UNION OF INDIA & ANR versus M/S MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR

[2022] 9 S.C.R.

AUNION OF INDIA & ANR.

M/s MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR

(Civil Appeal No. 1390 of 2022)

BMAY 19, 2022

[DR. DHANANJAYA Y CHANDRACHUD, SURYA KANTAND VIKRAM NATH, JJ.]

Constitution of India – Articles 246A and 279A – Constitution(One Hundred and First Amendment Act) 2016 – Central GoodsCand Services Tax Act, 2017 – Integrated Goods and Services TaxAct, 2017 – Recommendations of Goods and Services Tax Council– Nature of – Held: Recommendations of the GST Council are notbinding on the Union and States – Deletion of Art. 279B and theinclusion of Art. 279(1) by the Constitution Amendment Act 2016Dindicates that the Parliament intended for the recommendations ofthe GST Council to only have persuasive value, particularly wheninterpreted along with the objective of the GST regime to fostercooperative federalism and harmony between the constituent units– Neither does Art. 279A begin with non-obstante clause nor doesArticle 246A state that it is subject to the provisions of Article 279AE– Parliament and the State legislatures possess simultaneous powerto legislate on GST – Art. 246A does not envisage repugnancyprovision to resolve the inconsistencies between the Central andthe State laws on GST – The ‘recommendations’ of the GST Councilare the product of collaborative dialogue involving the UnionFand States – They are recommendatory in nature – To regard themas binding edicts would disrupt fiscal federalism, where both theUnion and the States are conferred equal power to legislate onGST – Government while exercising its rule-making power underthe provisions of the CGST Act and IGST Act is bound by therecommendations of the GST Council – However, that does not meanGthat all the recommendations of the GST Council made by virtue ofthe power Art. 279A (4) are binding on the legislature’s power toenact primary legislations.

Constitution of India – Constitution (One Hundred and FirstAmendment Act) 2016 – Articles 246 and 279A – Central GoodsH

and Services Tax Act, 2017 – ss.2(30), 2(93), 8 – Integrated Goodsand Services Tax Act, 2017 – ss.2(11), 5(3), 13(9) – Impugnednotifications (Notification 8/2017 and 10/2017) issued by CentralGovernment on the advice of the GST Council levied an integratedtax at the rate of 5 per cent on the supply of specified services,including transportation of goods, in vessel from place outsideIndia up to the customs station of clearance in India and categorizedthe recipient of services of supply of goods by person in non-taxable territory by vessel to include an importer u/s. 2(26) of theCustoms Act, 1962 – Respondents-importers of non coking coal ona Cost-Insurance-Freight (CIF) basis, filed writ petition challengingthe notifications – High Court held that the impugned notificationsare unconstitutional for exceeding the powers conferred by the IGSTAct and the CGST Act – On appeal, held: Government in exerciseof its power u/s.5(3) of the IGST Act issued the impugned Notification10/2017 specifying the ‘categories of the supply’ which shall besubject to reverse charge – The notification, besides specifying thecriteria also mentioned the corresponding recipient in thosecategories – The IGST Act and the CGST Act define reverse chargeand prescribe the entity that is to be taxed for these purposes – Thespecification of the recipient- in this case the importer- by Notification10/2017 is only clarificatory – The Government by notification didnot specify taxable entity different from that which is prescribedin s.5(3) of the IGST Act for the purposes of reverse charge – Theimpugned notification 10/2017 clearly specifies taxable personwho is liable to pay reverse charge that is envisaged in the statute– Thus, the impugned notifications cannot be invalidated for analleged failure to identify taxable person – Further, the impugnednotification 8/2017 cannot be struck down for excessive delegationwhen it prescribes 10 per cent of the CIF value as the mechanismfor imposing tax on reverse charge basis – Also, ConstitutionBench decision in GVK Industries recognises the power of Parliamentto legislate over events occurring extra-territorially – The onlyrequirement imposed is that such an event must have realconnection to India – In the present case, the impugned levy on thesupply of transportation service by the shipping line to the foreignexporter to import goods into India has two-fold connection: first,the destination of the goods is India and thus, clear territorialnexus is established with the event occurring outside the territory;

Aand second, the services are rendered for the benefit of the Indianimporter – Thus, the transaction does have nexus with the territoryof India – On conjoint reading of ss.2(11) and 13(9) of the IGSTAct, r/w ss.2(93) of the CGST Act, the import of goods by CIFcontract constitutes an “inter-state” supply which can be subjectto IGST where the importer of such goods would be the recipient ofBshipping service – s.5(4) of the IGST Act enables the CentralGovernment to specify class of registered persons as the recipients,thereby conferring the power of creating deeming fiction on thedelegated legislation – Validity of the impugned notifications upheldu/ss.5(3) and 5(4) of the IGST Act – However, the impugned levyCimposed on the ‘service’ aspect of the transaction is in violation ofthe principle of ‘composite supply’ enshrined u/s.2(30) r/w s.8, CGSTAct and the overall scheme of the GST legislation – Double taxation– Customs Act 1962 – s.2(26).

Integrated Goods and Services Tax Act, 2017 – StatutoryDprovisions and Scheme of the Act – Discussed.

Constitution of India – Constitution (One Hundred and FirstAmendment Act) 2016 – Legislative History – Discussed.

Integrated Goods and Services Tax, Act 2017 – ss.2(11), 13(9)– Central Goods and Services Tax, Act 2017 – s.2(93) – WhetherEthe import of goods by CIF contract constitutes an “inter-state”supply which can be subject to IGST where the importer of suchgoods would be the recipient of shipping service – Held: Yes.

Constitution of India – Power of Parliament to levy tax overevents occurring extra-territorially – Discussed – Central GoodsFand Services Tax, Act 2017 – Integrated Goods and Services Tax,Act 2017.

Central Goods and Services Tax, Act 2017 – s.2(93) –Integrated Goods and Services Tax, Act 2017 – ss.5(3), 5(4) – Pleaof respondents that the amended and unamended s.5(4) do not saveGthe impugned notifications since they still make the reference to theterm “recipient” – Held: s.5(4) employs the language “as therecipient”, in contradistinction to s.5(3) of the IGST Act which uses“by the recipient” – Recipient includes the importer – Further, s.5(4)clarifies that it may designate class of registered persons as therecipient, thereby broadening the scope of s.2(93) of the CGST Act,H

which is anyway an inclusive definition since s.2 is prefaced with“unless the context otherwise requires” – It is settled law that non-reference of the source of power may not vitiate its exercise andapplication in given facts and circumstances of case.

Integrated Goods and Services Tax Act, 2017 – s.5(3), 13(9)– Central Goods and Services Tax, Act 2017– s.2(93)(c) – Whetherthe imports of goods on CIF basis would also constitute import ofshipping services, by way of deeming fiction – Held: s.5(3) of theIGST Act does not confer the powers on the Central Government tocreate deeming fiction vis-à-vis who constitutes the recipient – Itmerely enables the Central Government to identify certain categoriesof goods and services, where the recipient of such services is subjectto reverse charge, as opposed to the usual mode of taxation wherethe supplier of the service is charged on forward charge basis –However, s.13(9) of the IGST Act r/w s.2(93)(c) of the CGST Actinherently create deeming fiction of the importer of goods to bethe recipient of shipping service.

Constitution of India – “Recommendations”– Articles 3, 109,111, 113, 117, 203, 207, 255 and 274; Article 233; Articles 243I,243Y, 280, 281, 338, 338B and 340; Article 263; Articles 270, 275,344, 349 and 371A – Nature and contextual meaning of – Discussed.

Constitution of India – Constitutional role and functions ofthe GST Council, in the context of the simultaneous legislative powerconferred on Parliament and the State legislatures – Discussed.

Constitution of India – Constitution (One Hundred and FirstAmendment Act) 2016 – Articles 246A, 279A – Held: GST Councilis not only an avenue for the exercise of cooperative federalism butalso for political contestation across party lines – Thus, thediscussions in the GST Council impact both federalism anddemocracy – The constitutional design of the ConstitutionAmendment Act 2016 is sui generis since it introduces unique featuresof federalism – Article 246A treats the Centre and States as equalunits by conferring simultaneous power of enacting law on GST– Article 279A in constituting the GST Council envisions that neitherthe Centre nor the States can act independent of the other.

Constitution of India – GST Law – Essential legislativefunctions – Excessive delegation of, if any – Constitution (One

AHundred and First Amendment Act) 2016 – Central Goods andServices Tax, Act 2017 – Integrated Goods and Services Tax, Act2017 – Whether the impugned notifications are ultra vires the IGSTAct on the grounds of excessive delegation – Held: Legislature isrequired to perform its essential legislative functions – Once theskeletal structure of the policy is framed by the legislature, the detailsBcan emerge through delegated legislations – Legislature cannotdelegate its ‘essential legislative functions – Essential legislativefunctions with respect to the GST law are the levy of tax, subjectmatter of tax, taxable person, rate of taxation and value for thepurpose of taxation – Principles governing these essential aspectsCof taxation find place in the IGST Act – Both the IGST and CGSTAct clearly define reverse charge, recipient and taxable persons –Thus, the essential legislative functions vis-à-vis reverse charge havenot been delegated.

Integrated Goods and Services Tax, Act 2017 – Central GoodsDand Services Tax, Act 2017 – ss. 2(30) and 8 – Impugned levyseeking to impose IGST on the ‘service’ aspect of the transaction, ifin violation of the principle of ‘composite supply’ incorporated u/s.2(30) r/w s.8 of the CGST Act – Held: Yes – Since the Indianimporter is liable to pay IGST on the ‘composite supply’, comprisingof supply of goods and supply of services of transportation,Einsurance, etc. in CIF contract, separate levy on the Indianimporter for the ‘supply of services’ by the shipping line would bein violation of s.8 of the CGST Act – Double taxation.

Central Goods and Services Tax, Act 2017 – s.2(93)(c) –Integrated Goods and Services Tax, Act 2017 – s.13(9) – Held: TheFonly argument that supports the case of the appellant is that ofs.13(9) of the IGST Act r/w s.2(93)(c) of the CGST Act which definesa “recipient” – s.13(9) of the IGST Act creates the deeming fictionof place of supply of service to be the destination of goods whenthey are transported by means other than mail or courier – No specificGexemptions for importers have been carved out – This reasoning isaccepted and read into the definition of recipient in s.2(93) of theCGST Act.

Central Goods and Services Tax, Act 2017 – s.24(iii) –Integrated Goods and Services Tax Act, 2017 – ss.5(3), (4) – Held:HPower of the Central Government to designate persons and

categories of supply for reverse charge derives from ss.5(3) and5(4) of the IGST Act and not s.24(iii) of the CGST Act which mandatesthe compulsorily registration as logical corollary to ensure taxcollection.

Central Goods and Services Tax Act, 2017 – s.2(93) –Integrated Goods and Services Tax Act, 2017 – s.5(3) – Held:Interpreting the term “by the recipient” vis-à-vis the categories ofgoods and services identified in s.5(3) of the IGST Act shouldnecessarily be governed by the principles governing the definitionof “recipient” u/s.2(93) of the CGST Act.

Interpretation of Statutes – Legislative history, Parliamentarydebates, Committee Reports – Held: Though the traditional view ofinterpretation of statutes is that legislative history is not readily usedin interpreting law, the modern trend of thinking on the subjecthas enabled courts to look into the history of legislation tounderstand the full purport of the words used and the mischiefsought to be remedied by the law – Constitution of India – Articles246A, 279A – Constitution (One Hundred and First Amendment Act)2016 – Central Goods and Services Tax Act, 2017 – IntegratedGoods and Services Tax Act, 2017.

Words and Phrases:

“Recommendations”– Constitution of India – Interpretationof, vis-à-vis the provisions of IGST Act and CGST Act – IntegratedGoods and Services Tax Act, 2017 – Central Goods and ServicesTax Act, 2017.

‘Cooperative federalism’; ‘Dual federalism’; ‘Fiscalfederalism’ – Discussed.

Dismissing the appeals, the Court

HELD: 1. Though the traditional view of interpretation ofstatutes is that legislative history is not readily used in interpretinga law, the modern trend of thinking on the subject has enabledcourts to look into the history of legislation to understand thefull purport of the words used and the mischief sought to beremedied by the law. [Para 42][386-H; 387-A]

A2.1 The nature of the recommendations of the GST Council

Article 246A vests Parliament and the State Legislatureswith unique, simultaneous law-making power on GST. It is inthis context that the role of the GST Council gains significance.The recommendations of the GST Council are not based on aBunanimous decision but on three-fourth majority of the memberspresent and voting, where the Union’s vote counts as one-third,while the States’ votes have weightage of two-thirds of the totalvotes cast. There are two significant attributions of the votingsystem in the GST Council. First, the GST Council has an unequalvoting structure, where the States collectively have two-thirdCvoting share and the Union has one-third voting share; andsecond, since India has multi-party system, it is possible thatthe party in power at the Centre may or may not be in power invarious States. Therefore, the GST Council is not only an avenuefor the exercise of cooperative federalism but also for politicalDcontestation across party lines. Thus, the discussions in the GSTCouncil impact both federalism and democracy. The constitutionaldesign of the Constitution Amendment Act 2016 is sui generissince it introduces unique features of federalism. Article 246Atreats the Centre and States as equal units by conferring asimultaneous power of enacting law on GST. Article 279A inEconstituting the GST Council envisions that neither the Centrenor the States can act independent of the other. [Para 46][390-D-H; 391-A]

K.P Varghese v. ITO (1981) 4 SCC 173 : [1982] 1 SCR629; Kalpana Mehta v. Union of India (2017) 7 SCCF295 – relied on.

2.2 The Indian Constitution has sometimes been describedas quasi-federal or Constitution with ‘centralising drift’. Thisis because when the Constitution is read as whole, the Union isgranted larger share of the power. Instances of this centralisingGdrift can be traced to Articles 254, 248, and 353. However, thereare instances such as Article 246A, where the Centre and theStates are conferred equal power. Merely because few provisionsof the Constitution provide the Union with greater share ofpower, the provisions in which the federal units are envisaged toHpossess equal power cannot be construed in favour of the Union.

The Union and the States have simultaneous power to legislateon GST. The GST Council has the power to makerecommendations on wide range of subjects relating to GST.Since the Constitution does not envisage repugnancy provisionto resolve inconsistencies between the Central and State lawson GST, the GST Council must ideally function, as provided byArticle 279A(6), in harmonised manner to reach workablefiscal model through cooperation and collaboration. [Para 48][392-B-E]

2.3 One of the important features of Indian federalism is‘fiscal federalism’. reading of the Statement of Objects andReasons of the 2014 Amendment Bill, the Parliamentary reportsand speeches indicate that Articles 246A and 279A wereintroduced with the objective of enhancing cooperative federalismand harmony between the States and the Centre. However, theCentre has one-third vote share in the GST Council. Thiscoupled with the absence of the repugnancy provision in Article246A indicates that recommendations of the GST Council cannotbe binding. Such an interpretation would be contrary to theobjective of introducing the GST regime and would also dislodgethe fine balance on which Indian federalism rests. Therefore, theargument that if the recommendations of the GST Council arenot binding, then the entire structure of GST would crumble doesnot hold water. Such reading of the provisions of the Constitutiondiminishes the role of the GST Council as constitutional bodyformed to arrive at decisions by collaboration and contestation ofideas. [Para 51][393-G-H; 394-A-C]

2.4 The contextual meaning of ‘recommendations’

The GST Council which is constitutional body is entrustedwith the duty to make recommendations on wide range of areasconcerning GST. The GST Council has plenary powers underArticle 279A (4)(h) where it could make recommendations on‘any other matter’ related to GST as the Council may decide.The GST Council has to arrive at its recommendations throughharmonised deliberation between the federal units as providedin clause 6 of Article 279A. Unlike the other provisions of theConstitution which provide that recommendations shall be made

Ato the President or the Governor, Article 279A states that therecommendations shall be made to the ‘Union and the States’.The recommendation of the GST Council made under Article 279Ais non-qualified. That is, there is no explanation on the value ofsuch recommendation. Yet the notion that the recommendationsof the GST Council transform into legislation in and of themselvesBunder Article 246A would be farfetched. If the GST Council wasintended to be decision-making authority whose recommendationstransform to legislation, such qualification would have beenincluded in Articles 246A or 279A. Neither does Article 279A beginwith non-obstante clause nor does Article 246A provide thatCthe legislative power is ‘subject to’ Article 279A. If the GSTCouncil were intended to be constitutional body whoserecommendations transform into legislation without anyintervening act, there would have been an express provision inArticle 246A. Article 279A does not mandate tabling therecommendations in the legislature like the provisions in categoryD3, where the recommendations have to be mandatorily tabled inthe legislature along with an explanatory note. Only the secondarylegislation which is framed based on the recommendations of theCouncil under the provisions of the CGST Act79 and IGST Act80is mandated to be tabled before the Houses of the Parliament.EThe use of the phrase ‘recommendations to the Union or States’indicates that the GST Council is recommendatory body aidingthe Government in enacting legislation on GST. [Paras 54 and56][396-H; 397-A-D, G-H; 398-A-B]

Naraindas Indurkhya v. State of Madhya PradeshF(1974) 4 SCC 788 : [1974] 3 SCR 624 – followed.

Manohar v. State of Maharashtra (2012) 13 SCC 14 :[2012] 12 SCR 850 – relied on.

