privity of contract are relevant for interpreting the term

“recipient” deployed in Section 5(3) of the IGST.

114 The Union Government has argued that Section 2 of the CGST Act is

prefaced with the term “unless the context otherwise requires”, and hence would

enable taxation of the importer on a reverse charge basis as the “recipient” of

service under Section 2(93). However, this argument overlooks the context of

Section 5(3) of the IGST Act which reiterates the taxable person to be the recipient

of the service and only enables the Union Government to notify categories of inter-

state supply of goods and services.

127 PART D

115 The Union Government has attempted to make a far-fetched argument that

Section 24(iii) of the CGST Act mandating compulsory registration of persons liable

to pay tax on a reverse charge basis extends to designating any person to pay the

tax on a reverse charge basis, irrespective of their status as either a recipient or a

supplier of service. This argument inverts the identification of a category of goods

and services under Section 5(3) and the recipient therein, who is then liable to

compulsorily register themselves under Section 24(iii) of the CGST Act. The power

of the Central Government to designate persons and categories of supply for

reverse charge derives from Sections 5(3) and 5(4) of the IGST Act and not Section

24(iii) of the CGST Act which mandates the compulsorily registration as a logical

corollary to ensure tax collection. Section 2(98) of the CGST Act, which defines

“reverse charge” reiterates that it means the “liability to pay tax by the recipient of

supply of goods or services or both instead of the supplier…”. It cannot be construed

to imply that any taxable person identified for payment of reverse charge would

automatically become the recipient of such goods or service. The deeming fiction of

treating the importer as a recipient must be found in the IGST Act. As it currently

stands, Section 5(3) of the IGST Act enables the delegated legislation to create a

deeming fiction on categories of supply of goods/services alone.

116 Interpreting the term “by the recipient” vis-à-vis the categories of goods and

services identified in Section 5(3) of the IGST Act should necessarily be governed

by the principles governing the definition of “recipient” under Section 2(93) of the

CGST Act. Contrary to the arguments of the Union Government, such an

128 PART D

interpretation would not annihilate the mandate of compulsory registration under

Section 24(iii) of the CGST Act. It would be applicable to suitably worded provisions

in the CGST or IGST Act which permit the Central Government to identify a taxable

person for a reverse charge. In any event, it would be applicable to all the recipients

liable for reverse charge under Sections 5(3) and 5(4) of the IGST Act. The

ineffectiveness of a tax collection mechanism under Section 24(iii) of the CGST Act

cannot be argued to obfuscate the concept of a “recipient” of a good or service that

is uniformly understood across the IGST Act, CGST Act and tax jurisprudence.

117 The Union Government has argued that the expression “by the recipient” in

Section 5(3) of the IGST Act does not impede the authority of the GST Council in

making recommendations for issuance of notifications for identifying such persons

who shall be governed by reverse charge and once the identification is complete,

such taxable person would automatically be interpreted as “the recipient”. This

argument requires the Court to completely discard the principles of determining the

recipient of a service and replace it with whichever taxable person is identified. The

appellant may argue for such an interpretation to achieve a favourable outcome in

this case. However, in matters of inter-state supply when the supplier and recipient

are within the territory of India, this Court would have to follow this artificially

bifurcated interpretation which identifies recipients vis-à-vis the nature of service and

supply in some cases, and by a simple equation of the identified taxable person in

others without considering the literal and contextual definition of recipient. This is

against settled rules of interpretation and would be an act of judicial legislation. If

129 PART D

Parliament’s intention were to designate certain persons for reverse charge,

irrespective of them being the recipient of such goods and services, it must make a

suitable amendment to confer such power for exercise of delegated legislation.

118 The only argument that supports the case of the appellant is that of Section

13(9) of the IGST Act read together with Section 2(93)(c) of the CGST Act which

defines a “recipient”. As noted in Section D.4.(a) above, Section 13(9) of the IGST

Act creates the deeming fiction of place of supply of service to be the destination of

goods when they are transported by means other than mail or courier. No specific

exemptions for importers have been carved out. This Court is inclined to accept this

reasoning and read it into the definition of recipient in Section 2(93) of the CGST Act

which is as follows:

“(93) “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;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available;

and

(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 and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;” (emphasis supplied)

Since a reference to a person to whom a supply is made, is a reference to the

recipient, the place of supply is critical. By virtue of Section 13(9) of the IGST Act,

the place of supply is the destination of goods. The time of supply is then

130 PART D

determined through the provisions of Section 13 of the CGST Act. 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.

