TMI Blog2022 (5) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... rally bundled together, must be taxed as a composite supply. 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 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. 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 CG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anish Gupta, Adv. Ms. Hemantika Wahi, AOR Ms. Jesal Wahi, Adv. Mr. Santosh Krishnan, AOR M/S. Ap J Chambers, AOR Mr. Parijat Sinha, AOR Mr. V. Sridharan, Sr. Adv. Mr. Anand Nainawati, Adv. Mr. Aditya Bhattacharya, Adv. Ms. Apeksha Mehta, Adv. Mr. Sahil Parghi, Adv. Mr. Somesh Jain, Adv. Ms. Mounica Kasturi, Adv. Ms. Charanya Lakshmikumaran, AOR Ms. Deepanwita Priyanka, AOR Mr. Vinay Shraff, Adv. Mr. Ravi Bharuka, AOR Mr. Ankit Agarwal, Adv. Mr. Ankit Kanodia, Adv. Mr. Prateek Gattani, Adv. Mr. Abhishek A. Rastogi, Adv. Mr. Pratyushprava Saha, Adv. Mr. Mahir Chablani, Adv. Mr. Rohit Ghosh, Adv. Ms. Kanika Sharma, Adv. M/S. Khaitan Co., AOR Mr. Tarun Gulati, Sr. Adv. Mr Sparsh Bhargava, Adv. Mr Ankit Sachdeva, Adv. Mr Vinayak Mathur, Adv. Ms. Anishka Gupta, Adv. Mr. Kamal Kumar Arya, Adv. Mr Rahul Jain, AOR JUDGMENT Dr Dhananjaya Y Chandrachud, J A Introduction ........................................................................................................... 5 B Submissions ....................................................................................................... 12 B.1 Union of India ....................................................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Indonesia, South Africa and the U.S. by ocean transport on a Cost-Insurance-Freight CIF 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 FOB contract. In the case of a high seas sale transaction, the coal is purchased from the original buyer before it arrives at Indian ports. 3 Prior to the enforcement of the Goods and Services Tax GST 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 2017 Notification 8/2017 was issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount 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-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, acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pient 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; (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) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Pradesh 1999 (8) SCC 667 ( Mathuram Agrawal ) and further elaborated on by this Court in Gobind Saran Ganga Saran v. Commissioner of Sales Tax AIR 1985 SC 1041 ( Gobind Saran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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 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. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of India v. Commissioner of Income Tax 1989 Supp 2 SCC 642 and GVK Industries v. Income Tax Officers 2011 (4) SCC 36 [ GVK Industries ] 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 defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idelines 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 (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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces; (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. B.2 Respondent-assessees 12 Mr V Sridharan, learned senior counsel appearing on behalf of the respondents In SLP(C) No. 3081 of 2021, SLP(C) No. 1625 of 2021 and SLP(C) No. 3760 of 2021 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (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, operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel who enters into a contract of affreightment has a privity of contract with the supplier of goods 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 fictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respondent SLP (C) No. 3462 of 2021 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: (a) The levy imposed is on the service of transportation of goods rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations 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; (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermination 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 (vii) The GST Council which has been created by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respondents 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 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 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of brevity. 19 The rival submissions will now be analysed. 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) 2016 Constitution Amendment Act 2016 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncil 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2011 2011 Amendment Bill 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 2014 2014 Amendment Bill 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 common national market. The Statement of Objects and Reasons of the 2014 Amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject 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. 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. For example, while the Union primarily has the power to impose income taxes, except from agriculture Entry 82 of List I , the State has the power to impose tax on agricultural income Entry 46 of List II . 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 Bihar (1983) 4 SCC 45 , 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. H.M Seervai, Constitutional Law of India, (NM Tripati Private Limited, 4th Edition, vol 1) 289; SR Bommai v. Union of India, (1994) 3 SCC 1 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 constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges in the constitutional scheme introduced by Article 246A. One of us (Dr DY Chandrachud) writing for the two-judge Bench observed: 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 claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he defaulting State pays penalty Ibid, paragraph 9.8 . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9B, 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. (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recommendati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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- -vis the legislature and would not override the role of the legislature Ibid, paragraph 15: The Committee would thus expect the proposed GST Council to follow the principles of cooperative federalism and democratic governance. As this will be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the concern that the GST Council would diminish the role of the States in fiscal policy: Speech of T.G Venkatesh Babu in Lok Sabha on 05.05.2015 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 constitutional body as it compromises the autonomy of the States including in fiscal matters. In response, the Finance Minister had said Speech of Mr. Arun Jaitley in Lok Sabha on 08.08.2016 : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ITO (1981) 4 SCC 173, this Court held that the speech made by the mover of the Bill explaining the reason for the introdu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmended 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-fold 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 : first, if the GST Council cannot make binding recommendations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 India (1994) 3 SCC 1 , referred to the exclusive and equal legislative distribution of heads of taxation to establish the federal nature of the Indian Constitution. Prasanna (n 69) 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 Parliamen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Robert A. Schapiro, Justice Steven s theory of Interactive Federalism 74 Fordham L. Rev. 2133 (2006) 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. Jessica Bulman-Pozen and Heather K. Gerken, Uncooperative Federalism Yale Law Journal, Vol. 118. No. 7 (May, 2009), pp. 1256-1310 This Court in State (NCT of Delhi) v. Union of India (2018) 8 SCC 501 , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Seervai (n 50) 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recommendations of the GST Council cannot be binding. Such an interpretation would be contrary to the objective of introducing the GST 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 decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fying 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 recomme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemselves 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduce prejudicial results including misconduct within the relevant service rules and invite minor and/or major penalty. In Naraindas Indurkhya v. State of Madhya Pradesh (1974) 4 SCC 788, 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llection 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 No. Chapter, Section or Heading Description of Service Rate (per cent) Condition 9 Heading 9965 (Goods transport services) [ ] [ ] [ ] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verting 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 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 good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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 reci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient 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. Ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Municipal Corporation of Delhi v. Birla Cotton Spinning and Weavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 oce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 Act, the argument of the failure to identify a specific person who is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 furthera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices: 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of facts and of law. Obviously, where 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 mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST 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 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 2019 Notification No. G.S.R. 67(E) dated 29 Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry 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 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 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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 valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued. Commenting on the 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 foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day 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 impe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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; (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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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