2.5 Interpretation of ‘recommendation’ vis-à-vis theprovisions of IGST Act and CGST ActG

The provisions of the IGST Act and CGST Act which providethat the Union Government is to act on the recommendations ofthe GST Council must be interpreted with reference to thepurpose of the enactment, which is to create uniform taxationsystem. The GST was introduced since different States could

earlier provide different tax slabs and different exemptions. Therecommendations of the GST Council are made binding on theGovernment when it exercises its power to notify secondarylegislation to give effect to the uniform taxation system. TheCouncil under Article 279A has wide recommendatory powerson matters related to GST where it has the power to makerecommendations on subject matters that fall outside the purviewof the rule-making power under the provisions of the IGST andCGST Act. Merely because few of the recommendations of theGST Council are binding on the Government under the provisionsof the CGST Act and IGST Act, it cannot be argued that all of theGST Council’s recommendations are binding. [Para 59][400-D-H; 401-A]

3.1 Statutory Provisions and Scheme of the IGST Act

The IGST Act enables the Central Government to imposeIGST on inter-state supply of goods and services. In aiding thelevy and collection of IGST, the IGST Act provides for acomprehensive scheme for determining the nature of supply, timeof supply and place of supply. Statutory interpretation willdetermine whether the IGST Act confers the powers on theCentral Government, in consultation with the GST Council, todesignate imports as supply of services under Section 5(3) ofthe IGST and whether the importer can be considered as therecipient of such supply, liable to pay tax on reverse chargebasis. Further, it will determine if the Central Government, inconsultation with the GST Council, has the powers to designatethe importer as recipient of service under 5(4) of the IGSTAct, when goods are imported on CIF basis. The critical fact inthis case is that the service of shipping in these CIF contracts isavailed by the non-taxable exporter who engages and pays aforeign shipping line of their choice, without the involvement ofthe importer. In contrast, in FOB contracts, the Indian importerpays for the services of shipping and directly deals with theshipping line. The respondents herein are importers of non-cokingcoal on CIF basis. [Paras 61 and 62][401-C-G]

310SUPREME COURT REPORTS

[2022] 9 S.C.R.

A3.2 Do the impugned notifications suffer from excessivedelegation?

Article 286(1) stipulates that the State shall not levy taxwhen the supply of goods or services takes place outside theState or in the course of import or export of goods or servicesBfrom the territory of India. Clause (2) of Article 286 states thatParliament may by law formulate principles for determining whenthere is supply of goods or services as prescribed by clause(1). Article 269A provides that GST on supplies in the course ofinter-state trade or commerce shall be levied and collected bythe Union Government. The manner of apportionment betweenCthe Union and the States has to be provided by Parliament on therecommendations of the GST Council. The explanation to Article269A(1) states that supply of goods or services in the course ofimport shall be deemed to be supply in the course of inter-Statetrade or commerce. Clause (5) provides that Parliament may byDlaw formulate principles for determining the place of supply andwhen the supply of goods or services takes place in the course ofinter-state trade or commerce. Articles 269A stipulates thatParliament may by law formulate principles for determining: (a)the place of supply and; (b) when the supply of goods or servicesor both takes place in the course of inter-State trade or commerce.EArticle 286(1) empowers Parliament to formulate the principlesby law for determining when supply of goods or services, orboth, takes place (a) outside the state; and (b) in the course ofimport into or export outside the territory of India. Parliamentenacted the IGST Act prescribing the principles as requiredFunder Articles 269A and 286(1). The provisions of the IGST Actdeal with the levy and collection of tax (Section 5(1)), export ofgoods and services (Section 2(5) and 2(6)), import of goods andservices (Section 2(10) and 2(11)), identification of the locationof the supplier and recipient of services (Sections 2(14) and2(15)), determination of the nature of inter-State supply (SectionG7), supplies in territorial waters (Section 9), place of supply withrespect to import to India and export from India (Section 11),and place of supply of services where the location of the supplierand recipient is in India and outside India (Sections 12 and 13).[Paras 80-82][412-F-G; 413-B-D, H; 414-A-C]H3.3 The legislature is required to perform its essentiallegislative functions. Once the skeletal structure of the policy isframed by the legislature, the details can emerge throughdelegated legislations. It is settled position that the legislaturecannot delegate its ‘essential legislative functions’.87 Theessential legislative functions with respect to the GST law arethe levy of tax, subject matter of tax, taxable person, rate oftaxation and value for the purpose of taxation. The principlesgoverning these essential aspects of taxation find place in theIGST Act: Section 5(1) identifies the subject matter of taxationas inter-State supplies of goods, services or both; Section 2(107)of the CGST Act identifies taxable person; Section 5(1) providesa maximum cap of 40% as the rate of taxation; and Section 5(1)stipulates that the value of taxation be determined under Section15 of the CGST Act. Section 2(98) of the CGST Act defines“reverse charge” as the liability of the recipient of the supply ofgoods or services or both to pay tax instead of the supplier.Section 2(93) of the CGST Act defines “recipient” with referenceto three situations (i) when consideration is payable for the supplyof goods or services or both; (ii) when no consideration is payablefor the supply of goods; and (iii) when no consideration is payablefor the supply of services. In the first situation, the recipient isthe person by whom consideration is payable. In the secondsituation, the recipient is the person to whom (a) the goods aredelivered or made available; or (b) possession or the use of thegoods is given or made available. The CGST Act also stipulatesa two-fold requirement for recipient to be taxed on reversecharge basis- the recipient must be ‘person’ as defined underSection 2(84) of the CGST; and the person is “taxable person”only if registered or is liable to be registered under Section 22 orSection 24. Section 24(iii) of the CGST Act states that personswho are required to pay tax under reverse charge must beregistered. Therefore, both the IGST and CGST Act clearly definereverse charge, recipient and taxable persons. Thus, theessential legislative functions vis-à-vis reverse charge have notbeen delegated. Section 5(3) of the IGST Act provides theGovernment the power to specify categories of supply of goodsor services or both on which tax shall be paid on reverse chargebasis by the recipient. The Government is to exercise this power

Aon the recommendation of the GST Council. The Government inexercise of its power under Section 5(3) of the IGST Act issuedthe impugned Notification 10/2017 specifying the ‘categories ofthe supply’ which shall be subject to reverse charge. Thenotification, besides specifying the criteria, has also mentionedthe corresponding recipient in those categories. The IGST ActBand the CGST Act define reverse charge and prescribe the entitythat is to be taxed for these purposes. Therefore, the stipulationof the recipient in each of the categories is only clarificatory. TheGovernment by notification did not specify taxable entitydifferent from that which is prescribed in Section 5(3) of the IGSTCAct for the purposes of reverse charge. [Paras 84-86][414-E-G;415-A-G]3.4 Charging Section: taxable person, taxable rate andmanner of determining value

Taxable personD

The respondents have alleged that the importer cannot bevalidly termed as taxable person. However, this argument hasto fail on close reading of the impugned notifications alongsideSections 2(107) and 24 of the CGST Act. Section 24(iii) of theCGST Act mandates persons required to pay tax under reverseEcharge to be compulsorily registered under the CGST Act.Section 2(107) of the CGST Act defines “taxable person” tomean person who is registered or liable to be registered underSection 24 of the CGST Act. Neither Section 2(107) nor Section24 of the CGST Act qualify the imposition of reverse charge on aF“recipient of service” and broadly impose it on “the persons whoare required to pay tax under reverse charge”. Since theimpugned notification 10/2017 identifies the importer as therecipient liable to pay tax on reverse charge basis under Section5(3) of the IGST Act, the argument of the failure to identify aspecific person who is liable to pay tax does not stand. TheGimpugned notification 10/2017 clearly specifies taxable personwho is liable to pay reverse charge that is envisaged in thestatute. Thus, the impugned notifications cannot be invalidatedfor an alleged failure to identify taxable person. [Paras 91 and92][417-C-F; 419-C-D]

Laghu Udyog Bharati v. Union of India 1999 (6) SCC418 : [1999] 3 SCR 1199 – held inapplicable.

Mathuram Agrawal v. State of Madhya Pradesh 1999(8) SCC 667 : [1999] 4 Suppl. SCR 195 – followed.

Gobind Saran Ganga Saran v. Commissioner of SalesTax AIR 1985 SC 1041 : [1985] 3 SCR 985; CIT v.B.C. Srinivas Setty AIR 1981 SC 972 : [1981] 2 SCR938 – relied on.

Taxable value

By corrigendum dated 8 June 2016, Notification 8/2017was amended to include the measure of taxable value to be tenper cent of the CIF value. Section 5(1) of the IGST Act enablesthe taxable value to be determined under Section 15 of the CGSTAct. The respondents have argued that the value has to be strictlydetermined by Section 15(1) of the CGST Act and not by way ofdelegated legislation. However, Sections 15(4) and 15(5) enabledelegated legislation to prescribe methods for determination ofvalue, on the recommendations of the GST Council. Rules 27 to31 of Chapter IV of the CGST Rules 2017, prescribe the mannerof determining value of supply. Rule 31 also provides for residualpowers to the GST Council for prescribing modes of valuation.The respondents have urged that the determination of the valueof supply has to be specified only through rules, and not bynotification. However, this would be an unduly restrictiveinterpretation. Parliament has provided the basic framework anddelegated legislation provides necessary supplements to createa workable mechanism. Rule 31 of the CGST Rules 2017specifically provides for residual power to determine valuationin specific cases, using reasonable means that are consistent withthe principles of Section 15 of the CGST Act. This is where thevalue of the supply of goods cannot be determined in accordancewith Rules 27 to 30 of the CGST Rules 2017. Thus, the impugnednotification 8/2017 cannot be struck down for excessivedelegation when it prescribes 10 per cent of the CIF value as themechanism for imposing tax on reverse charge basis. [Paras 93and 94][419-D-F; 420-D-F]

CDEF

A4.1 Taxable event: Is an ocean freight transaction for importof goods valid category of supply of services under Section 5(3)of IGST Act?

The analysis of whether import of goods under CIF contractsconstitutes valid import of service has to be answered on twoBprongs: (i) whether classification of imports as specific categoryof supply of shipping service is valid under Section 5(3) read withSection 5(1) of the IGST Act; and (ii) whether the recipient of theimported goods is also recipient of shipping services in CIFtransactions under Section 5(3). [Para 96][421-A-B]

C4.2 Do imported goods procured on CIF basis constitutean inter-state supply or is it an extra-territorial tax?

Section 7 of the CGST Act defines the term “supply” witha broad brush and provides for an inclusive definition. SectionD7(1)(b) of the CGST Act considers import of services for aconsideration to constitute “supply”. Section 7(1)(c) of the CGSTAct captures any and all activities in Schedule 1 of the CGST Act,irrespective of whether they are made for consideration.Additionally, Section 7(3) confers the power on the CentralGovernment to specify which transactions are to be treated as aEsupply of goods and not supply of services, and vice-versa.Section 7(4) of the IGST Act states that supply of servicesimported into India would be considered as supply of servicesin the course of “inter-State trade or commerce”. Thus, an Indianimporter could also be considered as an importer of the serviceFof shipping which is liable to IGST on inter-state supply, if theactivity falls within the definition of “import of service” for theIGST Act and CGST Act. The term ‘importer’ is not defined inthe IGST Act or the CGST Act. The term ‘import of goods’ isdefined in Section 2(10) of the CGST Act. “Import of services”is defined in Section 2(11) of the CGST Act. The conditions forGan “import of service” would entail three aspects: (i) the supplierof service must be located outside India; (ii) the recipient of theservice must be located in India; and (iii) the place of supply ofservice ought to be in India. [Paras 101 and 102][423-G-H; 424-A-B, F-G]H

4.3 Chapter V of the IGST Act provides for methodologiesto determine the place of supply of goods or services or both.Section 13 of the IGST Act provides the place of supply of serviceswhere the location of the supplier or location of recipient is outsideIndia. Section 13(9) of the IGST Act appears to create deemingfiction, where in case of supply of services of transportation ofgoods by supplier located outside India, the place of supplywould be the place of destination of such goods. The supplier,the foreign shipping line, in this case would be non-taxableperson. However, its services in CIF contract for transport ofgoods would enter Indian taxable territory as the destination ofsuch goods. The place of supply of shipping service by foreignshipping line, would thus be India. [Para 103][425-A-B, F-G]

4.4 The respondents argued that since Section 7(1)(b) ofthe CGST Act does not define “supply” of import of servicewithout consideration, other than the ones specified in Schedule1, this would be inapplicable to importers with CIF contracts asthe consideration is paid by the exporter. Thus, the importer ofgoods cannot be said to be an importer of shipping service sincethe latter is not an import of service for consideration underSection 7(1)(b) of the CGST Act. However, this argument missesout on some crucial definitions. The term ‘supply’ has beendefined in the IGST Act with reference to the CGST Act. Thus,the three conditions for “import of services” under Section2(11)(iii) must be understood with reference to the provisions ofthe CGST and IGST Acts, including the provisions fordetermination of place of supply under Section 13(9) of the IGSTAct. As mentioned previously, Section 13(9) of the IGST Actcreates deeming fiction of place of supply of transportationservices to be in India when the destination of goods is in India.In this case, it is clear the supplier of service- the foreign shippingline - is located outside India; and the place of supply is India.Accordingly, Section 13 of the CGST Act would be applicable todetermine the time of such supply. [Para 104][425-G-H; 426-A-C]

4.5 The respondents have argued that the ocean freighttransaction cannot be considered as “supply” since Section 7(1)(b)of the IGST act requires the import of service to be for

A“consideration”. The definition of “consideration” in Section 2(31)of the CGST Act is instructive. Section 2(31) of the CGST Actdefines ‘consideration’ to include payment made or to be made,in money or any other form, for the inducement of supply of goodsor services to be made by the recipient or by any other person.Thus, in the case of goods imported on CIF basis, the fact thatBconsideration is paid by the foreign exporter to the foreignshipping line would not stand in the way of it being considered asa “supply of service” under Section 7(4) of the IGST Act which ismade for consideration, thereby constituting “supply of service”in the course of inter-state trade or commerce that can be subjectCto IGST under Section 5(1) of the IGST Act. [Para 105][426-D;427-A-C]

4.6 The decision in GVK Industries clearly recognises thepower of Parliament to legislate over events occurring extra-territorially. The only requirement imposed by the Court is thatDsuch an event must have real connection to India. The impugnedlevy on the supply of transportation service by the shipping lineto the foreign exporter to import goods into India has two-foldconnection: first, the destination of the goods is India and thus, aclear territorial nexus is established with the event occurringoutside the territory; and second, the services are rendered forEthe benefit of the Indian importer. Thus, the transaction doeshave nexus with the territory of India. The IGST Act underSection 13(9) recognises the place of supply of services as thedestination of goods when the supplier is located outside India.Since the destination of goods is India, the statute itself is broadFenough to cover taxable event that has extra-territorial aspects,which bears nexus to India. [Paras 108 and 109][107, 108 and109]

GVK Industries v. Income Tax Officers [2011] 4 SCC36 : [ 2011] 3 SCR 366 – followed.

G4.7 Are importers service recipients under CIF contracts?

Section 5(3) of the IGST Act enables taxation of therecipients of certain specified categories of supply of services ona reverse charge basis. It is pertinent to note that the tax ispayable “by the recipient” of such services, in contradistinctionHto broad language such as “any person as may be prescribed”

which was otherwise used in Section 98(2) of the Finance Act1994 which taxed services. The term “recipient” of supply ofservice has been exhaustively defined by Section 2(93) of theCGST Act. Thus, the language employed in Section 2(93)(a) ofthe CGST Act clearly stipulates that when consideration ispayable for the supply of services, the recipient would mean theperson who is liable to pay that consideration. However, when noconsideration is payable for the supply of service, Section2(93)(c) states that the recipient shall be the person to whom theservice is rendered. Further, Section 2(93) provides that “anyreference to person to whom supply is made shall be construedas reference to the recipient”. Hence, where the statute refersto person to whom supply is made, it has to be construed as areference to the recipient of service. The power of the CentralGovernment to designate persons and categories of supply forreverse charge derives from Sections 5(3) and 5(4) of the IGSTAct and not Section 24(iii) of the CGST Act which mandates thecompulsorily registration as logical corollary to ensure taxcollection. Section 2(98) of the CGST Act, which defines “reversecharge” reiterates that it means the “liability to pay tax by therecipient of supply of goods or services or both instead of thesupplier…”. It cannot be construed to imply that any taxableperson identified for payment of reverse charge wouldautomatically become the recipient of such goods or service. Thedeeming fiction of treating the importer as recipient must befound in the IGST Act. As it currently stands, Section 5(3) of theIGST Act enables the delegated legislation to create deemingfiction on categories of supply of goods/services alone.Interpreting the term “by the recipient” vis-à-vis the categoriesof goods and services identified in Section 5(3) of the IGST Actshould necessarily be governed by the principles governing thedefinition of “recipient” under Section 2(93) of the CGST Act.Contrary to the arguments of the Union Government, such aninterpretation would not annihilate the mandate of compulsoryregistration under Section 24(iii) of the CGST Act. It would beapplicable to suitably worded provisions in the CGST or IGSTAct which permit the Central Government to identify taxableperson for reverse charge. In any event, it would be applicableto all the recipients liable for reverse charge under Sections 5(3)

Aand 5(4) of the IGST Act. The ineffectiveness of tax collectionmechanism under Section 24(iii) of the CGST Act cannot be arguedto obfuscate the concept of “recipient” of good or servicethat is uniformly understood across the IGST Act, CGST Act andtax jurisprudence. The Union Government has argued that theexpression “by the recipient” in Section 5(3) of the IGST ActBdoes not impede the authority of the GST Council in makingrecommendations for issuance of notifications for identifying suchpersons who shall be governed by reverse charge and once theidentification is complete, such taxable person wouldautomatically be interpreted as “the recipient”. This argumentCrequires the Court to completely discard the principles ofdetermining the recipient of service and replace it with whichevertaxable person is identified. The appellant may argue for such aninterpretation to achieve favourable outcome in this case.However, in matters of inter-state supply when the supplier andrecipient are within the territory of India, this Court would haveDto follow this artificially bifurcated interpretation which identifiesrecipients vis-à-vis the nature of service and supply in some cases,and by simple equation of the identified taxable person in otherswithout considering the literal and contextual definition ofrecipient. This is against settled rules of interpretation and wouldEbe an act of judicial legislation. If Parliament’s intention were todesignate certain persons for reverse charge, irrespective ofthem being the recipient of such goods and services, it must makea suitable amendment to confer such power for exercise ofdelegated legislation. [Paras 112, 115-117][429-H; 430-A-B, G-H; 431-A-H; 432-A-H; 433-A-B]F

4.8 The only argument that supports the case of theappellant is that of Section 13(9) of the IGST Act read togetherwith Section 2(93)(c) of the CGST Act which defines “recipient”.Section 13(9) of the IGST Act creates the deeming fiction of placeof supply of service to be the destination of goods when they areGtransported by means other than mail or courier. No specificexemptions for importers have been carved out. This Court isinclined to accept this reasoning and read it into the definition ofrecipient in Section 2(93) of the CGST Act. Since reference toa person to whom supply is made, is reference to the recipient,Hthe place of supply is critical. By virtue of Section 13(9) of the

