IGST on Ocean Freight Struck Down — Importer Wins Refund with Interest

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Case Name

M/s Louis Dreyfus Company India Private Limited vs. Union of India

Court Name: High Court of Gujarat at Ahmedabad

Case No.: R/Special Civil Application No. 11540 of 2021

Date of Decision: 07th July, 2022

Coram: Hon’ble Mr. Justice N.V. Anjaria and Hon’ble Mr. Justice Bhargav D. Karia

Key Takeaways

1. IGST on Ocean Freight is Unconstitutional: The notifications that imposed IGST on ocean freight charges paid by importers were declared ultra vires (beyond the powers granted by law) and unconstitutional.

2. Reverse Charge on Importers Was Invalid: The government had tried to make importers pay IGST on a reverse charge basis for transportation services provided by foreign shipping companies. This was struck down.

3. Refund is Mandatory: Since the tax itself was illegal, any IGST already collected must be refunded with statutory interest within six weeks.

4. Supreme Court Confirmed the Position: The Supreme Court dismissed the government’s appeals against the Gujarat High Court’s earlier ruling, cementing the legal position in favour of importers.

5. Precedent-Driven Decision: This case was decided purely on the basis of already-established precedents — there was no fresh legal debate needed.

Issue

The central legal question here is:

Can the government legally impose IGST on ocean freight charges on importers through Notification No. 8 of 2017 and Notification No. 10 of 2017 (both dated 28.6.2017), read with the corrigendum dated 30.6.2017?

In short — No, the court said. These notifications were unconstitutional and beyond the powers of the law.

Facts

• Who is the Petitioner? M/s Louis Dreyfus Company India Private Limited — a company engaged in processing edible oils, coffee, etc. They import goods into India via ships.

• What triggered the dispute? When GST came into effect on 1st July 2017, the government issued two key notifications:
• Notification No. 8 of 2017 – Integrated Tax (Rate) dated 28.6.2017: This said that IGST at 5% would be levied on inter-state supply of services when goods are transported by vessel.
• Notification No. 10 of 2017 – Integrated Tax (Rate) dated 28.6.2017: This said that for transportation services provided by a foreign person (outside India) by vessel from outside India to the customs clearance station in India, the entire IGST would be paid by the importer on a reverse charge basis.
• Corrigendum dated 30.6.2017: This further provided that IGST would be collected at 10% of the CIF (Cost, Insurance, and Freight) value.

• What did the company do? Louis Dreyfus filed this Special Civil Application asking the court to:

1. Refund the IGST already paid on ocean freight charges, with interest.
2. Prohibit the authorities from collecting IGST under these notifications going forward.

Arguments

Petitioner’s Side (Louis Dreyfus):

• The company argued that Notification No. 8 of 2017 and Notification No. 10 of 2017, read with the corrigendum dated 30.6.2017, were unconstitutional and ultra vires the statute.
• They relied heavily on the earlier Gujarat High Court decision in Mohit Minerals Pvt. Ltd. vs. Union of India which had already struck down these very notifications.
• They also pointed out that the Supreme Court had dismissed the government’s appeal against the Mohit Minerals ruling, so the law was now settled.

Respondent’s Side (Union of India):

• Interestingly, the judgment notes that the advocates for the respondents could not dispute the legal position established by the Mohit Minerals case.
• In other words, the government’s own lawyers essentially had no counter-argument to offer, given the binding precedents!

Key Legal Precedents

1. Mohit Minerals Pvt. Ltd. vs. Union of India — Special Civil Application No. 726 of 2018

• Decided on: 23rd January, 2020
• Court: Gujarat High Court
• What it held: This is the landmark case that declared Notification No. 8 of 2017 and Notification No. 10 of 2017 (both dated 28.6.2017), read with the corrigendum dated 30.6.2017, as unconstitutional and ultra vires the statute.
• How it was applied here: This was the primary precedent. Since the same notifications were challenged in the Louis Dreyfus case, the court simply followed this ruling.

2. Gokul Agro Resources Ltd. vs. UOI — [2020 (35) GSTL 82 (Guj.)]

• The Gujarat High Court followed the Mohit Minerals decision in this case as well.

3. Bharat Oman Refineries Ltd. vs. Union of India — [2020 (41) GSTL 292 (Guj.)]

• Again, the Gujarat High Court followed the Mohit Minerals ruling.