“(14) ―location of the recipient of services means,––

(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and

(d) in absence of such places, the location of the usual place of residence of the recipient;

(15) location of the supplier of services means,––

(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(d) in absence of such places, the location of the usual place of residence of the supplier;” (emphasis supplied)

In such a scenario, 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. The supply

131 PART D

can thus be construed as being “made” to the Indian importer who becomes the

recipient under Section 2(93)(c) of the CGST Act.

119 This conclusion comports with the philosophy of the GST to be a consumption

and destinated based tax. The services of shipping are imported into India for the

purpose of consumption that is routed through the import of goods. Although the

consideration for shipping is payable by the foreign supplier to the foreign shipping

line in CIF contracts, the price is consequently factored into the price of the

shipment. The ultimate benefactor of the shipping service is also the importer in

India who will finally receive the goods at a destination which is within the taxable

territory of India. Thus, the meaning of the term “recipient” in the IGST Act will have

to be understood within the context laid down in the taxing statute (IGST and CGST

Act) and not by a strict application of commercial principles.

120 Some of the respondents have argued that the possibility of two different

recipients of services would create absurdities since whether a supply of service is

an inter-state supply under Section 7(3) or intra-state supply under Section 8(2) of

IGST Act depends on the location of the supplier and the place of supply, which in

most cases is the location of the recipient of service. Since there can effectively be

two recipients on a reading of Section 2(93)(a) and (c) of the CGST Act, the

respondents argue that the transaction may simultaneously become an inter-state or

intra-state supply. This could also mean that two recipients can claim ITC. However,

this argument is inapplicable to the case at hand since Sections 7(3) and 8(2) of the

IGST Act do not conflate the concept of imports. Section 8(2) deals with a scenario

132 PART D

where the location of the supplier and place of supply are within the same

State/Union Territory in India. This is inapplicable to determining imports where the

supplier is located outside India. Similarly, Section 7(3) deals with inter-state supply

within the territory of India. Further, both these sections are subject to the provisions

of Section 12 of the IGST Act where both- the supplier and recipient are located in

India. Section 12 of the IGST Act does not create the deeming fiction under Section

13(9) of the IGST Act which is applicable only when the supplier is located outside

India. The applicable section in this case would be Section 7(4) of the IGST Act

which clearly stipulates that “Supply of services imported into the territory of India

shall be treated to be a supply of services in the course of inter-State trade or

commerce”. Thus, no absurdity is created by the deeming fiction argued by the

Union Government. In no scenario would the foreign exporter be claiming ITC in

India.

121 The respondents’ arguments of identification of two recipients do not have

any bearing on the determination of the present dispute as the foreign exporter is

not sought to be taxed in this case. In the digital age, the concepts of supplier and

recipient of service have also been altered and are not necessarily understood as

two parties with a direct chain of supply. The IGST Act tends to create several such

deeming fictions to adequately capture such complexities. For instance, Section 5(5)

of the IGST Act taxes the electronic commerce operator as the supplier of service in

spite of it only being a conduit, in the commercial sense. These deeming fictions

need to be respected for the purpose of the statute, as long as they have

133 PART D

constitutional and parliamentary sanction. Similarly, Section 2(14)(c) of the IGST Act

recognizes the possibility of the supply being received in more than one

establishment:

“(14) “location of the recipient of services” means,—

(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and

(d) in absence of such places, the location of the usual place of residence of the recipient;”

122 Section 13 of the IGST Act is critical to effectively meet the aim of the GST

statute to tax the destination of supplies, as opposed to their origins. The deeming

fiction therein is critical to interpret the charging provision under the IGST Act

(Section 5). The respondents’ argument for the irrelevance of determining the

beneficiary of the supply or who has received the supply in view of the definition of

‘recipient’ of Section 2(93) of the CGST Act mis-reads Section 2(93) which identifies

the recipient, inter alia, on the basis of the person to whom “supply is made” i.e. the

place of supply.