IGST Act, the place of supply is the destination of goods. Thetime of supply is then determined through the provisions ofSection 13 of the CGST Act. Sections 2(14) and 2(15) of the IGSTAct also define the location of the recipient and supplier of serviceswith respect to the physical location where the supply of servicesis made or received. In such scenario, when the place of supplyof services is deemed to be the destination of goods under Section13(9) of the IGST Act, the supply of services would necessarilybe “made” to the Indian importer, who would then be consideredas “recipient” under the definition of Section 2(93)(c) of theCGST Act. The supply can thus be construed as being “made” tothe Indian importer who becomes the recipient under Section2(93)(c) of the CGST Act. This conclusion comports with thephilosophy of the GST to be consumption and destinated basedtax. The services of shipping are imported into India for thepurpose of consumption that is routed through the import ofgoods. Although the consideration for shipping is payable by theforeign supplier to the foreign shipping line in CIF contracts, theprice is consequently factored into the price of the shipment.The ultimate benefactor of the shipping service is also theimporter in India who will finally receive the goods at destinationwhich is within the taxable territory of India. Thus, the meaningof the term “recipient” in the IGST Act will have to be understoodwithin the context laid down in the taxing statute (IGST and CGSTAct) and not by strict application of commercial principles. [Paras118 and 119][433-B-D, G-H; 434-A, G-H; 435-A-D]4.9 Some of the respondents have argued that the possibilityof two different recipients of services would create absurditiessince whether supply of service is an inter-state supply underSection 7(3) or intra-state supply under Section 8(2) of IGST Actdepends on the location of the supplier and the place of supply,which in most cases is the location of the recipient of service.Since there can effectively be two recipients on reading ofSection 2(93)(a) and (c) of the CGST Act, the respondents arguethat the transaction may simultaneously become an inter-state orintra-state supply. This could also mean that two recipients canclaim ITC. However, this argument is inapplicable to the case athand since Sections 7(3) and 8(2) of the IGST Act do not conflate

Athe concept of imports. Section 8(2) deals with scenario wherethe location of the supplier and place of supply are within thesame State/Union Territory in India. This is inapplicable todetermining imports where the supplier is located outside India.Similarly, Section 7(3) deals with inter-state supply within theterritory of India. Further, both these sections are subject to theBprovisions of Section 12 of the IGST Act where both- the supplierand recipient are located in India. Section 12 of the IGST Actdoes not create the deeming fiction under Section 13(9) of theIGST Act which is applicable only when the supplier is locatedoutside India. The applicable section in this case would be SectionC7(4) of the IGST Act which clearly stipulates that “Supply ofservices imported into the territory of India shall be treated tobe supply of services in the course of inter-State trade orcommerce”. Thus, no absurdity is created by the deeming fictionargued by the Union Government. In no scenario would theforeign exporter be claiming ITC in India. The respondents’Darguments of identification of two recipients do not have anybearing on the determination of the present dispute as the foreignexporter is not sought to be taxed in this case. In the digital age,the concepts of supplier and recipient of service have also beenaltered and are not necessarily understood as two parties with aEdirect chain of supply. The IGST Act tends to create several suchdeeming fictions to adequately capture such complexities. Forinstance, Section 5(5) of the IGST Act taxes the electroniccommerce operator as the supplier of service in spite of it onlybeing conduit, in the commercial sense. These deeming fictionsneed to be respected for the purpose of the statute, as long asFthey have constitutional and parliamentary sanction. Section 13of the IGST Act is critical to effectively meet the aim of the GSTstatute to tax the destination of supplies, as opposed to theirorigins. The deeming fiction therein is critical to interpret thecharging provision under the IGST Act (Section 5). TheGrespondents’ argument for the irrelevance of determining thebeneficiary of the supply or who has received the supply in viewof the definition of ‘recipient’ of Section 2(93) of the CGST Actmis-reads Section 2(93) which identifies the recipient, inter alia,on the basis of the person to whom “supply is made” i.e. theplace of supply. [Paras 120-122][435-D-H; 436-A-D, G-H; 437-HA]4.10 GST laws mark departure from the previous policyof taxing sale/consignments and focuses on the taxing of supplies.The concept of supplycentric and destination-based tax runsthrough the scheme of the statutory provisions and the proposalsissued by the GST Council. Thus, an amendment to theConstitution was introduced in the form of Article 366(12-A) tocreate tax on the supply of goods, or services, or both. In thecommercial reality of the times, the conceptual lines betweengoods and services wear thin. Hence, the focus is on the taxationof supply, as opposed to the creation of neat compartmentsbetween goods and services. Section 7(1)(c) of the CGST Actspecifically characterizes import of services for considerationto constitute “supply”. The only question that falls fordetermination is whether the imports of goods on CIF basiswould also constitute import of shipping services, by way ofdeeming fiction. Section 5(3) of the IGST does not confer thepowers on the Central Government to create deeming fictionvis-à-vis who constitutes the recipient. Section 5(3) merely enablesthe Central Government to identify certain categories of goodsand services, where the recipient of such services is subject to areverse charge, as opposed to the usual mode of taxation wherethe supplier of the service is charged on forward charge basis.However, Section 13(9) of the IGST Act read with Section 2(93)(c)of the CGST Act inherently create deeming fiction of theimporter of goods to be the recipient of shipping service. [Para123][437-B-E]

5. Applicability of Section 5(4) of IGST Act

Amended Section 5(4) came into effect on 1 February 2019.Amending Act 32 of 2018 enables the Central Government tocreate deeming fiction of declaring class of registered persons“as the recipient” of the supply of taxable goods or service. Indeploying the language “as the”, and not “by the” recipient, theapplicability of the definition of recipient vis-à-vis Section 2(93)of the CGST Act is no longer necessary for determining the validityof such notification. The effect of the Amending Act 32 of 2018has been as follows:- (i) the powers of the Central Governmentto specify through notification has been clarified; and (ii) thepower to specify class of registered persons as the recipient

ABC

Ahas been recognised. The respondents have argued that theamended and unamended Section 5(4) do not save the impugnednotifications since they still make the reference to the term“recipient”. However, the respondents crucially miss out thatSection 5(4) employs the language “as the recipient”, incontradistinction to Section 5(3) of the IGST Act which uses “byBthe recipient”. Recipient includes the importer in Part of thisjudgment. Further, Section 5(4) clarifies that it may designate aclass of registered persons as the recipient, thereby broadeningthe scope of Section 2(93) of the CGST Act, which is anyway aninclusive definition since Section 2 is prefaced with “unless theCcontext otherwise requires”. It is settled law that non-referenceof the source of power may not vitiate its exercise and applicationin given facts and circumstances of case. Thus, as long as asource of power to legislate or issue notification is available,the lack of mention, an incorrect reference or mistake does notvitiate the exercise of such power. The impugned notificationsDwere issued with the intention of creating level playing fieldbetween the Indian and foreign shipping lines. [Paras 124, 126,127, 128 and 129][438-C-E, G; 439-A-C]

Union of India v. Tulsi Ram Patel (1985) 3 SCC 398 :[1985] 2 Suppl. SCR 131 – followed.ETitagarh Paper Mills v. Orissa State Electricity Board(1975) 2 SCC 436 – relied on.

6.1 Composite Supply and Issues of Double Taxation

The transaction at hand involves three parties- the foreignFexporter, the Indian importer and the shipping line. The first legof the transaction involves CIF contract, wherein the foreignexporter sells the goods to the Indian importer and the cost ofinsurance and freight are the responsibility of the foreign exporter.In other words, the foreign exporter is liable to ensure that theGgoods reach their place of destination and the Indian importerpays the transaction value to the exporter. The second leg of thetransaction involves an agreement between the foreign exporterand the shipping line (whether foreign or Indian) for providingservices for transport of goods to the destination, i.e., in theterritory of India. Section 2(30) of the CGST Act clearly providesH

that transaction may have two or more taxable supplies, whereone of them is principal supply. The illustration to Section 2(30)further clarifies that transaction such as the CIF contract forsupply of goods reflects composite supply under the CGST Act,where the principal supply is the supply of goods. Section 8 ofthe CGST Act provides that the tax liability on composite supplywhich comprises of two or more supplies, will only be levied onthe ‘principal supply’. In CIF transaction, the principal supply,according to Section 2(30), is supply of goods. Thus, the tax wouldbe levied as if the transaction was one of supply of goods. Section20 of the IGST Act provides that the provisions relating to‘composite supply’ under the CGST Act would apply mutatismutandis under the IGST Act. By extension, the IGST in atransaction of composite supply would be levied on the principalsupply of goods. [Paras 133, 136 - 138][442-G-H; 443-A-B, F-H;444-C-E]

6.2 The provisions of composite supply in the CGST Act(and the IGST Act) play specific role in the levy of GST. Theidea of introducing ‘composite supply’ was to ensure that variouselements of transaction are not dissected and the levy is imposedon the bundle of supplies altogether. This finds specific mentionin the illustration provided under Section 2(30) of CGST Act,where the principal supply is that of goods. Thus, the intent ofthe Parliament was that transaction which includes differentaspects of supply of goods or services and which are naturallybundled together, must be taxed as composite supply. It is truethat in this case, the first leg of the transaction between the foreignexporter and the Indian importer is composite supply, whilethe second leg, between the foreign exporter and the shippingline may, from perspective, be regarded as standalonetransaction. Both of them are independent transactions andordinarily, 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 impugnednotifications seek to tax the importer as the deemed recipient ofthe supply of service. The ASG has advanced an interpretation ofSections 5(3) and 5(4) of the IGST Act, read with Section 2(93) ofthe CGST Act to contend that the importer can be classified asthe ‘recipient’ of the services. On this interpretation, the validity

Aof the impugned notifications has been upheld under Sections5(3) and 5(4) of the IGST Act in Section D.2-D.5 of this judgment.This Court is bound by the confines of the IGST and CGST Actto determine if this is composite supply. It would not bepermissible to ignore the text of Section 8 of the CGST Act andtreat the two transactions as standalone agreements. In CIFBcontract, the supply of goods is accompanied by the supply ofservices of transportation and insurance, the responsibility forwhich lies on the seller (the foreign exporter in this case). Thesupply of service of transportation by the foreign shipper forms apart of the bundle of supplies between the foreign exporter andCthe Indian importer, on which the IGST is payable under Section5(1) of the IGST Act read with Section 20 of the IGST Act, Section8 and Section 2(30) of the CGST Act. To levy the IGST on thesupply of the service component of the transaction wouldcontradict the principle enshrined in Section 8 and be in violationof the scheme of the GST legislation. Thus, while the impugnedDnotifications are validly issued under Sections 5(3) and 5(4) ofthe IGST Act, it would be in violation of Section 8 of the CGSTAct and the overall scheme of the GST legislation. This Court isin agreement with the High Court to the extent that tax on thesupply of service, which has already been included by theElegislation as tax on the composite supply of goods, cannot beallowed. [Paras 143-147][446-E-H; 447-A, G-H; 448-A-B; 449-F-G]

Federation of Hotels & Restaurant Association of Indiav. Union of India (1989) 3 SCC 634 : [1989] 2 SCRF918, BSNL v. Union of India 2006 (3) SCC 1 : [2006]2 SCR 823 – referred to.

7. Conclusion

(i) The recommendations of the GST Council are not bindingon the Union and States for the following reasons:G

(a) The deletion of Article 279B and the inclusion of Article279(1) by the Constitution Amendment Act 2016 indicates thatthe Parliament intended for the recommendations of the GSTCouncil to only have persuasive value, particularly wheninterpreted along with the objective of the GST regime to fosterHcooperative federalism and harmony between the constituent units;

(b) Neither does Article 279A begin with non-obstanteclause nor does Article 246A state that it is subject to theprovisions of Article 279A. The Parliament and the Statelegislatures possess simultaneous power to legislate on GST.Article 246A does not envisage repugnancy provision to resolvethe inconsistencies between the Central and the State laws onGST. The ‘recommendations’ of the GST Council are the productof collaborative dialogue involving the Union and States. Theyare recommendatory in nature. To regard them as binding edictswould disrupt fiscal federalism, where both the Union and theStates are conferred equal power to legislate on GST. It is notimperative that one of the federal units must always possess ahigher share in the power for the federal units to make decisions.Indian federalism is dialogue between cooperative anduncooperative federalism where the federal units are at libertyto use different means of persuasion ranging from collaborationto contestation; and

(c) The Government while exercising its rule-making powerunder the provisions of the CGST Act and IGST Act is bound bythe recommendations of the GST Council. However, that doesnot mean that all the recommendations of the GST Council madeby virtue of the power Article 279A (4) are binding on thelegislature’s power to enact primary legislations;

(ii) On conjoint reading of Sections 2(11) and 13(9) of theIGST Act, read with Section 2(93) of the CGST Act, the import ofgoods by CIF contract constitutes an “inter-state” supply whichcan be subject to IGST where the importer of such goods wouldbe the recipient of shipping service;

(iii) The IGST Act and the CGST Act define reverse chargeand prescribe the entity that is to be taxed for these purposes.The specification of the recipient – in this case the importer – byNotification 10/2017 is only clarificatory. The Government bynotification did not specify taxable person different from therecipient prescribed in Section 5(3) of the IGST Act for thepurposes of reverse charge;

(iv) Section 5(4) of the IGST Act enables the CentralGovernment to specify class of registered persons as the

Arecipients, thereby conferring the power of creating deemingfiction on the delegated legislation;

(v) The impugned levy imposed on the ‘service’ aspect ofthe transaction is in violation of the principle of ‘composite supply’enshrined under Section 2(30) read with Section 8 of the CGSTBAct. Since the Indian importer is liable to pay IGST on the‘composite supply’, comprising of supply of goods and supply ofservices of transportation, insurance, etc. in CIF contract, aseparate levy on the Indian importer for the ‘supply of services’by the shipping line would be in violation of Section 8 of the CGSTAct. [Para 148][449-G-H; 450-A-H, 451-A-E]

McDowell and Company Ltd. v. Commercial Tax Officer1985 (3) SCC 230: [1985] 3 SCR 791; M/s ElectronicCorporation of India v. Commissioner of Income Tax1989 Supp 2 SCC 642 : [1989] 2 SCR 994; MunicipalCorporation of Delhi v. Birla Cotton Spinning andWeaving Mills [1968] 3 SCR 251; Avinder Singh v. Stateof Punjab (1979) 1 SCC 441; Union of India v. VKCFootsteps India Private Limited (2022) 2 SCC 603;Union of India v. Jalyan Udyog 1994 (1) SCC 318: [1993] 2 Suppl. SCR 293; Ispat Industries Ltd. v.Commissioner of Customs (2006) 12 SCC 583 : [2006]6 Suppl. SCR 733; Abhiram Singh v. CD Commachen,(2017) 2 SCC 629; Hoecst Pharmaceuticals Ltd. v. Stateof Bihar (1983) 4 SCC 45 : [1983] 3 SCR 130; Unionof India v. Mohit Mineral Pvt. Ltd. (2019) 2 SCC599 [2018] 13 SCR 139; Baiku v. State Tax Officer, GST2019 SCC OnLine Ker 5362; SR Bommai v. Union ofIndia (1994) 3 SCC 1 : [1994] 2 SCR 644; State (NCTof Delhi) v. Union of India (2018) 8 SCC 501 : [2018]7 SCR 1; Union of India v. Pradip Kumar Dey, (2000)8 SCC 580 : [2000] 4 Suppl. SCR 465; KesoramIndustries and Cotton Mills Ltd. v. CWT, [1966] 2 SCR688; Som Mittal v. Government of Karnataka, (2008) 3SCC 753 : [2008] 2 SCR 323; State of AP v. T.Gopalakrishnan Murthi, (1976) 2 SCC 883 : [1976]1 SCR 1008; In re Delhi Laws Act 1912 AIR 1951 SC332 : [1951] SCR 747; Edward Mills Co. Ltd. v. State

of Ajmer, AIR 1955 SC 25 : [1955] 1 SCR 735; A.NParasaran v. State of Tamil Nadu, (1989) 4 SCC 683 :[1989] 1 Suppl. SCR 371 – referred to.

Tarun Jain, Goods and Services Tax: ConstitutionalLaw and Policy (EBC 2018) 16, 117; H.M. Seervai,Constitutional Law of India (NM Tripati PrivateLimited, 4[th] Edition, Vol.1) 28; EmpoweredCommittee, First Discussion Paper on Goods andServices Tax, (2009) Pars 1.13-1.14; ThirteenthFinance Commission, Report of the Task Force onGST (2009) Para 10.5; Standing Committee onFinance, The Constitution (One Hundred andFifteenth Amendment) 2011 (73rd report, 2013) ;Select Committee, Report on the Constitution (OneHundred and Twenty Second Amendment) Bill , 2014,(Submitted to the Rajya Sabha, 2015); Alok Prasanna,‘For mess of Potage: The GST’s promise ofincreased revenue to states comes at the cost of thefederal structure of the Constitution’ National LawSchool of India Review. Vol. 28, No. 2(2016), pp-97-113; Ajitesh Kir, ‘India’s Goods and Services Tax: AUnique Experiment in Cooperative Federalism and aConstitutional Crisis in Waiting’ Canadian Tax Journal(2021) 69:2, 391-445 – referred to.

Robert A. Schapiro, ‘Justice Steven’s theory ofInteractive Federalism’ 74 Fordham L. Rev. 2133(2006); Jessica Bulman-Pozen and Heather K.Gerken, ‘Uncooperative Federalism’ Yale LawJournal, Vol. 118. No. 7 (May, 2009), pp. 1256-1310;Bulman-Pozen and K. Gerken (n 74) – referred to.

Case Law Reference

328SUPREME COURT REPORTS

[2022] 9 S.C.R.

CIVIL APPELLATE JURISDICTION: Civil Appeal No.1390 of2022.

From the Judgment and Order dated 23.01.2020 of the High Courtof Gujarat at Ahmedabad in R/SCA No. 726 of 2018.

