No RCM on Ocean freight on FOB basis- Bombay High court

Legal Background:

The Bombay High Court case, M/s. Aggarwal Coal Corporation Pvt Ltd vs. The Assistant Commissioner of State Tax, addresses the issue of reverse charge mechanism (RCM) on ocean freight for imports under the Integrated Goods and Services Tax (IGST) Act, focusing on Free on Board (FOB) contracts.

Supreme Court Decision:

This case references a Supreme Court decision from May 19, 2022, in the Mohit Minerals case, which established that ocean freight on imports under Cost, Insurance, and Freight (CIF) contracts is not liable to reverse charge under IGST, as the cost of freight is included in the value of goods and subject to customs duty.

Gujarat High Court Ruling: The Gujarat High Court had previously declared the relevant IGST notification concerning the reverse charge on ocean freight as ultra vires (beyond legal authority), a decision upheld by the Supreme Court.

Read/download the copy of judgment here.

Bombay High Court’s Stance: The Bombay High Court applied the doctrine from the Kusum Ingots and Alloys SC case, stating that once a law is declared ultra vires in one state, it cannot be enforced in any other state, rendering the notification legally inapplicable nationwide.

Specifics of FOB Contracts: The Supreme Court noted that the RCM on ocean freight should not apply to FOB contracts where the Indian importer pays directly for the shipping services.

Notification and Compliance: The notifications under dispute, No. 8/2017 and No. 10/2017, which concerned the RCM on ocean freight, were discussed regarding their applicability and the legal challenges they faced.

Refund of Tax Under Protest: The court allowed the petitioner, who had paid tax under protest, to seek a refund following the quashing of the show cause notice based on the declared ultra vires notifications.

Final Judgment: The show cause notice issued to Aggarwal Coal Corporation was set aside, confirming that the imposition of IGST on ocean freight for FOB contracts, based on the contested notifications, was not valid.

Legal Precedent and Implications: This case reinforces the principle that judicial decisions declaring a law or notification as ultra vires have nationwide implications, ensuring uniformity in legal application across different jurisdictions.

Future Compliance: Entities dealing with similar import scenarios on an FOB basis can reference this judgment for clarity on GST compliance and the non-applicability of RCM on ocean freight, enhancing legal certainty and reducing litigation risks.