Mohit Mineral v. UOI: The Make or Break for the GST Regime

[By Vaibhav Kashyap]

The author is a student at the National Law University, Odisha.

Background

The 101st Constitution Amendment was inserted to make the necessary constitutional changes to allow the functioning of the GST regime. The GST Acts brought about a long-standing change in the indirect taxation policy of the country. The main thrust point of these changes was the uniformity in the taxation structure of the country, popularly known as the “One Nation, One Tax” system. For the last five years, this objective was fulfilled through the recommendation of the GST council which was followed by the states earnestly, almost mandatorily. In fact, all the decisions except one were taken unanimously. But with the recent decision of the court in Mohit Mineral Pvt. Ltd. v. Union of India, the Supreme Court has clarified that the recommendation of the GST council is only recommendatory. This decision can have far-reaching consequences and has the potential to destabilize the whole GST regime.

Facts of the Case

In the present case, the respondent, Mohit Mineral Pvt. Ltd., was engaged in the business of importing non-coking coal into the territory of India from foreign countries. Consequent to the import of the goods, the appellant supplied the same to various businesses across India. The nature of the arrangement that the appellant had with the exporters was such that the exporter was liable to bear the freight charges on the goods. This arrangement is called CIF (“Cost-Insurance-Freight”) where the exporter pays the freight and insurance charges. On the other hand, in the FOB (“Free-on-Board”)  system, the importer pays the freight and insurance charges.

Nevertheless, the respondent paid two types of taxes on the value of the freight: the customs according to the Customs Act of 1962 and the applicable IGST on the value of the goods. Before the enforcement of the GST Acts in 2017, the service tax on ocean freight was non-taxable. But through Notification 08/2017 and Notification 10/2017 issued by the Central Government, it was made taxable on a Reverse Charge Basis, meaning the recipient of the service would be liable for the payment of the tax.

While the appellant did not dispute the payment of IGST when the transportation of goods was done on FOB basis, it contended that it was not obliged to pay the IGST on transportation done on CIF basis since both the recipient as well as the supplier were foreign entities. This, they contended, violated Article 5(3) of the IGST Act. Consequently, the respondents challenged the Notifications dated 08/2017 and 10/2017 as being ultra vires.

Analysis

The Nature and Recommendation of the GST Council

Since the impugned notifications were issued on the recommendation of the GST Council, a question arose before the Court whether the recommendations of the GST Council were mandatory or recommendatory in nature. The appellant (Government) contended that the recommendations were mandatory in nature since the very basis of the GST regime was maintaining the uniformity in tax slabs across states. In addition, Article 279(11) of the Constitution provided for a dispute resolution mechanism and therefore it was contended that the recommendation was intended to be mandatory. The argument was that this provision could have only been inserted if there was a possibility of a  dispute arising between the states and the center. On the other hand, the respondents submitted that the recommendations were not mandatory in nature considering the federal structure of the constitution and also because such an interpretation would undermine the supremacy of the Parliament and State Legislatures.

The court held that prior to the 2016 amendment to the Constitution, the union and the state had the “exclusive” right of taxation in their respective domains. Post the 2016 amendment, this exclusive right of taxation was converted into a “simultaneous” right. The court noted that Article 246A treats the states and center equally. Similarly, Article 279A mentions that the states and center should not act independently and are interdependent on each other. Also, the decisions of the GST Council are not unanimous and the center and states have been given varying levels of voting power. The court concluded based on these grounds that the simultaneous power of taxation has to be exercised in a manner to reach a workable fiscal model through cooperation and collaboration.

The court rejected the argument that federal structure in India had a centralizing effect since the states had been provided exclusive power under the constitution. The nature of the recommendation of the GST Council is non-qualified and made without any explanation. Therefore, to say that the recommendations are mandatory would be far-fetched. The court noted that the word “recommendation” was used in a number of varying contexts in the constitution.   But the court noted that the word “recommendation” only has a “persuasive” value in accordance with the Supreme Court judgement in Manohar v. State of Maharashtra and Naraindas Indurkhya v. State of Madhya Pradesh.