4. Comsol Energy Private Limited vs. State of Gujarat — [TS-1241-HS(GUJ)-2020-GST]

• Another case where the same legal position was followed.

5. ADI Enterprises vs. Union of India — Misc. Civil Application No. 1 of 2020 in Special Civil Application No. 10479 of 2019

• What it held: A coordinate bench of the Gujarat High Court directed the respondents to refund the IGST already paid pursuant to Entry No. 10 of Notification No. 10/2017-IGST (Rate) dated 28.6.2017, along with statutory rate of interest, within four weeks of submission of necessary documents.
• Key quote from the judgment in ADI Enterprises:

The respondents are hereby directed to grant refund of the amount of IGST already paid by the applicants pursuant to the Entry No. 10 of Notification No. 10/2017-IGST (Rate) dated 28.6.2017 along with statutory rate of interest on such refund within a period of four weeks from the date of submission of necessary documents by the applicants.”

6. Civil Appeal No. 1390 of 2022 and allied appeals — Supreme Court of India

• Decided on: 19th May, 2022
• The Supreme Court dismissed the government’s appeals against the Gujarat High Court’s ruling in Mohit Minerals, thereby confirming that the notifications were indeed unconstitutional. This made the legal position absolutely final and binding.

Judgment

The Petitioner — M/s Louis Dreyfus Company India Private Limited — WON

What did the Court decide?

The Gujarat High Court, relying entirely on the settled legal position from Mohit Minerals Pvt. Ltd. (supra) and subsequent cases, held that:

1. The impugned Notification No. 8 of 2017 and Notification No. 10 of 2017 (both dated 28.6.2017), read with the corrigendum dated 30.6.2017, had already been declared ultra vires (unconstitutional), and therefore the petition deserved to be allowed.

2. The petition was allowed in terms of para Nos. 13(A) and 13(B) of the petition.

Orders Made:

• If any IGST amount has been collected from the petitioner under these notifications, the same shall be refunded within six weeks from the date of the order.
• The refund shall be made along with the statutory rate of interest.

FAQs

Q1. What is IGST on ocean freight, and why was it controversial?

When goods are imported into India by ship, the shipping charges (ocean freight) are paid to a foreign shipping company. The government tried to tax this service under GST by making the Indian importer pay IGST on a reverse charge basis. The courts found this to be legally invalid because the importer is not the recipient of the service in the traditional sense, and the tax was being levied without proper legal authority.

Q2. What does “ultra vires” mean in simple terms?

It simply means “beyond the powers.” When a court says a notification is ultra vires, it means the government exceeded its legal authority when issuing that notification — basically, it did something it wasn’t legally allowed to do.

Q3. What is “reverse charge mechanism” in GST?

Normally, the seller of a service pays GST. Under the reverse charge mechanism, the buyer (or recipient) of the service is made responsible for paying the tax. Here, the government tried to make importers pay IGST for shipping services provided by foreign companies — which the court found to be invalid.

Q4. Does this judgment apply only to Louis Dreyfus, or does it have broader implications?

While this specific order applies to Louis Dreyfus, the legal principle is broadly applicable to all importers who paid IGST on ocean freight under these notifications. The Supreme Court’s dismissal of the government’s appeal in Civil Appeal No. 1390 of 2022 makes this a settled position of law for everyone.

Q5. How much time does the government have to refund the IGST?

The court ordered the refund to be made within six weeks from the date of the order (i.e., from 7th July 2022), along with statutory interest.

Q6. What is the “statutory rate of interest” mentioned in the order?

The statutory rate of interest refers to the interest rate prescribed under the GST law for delayed refunds. This ensures that the government compensates the taxpayer not just for the principal amount but also for the time value of money during which the funds were wrongly held.

Q7. What happens if the government doesn’t refund within six weeks?

The judgment doesn’t explicitly address this, but generally, non-compliance with a High Court order can lead to contempt of court proceedings against the concerned officials.

Heard learned advocate Mr. Kishore Kunal with learned advocate Mr. Parth Contractor for the petitioner and learned advocate Mr. Nikunt Raval for the respondent No.3.