With

Civil Appeal Nos. 1390, 1394, 1417, 1419, 1445, 1414, 1402, 1412,1411, 1413, 1415, 1418, 1420, 1446, 1447, 1409, 1416, 1395, 1407, 1406,1398, 1401, 1391, 1403, 1393, 1410, 1405, 1397, 1404, 1400. 1396, 1408,1399 and 1392 of 2022.

N. Venkataraman, ASG, Mukesh Kumar Maroria, Ms. NishaBagchi, Rupesh Kumar, Akshay Amritanshu, Sharath Narayan Nambiar,Ms. Meena Devi, B. Krishna Prasad, Advs. for the Appellants.

J. K. Mittal, Ms. Neeha Nagpal, Malak Manish Bhatt, Ms.Vandana Mittal, Ms. Aashna Suri, Joseph Pookkatt, Prashant Kumar,Nilesh Sharma, Dhawesh Pahuja, M/s AP & J Chambers, Uchit Sheth,Santosh Krishnan, Dr. C. Manickam, Ranjan Kumar, Sanjay Kumar,Kapil Dev Yadav, Rishabh Sancheti, Sharad Kothari, Ms. Padma Priya,Anchit Bhandari, Sushant Rao, K. Paarivendhan, Devendra Singh, AnkitSachdeva, Vinayak Mathur, Kamal Kumar Arya, Ms. Anishka Gupta,Rahul Jain, G. Natarajan, Rajesh Kumar Gautam, Kartik Jindal, Ms.Pallavi Ganesh, Parmeet Singh, Ms. Deepanwita Priyanka, S.Suriyanarayanan Iyer, Ms. Garima Bajaj, Advs. for the Respondent.

The Judgment of the Court was delivered by

DR. DHANANJAYA Y CHANDRACHUD, J.

AIntroduction.................................................................5FBSubmissions...............................................................12

B.1Union of India..................................................12

B.2Respondent-assessees........................................28

CConstitutional Architecture of GST................................52G

C. 1Legislative History of the Constitution AmendmentAct 2016..........................................................56

C.2The nature of the recommendations of the GSTCouncil.............................................................75

ADAnalysis....................................................................92

D.1Statutory Provisions and Scheme of the IGST Act...92D.2Do the impugned notifications suffer from excessivedelegation?.....................................................104

D.3Charging Section: taxable person, taxable rate andmanner of determining value.............................108

D.4Taxable event: Is an ocean freight transaction forimport of goods valid category of supply of servicesunder Section 5(3) of IGST Act?........................114

D.4.(a) Do imported goods procured on CIF basisconstitute an inter-state supply or is it anextra-territorial tax?.............................115

D.4.(b) Are importers service recipients under CIFcontracts?............................................126

D.5Applicability of Section 5(4) of IGST Act.............136

D.6Composite Supply and Issues of Double Taxation...142

EConclusion...............................................................151

Introduction

1. The Union of India[1] is in appeal against judgment of DivisionBench of the Gujarat High Court dated 23 January 2020. The HighCourt allowed petition instituted by the respondents under Article 226Ffor challenging the constitutionality of two notifications of the CentralGovernment. The bone of contention is whether an Indian importer canbe subject to the levy of Integrated Goods and Services Tax[2] on thecomponent of ocean freight paid by the foreign seller to foreign shippingline, on reverse charge basis.2. The respondents import non-coking coal from Indonesia, SouthGAfrica and the U.S. by ocean transport on ‘Cost-Insurance-Freight’[3]basis which is supplied to domestic industries. The goods are transported

1 “Union Government” or “Central Government”

2 “IGST”

H3 “CIF”

from place outside India, up-to the customs station in India. Therespondent pays customs duties on the import of coal, which includesthe value of ocean freight. In the case of CIF contract, the freightinvoice is issued by the foreign shipping line to the foreign exporter,without the involvement of the importer. Ocean freight is paid by theimporter only when goods are imported under ‘Free-on-Board’[4] contract.In the case of high seas sale transaction, the coal is purchased fromthe original buyer before it arrives at Indian ports.

3. Prior to the enforcement of the Goods and Services Tax[5] regime,service tax on ocean freight was exempted by Notification No. 25/2012-ST (Serial No. 34) dated 20 June 2012. This exemption was withdrawnby Notification No. 01/2017-ST dated 12 January 2017 which leviedservice tax on the importer, by reverse charge mechanism. With theadvent of the GST regime, Notification No.8/2017- Integrated Tax (Rate)dated 28 June 2017[6] was issued by the Central Government on the adviceof the Goods and Services Tax Council[7], in exercise of powers underSection 5(1), Section 6(1) and Section 20(iii)-(iv) of the Integrated Goodsand Services Tax Act 2017[8], read with Section 15(5) and Section 16(1)of the Central Goods and Services Act[9]. Entry 9 of Notification 8/2017,effective from 1 July 2017, levied an integrated tax at the rate of 5 percent on the supply of specified services, including transportation of goods,in vessel from place outside India up to the customs station ofclearance in India.

4. On 28 June 2017, the Central Government issued Notification10/2017[10]. Serial 10 of Notification 10/2017 categorized the recipient ofservices of supply of goods by person in non-taxable territory by avessel to include an importer under Section 2(26) of the Customs Act1962.

5. Section 5(1) of the IGST Act authorises the levy of an integratedtax on all inter-state supplies of goods and services or both. The integratedtax can also be levied on goods imported into India on the value determined

4 “FOB”5 “GST”

6 “Notification 8/2017”

7 “GST Council”

8 “IGST Act”

9 “CGST Act”

10 “Notification 10/2017”

Aunder Section 3 of the Customs Tariff Act 1975[11] at the point whencustoms duties are levied on the goods under Section 12 of the CustomsAct 1962[12]. Section 11 of the IGST Act stipulates that the place of supplyof goods in the case of goods imported into India shall be the place of theimporter. Section 13(9) of the IGST Act contemplates that the place ofsupply of services, in the case of transportation of goods shall be theBdestination of the goods. The respondent alleges that the impugnednotifications create an element of double taxation, as ocean freight isincluded in the value of goods for the purpose of customs duty which theimporter is liable to pay. The respondent does not dispute the liability ofintegrated tax on supply of service of transportation when it importsCgoods on an FOB basis.6. The respondent filed writ petition before the Gujarat HighCourt challenging Notification 8/2017 and Notification 10/2017[13] on thegrounds that: (i) the notifications are ultra vires the IGST Act and CGSTAct; (ii) customs duty is levied on the component of ocean freight andDthe levy of IGST on the freight element in the course of transportationwould amount to double taxation; (iii) though in the case of high seasales, the importer is different entity yet this regime would tax therespondent as the importer and the recipient of service; (iv) in the caseof CIF contract, the supply of service of transport of goods in vesselis by foreign shipping line located in non-taxable territory to anEexporter located in non-taxable territory by vessel outside the territoryof India which cannot be subject to tax under the IGST Act; (v)Notification 10/2017 transgresses the provisions of Section 5(3) of theIGST 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;Fand (vi) Entry 9(ii) and para 2 of Notification 8/2017, read with Notification10/2017, creates deeming fiction and separate taxable event whichis not permissible in law.

7. The Union of India urged before the High Court that althoughtax is being paid twice on the value of ocean freight, it is notGunconstitutional as the tax is on two different aspects of the transaction,namely, the supply of service and import of goods. The rationale for theimpugned notifications, according to the Union Government, is to remove

11 “Customs Tariff Act”

12 “Customs Act”H13 Collectively referred as “impugned notifications”

the disparity between Indian and foreign shipping lines, as the formerare unable to claim input tax credit[14] that forms part of theirtransportation costs, since supply of goods was hitherto exempt fromservice tax. The levy of the integrated tax does not, according to theUnion of India, impose an additional cost on importers as the cost paidon inward transportation of goods and import freight services is availableto them as ITC.

8. Under the existing GST regime (presently under challenge),taxability of ocean freight under different situations is tabulated below :

9. The Division Bench of the Gujarat High Court held that theimpugned notifications are unconstitutional for exceeding the powersconferred by the IGST Act and the CGST Act. The High Court held:

(i)The importer of goods on CIF basis is not the recipient ofthe transport services as Section 2(93) of the CGST Actdefines recipient of services to mean someone who paysconsideration for the service, which is the foreign exporterin this case;

14 Interchangeably referred as “ITC”

334SUPREME COURT REPORTS

A(ii)Section 5(3) of the IGST Act enables the Government tostipulate categories of supply, not specify third-party as arecipient of such supply;

(iii)There is no territorial nexus for taxation since the supply ofservice of transportation of goods is by person in non-Btaxable territory to another person in non-taxable territoryfrom place outside India up to the Indian customsclearance station and this is neither an inter-state nor anintra-state supply;

(iv)Section 2(11) of the IGST Act defines “import of service”Cto mean the supply of service where the supplier of serviceis located outside India, the recipient of service is located inIndia and the place of supply of service is in India;

(v)In this case, since the goods are transported on CIF basis,the recipient of service is the foreign exporter who is outsideIndia;

(vi)Section 7(5)(c) of the IGST Act dealing with intra-statesupply 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)Sections 12 and 13 of the IGST Act deal with determiningEthe place of supply. Neither of them will apply if both thesupplier and recipient of service are based outside India.The mere fact that the service terminates at India does notmake the service of supply of transportation to be takingplace in India;

F(viii) The provisions regarding time of supply, as contemplated inSection 20 of the IGST Act and applicable to Section 13 ofthe IGST Act dealing with supply of services, are applicableonly vis-à-vis the actual recipient of the supply of service,which is the foreign exporter in this case;

G(ix)Section 15(1) of the CGST Act enables the determinationof the value of the supply, only between the actual supplierand actual recipient of the service;

(x)Since the importer is not the “recipient” of the service underSection 2(93) of the CGST Act, it will not be in position toHavail ITC under Section 16(1) of the CGST Act; and

(xi)Since the importer pays customs duties on the goods whichAinclude the value of ocean freight, the impugned notificationsimpose double taxation through delegated legislation,which is impermissible.

Submissions

B.1 Union of India

10. Mr N Venkataraman, learned Additional Solicitor General[15]appearing on behalf of the appellant – the Union of India – urged thefollowing submissions:

A.Constitutional Architecture of IGST

(i)Under Article 286(2), Parliament is empowered toformulate inter alia the principles for determining whena supply of goods or services takes place in any of theways mentioned in Article 286(1), which includes imports;

(ii)Article 269A enables the Union Government to levy GSTDon inter-state supplies. The explanation to Article269A(1) creates deeming fiction that supply of goodsor services in the course of imports is to be consideredas supply of goods or services or both in the course ofinterstate trade;E(iii)Article 269A(5) enables Parliament to formulate theprinciples for determining the place of supply and whena supply of goods and services or both takes place inthe course of inter-State trade or commerce. Thisconstitutional mandate finds legislative effect in the IGSTFAct;(iv)As contemplated in Article 286(2) read with Article269A(1), the IGST Act enacts provisions relating to thelevy and collection of integrated tax (Section 5(1)), exportof goods [Section 2(5)], export of services [Section 2(6)],Gimport of goods [Section 2(10)], import of services[Section 2(11)], location of recipient of services [Section2(14)] and location of supplier of services [Section2(15)];

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[2022] 9 S.C.R.

A(v)In terms of Article 269A(5), the IGST Act contemplatesprovisions for determining the nature of inter-Statesupply (Section 7), supplies in territorial waters (Section9), place of supply of goods imported into or exportedout of India (Section 11), place of supply of serviceswhere the location of supplier and recipient is in IndiaB(Section 12) and place of supply of services where thelocation of supplier and recipient is outside India (Section13).

B.Charging Section

C(vi)The charge created by Section 5(1) of the IGST Actcan extend to an ocean freight transaction to be taxedin the hands of the importer. This creation of charge isin compliance with the essential components of taxationidentified by Constitution Bench in MathuramAgrawal v. State of Madhya Pradesh[16]and furtherDelaborated on by this Court in Gobind Saran GangaSaran v. Commissioner of Sales Tax[17].

(vii)The four fundamental principles of taxing enactmentare: the taxable event, the person on whom the levy isimposed, the rate at which the levy is imposed and theEmeasure or the value to which the rate will be applied;

(viii)Section 5(1) fulfils the above components of taxation:

•Taxable event à “There shall be levied tax calledintegrated goods and services tax on all inter-FState supplies of goods or services or both excepton the supply of alcoholic liquor for humanconsumption.”

•Taxable value à “On the value determined underSection 15 of the CGST Act”

•Taxable rate à “At such rates not exceeding 40%as may be notified by the Government on therecommendations of the Council and collected insuch manner as may be prescribed”

16 1999 (8) SCC 667 (“Mathuram Agrawal”)H17 AIR 1985 SC 1041 (“Gobind Saran Ganga Saran”)

•Taxable person à “Shall be paid by the taxableAperson”

C.Concept of Reverse Charge(ix)Section 2(98) of the CGST Act defines “reverse charge”to mean the liability to pay tax by the recipient of supplyBof goods or services or both instead of the supplier ofsuch goods or services or both under sub-Section (3) orsub-Section (4) of Section 9 of the CGST Act or undersub-Section (3) or sub-Section (4) of Section 5 of theIGST Act. The impugned notifications are issued inexercise of the powers of the Union Government vestedCby the aforesaid sections of the IGST Act or the CGSTAct;

(x)A person covered by reverse charge becomes taxableperson in terms of Section 2(107) of the CGST Act readwith Section 24(iii) of the CGST Act. Pertinently, Section24(iii) of the CGST Act employs the language of “personswho are required to pay tax under reverse charge” andnot “persons who are recipient of services underSection 2(93) of the CGST Act 2017”;(xi)Section 5(3) of the IGST Act and Section 9(3) of theCGST Act permit the Government, on therecommendation of the GST Council, to specify thecategories of goods or services or both, the tax for whichshall be paid on reverse charge basis by the recipient ofsuch goods or services or both;(xii)Presently, neither the provisions nor the rules haveidentified the taxable persons for reverse charge. Hence,the impugned notifications are legitimate exercise ofdelegated legislation. Notification 10/2017 identifies animporter as recipient for the purposes of reverse charge.The power to issue such notification can be tracedback 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 supplyin terms of Section 7(4) read with Section 13(1) and

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[2022] 9 S.C.R.

A13(9) of the IGST Act. Although the contracting partiesare foreign, the critical limb of the transaction happensin the taxable territory, namely, India. Hence, thetransaction can also fall under Section 7(5)(c) read withSection 13(1) and Section 13(9) of the IGST Act;

B(xiv)Section 13(9) of the IGST Act stipulates that the placeof supply of services of transportation of goods otherthan by way of mail or courier shall be the place ofdestination of such goods. Even though the contractingparties – the foreign shipping line and the foreign exporterC– are outside the territory of India, the provision ofservice is for the Indian importer and consequently theconsumption and exhaustion of service which is criticallimb, both commercially and legally, happens only in thehands of the Indian importer;

DE.Time of Supply

(xv)Section 13(5) of the CGST Act contains residualprovision for determining time of supply to be the dateon which the tax is paid. Since the other sub-sections inSection 13 are not applicable for construing the time ofEsupply, Section 13(5) of the CGST Act would beapplicable;

F.Composite Supply

(xvi)The CIF transaction and IGST on ocean freight are twoindependent transactions, entitled to suffer independentFlevies and do not qualify as composite supply underSection 2(30) of the CGST;

(xvii)GST and customs duties are not exclusive means oftaxation. GST is destination-based tax. The integratedtax is being sought to be imposed on the supply of serviceand not on the goods. Separate aspects are being taxed,hence it cannot be termed as overlapping. Moreover,the tax is on the value of goods, and not the freight. Taxpaid at an anterior stage is not double taxation if it isincluded in the overall value;

(xviii)The discharge of reverse charge taxation does not makeAtwo independent contracts as composite contract. Thecontract between the foreign shipping line and the foreignexporter is distinct and independent of the contractbetween the foreign exporter and the Indian importer.Their concomitance does not make them composite;B(xix)What is sought to be taxed on the supply of goods onCIF value basis is traceable to the proviso to Section5(1) read with Sections 3(7) and 3(8) of the CustomsTariff Act. On the other hand, what is sought to be taxedunder IGST on reverse charge basis derives power underCSection 5(1) (taxable person) read with Section 24(iii)of the CGST Act and Section 5(3) of the IGST Act andthe impugned notifications;(xx)A Constitution Bench of this Court in McDowell andCompany Ltd. v. Commercial Tax Officer[18] has heldDthat single element can constitute the basis of levyand can also form part of the value for anothertransaction. This cannot be termed as double taxation.G.Extra-territorialityE(xxi)There is sufficient territorial nexus for the purpose oftaxation since the importer is the final beneficiary of aservice provided by foreign shipping line by way oftransportation up to the customs station of clearance inIndia. The transaction between the foreign exporter andthe foreign shipping line has nexus to the taxableFterritory of India. The importer is the beneficial ownerof the goods at the time of clearance. The appellantrelies on the decisions of this Court in M/s ElectronicCorporation of India v. Commissioner of IncomeTax[19 ]and GVK Industries v. Income Tax Officers[20]Gwhere this Court has upheld taxing statutes having aterritorial nexus to India;

18 1985 (3) SCC 230 [“McDowell”]

19 1989 Supp 2 SCC 642

20 2011 (4) SCC 36 [“GVK Industries”]

340SUPREME COURT REPORTS

AH.Service recipient

(xxii)There are six reasons to term an Indian importer as therecipient of service:

(a)Section 2(93)(c) of the CGST Act envisages recipientof an intangible service as one who does not payBconsideration. In CIF transactions, the Indian importerdoes not pay for ocean freight and yet receives thebenefit of transportation;

(b)Section 2 of the CGST Act is prefaced with “In this Act,unless the context otherwise requires” which warrantsCa 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 impugnednotifications issued thereunder, allow any person tobecome taxable person and such taxable personDbecomes the recipient of supply of goods or services orboth. Once ‘any person’ is identified as taxable personfor reverse charge under notification issued under 5(3)of IGST Act, by sheer default of the definition of reversecharge under Section 2(98) of the CGST Act, such aEtaxable person on reverse charge becomes servicerecipient;(d)Section 5(3) of the IGST Act clearly enables theidentification of service recipients, and not just categoriesof goods or services or both. Any contrary interpretationFwould be against the legislative intention. On conjointreading of Section 5(3) of the IGST Act read with Section2(93) of the CGST Act, service recipient can beidentified through notification;

(e)The definition of “supply” without consideration underSection 7(c) of the CGST Act is not an exhaustiveGdefinition. Further, Section 2(31) of the CGST Act definesconsideration and does not restrict its payment to onlythe owner of such goods and services; and

(f)Section 2(93)(c) of the CGST Act reads “..and anyreference to person to whom supply is made, shall

be construed as reference to the recipient of thesupply…”. supply can be made to ‘a person’, ‘aregistered person’ and ‘a taxable person’ and such asupply shall be construed to be supply to recipient.Since the Indian importer would qualify under all theaforementioned categories, it can be termed as recipientof the service.

