Service Tax On Ocean Freight In CIF Imports Illegal: Karnataka High Court

The Karnataka High Court has held that service tax cannot be levied on ocean freight in imports made on a CIF (Cost, Insurance and Freight) basis, as such services fall outside the scope of the Finance Act, 1994.

“The Act itself would be inapplicable to territories other than India and the Executive would not have the power to make rules for territories beyond India and where the events could be described to be extra territorial events i.e., service provided by a foreign exporter and a transport company which also enters into contract for transportation outside the territory of India, such extra territorial transactions cannot be the subject matter of a national law,” the court said.

Justice S Sunil Dutt Yadav declared Notifications No. 15/2017-ST and 16/2017-ST dated April 13, 2017 to be ultra vires the Finance Act, 1994, insofar as they apply to CIF contracts. The Court quashed the service tax demand raised against Konkan Specialty Poly Products Pvt. Ltd.

The notifications had sought to levy service tax on ocean freight by treating the Indian importer as the recipient of the transportation service under the reverse charge mechanism. They also prescribed a deemed value for ocean freight, even though the importer neither contracted the shipping line nor paid the freight.

The petitioner challenged the levy on the ground that it imports goods on a CIF basis, under which the foreign supplier engages the foreign shipping line and bears the freight cost. The Indian importer, it argued, has no role in arranging or availing the transportation service.

The petitioner also pointed out that customs duty had already been paid on the full CIF value of the imports. Despite this, a demand was issued proposing service tax on ocean freight along with interest.

Relying on the Gujarat High Court's ruling in Sal Steel Ltd. v. Union of India, the Court held that in CIF contracts the service of transportation by sea is rendered and consumed outside India and constitutes an extraterritorial event.

The High Court further held that service tax under Sections 66B and 68 of the Finance Act can be levied only on the service provider or the service recipient. An importer under a CIF contract is neither.

Fastening tax liability on the importer, the court held, amounts to recovery from a third party, which is impermissible in law.

Accordingly, the Court held that the impugned notifications could not be applied to CIF imports and set aside the service tax demand raised against the petitioner.

The writ petition was disposed of after granting the petitioner liberty to seek a refund of the tax paid, subject to the applicable principles of unjust enrichment.

For Petitioner: Advocates, P B Harish and Mohan Maiya G.L. 

For Respondent: Advocates, H. Shanthibhushan, Jeevan J Neeralgi and Jyothi M Maradi