Finally, while several articles of the CGST Act and IGST Act provide that while the GST Council recommends is binding, these provisions have to be seen in the light of the legislative purpose of the legislation, which is the creation of a uniform system of taxation. No such provision has been inserted in the Constitution. Thus, even though a few recommendations are binding, it cannot mean that all the recommendations are similarly binding.

Did The Impugned Notification Suffer from Excessive Delegation?

The power of identification of goods or services where tax is payable has been delegated by the IGST Act under Section 5(3). This was contended to be “excessive delegation” since too much power was entrusted to the GST Council. The legislature should make the “essential basic framework” and the minor details can be filled through the process of delegated legislation. The legislature should not refrain from doing its “essential legislative function”. The Court held that the essential legislative function with respect to the GST laws was the rate of taxation, the levy of tax, taxable person, the subject matter of tax, and the value for the purpose of taxation. It went on to analyze the relevant statutory provisions in the IGST Act and held that the act had made relevant provisions for all of them. Therefore, the court concluded that the impugned notifications are only clarificatory and don’t engage in excessive delegation.

Is an ocean freight transaction for the import of goods a valid category of supply of services under Section 5(3) of the IGST Act?

The court dealt with this question primarily on two grounds: first, whether imported goods procured on a CIF basis constitute an inter-state supply or is an extra-territorial tax; secondly, are importers service recipients under the CIF contract.

On the first question, the respondents urged that the categorization created by the notification is extraterritorial since the same has no territorial nexus to India and therefore, cannot be taxed as such. Moreover, the recipient of the service and the place of supply is a foreign location. The court held that the “supply” included the “import of service” under the IGST Act. The court noted the provisions of Section 13(9) of the IGST Act which created a deeming fiction whereby the place of good transported would be the place of supply of service. But the court held that since India would be the destination of the good, this provision was not attracted.

As far as the payment of consideration was concerned, the court cited the provisions of Section 2(31) of the IGST Act which allowed the consideration to be paid by any other person as well (including in this case foreign exporter). As far as the argument concerned with respect to the territorial nexus of the taxation, the court held there was clearly a territorial nexus since the place of supply of the goods was in India. The court also noted that the statute itself had provided for the imposition of such a tax and that it cannot be alleged to have been imposed through delegated legislation, which would otherwise be illegal.

On the second question, the respondents were aggrieved by the fact that they were deemed to be the recipient of service even when the goods were transported on CIF basis. According to Section 5(3) of the IGST Act, a reverse charge can be imposed on certain categories of services. Section 2 (93) provides that in case no consideration is payable by the recipient of a service, the recipient shall be the person to whom the service is rendered. The court held that this deeming fiction is appropriate and in accordance with the principle of the GST regime which is intended to be a consumption and destination-based tax. The court rejected the argument of the respondent that this would have the potential to create two recipients of services since the same was inapplicable to the case at hand.

Composite Supply and Issue of Double Taxation

The respondents argued that the transaction is treated as a “composite supply” under the IGST Act, meaning thereby that the tax is levied both on the goods and the freight. An additional tax on the freight charges would, therefore, amount to double taxation. On the other hand, the Union Government contended that the freight constitutes a different service that can be treated as a different category of tax. But the court rejected this argument on the ground that the provisions of Section 8 of the CGST Act would be violated if the GST is levied on the service component. The appellant relied on the “aspect theory” to argue that different aspects of a transaction can be taxed differently. Nevertheless, citing the decision in the BSNL v. Union of India, the court observed that the value of goods could not be included in services and vice versa according to the aspect theory. The court held that the BSNL v. Union of India was on double taxation and therefore had no applicability to the present case as it was on the question of the overlap of VAT and service tax in the pre-GST regime Moreover, the legislative intent was clearly to bundle similar goods and services together rather than treating them as separate transactions.

Conclusion

This ruling will have a huge impact on the future development of the GST regime. It can become a defining moment in the development of the GST in India. In fact, it would not be wrong to say that with this ruling the GST regime is at a crossroads, one path could lead to destruction while the other path might result in strengthening of the GST regime. It all depends on the prudence of the states and the center. While the states should not create unnecessary hindrances and should try to comply with the recommendations of the council, the center should provide space for the opinion and needs of the states. Only then can the GST regime truly usher in the spirit of cooperative federalism.

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