I.Applicability of Section 5(4) of the IGST Act

(xxiii)In the alternative, the impugned notifications would besaved by Section 5(4) of the IGST Act which permitsthe Union Government, on the recommendations of theGST Council, to specify class of registered personswho shall in respect of specified categories of goods orservices or both received from an unregistered supplier,pay the tax on reverse charge basis as the recipient andall the provisions of the Act would apply to such recipient;

(xxiv)It is admitted that the impugned notifications do not referto Section 5(4) of the IGST Act. However, it is settledlaw that once power is available to grant or identifythe taxable person, taxable event, rate and measure, non-reference of the source of power will not vitiate itsexercise and application in given facts and circumstancesEof the case;

J.Parliamentary legislation v. Excessive delegation

(xxv)This Court in Municipal Corporation of Delhi v. BirlaCotton Spinning and Weaving Mills[21] and AvinderSingh v. State of Punjab[22] has held that only essentialFlegislative functions, such as policy guidelines andframework, need to be performed by Parliament andthe state legislatures. Once these are made availablethrough the exercise of plenary power, the rest of thedetails can always emerge through the exercise ofGdelegated powers;

(xxvi)The constitutional mandate of Articles 269A and 286finds effect under the IGST Act. The IGST Act, and

21 1968 (3) SCR 25122 1979 (1) SCC 441

342SUPREME COURT REPORTS

Aspecifically Section 5(1) therein, has defined the subjectmatter of taxation (inter-state supply of goods andservices), the taxable person under Section 2(107) readwith Section 24(iii) of the CGST Act, maximum cap of40 per cent and determination of taxable value in termsof Section 15 of the CGST Act. Only the identificationBof the taxable person is delegated to the UnionGovernment which makes its decisions on the basis ofthe recommendations of the GST Council;

K.GST Council recommendations- Cooperative federalism andcollaborative federalismC

(xxvii)GST is consumption tax and the tax jurisdiction extendsto the place the supply is consumed. Since the foreignshipping line or foreign exporter are located in non-taxable territory, the Indian importer has to be taxed ona reverse charge basis since the service is consumed inDIndia. The purpose is to make the Indian shipping linesas competitive as foreign shipping lines. ITC is availableto the importer and the tax paid on such reverse chargecan be offset in the importer’s output tax liability.Therefore, there is no additional burden on the importer-Eit is mere alteration of the mechanism;

(xxviii)The integrated tax was essential to level the playing fieldbetween foreign shipping lines and Indian shipping linessince the former were not required to charge any tax onthe recipient of supply of service;

F(xxix)The spirit of the cooperative federalism must guide thefunctioning of the GST Council as envisaged in Article279A(6). This was espoused by this Court in Union ofIndia v. VKC Footsteps India Private Limited[23]where it was held that there is need for harmonisedGstructure of goods and service tax. The GST Council isempowered to decide on every aspect of the GST law.The recommendations of the GST Council are bindingon the executive and the legislature-while it frames lawsrelating to GST by the power under Article 246A;

H23 (2022) 2 SCC 603 (“VKC Footsteps”)

(xxx)The GST Council recommends the law, rules andAnotifications through voting architecture that isprescribed in Article 279A(6) and quorum requirementsin Article 279A(7). Every decision flows from onecommon source;(xxxi)The GST Council is the only constitutional body whichBacts as converging point or platform for both thefederal units to work in harmonious manner instructuring the goods and service tax, in the process ofdeveloping harmonised national market for goods andservices;C(xxxii)Article 246A states that the power to legislate GST lawsis only with the Union of India and the States. Neithercan Article 279A override Article 246A nor can Article246A be made subject to Article 279A. Judicialinterpretation must strike harmony such that Parliament,Dthe state legislatures and the GST Council work in unisonand harmony; and(xxxiii)The constitutional scheme therefore envisages two-step process. At the first level of the GST Council, Article279A(6) envisages cooperative federalism and in theabsence of either non obstante clause in Article 279AEor ‘subject to’ clause in Article 246A, the need orrequirement is that both the Union and the States shouldbe supportive of this cooperative federalism through theprocess of collaborative federalism; and(xxxiv)Section 5(1) of the IGST Act, by design, chooses toFdelegate certain functions to the GST Council in orderto achieve the legislative object. Even though Article246A does not subject Article 246A to Article 279A, theUnion and States after exercising their legislative powerand discretion under Article 246A(1) have agreed to goGby the recommendations of the GST Council in everyaspect of the GST law wherever required. This is thespirit of collaborative federalism which must be respectedby upholding the constitutional validity of the impugnednotifications.H

A11. The learned ASG has urged the following supplementarysubmissions by way of rejoinder:

(i)The purpose of the integrated tax is to introduce levelplaying field between foreign shipping lines and Indianshipping lines. It is settled principle that to tax one subject,Bthe revenue does not have to tax everything;

(ii)The respondents have contended that the tax on an Indianimporter is on reverse charge basis, and therefore theimporter does not fall under the definition of ‘taxableperson’. However, Section 2(107) of the CGST Act definesCa taxable person as any person registered or liable to beregistered under Section 22 or Section 24 of the CGST Act.Section 24 classifies persons liable for compulsoryregistration, and Section 24(iii) includes persons governedby the reverse charge mechanism;

D(iii)In Laghu Udyog Bharati v. Union of India[24], this Courtstruck down the imposition of service tax on reversecharge basis since the legislature had failed to identify thepersons on whom service tax could be imposed, enforcedand collected. However, Section 2(107) read with Section24(iii) of the CGST Act specifically identifies the importerEas taxable person who is liable to pay tax on reversecharge basis. Section 24(iii) of the CGST Act also definespersons liable to pay tax on reverse charge as taxablepersons;(iv)The respondents have argued that under Section 5(1) ofFthe IGST Act, the taxable value can be determined onlythrough Section 15 of the CGST Act and its correspondingrules. It was contended that Notification 8/2017 prescribesthe valuation of 10% of CIF value for the first time, whichviolates Section 5(1) of the IGST Act. The appellant submitsGthat in terms of Section 15(4) and Section 15(5) of the CGSTAct, Rules 27 to 31 of the Central Goods and Service TaxRules 2017[25] have been formulated. The Revenue can alsoassess the transaction by taking aid of residual method

24 1999 (6) SCC 418 (“Laghu Udyog”)H25 “CGST Rules”

prescribed under Rule 31 of the CGST Rules. Any discretionvested in quasi-judicial authorities must be regulated. Thecorrigendum dated 30 June 2016 amending Notification 8/2017 and prescribing the methodology for determiningvaluation can be read as guideline for dealing withinfirmities in assessment practices. It is only reference ora guideline for making assessments. Even if it were to beheld inapplicable, the revenue can assess the transactionunder Rule 31 of the CGST Rules. Thus, Notification 8/2017 does not impinge on Rule 31 of the CGST Rules butonly aids uniformity;

(v)The respondents rely on Section 2(87) of the CGST Actand Section 5 of the IGST Act to argue that prescriptioncan only be through rules, and not notifications. However,Section 15(1), (2) and (3) of the IGST Act prescribes values.Section 15(4) and 15(5) of the IGST Act deals with caseswhere the valuation cannot be determined under Section15(1). Rule 31 of the CGST Rules also enables the valuationto be conducted through “reasonable means”. Thus,delegation is envisaged in the statutory mechanism;

(vi)If the expression “by the recipient” is to be given staticmeaning as those falling under Section 2(93) of the CGSTAct, then one would be denuding the power to notify personsfor reverse charge under Sections 5(1) and 5(3) of the IGSTAct read with Section 24(iii) of the CGST Act.

(vii)Alternatively, the concept of reverse charge and notifyingpersons liable for reverse charge is envisaged in the statutorymechanism. Section 2(98) of the CGST Act defines reversecharge as imposed “only on the recipient”. Section 2(93) ofthe CGST Act defines recipient. An Indian importer canbe recipient in six ways that have been elaborated in thesubmissions. The Indian importer does not pay anyconsideration of service in CIF imports since considerationis paid by the foreign exporter. Section 2 is illustrative andnot rigid. “person”, as defined under Section 2(84), isdeemed to be the recipient of service if such personsatisfies the conditions under 2(93) of the CGST Act. Section5(3) of the IGST Act contemplates the applicability of all

Aprovisions of the Act to the recipient. The fact thatconsideration is paid by the foreign exporter to the foreignshipping line does not vitiate the IGST Act’s scheme whichenables payment of tax on reverse charge basis;

(viii) Section 13(9) of the IGST Act states that the destination ofBthe goods shall be the place of supply, which is on Indianterritory. This Court in Union of India v. Jalyan Udyog[26]has held that deeming fictions can be created even by theexecutive, i.e. through delegated legislation.

(ix)In case of foreign exporter and foreign shipping line,Cthere is nexus with India since the importer would beIndian. Forward charge taxation is envisaged in direct tax.Section 9(1)(6) of the Income Tax Act 1961 taxes non-resident outside India since the income is generated inIndia;

D(x)The decision of this Court in BSNL v. Union of India[27 ]ondouble taxation has no applicability to this case since thatwas on the question of the overlap of VAT and service taxin the pre-GST regime and was decided on the ground ofthe impingement on the exclusive domain of the Union toimpose service tax under Entry 97, List I;E

(xi)In the alternative, the integrated tax derives authority fromSection 5(4) of the IGST Act which permits the governmentto specify class of registered persons who receive goodsor supplies from an unregistered supplier, who shall pay thetax on reverse charge basis as the recipient. If this sectionFis deemed applicable, then the importers would be liable fortax with effect from 1 February 2019, though exempted forthe period from 13 October 2017 till 31 January 2019;

(xii)The creation of the GST Council under Article 279Aembodies the spirit of collaborative federalism. The GSTGCouncil is constitutionally mandated, particularly underArticle 279A(6), to promote harmony and alignmentamongst the federal partners;

26 1994 (1) SCC 318H27 2006 (3) SCC 1 (“BSNL”)

(xiii) Under Article 279A(4), decisions of the GST CouncilAtransform into recommendations to the Unions and theStates. The GST Council is the only constitutional body thatacts as converging space or platform for the federal unitsto work in harmonious matter. The principal function ofthe GST Council is to take decisions, which are conveyedBas recommendations. These recommendations have aunique constitutional status and they are overridden inexceptional circumstances;

(xiv) It was contended by the respondents that instead of coursecorrecting the input tax mechanism, the revenue has chosento tax the Indian importer on reverse charge. This is morea policy than perceptional issue. As long as the tax islegal and valid, the manner and mode of taxation need notbe questioned. better manner and mode would not resultin the exercise of legislative discretion being declared to beinvalid or illegal; and

(xv)The integrated tax was introduced to ensure level playingfield between foreign and Indian shipping lines. This objectivemust be appreciated while determining constitutionality.

B.2 Respondent-assessees

12. Mr V Sridharan, learned senior counsel appearing on behalfof the respondents[28] has urged the following submissions:

(i)Under Section 5(4) of the IGST Act, the Government cannotspecify the person liable to pay service tax on reversecharge basis:

(a)Section 5(3) of the IGST Act provides that theGovernment may specify the categories of supply ofgoods or services or both on which the tax shall bepaid on reverse charge basis by the recipient of thegoods or services. Thus, the power under Section5(3) is only to specify the categories of supply, whilethe liability to pay tax is fixed on the recipient. TheGovernment cannot specify the person liable to paytax on reverse charge basis under Section 5(3);

28 In SLP(C) No. 3081 of 2021, SLP(C) No. 1625 of 2021 and SLP(C) No. 3760 of 2021

A(b)Notification 10/2017 has been issued under Section5(3) of the IGST Act. Since the power flows fromSection 5(3), the Government can by notificationonly specify the ‘categories of supply’, as the liabilityfor tax has been determined by Parliament;

(c)In contrast with Section 5(3), prior to the introductionof GST, Section 68(2) of the Finance Act 1994provided that the service tax shall be paid by “suchperson…as may be prescribed”. In that case, theliability of tax was not determined by the legislation;

(d)Under the CGST Act and the IGST Act, the onlyplace where person other than supplier or recipientis made liable to pay tax is under Section 5(5) of theIGST Act, where an electronic commerce operatorthrough whom supply is made is taxed; and

(e)In case the Parliament desired the tax to be collectedfrom person other than supplier or recipient, itwould have expressly provided so in the legislation.Since Parliament has specified the person liable fortax, it is not matter to be governed by delegatedlegislation;

(ii)Section 2(98) of the CGST Act defines ‘reverse charge’ asthe liability to pay tax by the recipient of supply of goods orservices or both instead of the supplier of such goods orservices or both. In other words, only the recipient can bemade liable to pay tax under reverse charge basis and theFreverse charge cannot be disintegrated from the recipientof supply;

(iii)Section 5(3) clearly stipulates that (i) the tax shall be paidon reverse charge basis and (ii) the tax is payable by therecipient;

G(iv)GST laws contemplate only one recipient for one supply:

(a)The interpretation of the ASG that the foreign exporteris the recipient under clause (a) of Section 2(93) ofthe CGST Act and the Indian importer is the recipientunder clause (c) of Section 2(93) of the CGST ActHleads to absurdity;

(b)Under Section 2(93) of the CGST Act, ‘recipient’Ais defined with reference to three situations- (a)where consideration is payable for the supply of goodsor services or both, (b) where no consideration ispayable for the supply of goods and (c) where noconsideration is payable for the supply of service.BClauses (a), (b) and (c) of Section 2(93) are mutuallyexclusive and cannot apply simultaneously. In casethe supply of goods or services is for consideration,clause (a) applies and the recipient is the person whois liable to pay the consideration;

(c)The question of who is the beneficiary of the supplyor who has received the supply are irrelevant indetermining the ‘recipient’ under Section 2(93) of theCGST Act;

(d)Whether supply of service is an ‘inter-state supply’under Section 7(3) or ‘intra-state supply’ underDSection 8(2) of the IGST Act depends on the locationof the supplier and the place of supply. In case thereare two recipients of single supply, as argued bythe ASG, then the transaction may become inter-stateas well as intra-state supply. Such situation has notEbeen envisaged by Parliament;

(e)Only the recipient of the supply is entitled to availinput tax credit. In case there are two recipients of asingle supply, two persons will be allowed to availcredit of tax by the supplier;

(f)The rate of tax is often dependent on the recipient ofthe supply. For instance, services supplied toGovernment, local authorities or charitableinstitutions, are exempted or liable to lower rate oftax. If there are two recipients, this would result inan anomaly; and

(g)Even in case of three-party transaction involvingsupply of goods, Section 10(1)(b) of the IGST Actprovides that the place of supply of goods is theprincipal place of business of the recipient, and notthe person to whom the goods are delivered;

A(v)The last leg of Section 2(93) of the CGST Act does notcreate separate category of recipient:

(a)Section 2(93) provides three categories of recipients,namely, where consideration is payable for supply ofgoods or services; where no consideration is payableBfor supply of goods; and where no consideration ispayable for supply of services;

(b)Section 2(93) also provides that any reference to aperson to whom supply is made shall be construedas reference to the recipient of supply and shallCinclude an agent acting on behalf of the recipient;and

(c)The above provision implies that if the Act does notuse the term ‘recipient’ but makes reference to theperson to whom supply is made, then they shall beconstrued as ‘recipient’. It does not however, createDa new category of recipient.