123 GST laws mark a departure from the previous policy of taxing

sale/consignments and focuses on the taxing of supplies. The concept of a supply-

centric and destination-based tax runs through the scheme of the statutory

provisions and the proposals issued by the GST Council. Thus, an amendment to

the Constitution was introduced in the form of Article 366(12-A) to create a tax on

134 PART D

the supply of goods, or services, or both. In the commercial reality of the times, the

conceptual lines between goods and services wear thin. Hence, the focus is on the

taxation of supply, as opposed to the creation of neat compartments between goods

and services. Section 7(1)(c) of the CGST Act specifically characterizes import of

services for a consideration to constitute “supply”. The only question that falls for

determination is whether the imports of goods on a CIF basis would also constitute

import of shipping services, by way of deeming fiction. We have held that Section

5(3) of the IGST does not confer the powers on the Central Government to create a

deeming fiction vis-à-vis who constitutes the recipient. Section 5(3) merely enables

the Central Government to identify certain categories of goods and services, where

the recipient of such services is subject to a reverse charge, as opposed to the usual

mode of taxation where the supplier of the service is charged on a forward charge

basis. However, Section 13(9) of the IGST Act read with Section 2(93)(c) of the

CGST Act inherently create a deeming fiction of the importer of goods to be the

recipient of shipping service.

D.5 Applicability of Section 5(4) of IGST Act

124 By way of an arguendo, the Union Government has argued that if the

importers do not qualify as service recipients, the impugned notifications would

derive their validity from Section 5(4) of the IGST Act. The unamended Section 5(4)

of the IGST Act stated as follows:

“(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

135 PART D

person liable for paying the tax in relation to the supply of such goods or services or both.” (emphasis supplied)

On 29 August 2018, Section 5(4) was amended by Amending Act 32 of 2018, to

state the following:

“(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.” (emphasis supplied)

The amended Section 5(4) came into effect on 1 February 201990. Amending Act 32

of 2018 enables the Central Government to create a deeming fiction of declaring a

class of registered persons “as the recipient” of the supply of taxable goods or

service. In deploying the language “as the”, and not “by the” recipient, the

applicability of the definition of recipient vis-à-vis Section 2(93) of the CGST Act is

no longer necessary for determining the validity of such a notification. The effect of

the Amending Act 32 of 2018 has been as follows:- (i) the powers of the Central

Government to specify through a notification has been clarified; and (ii) the power to

specify a class of registered persons as the recipient has been recognised.

125 The Union Government has argued that Notifications 8/2017 and 10/2017

dated 28 June 2017 issued under Section 5(3) may also be read as issued under

Section 5(4) of the IGST, in which case, the importers would be liable to tax with

90 Notification No. G.S.R. 67(E) dated 29 January 2019

136 PART D

effect from 1 February 2019 though exempted for the period 13 October 2017 – 31

January 2019.

126 The respondents have argued that the amended and unamended Section

5(4) do not save the impugned notifications since they still make the reference to the

term “recipient”. However, the respondents crucially miss out that Section 5(4)

employs the language “as the recipient”, in contradistinction to Section 5(3) of the

IGST Act which uses “by the recipient”. We have held that recipient includes the

importer in Part D above. Further, Section 5(4) clarifies that it may designate a class

of registered persons as the recipient, thereby broadening the scope of Section

2(93) of the CGST Act, which is anyway an inclusive definition since Section 2 is

prefaced with “unless the context otherwise requires”.

127 It is settled law that non-reference of the source of power may not vitiate its

exercise and application in given facts and circumstances of a case. In Union of

India v. Tulsi Ram Patel91, a Constitution Bench held that when a source of power

legally exists, a non-reference or an incorrect reference during its exercise does not

vitiate the action. Speaking in the context of the Railway Service Rules which did not

account for the power of the Disciplinary Authority under Article 311(2), this Court

held:

“126. As pointed out earlier, the source of authority of a particular officer to act as a disciplinary authority and to dispense with the inquiry is derived from the service rules while the source of his power to dispense with the disciplinary inquiry is derived from the second proviso to Article 311(2). There cannot be an exercise of a power unless such power exists in law. If such power does not 91 1985 3 SCC 398

