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In the last few days, there has been a lot of discussion on the observations made on the aspect of co-operative federalism, scope of recommendations of GST Council, voting mechanism and so on and so forth in the decision of Mohit Minerals. However, when I read the fine print, it is my view the observations on various aspects of GST Law whose interpretation will have implications on the future course of law and litigation alike.
The services provided by a non-resident person (read ‘shipping line’) to another non-resident person (read ‘foreign exporter’) in the hands of a resident person (read ‘importer’) has been held to be non-taxable as an independent supply (read as ‘receipt’) of supply by virtue of the aspect of ‘composite supply’. However, this was not the reasoning on which the Gujarat High Court held that the transaction was non-taxable. Infact, even before considering the aspect of taxability, the Hon’ble High Court considered the vires of the Notification imposing the liability on the importer to pay tax and held that the entry was beyond the contours of provision of GST Law. A brief indication of the findings of the Hon’ble High Court and Hon’ble Supreme Court on various aspects is tabulated below
Sl No.
Issue
Findings of Hon’ble High Court
Findings of the Hon’ble Supreme Court
Scope of empowerment under Section 5(3) of IGST Act
The Central Government vide notification can only prescribe a class of goods or services on which tax shall be paid under reverse charge. It cannot prescribe a taxable person through such a notification.
The Central Government has powers to determine the person who shall be the recipient and in effect the taxable person on whom the liability can be imposed.
Application of definition of ‘Recipient’ provided under Section 2(93) of the CGST Act
The definition provided in the Act will have to be considered while issuing the notification and if a person is identified as ‘recipient’ by virtue of payment of consideration for the transaction, then any other person cannot be made recipient by virtue of notification.
Entry 4 of Schedule-I of CGST Act, makes the importer deemed recipient of supply and in such a scenario, the recipient is to be determined only by application clause (c) of Section 2(93) of the CGST Act, i.e. the person to whom service is rendered and in the present transaction it will be the importer.
Value of Supply
Value under the provisions of GST law is the price paid or payable and a person other than the supplier or the recipient of the supply will not be able to determine the value of supply and hence the valuation mechanism fails as such person will not be knowing the price actually paid or payable for the supply.
Sections 15(4) and 15(5) enable delegated legislation to prescribe methods for determination of value, on the recommendations of the GST Council and hence, the notification prescribing value at 10% of the CIF contract value is valid and there exists a value for the supply.
Time of Supply
The time of supply of services in case where the tax is payable under the reverse charge basis is the earliest of the date of payment entered in the books of accounts of the recipient or the date of debit in the bank account or sixty days from the date of issue of invoice by the supplier. Thus, a person other than a recipient of supply cannot determine the time of supply as per the provisions of Section 13(3) of the IGST Act.
The time of supply for the present transaction would be governed by Section 13(5)(b), i.e. the date on which tax is paid.
Place of Supply
Section 12 and 13 of the IGST Act deal with determining the place of supply. Neither of them will apply if both the supplier and the recipient of the service are based outside India. Therefore, the importer is not the recipient merely because the service terminates in India.
When the place of supply of ocean freight 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 and it would qualify as an inter-state supply.
Credit
The restriction in interpretation of definition of ‘recipient’ under Section 2(39) will only enable the person who makes payment to the supplier to avail credit and hence, the Importer cannot avail credit.
By virtue of Entry 4 of Schedule-I of CGST Act, the importer becomes the deemed recipient and hence will be eligible to take credit. Further, for the same payment, the foreign exporter will not avail credit and hence, there is no question of double availment of credit.
On a perusal of the above, it becomes evident that the Supreme Court has indeed given a finding on each of the individual aspects in favour of the Department which according to me will be of larger consequence in the development of nascent GST law. One other factor which this decision throws light is on the untested territory of ‘composite supply’. While there is an observation on the application of this concept when the Customs Act provisions are to be applied by virtue of proviso to Section 5(1) of the IGST Act, this decision also clearly lays down that the levy of IGST insofar as the payment as Customs Duty is concerned, will be governed by the concepts of GST Law, which is indeed an aid in interpretation of GST law.
I would like to state that insofar as the discussion on GST Council and other Constitutional aspects are concerned, in my considered view GST being an ‘fourth dimensional animal’ which is not being regulated by Union List, State List or Concurrent List by directly deriving its power from Article 246A, there should be a lot more clarity on the Constitutional status of the GST Council and its effect on the powers of the Central and State Government to make laws independently but uniformly, which is indeed a prerequisite for smooth functioning. Though, while arriving at the decisions, the spirit of cooperative federalism needs to be resorted to.
*The contents and comments of this document remain as a view of the solely of the author and based on his interpretation of the judgement.
(Mr. G Shivadass is a Senior Advocate with more than 25 years of standing at the bar. He is a specialist in Central Excise, Customs, EXIM policy, Anti-Dumping Issues, Service Tax, Value Added Tax and WTO Laws. Prior to entering private practice, Mr. Shivadass held various positions in the Department of Revenue for a period of 12 years. Before being designated by the Karnataka High Court, he was the Principal Partner of Lakshmi Kumaran & Sridharan and led the firm’s Bangalore office.)
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