(vi)The taxable event for levy of GST is ‘supply’ of goods orservice. In the absence of supply, no tax can be levied underIGST, CGST or State Goods and Services Tax Act[29]:

(a)Article 366(12A) of the Constitution defines theE‘goods and services tax’ as the tax on ‘supply’ ofgoods or services or both;

(b)Section 5 of the IGST Act, which is the chargingsection for levy of tax, also states that the IGST willbe levied on all inter-State ‘supplies’ of goods orFservices or both; and

(c)Each transaction has to be evaluated independentlyto determine its taxability. The transaction of supplytakes place between the contracting parties, that is,at whose instance the supply is made;

(vii)The CGST Act does not envisage taxable supply withoutconsideration, other than those specified in Schedule I:

(a)Clause (a) of Section 7(1) of the CGST Act definesthe term ‘supply’ as all forms of supply of goods orH29 “SGST”

services made for consideration in the course of orin furtherance of business. Clause (b) of Section 7(1)of the CGST Act provides that import of service fora consideration will be included in the term ‘supply’even if it is not made in the course or furtherance ofbusiness. Clause (c) provides that activities specifiedin 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 ofbusiness and (ii) made for consideration. In clause(b), the condition of the supply being made in thecourse of business is absent. In clause (c), thecondition of supply being made for considerationhas not been incorporated but this only for activitiesprovided in Schedule I; and

(c)The argument that supplies can be made withoutconsideration for activities other than those specifiedin 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 providesthat integrated tax in respect of supplies made by anunregistered supplier to registered person shall bepaid by such person on reverse charge basis as arecipient of supply;

(b)The section was standalone section, operating onits own, and did not require anything to be specifiedby way of notification. Thus, Notification 10/2017cannot be sustained under Section 5(4);

(c)Pursuant to the Goods and Services Tax (Amendment)Act 2018, Section 5(4) was amended w.e.f. 1 February2019 to provide that the Government may, based onthe recommendations of the GST Council, bynotification, specify class of registered persons whoshall, in respect of supply of specified categories of

goods or services or both received from anunregistered supplier, pay the tax on reverse chargebasis as the recipient;

(d)The reliance placed by the Government on theamended Section 5(4) of the IGST Act to justifyNotification 10/2017 is erroneous as:

•There was no power to issue notificationspecifying the class of registered person liable topay tax under reverse charge basis under Section5(4) at the time when the impugned notificationwas issued on 28 June 2017. The power has beengranted by amendment w.e.f. 1 February 2019;

•Section 2(93) of the CGST Act provides that anyreference to person to whom supply is madeshall be construed as reference to the recipientof supply. Thus, the person under Section 5(4)who has received the supply is the recipient ofthe supply. Even after the amendment of Section5(4), only the recipient can be specified as aperson liable to pay tax; and

•Section 2(98) of the CGST Act defines ‘reversecharge’ as the liability to pay tax by the recipientof the supply instead of the supplier. Thus, onlythe recipient can be made liable to pay tax on areverse charge basis;

F(ix)Section 13(9) of the IGST Act is onlyrelevant to determinethe place of supply and not the recipient of supply. Whetherthe supply of service is an export of services under Section2(6)(a) of the IGST Act or an import of services underSection 2(11), read with Section 7(4) of the IGST Act; oran inter-State supply of service, is not determined by SectionG13(9);

(x)Notification 10/2017 has been issued on the recommendationof the GST Council under Section 5(3) of the IGST Actand not under Article 279A of the Constitution. If the GSTCouncil intended to make recommendation deeming theHimporter as recipient of supply, then the proper course of

implementation would be to make an amendment in the IGSTAct and seek Parliamentary approval;

(xi)The objective of the tax or levy cannot validate an ultravires levy:

(a)The Government has contended that the levy of taxon services of transportation of goods into IndiaBprovided by person in non-taxable territory to aperson in non-taxable territory, has been introducedto create parity for Indian shipping lines with foreignshippers;

(b)The notification for the levy and reverse charge hasbeen lifted from the erstwhile service tax regime intothe GST regime without considering the changes inlanguage in Section 5(3) of the IGST Act as opposedto Section 68(2) of the Finance Act 1994. Thus, thenotification is ultra vires the Act;

(xii)The scheme of IGST Act does not envisage person otherthan the supplier or the recipient as person liable to paytax:

(a)The time of supply of services is determined accordingto Section 20 of the IGST Act along with Section 12and 13 of the CGST Act. Section 12 deals with thetime of supply of goods and Section 13 deals withthe time of supply of services;

(b)Section 13(1) states that the liability to pay tax onservices arises at the time of supply. Sub-section (2)determines the time of supply on forward chargebasis. Sub-section (3) deals with time of supply whentax is payable on reverse charge basis. Under thissub-section, time of supply of services is the earliestdate of payment entered in the books of accounts ofthe recipient or the date of debit in the bank accountor sixty days from the date of last issue of invoice bythe supplier. Thus, person other than recipientcannot determine the time of supply;

(c)Section 13(5) of the CGST Act is only relevant fordetermining the time of supply in case of clandestineH

supply or evasion of tax and cannot be used todetermine time of supply for ocean freight services;

(d)The provisions relating to filing of returns applywhether person is supplier or recipient of supply,or apply only to an outward supply and an inwardBsupply. The supply of ocean freight service is neitheran inward supply nor an outward supply;

(xiii) In case of CIF contracts, the customer contracts for supplyof delivered goods at the port of destination. The contractfor transportation of goods is entered into by the foreignCexporter with the foreign shipper. Thus, the person liable topay consideration to the foreign shipper is the foreignexporter. The importer of goods in India is not the personliable to pay the consideration, and is thus, not the ‘recipient’of the service;

D(xiv) The contract of the Indian importer with the foreign exporteris for supply of delivered goods. The service of transportationis component of the supply of goods similar to rawmaterial, manufacturing cost or employee cost of thesupplier. To contend that the purchaser has received thesupply of raw material or the services of an employee isEillogical. Similarly, the argument that the Indian importerhas received transportation services is irrational; and

(xv)Serial No. 9(ii) of Notification 8/2017 read with Para 4 andSerial No. 10 of Notification No. 9 of 2017-Integrated Tax(Rate) dated 28 June 2019 describe the services as providedFby person located in non-taxable territory to personlocated in non-taxable territory. These notificationsrecognise the exporter as the recipient of the service ofocean freight;

(xvi) The argument of the ASG that the IGST paid on goods atGthe time of import is customs duty and not tax, and thus,there is no dual levy of tax recovered on ocean freight fromthe exporter is erroneous:

(a)The present case involves outright purchase of goodsand thus, it is supply of goods under GST and animport of goods according to customs law. The issue

is whether the transaction is an import of goods undercustoms law, but 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 taxon goods imported into India shall be levied andcollected in accordance with Section 3 of the CustomsBTariff Act on the value as determined under theCustoms Tariff Act and at the point when duties ofcustoms are levied under Section 12 of the CustomsAct;

(c)Section 3(7) of the Customs Tariff Act provides thatany article imported into India shall, in addition, beliable to integrated tax;

(d)Both the proviso to Section 5(1) of the IGST Act andSection 3(7) of the Customs Tariff Act provide thatgoods imported into India shall be liable to integratedtax;

(e)The contention that the proviso to Section 5(1) of theIGST Act does not contain the word ‘supply’ andthus, the tax is imposed on import of goodsirrespective of whether the transaction is supply ornot, is erroneous;

(f)The absence of the word ‘supply’ in the proviso willnot lead to an extreme result that the transaction ofimport of goods becomes leviable to IGST even if itis not supply;

(g)The CGST Act has at various instances, such asSection 11(1), Section 12(1), Section 13(1) andSection 49(9), omitted the word ‘supply’ and merelymentioned the liability to pay tax on goods or services;

(h)The proviso under Section 5(1) of the IGST Act readwith Section 3(7) of the Customs Tariff Act impliesthat the tax is leviable only on supply of goodsimported into India;

(i)The amount collected as IGST on import of goods isapportioned between the Union and States as per

Article 269A of the Constitution which provides forapportionment of GST on inter-state supply of goodsor service. If import IGST was customs duty, thenthe revenue proceeds would be distributed inaccordance with Article 270 of the Constitution;

B(j)At the introduction of GST, the understanding of theGovernment was in consonance with the above legalposition and accordingly, the Government issued anotification exempting goods and services importedfrom an SEZ unit or developer under the IGST Act.Subsequently, the Government rescinded the aboveCexemption notifications and issued separatenotifications under the Customs Act and IGST Act;and

(k)The Government has also issued various notificationsexempting payment of IGST in case of import ofDgoods on lease or temporary import basis. Theintention of Government is not to impose IGST incase of import of goods that do not amount to supply.

13. Mr Harish Salve, learned senior counsel, appearing on behalfof the respondent[30] has submitted:E

(i)A CIF contract is an inclusive price covering cost of goods,insurance and freight payable for carriage of goods to thedestination specified in the contract. The essence of thecontract is that seller having shipped the goods inaccordance with the contract, can fulfil his part of theFbargain by tendering to the buyer the proper shippingdocuments. If he does this, he is not in breach even if thegoods are lost before such tender. In the event of loss,the buyer must pay the price on tender of documents andhis remedies lie against the carrier but not the seller;

G(ii)A CIF contract has two components: (i) price is paid forthe freight, and (ii) the buyer is never obligated to pay it.The owner of the vessel who enters into contract ofaffreightment has privity of contract with the supplier of

goods and is rendering service to the supplier. If theservice is not received, then the question of reverse chargedoes not arise;

(iii)Sections 5(3) and 5(4) of the IGST Act are merelymachinery provisions for collection of tax, and not thecharging provision:

(a)Section 5(1) is the charging section which leviesIGST. Since there is no separate levy under Section5(1) on ocean freight, as it is an import of goods whichalready suffers IGST on CIF value, the question ofreverse charge does not arise;

(b)The proviso to Section 5(1) clarifies that the ‘valueas determined’ is only the measure of tax and not thesubject of tax; and

(c)Section 5(3) cannot be treated as the charging sectionas it would make it possible for the Government toimpose separate taxes under Sections 5(1) and 5(3)and charge for the services at both ends;

(iv)There must be taxable event in the CIF contract of thekind contemplated under the IGST Act. In case there is nosuch event, it cannot be created through delegated legislationby the GST Council. There is an absence of statutoryfiction by which CIF contract can be split into contractfor supply of goods and services, and creating secondlayer of fiction by which the shipper is rendering serviceto the supplier of goods. Thus, the question of levy of taxby the GST Council does not arise;

(v)In the transaction of import of coal on CIF basis in thepresent case, the recipient will fall under clause (a) ofSection 2(93) of the CGST Act as consideration is payablefor the service of shipping. The mere fact that an Indian isthe recipient will not lead to the Indian recipient making thepayment separately under the contract of affreightment.The Indian recipient is only recipient of goods, not ofservice;

(vi)The law recognises and maintains the integrity of CIFcontract under Section 2(30) read with Section 2(93), and

Section 8. These sections maintain the integrity of acomposite contract by providing that where the goods comewith insurance and freight, the tax is imposed only on supplyof goods;

(vii)The High Court has held that that the notifications underBchallenge were ultra vires. The Government has not urgedthat any of these findings are incorrect and has onlycontended that Section 5(1) of the IGST Act satisfies allingredients of valid tax law;

(viii) Notification 8/2017 is ultra vires the IGST Act. Section 5(1)of the IGST Act only empowers the issuance of notificationsfor rates and requires other provisions to be prescribed.Section 5(1) does not empower the Government to define‘description of service’ which is an essential legislativefunction;

(ix)Entry 9(ii) of Notification 8/2017 imposes tax on oceanDfreight in import of goods. Such power however, has notbeen provided in the statute;

(x)Para 4 of Notification 8/2017 determines the ‘value ofservice’ as 10% of the CIF value, which is contrary toSection 15(1) of the CGST Act which says ‘transactionEvalue’;

(xi)Article 366(12A) defines goods and services tax as involvingonly supply of goods or services or both. Section 7 of theIGST Act has made clear distinction between standalonesupply of goods, standalone supply of services andFstandalone supply of ‘goods or services or both’. Section7(4) treats standalone services imported into India as inter-State supply and does not artificially bifurcate by assumingocean freight in the transaction of import of goods;

(xii)Section 13 of the IGST Act has no application in the caseGwhich relates to import of goods and not services standalone.Section 13 applies to place of supply of services, referringto standalone services, and does not use the term ‘both’ toapply to supply of goods or services; and

(xiii) IGST Act has no extra-territorial application as the ActHextends to the whole of India. Under Section 2(109) of the

CGST Act, taxable territory means the territory to whichthe Act applies. Further, GVK Industries (supra) statesthat Parliament may exercise its powers with respect to anextra-territorial aspect when it has nexus with India. Itdoes not however empower delegated legislation to exercisesuch power. Thus, the activity brought within the tax net bythe impugned notifications is contrary to the IGST Act.

14. Mr Arvind Datar, learned senior counsel, appearing on behalfof the respondent[31] has submitted:

(i)The levy of IGST on ocean freight by way of NotificationNo. 10/2017-Integrated Tax (Rate) is extra-territorial andultra vires Section 1 read with Section 2(22) of the IGSTAct:

(a)The levy imposed is on the service of transportationof goods rendered by the shipping line to the foreignvendor/exporter, occurring outside the territory ofIndia, that is outside the taxable territory;

(b)The only nexus of the service with India is that theservice results in the import of goods into India.However, this activity is already subject to IGST underthe IGST Act and customs duty under the CustomsAct;

(c)For levy to be imposed under the IGST Act, theservice must be ‘supply’ under the provisions ofIGST Act read with Section 7 of the CGST Act.However, Section 1 of the CGST Act and IGST Actare limited to the territory of India. Thus, any servicereceived outside the territory of India cannot beconsidered to be ‘supply’ under the IGST Act or theCGST Act;

(d)To impose levy on service that is extra-territorial,there has to be deeming fiction in the form of astatutory provision which deems the supply oftransportation by vessel to non-resident exporter.In this case, such deeming fiction does not exist.

31 SLP (C) No. 3462 of 2021

Thus, the transportation service cannot be deemedas ‘supply’ under the IGST Act;

(e)Only once the service provided outside the territoryof India is deemed as ‘supply’ by way of statute,can there be determination of the supplier and therecipient;

(f)By way of the impugned notification, the freightcharges incurred abroad are sought to be taxed inIndia on the ground that the service recipient is inIndia. If this argument is accepted, then any service(such as insurance or incidental services) renderedabroad can be taxed in India on the ground that therecipient is in India. This practice is in contrast withinternational taxation laws and will lead to hardshipfor Indian importers;

(g)Article 245(2) of the Constitution states that lawmade by the Parliament will not be invalid on theground that it has extra-territorial operation. However,the expression ‘law made by the Parliament’ doesnot include executive notifications, even if made onthe recommendations of the GST Council; and

(h)Tax can be levied outside the territory of India byway of primary legislation. For instance, underSections 6 and 7 of the Territorial Waters, ContinentalShelf, Exclusive Economic Zone and Other MaritimeFZones Act 1976, legal fiction is created by whichIndia has the power to levy tax in the ExclusiveEconomic Zone and Continental Shelf. Pursuant tothis fiction, notifications levying customs duty onsupplies made to oil drilling rigs in the ContinentalShelf have been issued. In the absence of primaryGlegislation or statutory provision to this effect,notifications cannot impose duties on activitiesoccurring outside India;

(ii)The value of CIF contract is indivisible, making thecomputation of tax on such contract impossible:

(a)The only way to artificially dissect the value of aACIF contract is by way of statute, which is absent inthis case;(b)If such division is allowed, then the Governmentwill be able to tax not just ocean freight, but alsoinsurance services; andB(c)Levy on contracts on CIF basis will lead tohardships for the Indian recipients. The advantageof entering into CIF contracts is to ensure that theforeign supplier is responsible for arrangingtransportation and insurance. However, if CIFCcontract is made subject to GST, then the Indianimporters will have to make their own arrangementsto transport the goods, book an insurance policy andarrange for shipping;(iii)The ASG’s reliance on the nexus theory to justify the levyDof GST on ocean freight, by equating it to the imposition ofincome tax on income accruing in India or customs dutyimposed on goods imported into India- is erroneous:(a)In case of imposition of income tax, the nexus isprovided by way of deeming fiction under SectionE5(2) of the Income Tax Act 1961, where non-resident is liable to tax only if the income is deemedto accrue or arises in India;(b)In case of customs duty, the taxing event is the goodsentering the territory of India; andF(c)In the absence of such provision, the freightservices rendered outside India cannot be deemedto be received in India merely because the recipientis in India.G(iv)The importer is not the ‘recipient’ of services under Section2(93) of the CGST Act:(a)Under clause (c) of Section 2(93), when there is noconsideration payable for the supply of services, thenthe person to whom the services are rendered is theH

(iii)The ASG’s reliance on the nexus theory to justify the levyof GST on ocean freight, by equating it to the imposition ofincome tax on income accruing in India or customs dutyimposed on goods imported into India- is erroneous:

Aservice recipient. However, in this case, the importeris not the service recipient as the importer does notpay the consideration or receive the services;

(b)The argument of the ASG that the importer is a‘recipient’ as they are the ultimate beneficiaryBenlarges the scope of Section 2(93) by adding wordsthat are absent in the statute;

(c)Even if the ultimate beneficiary is considered to bethe recipient, the importer is not the beneficiary ofthe service of transportation of goods. Under theterms of CIF contract, the foreign vendor is obligatedto arrange for transportation of goods for which heengages the services of shipping line. Thus, theforeign vendor is the ultimate beneficiary;

(d)The importer is only the beneficiary of the importedDgoods, whose value is taxable as customs duty underthe Customs Tariff Act as well as under the IGSTAct; and

(e)Additionally, reliance cannot be placed on clause(c)of Section 2(93) as it only refers to those supplies forEwhich consideration is not paid as mentioned inSchedule I of the CGST Act. This scheduleenumerates the activities deemed as supplies withoutconsideration.

(v)Imposition of IGST on ocean freight will lead to doubleFtaxation:

(a)Section 3(7) of the Customs Tariff Act states thatgoods imported into India will be subject to IGSTunder Section 5 of the IGST Act, on the value asdetermined by Section 3(8) and Section 3(8)(a).Under Section 3(8), the value includes value of freight;and

(b)Rule 10 of the Customs Valuation (Determination ofValue of Imported Goods) Rules 2007 includes costof transportation and insurance in the value of goods,

which forms the basis of the levy of IGST under theproviso to Section 5 of the IGST Act. The impugnedlevy of IGST on ocean freight would thus amount todouble taxation on the same transaction;

(vi)The ASG’s reliance on ‘aspect theory’ to justify theimpugned levy is erroneous:

(a)The ASG relied on the ‘aspect theory’ and submittedthat the impugned notification taxes the ‘service’element of ocean freight, while the ‘goods’ elementis taxed under the proviso to Section 5 of the IGSTAct. However, such an approach is impermissibleCaccording to the decision of this Court in BSNL(supra);

(b)The aspect theory is inapplicable as the freightelement is included by levying IGST; and

(c)The aspect theory in India permits taxation of twodifferent aspects or features of transaction. Forinstance, in catering contract, supply of food wassubject to value added tax and the service aspectwas subject to service tax. However, the aspecttheory does not permit double taxation of the sameamount or value

(vii)The GST Council which has been created by Article 279Aof the Constitution is recommendatory body, whoserecommendations can be implemented by either amendingthe CGST Act or the IGST Act or by issuing notification.However, notifications issued cannot be ultra vires the parentlegislation;

(viii) The principles of cooperative federalism are not relevant inthis case as they were not adjudicated before the HighCourt. The appeal must test the correctness of the impugnedjudgment without expanding its scope; and

(ix)Interpretation of Article 279A of the Constitution was notan issue before the High Court and the present appeal shouldbe restricted to the validity of the impugned notification.

