The government is engaged in a pitched legal battle in the Supreme Court against importers over its decision to levy Integrated Goods and Services Tax (IGST) on ocean freight on a reverse charge basis.

With tax authorities reportedly raising fresh queries even while the dispute is pending before a Bench led by Justice D.Y. Chandrachud, importers are miffed. A hearing set for January 11 was postponed after two Judges on the Bench took ill. 

At the centre of the spat are two notifications issued on June 28, 2017, levying IGST on ocean freight. The Gujarat High Court, which had in January 2020 declared the levy ultra vires to the IGST Act, concluded that IGST on ocean freight under the provisions of the notifications was “not permissible in law”.

‘Ocean freight’ is the cost of moving goods internationally over sea to India. An agreement is entered into between two foreign parties, usually between an exporter, and a shipping line to transport goods to India.

In its appeal, the government, represented by Additional Solicitor General N. Venkataraman, has argued that the ultimate beneficiary of the transaction is however the recipient of the goods in India, who is importing the goods on a cost, insurance and freight (CIF) basis. The government contends that companies importing goods on the CIF basis are paying the freight directly or indirectly. 

“Transport of goods which is carried out by a person other than the importer himself is an activity, which gives rise to the aspect of providing transportation and as such gives rise to a taxing incident distinct from tax on import of goods,” the government says. “The eventual recipient and beneficiary of the transportation service is the 'importer' of the goods.”

‘Being taxed twice’

Importers, represented by advocate Malak Manish Bhatt, have countered that: “for the purposes of taxability, the service has to be rendered in India, to be provided to an Indian. The service rendered by a non-Indian to a non-Indian cannot be taxed merely due to the fact that ultimate benefit was reaped by an Indian as the goods had arrived in India”.

The importers have complained that IGST was being levied on them twice on the very same transaction by segregating portions of it.

“Importers... in addition to the customs duty, also pay IGST under IGST Act on the imported goods on the value as determined under the Customs Tariff Act. This value includes the value of ocean freight,” they argue.