137 PART D

exist in law, the purported exercise of it would be an exercise of a non-existent power and would be void. The exercise of a power is, therefore, always referable to the source of such power and must be considered in conjunction with it. The Court's attention in Challappancase [(1976) 3 SCC 190 : 1976 SCC (L&S) 398 :

(1976) 1 SCR 783] was not drawn to this settled position in law and hence the error committed by it in considering Rule 14 of the Railway Servants Rules by itself and without taking into account the second proviso to Article 311(2). It is also well settled that where a source of power exists, the exercise of such power is referable only to that source and not to some other source under which were that power exercised, the exercise of such power would be invalid and without jurisdiction. Similarly, if a source of power exists by reading together two provisions, whether statutory or constitutional, and the order refers to only one of them, the validity of the order should be upheld by construing it as an order passed under both those provisions. Further, even the mention of a wrong provision or the omission to mention the provision which contains the source of power will not invalidate an order where the source of such power exists. (See Dr Ram Manohar Lohia v. State of Bihar [AIR 1966 SC 740 : (1966) 1 SCR 709, 721 : 1966 Cri LJ 608] and Municipal Corporation of the City of Ahmedabad v. Ben Hiraben Manilal [(1983) 2 SCC 422 : (1983) 2 SCR 676, 681] .) The omission to mention in the impugned orders the relevant clause of the second proviso or the relevant service rule will not, therefore, have the effect of invalidating the orders and the orders must be read as having been made under the applicable clause of the second proviso to Article 311(2) read with the relevant service rule. It may be mentioned that in none of the matters before us has it been contended that the disciplinary authority which passed the impugned order was not competent to do so.” (emphasis supplied)

128 Similarly, in Titagarh Paper Mills v. Orissa State Electricity Board92, a

three-judge Bench of this Court, in the context of the Electricity Supply Act 1948,

held that a mislabelling of the source of power would not vitiate its exercise:

“9. …..But, if there is one principle more well settled than any other, it is that, when an authority takes action which is within its competence, it cannot be held to be invalid, merely because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision. A mere wrong description of the source of power — a mere wrong label —

92 1975 2 SCC 436

138 PART D

cannot invalidate the action of an authority, if it is otherwise within its power..”

Thus, as long as a source of power to legislate or issue a notification is available,

the lack of a mention, an incorrect reference or mistake does not vitiate the exercise

of such power.

129 The impugned notifications were issued with the intention of creating a level

playing field between the Indian and foreign shipping lines. In the Eighteenth GST

Council meeting held on 31 June 2017, the agenda of taxing importers on a reverse

charge basis was discussed:

““Para 6.7.1: Agenda Item 3(v)- Value for the purpose of levy of GST on transportation of goods by a vessel from a place outside India up to the customs station in India 6.7.1. In the existing Service Tax Law, with a view to provide level playing field to the Indian shipping companies, it has been provided that in cases where the goods are imported by an importer in India on CIF (Cost, Insurance and Freight) basis and the service of transportation of goods by a vessel from a place outside India up to the customs station in India is provided by a person located in non-taxable territory (a foreign shipping line) to a person located in non-taxable territory (overseas supplier/ exporter of goods), the importer in India shall be liable to pay Service Tax on freight. In view of the representations that where the importer purchases goods on CIF basis, he may not have the invoice issued by the shipping line for freight and may not know the amount of freight charged by the foreign shipping line from the foreign supplier; it was stipulated in the Service Tax Rules that in such cases the importer shall have the option to pay an amount calculated at the rate of 1.4% of the CIF value of imported goods. This provision was stipulated on the basis that freight roughly constitutes 10% of the CJF value of goods on an average. Under GST too, it was decided that the liability to pay GST on such transportation service provided by a foreign shipping line to a foreign supplier shall be of the importer in India and the notifications are being issued accordingly. It is proposed that the similar provision deeming value of such service at 10% of the CIF value may be incorporated in the IGST notification.

Considering the nature of the service, this provision is not required in the CGST, SGST or UTGST notifications. The Council approved the proposal.

139 PART D

[….]

