Kerala High Court Quashes GST Show Cause Notice on Shipping Services After Supreme Court Ruling

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Case Name

M/s K.V.N. Impex P Ltd. v. Union of India & Others (High Court of Kerala)

WP (C) No. 5861 of 2021

Date: 17th October 2023

Key Takeaways

• The Supreme Court’s decision in Union of India v. Mohit Minerals (2022 (10) SCC 700) is binding and led to the quashing of similar GST demands on importers for ocean freight services.
• The Kerala High Court reaffirmed that importers cannot be separately taxed for shipping services under a CIF (Cost, Insurance, Freight) contract, as this would violate the principle of “composite supply” under the GST law.
• The government’s notification (No. 10/2017-Integrated Tax (Rate)) was declared ultra vires (beyond its legal power) and invalid for imposing such a tax.
• This judgment provides relief to importers facing similar GST demands on ocean freight.

Issue

Was the government’s notification requiring importers to pay GST on ocean freight services under the reverse charge mechanism valid under the Integrated Goods and Services Tax (IGST) Act?

Facts

• Petitioner: M/s K.V.N. Impex P Ltd., an importer based in Calicut, Kerala.
• Respondents: Various GST authorities, including the Directorate General of GST Intelligence and the Union of India.
• Background: The petitioner imported goods under a CIF contract, where the foreign supplier arranged and paid for shipping. The government issued Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017, requiring importers to pay GST on the ocean freight component under the reverse charge mechanism.
• Dispute: The petitioner received a show cause notice demanding GST on ocean freight, which they challenged as being contrary to the IGST Act and the principle of composite supply under GST law.

Arguments

Petitioner (M/s K.V.N. Impex P Ltd.)

• The notification is ultra vires the IGST Act and violates the principle of composite supply.
• The Supreme Court in Union of India v. Mohit Minerals has already set aside the same notification.
• The show cause notice is invalid as it is based on a notification that has been struck down.

Respondents (GST Authorities)

• The government had issued the notification under its powers to specify taxable persons for reverse charge.
• However, the counsel for the respondents fairly conceded that the Supreme Court’s decision in Mohit Minerals covers the issue in favor of the petitioner.

Key Legal Precedents

• Union of India v. Mohit Minerals, 2022 (10) SCC 700: The Supreme Court held that the government’s notification requiring importers to pay IGST on ocean freight under the reverse charge mechanism was invalid. The Court reasoned that:
• The government cannot specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act.
• Levying IGST separately on the service component of a CIF contract violates the principle of “composite supply” under Section 2(30) read with Section 8 of the Central Goods and Services Tax (CGST) Act.
• Relevant Sections Cited:
• Section 2(11) and 13(9) of the IGST Act
• Section 2(93) and Section 2(30) of the CGST Act
• Section 8 of the CGST Act
• Section 5(3) and 5(4) of the IGST Act

Judgement

• The Kerala High Court allowed the writ petition.
• The show cause notice issued to the petitioner was set aside.
• The court relied on the Supreme Court’s decision in Union of India v. Mohit Minerals, which had already invalidated the government notification at issue.
• The court did not go into further detail, as the matter was clearly covered by the Supreme Court’s binding precedent.

FAQs

Q1: What was the main legal issue in this case?

A: Whether the government could require importers to pay GST on ocean freight services under the reverse charge mechanism, based on Notification No. 10/2017-Integrated Tax (Rate).

Q2: Why did the court set aside the show cause notice?

A: Because the Supreme Court had already declared the underlying notification invalid in Union of India v. Mohit Minerals, making the show cause notice unsustainable.

Q3: What is a “composite supply” under GST law?

A: It refers to a supply consisting of two or more goods or services that are naturally bundled and supplied together. In a CIF contract, the supply of goods and the associated shipping services are considered a composite supply, and GST is charged on the total value, not separately on the shipping service.

Q4: What does “ultra vires” mean?

A: It means “beyond the powers.” In this context, the notification was beyond the legal authority granted by the IGST Act.

Q5: What does this judgment mean for other importers?

A: Importers who received similar GST demands for ocean freight under the reverse charge mechanism can rely on this judgment (and the Supreme Court’s decision) to challenge such demands.