2. The petitioner-private limited company engaged in the business of

processing of edible oils and coffee etc. has by filling the present Special

Civil Application prayed to direct the respondents to refund the Integrated

Goods and Services Tax (hereinafter referred to as “IGST”) calculated

on the amount of ocean freight charges with interest. It was further

prayed to prohibit the respondent authorities from collecting the IGST in

terms of Notification No. 10 of 2017 - Integrated Tax (Rate) dated

28.6.2017 and Notification No. 8 of 2017 – Integrated Tax (Rate) of even

date read with corrigendum dated 30.6.2017.

3. With the commencement of levy of Goods and Services Tax under

the law with effect from 1.7.2017, the Notification No. 8 of 2017 dated

28.6.2017 provided that the IGST at the rate of 5% shall be levied on

inter-state supply of services when the goods are transported in a vessel

etc.. Another Notification No. 10 of 2017 dated 28.6.2017 came to be

issued notifying that in respect of services supplied by a person located in

the non-taxable territory by way of transportation of goods by vessel from

a place outside India upto the Custom Clearance Station in India, the

entire IGST shall be paid on the reverse charge basis by the importer.

The corrigendum dated 30.6.2017 was issued. It was provided therein

that in the circumstances mentioned therein, the IGST shall be collected

at the rate of 10% of the CIF value.

4. While the various contentions are raised in the petition, it is stated

that the aforementioned Notification Nos. 8 of 2017 and 10 of 2017 both

dated 28.6.2017 read with corrigendum dated 30.6.2017 came up for

consideration for their validity before this court. This court in Mohit

Minerals Pvt. Ltd. vs. Union of India being Special Civil Application

No. 726 of 2018 decided on 23rd January, 2020 held the said notifications

to be unconstitutional and ultra vires the statute. The decision has been

followed in Gokul Agro Resources Ltd. vs. UOI [2020 (35) GSTL 82

(Guj.)], Bharat Oman Refineries Ltd. vs. Union of India [2020 (41)

GSTL 292 (Guj.)] and in Comsol Energy Private Limited vs. State of

Gujarat [TS-1241-HS(GUJ)-2020-GST].

5. The above position and law emanating from the decision of this

court in Mohit Minerals Pvt. Ltd. (supra) could not be disputed by

learned advocates for the respective parties. It may also be mentioned that

similar issue came up for consideration before the co-ordinate Bench in

ADI Enterprises vs. Union of India being Misc. Civil Application No.

1 of 2020 in Special Civil Application No. 10479 of 2019, wherein the

question was about refund of the IGST paid pursuant to the

aforementioned Notifications. The court directed respondents to refund

the amount of IGST already paid by the applicants pursuant to Entry

No.10 of Notification No. 10 of 2017. In ADI Enterprises (supra), the

court recorded thus in para 3.

“Learned advocate appearing for the applicant would submit that the

reason for filing the present application is that vires of Entry No.10

of Notification No.10/2017- IGST (Rate) dated 28.6.2017 issued

under the Integrated Goods and Services Tax Act, 2017 was

challenged by the applicant by way of captioned writ petition along

with other identical writ petitions. The Division Bench of this Court

vide judgment and order dated 23.1.2020 passed in the captioned

writ petition along with other writ petitions allowed the writ

petitions and declared Entry No.10 of Notification No.10/2017-

IGST (Rate) dated 28.6.2017 as ultra vires the Act. He would further

submit that during the pendency of the present application, Civil

Appeal No.1390 of 2022 and allied appeals preferred at the instance

of the respondents also came to be dismissed by judgment and order

dated 19.5.2022 passed by Hon'ble Apex Court.

5.1 The court thereafter directed in para 4 as under,

“In view of the above, we are of the opinion that the present

application requires consideration and hence, the same is allowed in

terms of prayer 6 (a). The respondents are hereby directed to grant

refund of the amount of IGST already paid by the applicants

pursuant to the Entry No.10 of Notification No.10/2017-IGST

(Rate) dated 28.6.2017 along with statutory rate of interest on such

refund within a period of four weeks from the date of submission of

necessary documents by the applicants.”

6. In view of the decision in Mohit Minerals Pvt. Ltd. (supra), since

the impugned Notifications have already been declared as ultra vires,

present petition deserves to be allowed.

7. Accordingly, the petition is allowed in terms of para Nos. 13(A)

and 13(B). It is directed that if any IGST amount is collected, the same

shall be refunded within six weeks alongwith statutory rate of interest.

(N.V.ANJARIA, J)

(BHARGAV D. KARIA, J)