8(v)…..in respect of agenda item 3 the Council approved to incorporate a provision in the IGST notification that in cases where the goods are imported by an importer in India on CIF basis and the service of transportation of goods by a vessel from a place outside India up to the customs station in India is provided by a person located in non-taxable territory (a foreign shipping line) to a person located in non-taxable territory (overseas supplier/exporter of goods) and in case the importer did not know the amount of freight charged by the foreign shipping line from the foreign supplier the deemed value of such service shall be 10% of the CIF value.”

130 The impugned notifications were issued after the GST Council took note of

the fact that since transport of imported goods by Indian shipping lines to India is not

treated as export of service, the Indian shipping lines pay IGST on the same on a

forward charge basis. On the other hand, on the same transportation service, the

foreign shipping lines are not required to pay tax as they are not taxable persons in

India. Therefore, to provide a level playing field to Indian shipping lines, the importer

in India has been made liable to pay IGST on transportation of goods by foreign

shipping lines on a reverse charge basis. If Indian shipping lines continue to be

taxed and not their competitors, namely, the foreign shipping lines, the margins

arising out of taxation from GST would not create a level playing field and drive the

Indian shipping lines out of business.

131 It was contended by the respondents that instead of course correcting the

input tax mechanism, the Union Government has chosen to tax the Indian importer

on reverse charge. However, this Court is not in a position to adjudicate the

desirability of a taxation scheme, as long as it is legally issued. Commenting on the

140 PART D

efficacy of the tax intervention with the desired goals would be delving into the arena

of policy.

D.6 Composite Supply and Issues of Double Taxation

132 Having examined whether the impugned levy is permissible under Section 5

of the IGST Act, we shall now advert to the arguments raised by the respondents

regarding the impugned notifications amounting to double taxation. The respondents

have submitted before this Court that the transaction between the foreign exporter

and the respondents is already subject to IGST under Sections 5 of the IGST Act

read with Sections 3(7) and 3(8) of the Customs Tariff Act as “supply of goods”. An

additional levy of IGST on imported goods, that is on the supply of transportation

service, by designating the importer as the recipient would amount to double

taxation.

133 The transaction at hand involves three parties- the foreign exporter, the Indian

importer and the shipping line. The first leg of the transaction involves a CIF

contract, wherein the foreign exporter sells the goods to the Indian importer and the

cost of insurance and freight are the responsibility of the foreign exporter. In other

words, the foreign exporter is liable to ensure that the goods reach their place of

destination and the Indian importer pays the transaction value to the exporter. The

second leg of the transaction involves an agreement between the foreign exporter

and the shipping line (whether foreign or Indian) for providing services for transport

of goods to the destination, i.e., in the territory of India.

141 PART D

134 On the first leg of the transaction, between the foreign exporter and the Indian

importer, the latter is liable to pay IGST on the transaction value of goods under

Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariff

Act. Although this transaction involves the provision of services such as insurance

and freight it falls under the ambit of ‘composite supply’. We note from the written

submissions of the Union that the ASG has fairly submitted that this transaction

would include value elements of freight and insurance, and yet the IGST is levied as

a tax on supply of goods only. Such transactions are termed as “composite supply”

under the CGST Act.

135 Section 2(30) of the CGST Act defines “composite supply” as

“(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;”

136 Section 2(30) of the CGST Act clearly provides that a transaction may have

two or more taxable supplies, where one of them is a principal supply. The

illustration to Section 2(30) further clarifies that a transaction such as the CIF

contract for supply of goods reflects a composite supply under the CGST Act, where

the principal supply is the supply of goods.

142 PART D

137 The tax liability on composite supply is provided under Section 8 of the CGST

Act.

“8. Tax liability on composite and mixed supplies.— The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.” (emphasis supplied)

Section 8 of the CGST Act provides that the tax liability on a composite supply which

comprises of two or more supplies, will only be levied on the ‘principal supply’. In a

CIF transaction, the principal supply, according to Section 2(30), is supply of goods.

Thus, the tax would be levied as if the transaction was one of supply of goods.

138 Section 20 of the IGST Act provides that the provisions relating to ‘composite

supply’ under the CGST Act would apply mutatis mutandis under the IGST Act. By

extension, the IGST in a transaction of composite supply would be levied on the

principal supply of goods.