A15. In addition to the above, Mr Vikram Nankani, learned seniorcounsel, appearing on behalf of the respondent[32] urged the followingsubmissions:

(i)Section 7(4) of the IGST Act provides that supply ofservices imported into the territory of India shall be treatedBas supply of services in the course of inter-state trade orcommerce. Section 2(11) of the IGST Act defines “importof services” when the supplier of service is located outsideIndia, the recipient of service is located in India and theplace of supply of service is in India. When these provisionsare read together, it implies that in case of import of servicesCinto the territory of India, the location of the supplier ofservices is outside India and the location of the recipient isin India. Thus the IGST Act covers either import of goodsor import of services and not services subsumed into thevalue of goods imported into India;

D(ii)The IGST Act was never intended to apply to the importerof goods on CIF basis as the services are provided andconsumed before the goods reach India and have no nexuswith the Indian importer;

(iii)The transaction between two persons located outside Indiais not chargeable under Section 5(1) read with the provisoEand Section 7(4) read with Section 2(11) of the IGST Act.Thus, Notification 8/2017 is ultra vires and Notification 10/2017, providing for reverse charge is also ultra vires theIGST Act;

(iv)Section 13(9) of the IGST Act, which states that the placeFof supply of services of transportation of goods is thedestination of the goods, cannot be read in isolation. Readwith Section 7(4) of the IGST Act, it implies that in case ofimport of services, the supplier must be outside India whilerecipient must be in India; andG(v)The test of ‘ultimate beneficiary’ relied upon by the ASGdoes not have statutory backing since the charging section,that is Section 5, makes the recipient of the services liableto pay tax. The Indian importer is not party to the CIFcontract between the foreign exporter and the shipping line.

H32 SLP(C) No. 843/2021

16. Mr Uchit Sheth, counsel appearing on behalf of therespondents[33] submitted:

(i)The importers in CIF contract do not have any privity ofcontract with the supplier of the transportation service sincethey neither make payment of consideration to the serviceprovider, nor avail any service. The importers only purchaseBand import goods;

(ii)The impugned levy is contrary to the object and purpose ofthe IGST Act. Section 5 of the IGST Act clarifies that sofar as imported goods are concerned, IGST is levied at thepoint of clearance of goods for home consumption and onCthe total value (including value additions till that point). Thiswas also clarified by Circular no. 3/1/2018-IGST dated 25May 2018 issued by the Central Board of Indirect Taxesand Customs. The impugned levy of IGST on the freightelement of CIF contracts and high seas purchase contractsDis ultra vires as IGST is paid on the total value of goods;

(iii)In Ispat Industries Ltd. v. Commissioner of Customs[34],in the context of imposition of customs duty, it was heldthat in CIF contract, the freight is part of the price paid tothe seller and further addition of transportation charges iscontrary to the statutory provisions; andE

(iv)The judgment of this Court in Union of India v. JalyanUdyog[35 ]which states that legal fiction can be createdeven by delegated legislation, is inapplicable as in that case,the fiction created was within the parameters of the parentprovision. In this case, the fiction violates Section 5(3) ofthe IGST Act.

17. Mr Rajesh Kumar Gautam, learned counsel appearing on behalfof the intervenor[36] in SLP(C) No. 13958/2020, has submitted that theargument of the ASG that the levy has been introduced to create levelplaying field is fallacious as:

33 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. 2736/202134 (2006) 12 SCC 58335 (1994) 1 SCC 31836 IA No. 118754/2021 in SLP(C) No.

A(i)Prior to 2016, all import transportation, whether undertakenby Indian or foreign shipping lines was outside the scope oflevy. Service tax was imposed on import transactionsundertaken by Indian shipping lines only to allow them toavail CENVAT credit. This credit was protected eventhough no service tax was payable on export transportation.BFurther, Indian importers availing services of foreign shippinglines were liable to pay service tax under reverse charge.This position continued under the GST regime and the onlytransaction outside the ambit was when the foreign exporteravailed the services of foreign shipping line to transportCgoods to India; and

(ii)The introduction of levy of service tax or GST on importtransactions was by way of an incentive to Indian shippinglines. Thus, it cannot now be contended that the level playingfield has been affected because of this levy.

D18. Similar submissions have been addressed by Dr Manickam[37],Mr Shashank Shekhar[38] and Mr Abhishek Rastogi[39], which we havenot recorded separately for the sake of brevity.

19. The rival submissions will now be analysed.

Constitutional Architecture of GSTE

20. Before we proceed to analyse the vires of the impugnednotifications, it is pertinent to contextualize the constitutional architectureof the GST. The Constitution (One Hundred and First Amendment Act)2016[40] was enacted on 8 September 2016 introducing Article 246A andF279A. Article 246A stipulates that both the Parliament and the Statelegislatures 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 everyState, have power to make laws with respect to goods and servicesGtax imposed by the Union or by such State.

37 Appearing for the respondent in SLP(C) No. 3680/202138 Appearing for the respondent in SLP(C) No. 1798/2021

39 Appearing on behalf of the intervenor in IA No. 74108/2021 in SLP(C) No. 13958/2020H40 “Constitution Amendment Act 2016”

(2) Parliament has exclusive power to make laws with respect togoods 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 ofgoods and services tax referred to in clause (5) of Article 279A,take effect from the date recommended by the Goods and ServicesTax Council.”

Article 279A constitutes the GST Council which shall makerecommendations to the Union and the States on wide range of subjectsrelating to GST:

‘‘279A. (1) The President shall, within sixty days from the date ofcommencement of the Constitution (One Hundred and FirstAmendment) Act, 2016, by order, constitute Council to be calledthe Goods and Services Tax Council.

(2) The Goods and Services Tax Council shall consist of thefollowing members, namely:—

(a) the Union Finance Minister...................... Chairperson;

(b) the Union Minister of State in charge of Revenue orFinance................................................................ Member;

(c) the Minister in charge of Finance or Taxation or any otherMinister nominated by each State Government............Members.

(3) The Members of the Goods and Services Tax Council referredto in sub-clause (c) of clause (2) shall, as soon as may be, chooseone amongst themselves to be the Vice-Chairperson of the Councilfor such period as they may decide.

(4) The Goods and Services Tax Council shall makerecommendations to the Union and the States on— (a) the taxes,cesses and surcharges levied by the Union, the States and thelocal bodies which may be subsumed in the goods and servicestax;

(b) the goods and services that may be subjected to, or exemptedfrom the goods and services tax;

(c) model Goods and Services Tax Laws, principles of levy,apportionment of Goods and Services Tax levied on supplies in

Athe course of inter-State trade or commerce under article 269Aand the principles that govern the place of supply;

(d) the threshold limit of turnover below which goods and servicesmay be exempted from goods and services tax;

(e) the rates including floor rates with bands of goods and servicesBtax;

(f) any special rate or rates for specified period, to raise additionalresources during any natural calamity or disaster;

(g) special provision with respect to the States of ArunachalCPradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya,Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh andUttarakhand; and (h) any other matter relating to the goods andservices tax, as the Council may decide.

(5) The Goods and Services Tax Council shall recommend theDdate on which the goods and services tax be levied on petroleumcrude, high speed diesel, motor spirit (commonly known as petrol),natural gas and aviation turbine fuel.

(6) While discharging the functions conferred by this article, theGoods and Services Tax Council shall be guided by the need for aEharmonised structure of goods and services tax and for thedevelopment of harmonised national market for goods andservices.

(7) One-half of the total number of Members of the Goods andServices Tax Council shall constitute the quorum at its meetings.F(8) The Goods and Services Tax Council shall determine theprocedure in the performance of its functions.

(9) Every decision of the Goods and Services Tax Council shallbe taken at meeting, by majority of not less than three-fourthsof the weighted votes of the members present and voting, inGaccordance with the following principles, namely:—

(a) the vote of the Central Government shall have weightage ofone third of the total votes cast, and (b) the votes of all the StateGovernments taken together shall have weightage of two-thirdsof the total votes cast, in that meeting.

(10) No act or proceedings of the Goods and Services Tax Councilshall be invalid merely by reason of—

(a) any vacancy in, or any defect in, the constitution of the Council;or

(b) any defect in the appointment of person as Member of theCouncil; or

(c) any procedural irregularity of the Council not affecting themerits of the case.

(11)The Goods and Services Tax Council shall establish amechanism to adjudicate any dispute —

(a) between the Government of India and one or more States; or

(b) between the Government of India and any State or States onone side and one or more other States on the other side; or

(c) between two or more States, arising out of the recommendationsof the Council or implementation thereof.’’

21. The Union Government has contended that therecommendations of the GST Council are binding on the legislature andthe executive. It was submitted that since the recommendations arebinding, the rule making power of the Government under the provisionsof the IGST Act and CGST Act, exercisable on the ‘recommendations’of the GST Council, are also very wide. The arguments of the UnionGovernment are as follows:

(i)A combined reading of Articles 246A and 279A elucidatesthat the GST Council is the ultimate decision-making bodyin framing the GST law since it is constitutional body thatacts as converging platform for both the Union and theStates;

(ii)The functions and role of the GST Council are unique andincomparable to other constitutional bodies. Therefore,interpretations of other provisions of the Constitution donot have precedential value while interpreting the role ofthe GST Council;

(iii)The power of the Parliament and the State Legislature underArticle 246A and the power of the GST Council underArticle 279A must be balanced and harmonised, such thatneither overrides the other:

A(a)Though Article 279A does not begin with non-obstante clause overriding Article 246A, the latterwould not override the former. The core theme ofGST law – as it emanates from Article 279(6) – iscooperation and harmony. system premised oncooperation cannot provide inter se supremacy.BTherefore, Article 279A has rightly not been givenan overriding effect over Article 246A; and

(b)Article 246A vests the Parliament and the Statelegislatures with the power to enact laws on GST.This function, if delegated would amount to abdicationCof the Parliament’s constitutional function. Therefore,Article 246A cannot be made subject to Article 279A.

(iv)The ordinary legislative process for enacting statute isthat bills are introduced and voted on by the legislature.However, Article 264A departs from this as the framing ofDthe policy, discussion on the policy, and decision making arevested with the GST Council. The Parliament or the StateLegislature cannot legislate law on GST under Article246A independent of the recommendations of the GSTCouncil. reading of Sections 5, 6 and 22 of the IGST ActEindicates that the legislature and the executive are boundby the recommendations of the GST Council on threepreliminary provisions, namely charge, exemption and rule-making power. Therefore, Parliament bound itself to therecommendations of the GST Council by enacting the IGSTAct and CGST Act; and

(v)The recommendations by the GST Council are transformedinto legislation on combined reading of Article 279A andSections 5,6, and 22 of the IGST Act 2017 and Sections9,11, and 164 of the CGST Act.

GC. 1 Legislative History of the Constitution AmendmentAct 2016

Statement of Objects and Reasons

22. As early as in 2004, the Task Force on implementation of theFiscal Responsibility and Budget Management Act 2003 hadHrecommended shift to consumption taxes to increase efficiency in

production and enhance international competitiveness of Indian goodsand services. The need for such an enormous change in the tax regimearose out of the distortions in the then existing indirect tax regime whichsuffered from the drawback of multiplicity of taxes, taxable events,compliances, and authorities. For instance, the rate of the sales tax andvalue added tax on the same goods would differ across India. Severalstates would impose entry taxes on goods before the goods entered theirboundaries. The First Discussion Paper on Goods and Services Tax inIndia released by the Empowered Committee in November 2009 explainedthe rationale for introducing the GST regime in the following terms:[41]

“The introduction of GST at the Central level will not only includecomprehensively more indirect Central Taxes and integrate goodsand service taxes for the purpose of set-off relief, but may alsolead to revenue gain for the Centre through widening of the dealerbase by capturing value added addition in the distributive tradeand increased compliance.

In the existing State-level VAT structure there are also certainshort comings as follows. There are, for instance, even now, severaltaxes which are in the nature of indirect tax on goods and services,such as luxury tax, entertainment tax, etc., and yet not subsumedn the VAT. Moreover, in the present State-level VAT scheme,CENVAT load on the goods remains included in the value to betaxed under State VAT, and contributing to that extent cascadingeffect on account of CENVAT element. This CENVAT load needsto be removed.

However, for this GST to be introduced at the State-level, it isessential that the States should be given the power of levy oftaxation of all services. This power of levy of service taxes hasso long been only with Centre. Constitutional Amendment willbe made for giving this power also to the States. Moreover, withthe introduction of GST, burden of Central Sales Tax (CST) willalso be removed. The GST at the State-level is, therefore, justifiedfor (a) additional power of levy of taxation of services for theStates, (b) system of comprehensive set-off relief, including set-

41 Empowered Committee, First Discussion Paper on Goods and Services Tax, (2009)Pars 1.13-1.14

372SUPREME COURT REPORTS

Aoff for cascading burden of CENVAT and services taxes, (c)subsuming of several taxes in the GST and (d) removal of burdenfor CST. Because of the removal of taxes in the GST, the burdenof tax under GST on goods will, in general, fall.”

23. Parliament introduced the Constitution (One Hundred andBFifteenth Amendment) Bill 2011[42] which sought to amend the provisionsof the Constitution to introduce the GST regime. The Speaker of theLok Sabha referred the 2011 Amendment Bill to the ParliamentaryStanding Committee on Finance. The Constitution (One Hundred andTwenty-Second Amendment) Bill 2014[43] was introduced afterincorporating the recommendations of the Standing Committee. The 2014CAmendment Bill was introduced to replace almost all the indirect taxesthat were levied by the State Governments and the Union Government,with singular tax system to eliminate the cascading effect of multipletaxes and to provide for common national market. The Statement ofObjects and Reasons of the 2014 Amendment Bill reads as follows:D“The Constitution is proposed to be amended to introduce thegoods and services tax for conferring concurrent taxing powerson the Union as well as the States including Union territory withLegislature to make laws for levying goods and services tax onevery transaction of supply of goods or services or both. TheEgoods and services tax shall replace number of indirecttaxes being levied by the Union and the State Governmentsand is intended to remove cascading effect of taxes andprovide for common national market for goods andservices. The proposed Central and State goods and servicestax will be levied on all transactions involving supply of goods andFservices, except those which are kept out of the purview of thegoods and services tax.”

(emphasis supplied)

24. The Finance Minister while introducing the 2014 AmendmentBill in Parliament noted that the object of the constitutional amendmentGis to bring about “certain amount of convergence between thesetaxes so that the taxation mechanism becomes extremely simple”.[44]

42 “2011 Amendment Bill”

43 “2014 Amendment Bill”

44 Speech by Arun Jaitley in Lok Sabha on 24.4.2015; Tarun Jain, Goods and ServicesHTax: Constitutional Law and Policy (EBC 2018) 16

He also highlighted the fact that there was no uniformity in the tax ratesand structure across the States. The Statement of Objects and Reasonsand the debates and speeches in the legislature indicate the intent behindthe introduction of the Bill.[45] The legislative history, the statement ofobjects and reasons of the Bill and the speech made when the bill wasintroduced indicate the mischief that Articles 246A and 279A to theConstitution sought to remedy, which is to simplify the indirect tax regimeto prevent the complexities inherent in and the cascading effect of amultiplicity of taxes.

Simultaneous Legislative distribution

25. Article 246 read with the Seventh Schedule vests Parliamentand the State Legislatures with the power to make laws on subject matterslisted in the Seventh Schedule of the Constitution. Before the introductionof Articles 246A and 279A by the Constitution Amendment Act 2016,the legislative powers of the Union and the States on taxation wereexclusive. The general subjects of legislation constitute one group in theUnion List (entries 1 to 81) and the State List (entries 1 to 44). Thesubject heads related to taxation are clubbed together in both the Unionand the State lists (entries 82 to 92B in the Union list and entries 45 to 63in the State list). The concurrent list does not include any entry related totaxation.[46] For example, while the Union primarily has the power to imposeincome taxes, except from agriculture[47], the State has the power to imposetax on agricultural income[48]. Therefore, both the Union and the Stateshad separate and an exclusive domain over specific heads of taxation.The Union and the State could not impose tax under the same headsince the concurrent list did not include an entry for taxes. This Court, inits decision in Hoecst Pharmaceuticals Ltd. v. State of Bihar[49],recognised the exclusive powers held by the Union and the State ontaxation. The three-Judge Bench observed that:

“75. Legislative relations between the Union and the States interse with reference to the three Lists in Schedule VII cannot beunderstood fully without examining the general features disclosed

45 Abhiram Singh v. CD Commachen, (2017) 2 SCC 629

46 Entry 47 of the concurrent list mentions that “fees in respect of any of the matters inthis List, but not including fees taken in any court.”

47 Entry 82 of List I

48 Entry 46 of List II

49 (1983) 4 SCC 45

by the entries contained in those Lists” : Seervai inhis Constitutional Law of India, 3rd Edn., Vol. 1 at pp. 81-82. Ascrutiny of Lists I and II of the Seventh Schedule would showthat there is no overlapping anywhere in the taxing power and theConstitution gives independent sources of taxation to the Unionand the States. Following the scheme of the Government of IndiaAct, 1935, the Constitution has made the taxing power of theUnion and of the States mutually exclusive and thus avoided thedifficulties which have arisen in some other Federal Constitutionsfrom overlapping powers of taxation.76. It would therefore appear that there is distinction madebetween general subjects of legislation and taxation. The generalsubjects of legislation arc dealt with in one group of entries andpower of taxation in separate group. In M.P.V. Sundararamier& Co. v. State of A.P. [AIR 1958 SC 468 : 1958 SCR 1422 :(1958) 9 STC 298] this court dealt with the scheme of theseparation of taxation powers between the Union and the Statesby mutually exclusive lists. In List I, Entries 1 to 81 deal withgeneral subjects of legislation; Entries 82 to 92-A deal with taxes.In List II, Entries 1 to 44 deal with general subjects of legislation;Entries 45 to 63 deal with taxes. This mutual exclusiveness is alsobrought out by the fact that in List III, the Concurrent LegislativeList, there is no entry relating to tax, but it only contains an entryrelating to levy of fees in respect of matters given in that list otherthan court-fees. Thus, in our Constitution, conflict of the taxingpower of the Union and of the States cannot arise. That being so,it is difficult to comprehend the submission that there can beintrusion by law made by Parliament under Entry 33 of List IIIinto forbidden field viz. the State’s exclusive power to make alaw with respect to the levy and imposition of tax on sale orpurchase of goods relatable to Entry 54 of List II of the SeventhSchedule. It follows that the two laws viz. sub-section (3) of Section5 of the Act and para 21 of the Control Order issued by the CentralGovernment under sub-section (1) of Section 3 of the EssentialCommodities Act, operate on two separate and distinct fields andboth are capable of being obeyed. There is no question of anyclash between the two laws and the question of repugnancy doesnot come into play.”