139 The respondents have urged before this Court that the impugned levy which

seeks to impose IGST on the ‘service’ aspect of the transaction would be in violation

of the principle of ‘composite supply’ incorporated under Section 2(30) read with

Section 8 of the CGST Act, which applies equally to the imposition of IGST under

Section 20 of the IGST Act. In contrast, the Union Government has submitted that

the impugned levy is on the second leg of the transaction, which is a standalone

contract between the foreign exporter and the foreign shipping line. Thus, the Union

143 PART D

has urged that the contract between the foreign exporter and the foreign shipping

line- of which the Indian importer is not a party- cannot be deemed to be a part of

‘composite supply’. While the first leg of the transaction, between the foreign

exporter and Indian importer, is (according to the submission) a composite supply,

the second leg is an independent transaction. In this regard, the Union has relied on

the decision of this Court in McDowell (supra) to contend that a single element can

constitute a levy and a part of the value for another transaction. Further the Union

Government has urged that the levy is on different aspects of the transaction.

140 We are unable to agree with the Union Government on this count. The aspect

theory that the Union Government has relied on finds its place in various decisions

of this Court, such as in Federation of Hotels & Restaurant Association of India

v. Union of India93 and BSNL (supra).

141 In Federation of Hotels & Restaurants Association of India (supra), a

challenge was raised regarding the imposition of an expenditure tax by the Union

Government. In discussing the various aspects of a transaction, this Court, speaking

through Justice MN Venkatachaliah (as the learned Chief Justice then was),

observed that

“31. Indeed, the law “with respect to” a subject might incidentally “affect” another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the

93 (1989) 3 SCC 634

144 PART D

distinctiveness of the aspects. Lord Simonds in Governor General-in-Council v. Province of Madras [AIR 1945 PC 98 :

1945 FCR 179, 193] in the context of concepts of Duties of Excise and Tax on Sale of Goods said:

“... The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of, his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale....”” (emphasis supplied)

There is no doubt that different aspects of a transaction can be taxed through

separate provisions. However, this Court in BSNL (supra) observed that the aspect

theory does not allow the value of goods to be included in services and vice versa.

In BSNL (supra), this Court dealt with the question of whether provision of telephone

services involved a transfer of goods which would be amenable to sales tax. In this

context, the Court observed:

“88. No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax.”

142 In the present case, the question is whether the imposition of IGST on supply

of services can be sustained when there is a concomitant imposition of IGST on

145 PART D

supply of goods. However, we must first analyse the context in which the IGST is

levied on the import of goods in this case.

143 The provisions of composite supply in the CGST Act (and the IGST Act) play

a specific role in the levy of GST. The idea of introducing ‘composite supply’ was to

ensure that various elements of a transaction are not dissected and the levy is

imposed on the bundle of supplies altogether. This finds specific mention in the

illustration provided under Section 2(30) of CGST Act, where the principal supply is

that of goods. Thus, the intent of the Parliament was that a transaction which

includes different aspects of supply of goods or services and which are naturally

bundled together, must be taxed as a composite supply.

144 It is true that in this case, the first leg of the transaction between the foreign

exporter and the Indian importer is a composite supply, while the second leg,

between the foreign exporter and the shipping line may, from a perspective, be

regarded as a standalone transaction. Both of them are independent transactions

and ordinarily, the IGST could be levied on both sets of transactions- one as supply

of goods (under the ambit of composite supply) and the other as supply of services.

However, the impugned notifications seek to tax the importer as the deemed

recipient of the supply of service. The ASG has advanced an interpretation of

Sections 5(3) and 5(4) of the IGST Act, read with Section 2(93) of the CGST Act to

contend that the importer can be classified as the ‘recipient’ of the services. On this

interpretation, we have upheld the validity of the impugned notifications under

Sections 5(3) and 5(4) of the IGST Act in Section D.2-D.5 of this judgment. The

146 PART D

respondents as a matter of fact urged that (i) the Indian importer is not privy to the

contract between the foreign exporter and the foreign shipping line; (ii) the Indian

importer does not pay consideration to the foreign shipping line; and (iii) the Indian

importer does not receive any services from the foreign shipping line since the

transportation services are provided by the foreign shipping line to the foreign

exporter. The ASG, while advancing arguments on behalf of the Union Government,

has opposed these submissions. The Union Government has urged that this Court

must look beyond the text of the contract between the foreign shipping line and the

foreign exporter to identify the Indian importer as the recipient of the services. This

Court has upheld the validity of the impugned notifications on this ground. The Union

Government is contradicting the main plank of its submission now by contending

that the two legs of the transaction are separate standalone agreements. That would

imply, that while on the one hand the Union Government seeks to levy tax on the

Indian importer by going beyond the text of the contract between the foreign

shipping line and foreign exporter (for the purpose of identifying the Indian importer

as the recipient of services), on the other hand, as far as the submissions on

composite supply are concerned, the Union Government urges that the contracts

must be viewed as separate transactions, operating in silos. We are unable to

subscribe to this view. The Union of India cannot be heard to urge arguments of

convenience – treating the two legs of the transaction as connected when it seeks to

identify the Indian importer as a recipient of services while on the other hand,

treating the two legs of the transaction as independent when it seeks to tide over the

statutory provisions governing composite supply.

147 PART D

145 This Court is bound by the confines of the IGST and CGST Act to determine if

this is a composite supply. It would not be permissible to ignore the text of Section 8

of the CGST Act and treat the two transactions as standalone agreements. In a CIF

contract, the supply of goods is accompanied by the supply of services of

transportation and insurance, the responsibility for which lies on the seller (the

foreign exporter in this case). The supply of service of transportation by the foreign

shipper forms a part of the bundle of supplies between the foreign exporter and the

Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act

read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act.

To levy the IGST on the supply of the service component of the transaction would

contradict the principle enshrined in Section 8 and be in violation of the scheme of

the GST legislation. Based on this reason, 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. As noted earlier, under Section 7(3) of the CGST Act, the

Central Government has the power to notify an import of goods as an import of

services and vice-versa:

“7. Scope of supply—

[…]

(3) Subject to the provisions of [sub-sections (1), (1A) and (2)]16, the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.”

148 PART D

No such power can be noticed with respect to interpreting a composite supply of

goods and services as two segregable supply of goods and supply of services.

146 The High Court in the impugned judgment has observed that:

“What has led to the present day problems in the implementation of the GST:

132. The GST is implemented by subsuming various indirect taxes. The difficulty which is being experienced today in proper implementation of the GST is because of the erroneous misconception of law, or rather, erroneous assumption on the part of the delegated legislation that service tax is an independent levy as it was prior to the GST and it go vivisect the transaction of supply to levy more taxes on certain components completely overlooking or forgetting the basic concept of composite supply introduced in the GST legislation and the very idea of levying the GST. Prima facie, it appears that while issuing the impugned notification, the delegated legislature had in mind the provision of the Finance Act, 1994, rather than keeping in mind the object of bringing the GST by making the Constitutional (101st) Amendment Act, 2016 to merge all taxes levied on the goods and services to one tax known as the GST.

133. It appears that despite having levied and collected the integrated tax under the IGST Act, 2017, on import of goods on the entire value which includes the Ocean Freight through the impugned notifications, once again the integrated tax is being levied under an erroneous misconception of law that separate tax can be levied on the services components (freight), which is otherwise impermissible under the scheme of the GST legislation made under the CA Act, 2016.

134. All the learned senior counsel are right in their submission that if such an erroneous impression is not corrected and if such a trend continues, then in future even the other components of supply of goods, such as, insurance, packaging, loading/unloading, labour, etc. may also be artificially vivisected by the delegated legislation to once again levy the GST on the supply on which the tax is already collected.

[…]

149 PART E

215. Thus, having paid the IGST on the amount of freight which is included in the value of the imported goods, the impugned notifications levying tax again as a supply of service, without any express sanction by the statute, are illegal and liable to be struck down.”

(emphasis supplied)

147 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.

E Conclusion

148 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

150 PART E

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;

151 PART E

(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.

152 PART E

149 For the reasons stated above, the appeals are accordingly dismissed.

150 Pending application(s) if any, stand disposed of.

…….…………………………...............................J. [Dr Dhananjaya Y Chandrachud]

…….…………………………...............................J. [Surya Kant]

…….…………………………...............................J. [Vikram Nath]

New Delhi;

May 19, 2022

153