26. In the pre-GST regime, the Union had the exclusive power toimpose indirect taxes, that is, on inter-state sale of goods, customs duty,service tax, and excise duty. The States had the exclusive power toimpose tax on intra-State sale of goods, luxury tax, entertainment tax,purchase tax, and taxes on gambling and betting. The GST regime hassubsumed all the indirect taxes. Article 246A which was introduced bythe Constitution Amendment Act 2016 vests the Parliament and the Statelegislatures with the concurrent power to make laws with respect toGST.

27. The distribution of legislative power between federating units-the Union and the States, is among the paramount features of federalConstitution.[50] Articles 246 and 254 have been central to the debate onthe federal nature of the Indian Constitution. Article 246A, is ‘specialprovision with respect to goods and service tax,’ and begins with non-obstante clause overriding Articles 246 and 254. Article 246 sets downthe constitutional framework defining the legislative competence ofParliament and the State legislatures. Article 254 provides the frameworkfor addressing inconsistency between central and state laws on mattersin the Concurrent list. Article 246A entrusts Parliament and Statelegislatures the power to legislate on the goods and services tax. Thepower of the States is however subject to the conferment of an exclusivedomain to Parliament to levy the goods and services tax where the supplyof goods or services takes place in the course of inter-state trade andcommerce.

28. In Union of India v. Mohit Mineral Pvt. Ltd.[51], this Courtwhile deciding the constitutional validity of the GST (Compensation toStates) Act 2017 noted that the Constitution Amendment Act 2016introduced changes in the legislative powers of the Parliament and Statelegislature relating to indirect taxation. It observed that the amendment“confers concurrent taxing powers on the Union as well as the Statesfor levying GST on transactions of supply of goods or services orboth”. In Baiku v. State Tax Officer, GST[52], writ petition was filedchallenging the legality of the notices and assessment orders issued underthe Kerala Value Added Tax Act 2003[53] for the assessment years 2010-50 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

51 (2019) 2 SCC 599

52 2019 SCC OnLine Ker 5362

53 “KVAT Act”

A11 and 2011-12. The notices and orders were challenged on the groundthat the authorities did not have the jurisdiction to issue them since theamendments introduced to Section 25(1) of the KVAT Act through theKerala Finance Acts 2017 and 2018 did not operate retrospectively. TheKerala High Court had to decide whether the Kerala State legislaturehad the legislative competence to amend the KVAT Act after theBintroduction of Article 246A to the Constitution, and the repeal of KVATpursuant to the amendment. The Court noted that the special powerintroduced by Article 246A allows Parliament and the State legislaturesto ‘simultaneously’ make laws.[54] Subsequently, while explaining the‘simultaneous’ nature of power held by Parliament and State legislature,Cit was observed that the power under Article 246A can be exercisedsimultaneously by the State legislature and Parliament and none holdany ‘unilateral or exclusive’ legislative power[55].

29. In its decision in VKC Footsteps (supra), this Court noticedthe changes in the constitutional scheme introduced by Article 246A.DOne of us (Dr DY Chandrachud) writing for the two-judge Benchobserved:

“52. Article 246-A has brought about several changes in theconstitutional scheme:

52.1.Firstly, Article 246-A defines the source of power as well asEthe 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 bothto Parliament and the State Legislatures, save and except for theexclusive power of Parliament to enact GST legislation whereFthe supply of goods or services takes place in the course of inter-State trade or commerce.

52.3.Thirdly, Article 246-A embodies the constitutionalprinciple of simultaneous levy as distinct from the principleof concurrence. Concurrence, which operated within theGfold of the Concurrent List, was regulated by Article 254.”

(emphasis supplied)

54 Paragraph 19 of the judgement.H55 Paragraph 22 of the judgment.

30. Article 246A provides Parliament and the State legislaturewith the concurrent power to legislate on GST. Article 246A has non-obstante provision which overrides Article 254. Article 246 does notprovide repugnancy clause. Unlike Article 254 which stipulates thatthe law made by Parliament on subject in the Concurrent list shallprevail over conflicting laws made by the State legislature, theconstitutional design of Article 246A does not stipulate the manner inwhich such inconsistency between the laws made by Parliament andthe State legislature on GST can be resolved. The concurrent powerexercised by the legislatures under Article 246A is termed as a‘simultaneous power’ to differentiate it from the constitutional design onexercise of concurrent power under Article 246, the latter being subjectto the repugnancy clause under Article 254. The constitutional role andfunctions of the GST Council must be understood in the context of thesimultaneous legislative power conferred on Parliament and the Statelegislatures. It is from that perspective that the role of the GST Councilbecomes relevant.

Role of the GST Council

31. The Thirteenth Finance Commission set up the Task Force onGST. The Task Force recommended that the Empowered Committee ofState Finance Ministers may, upon the introduction of GST, be transformedinto permanent constitutional body known as the ‘Council of FinanceMinisters’. The Task Force had recommended that:

(i)The Council would be responsible for modification in thedesign of dual GST regulating the indirect tax system;

(ii)The Council would make decisions on the principle ofmajority and not unanimity. The initial decision would beapproved by the Union and three-fourths of the States. Thesubsequent changes to the decision could be made upon anagreement of the Union and two-third of the States;

(iii)The body would maintain the ‘existing balance of federalfiscal powers’ since both the Union and the States wouldsurrender their fiscal autonomy to change to the GSTregime;[56]

56 Tarun Jain, Goods and Services Tax: Constitutional Law and Policy (EBC 2018) 117

A(iv)The basis for levy should be common for both the Unionand the States upon agreement. This could be on the linesof the GST law in Australia, where both the Union and theStates will have to agree before any change in the rate orbase of GST could be implemented;[57] and

B(v)If the States deviate from the collectively agreed positionon GST rates, mechanism ought to be established by whichthe defaulting State pays penalty[58].

32. The 2011 Amendment Bill sought to include Article 279A inthe Constitution which constituted the GST Council. The provisionstipulated the constitution of the Council, the role of the Council and theCquorum necessary for making decisions:

“279-A. Goods and Services Tax Council.— (1) The Presidentshall, within sixty days from the date of commencement of theConstitution (One Hundred and First Amendment) Act, 2016, byorder, constitute Council to be called the Goods and ServicesDTax Council.(2) The Goods and Services Tax Council shall consist of thefollowing members, namely:—

(a) the Union Finance Minister – Chairperson;

E(b) the Union Minister of State in charge of Revenue or Finance– Member;

(c) the Minister in charge of Finance or Taxation or any otherMinister nominated by each State Government- Members.

(3) The Members of the Goods and Services Tax CouncilFreferred to in sub-clause (c) of clause (2) shall, as soon as maybe, choose one amongst themselves to be the Vice-Chairpersonof the Council for such period as they may decide.

(4) The Goods and Services Tax Council shall makerecommendations to the

GUnion and the States on—

(a) the taxes, cesses and surcharges levied by the Centre, theStates and the local bodies which may be subsumed in the goodsand services tax;

57 Thirteenth Finance Commission, Report of the Task Force on GST (2009) Para 10.5H58 Ibid, paragraph 9.8

(b) the goods and services that may be subjected to or exemptedfrom the goods and services tax;

(c) the threshold limit of turnover below which goods andservices tax may be exempted;

(d) the rates of goods and services tax; and

(e) any other matter relating to the goods and services tax, asthe Council may decide.

(5) While discharging the functions conferred by this article,the Goods and Services Tax Council shall be guided by the needfor harmonised structure of goods and services tax and for thedevelopment of harmonised national market for goods andservices.

(6) One-third of the total number of members of the Goodsand Services Tax Council shall constitute the quorum at itsmeetings.

(7) The Goods and Services Tax Council shall determine theprocedure in the performance of its functions.

(8) Every decision of the Goods and Services Tax Council takenat meeting shall be with the consensus of all the members presentat the meeting.

(9) No act or proceedings of the Goods and Services TaxCouncil shall be invalid merely by reason of—

(a) any vacancy in, or any defect in, the constitution of theCouncil; or

(b) any defect in the appointment of person as Member ofthe Council; or

(c) any irregularity in the procedure of the Council not affectingthe merits of the case.

Explanation.—For the purposes of this article, “State’’ includesa Union territory with Legislature.”

33. According to the draft of Article 279A, as it found place in the2011 Amendment Bill, every decision of the GST Council had to betaken with the consensus of all the members present at the meeting.The Bill also provided for the establishment of GST Dispute Settlement

AAuthority to adjudicate on any complaint referred to it by StateGovernment or the Union Government, arising out of deviation from anyrecommendations of the Council that resulted in the loss of revenue orwhich affected the harmonised structure of the GST. The draft provisionalso provided that Parliament may by law provide that no Court otherthan the Supreme Court shall exercise jurisdiction in respect of the dispute.BThe draft of Article 279B, as in the 2011 Amendment Bill, reads asfollows:

“279B. (1) Parliament may, by law, provide for the establishmentof Goods and Services Tax Dispute Settlement Authority toadjudicate any dispute or complaint referred to it by StateCGovernment or the Government of India arising out of deviationfrom any of the recommendations of the Goods and Services TaxCouncil constituted under article 279A that results in loss ofrevenue to State Government or the Government of India oraffects the harmonised structure of the goods and services tax.D(2) The Goods and Services Tax Dispute Settlement Authorityshall consist of Chairperson and two other members.

(3) The Chairperson of the Goods and Services Tax DisputeSettlement Authority shall be person who has been Judge ofthe Supreme Court or Chief Justice of High Court to be appointedEby the President on the recommendation of the Chief Justice ofIndia.

(4) The two other members of the Goods and Services Tax DisputeSettlement Authority shall be persons of proven capacity andexpertise in the field of law, economics or public affairs to beFappointed by the President on the recommendation of the Goodsand Services Tax Council.

(5) The Goods and Services Tax Dispute Settlement Authorityshall pass suitable orders including interim orders.

G(6) law made under clause (1) may specify the powers whichmay be exercised by the Goods and Services Tax DisputeSettlement Authority and provide for the procedure to be followedby it.

(7) Notwithstanding anything in this Constitution, Parliament mayHby law provide that no Court other than the Supreme Court shall

exercise jurisdiction in respect of any such adjudication or disputeor complaint as is referred to in clause (1).

Explanation.— For the purpose of this article, “State’’ includes aUnion territory with Legislature.”

34. The Standing Committee on Finance, Ministry of Finance inits 73[rd] report on the 2011 Amendment Bill explained the salient featuresof the Amendment Bill introducing the GST regime.[59] It was noted thatthe GST Council will be joint forum for the Union and the States todiscuss issues on GST and the recommendations of the GST Councilwill be benchmark and guiding force for the Union and StateGovernments.[60] In the same vein, it was observed that the legislaturewill be free to exercise its power on all issues recommended by theCouncil:[61]“(c) Goods and Services Tax Council (Article 279A) will becreated, which will be joint forum for the Centre and the Statesto discuss important issues relating to GST so that the objective ofhaving harmonized structure for GST and harmonized nationalmarket can be achieved. This Council would function under theChairmanship of the Union Finance Minister and will have Ministerin charge of Finance/Taxation or Minister nominated by each ofthe States and UTs with legislatures, as members. The Councilwill make recommendations to the Union and the States onimportant parameters like rates, exemption list, threshold limits,etc. The recommendations made by this Council will act asbenchmark or guidance to Union as well as State Governments.The Parliament and well as State Legislatures will be freeto exercise their power on all issues recommended by theCouncil. One-third of the total number of Members of the Councilwill constitute the quorum of GST council. It is further providedthat the decisions of the GST Council shall be with the consensusof all members present at the meeting. This is to protect theinterests of each State and the Centre when the Council takes adecision.

59 Standing Committee on Finance, The Constitution (One Hundred and FifteenthAmendment) 2011 (73[rd] report, 2013)

60 Ibid, paragraph 12

61 Ibid

A(d) In exercise of their powers, these legislative bodies maydeviate from the recommendations of the Council and mayact in manner which is prejudicial to the harmonious working ofGST or which adversely impacts the revenue of some other State/Central Government. Such deviations or actions are requiredto be kept to the minimum, if the objective of having aBcommon national market and smooth working of GST is tobe achieved. It is accordingly proposed to set up Goods &Services Tax Dispute Settlement Authority (Article 279B), whichmay be approached by the affected Government (whether theCentre or the States) seeking redressal for any loss caused byCany action due to deviation from the recommendations made bythe Goods & Services Tax Council or for adversely affecting theharmonious structure and implementation of the GST.”

(emphasis supplied)

35. The Committee also sought the opinion of the Attorney GeneralDthrough the Department of Legal Affairs on whether therecommendations of the GST Council would undermine the power ofthe legislature. In response, the Attorney General stated that though theGST Council has the power to make recommendations, both Parliamentand State legislatures, have the power to either accept or reject thoseErecommendations.[62] The Attorney General stated:

“This is an important point which has been raised and the shortanswer to it is that it is certainly open to Parliament to approveany recommendation. However, this does not mean that the GSTCrecommendations will have no value. Having regarding to theFnature of the Constitution of GSTC, the Council would haveperformed useful role in making recommendations but the ultimateauthority whether to accept such recommendations can and mustrest only in the Legislatures, namely, Parliament and the StateLegislatures. In this view of the matter, the setting up of the GSTCdoes not strike at the root of the legislative powers over Finance.GThe powers of the legislature over Finance are sacrosanct andare not affected by the setting up of the GSTC.”

36. The States raised concerns over the establishment of the GSTDispute Settlement Authority on the ground that such authority would

have the power to override the supremacy of Parliament and the StateLegislatures since legislation, though constitutional, could be struckdown if it deviated from the recommendations of the GST Council. TheCommittee, while addressing the concerns raised by the Statesrecommended that the provision establishing the GST Dispute SettlementAuthority be omitted since it would affect the fiscal autonomy of theStates. It was further recommended that provision be made in Article279A itself empowering the GST Council to resolve disputes arising outof its recommendations:

“60. On the GST Dispute Settlement Authority, the Chairman,Empowered Committee of State Finance Ministers stated thatmost of the States have expressed the view that the provisionpertaining to the GST Dispute Settlement Authority should beomitted as this authority shall have powers of overriding thesupremacy of the Parliament and the State Legislatures. It shallaffect the fiscal autonomy of the States.

61. The Constitution confers autonomy on the Parliamentand the State Legislatures to legislate within the respectivefields assigned to them and the fact that statute enactedby competent Legislative body can be called into questionon grounds of deviations from the recommendations of anessentially executive body, albeit Constitutional, is beingconstrued as undermining the supremacy of the Legislature.Keeping in view the concerns expressed by the States, andthe fact that the proposed provision of GST DisputeSettlement Authority will affect the fiscal autonomy of theParliament and the State Legislatures, the proposed Article279B providing for GST Dispute Settlement Authority maybe omitted. However, any dispensation involving multiple partnersdoes require mechanism to resolve disputes. provision can bemade in Article 279A itself empowering the GST Council to decideabout the mechanism to resolve the disputes arising out of itsrecommendations.”

(emphasis supplied)

37. The Committee reiterated in its conclusion that the GST Councilwould only play ‘constructive and enabling role’ vis-à-vis the legislatureand would not override the role of the legislature[63]:

A“The Committee would thus expect the proposed GST Council tofollow the principles of cooperative federalism and democraticgovernance. As this will be political and recommendatory body,it would be in position to play constructive and enabling rolevis-à-vis the Legislature, which needless to emphasise, wouldremain supreme in matters of legislation including taxation. In theBCommittee’s view the mandate entrusted to the GST Council underthe proposed Article 279A of the Constitution (Amendment) Billdoes not in any way alter the existing constitutional scheme in sofar as the Legislature, both Union and State, is concerned.”38. Taking into account the recommendations of the StandingCCommittee, Parliament introduced the 2014 Amendment Bill in whichArticle 279B was deleted and the GST Council was given the powerunder Article 279A(11) to devise mechanism of dispute resolution.The GST Council consists of the Union Finance Minister as theChairperson, the Union Minister of State in charge of Revenue or FinanceDand the Minister in charge of Finance or Taxation or any other Ministernominated by the State Government. The role of the GST Council is tomake recommendations to the Union and the States on seven specificcategories revolving around GST including principles of levy andapportionment of GST. Clause (h) of Article 279A(1) also provides theCouncil with plenary power by which it can make recommendationsEwith respect to ‘any other matter relating to GST’, as the Council maydecide. Clause (6) stipulates that the recommendations of the GST Councilshall be guided by the ‘need for harmonised structure of goods andservices tax’. One half of the total number of members of the Councilshall constitute the quorum for meetings. Clause (9) provides that theFCouncil shall take decision with three-fourths majority of the memberspresent and voting. The vote of the Union Government is given theweightage of one-third of the total votes cast, and the votes of the StateGovernments are given weightage of two-thirds of the total votes.

Parliamentary DebatesG

39. The inclusion of Article 279A in the 2014 Amendment Billraised two important concerns in Parliament: first, the GST Councilcould effectively override the legislative sovereignty of Parliament andthe State legislatures; and second, the fiscal autonomy of the Stateswould be diminished since the Centre has the power to stall consensusHreached by all the States. On 5 May 2015, Member of Parliament

from the State of Tamil Nadu raised the concern that the GST Councilwould diminish the role of the States in fiscal policy:[64]

“The GST Council as proposed in the Amendment will makerecommendations on whole range of issues relating to subsumingof taxes, cesses and surcharges under GST, exemption for goodsand services, model GST laws, etc. This will override thesupremacy of the legislature both at the Centre and the States intaxation matters. In the GST Council, the Union Government hasone-third weightage in vote and only two-third of the weightagein vote is given to States and Union Territories. Voting rights ofStates and Union Territories are equal irrespective of their size.We, are therefore, opposed to the idea of GST Council as aconstitutional body as it compromises the autonomy of the Statesincluding in fiscal matters.”

In response, the Finance Minister had said[65]:

“Once you get into the GST pipeline, the States and the Centrewill have to interact together; and once they interact together, theState of Tamil Nadu will be involved in determining and takingdecisions relating to the States. So, none of us is going to besurrendering his or her authority or autonomy. We are both goingto be pooling our sovereignty together so that we are able to createa new taxation mechanism.”

40. Select Committee of the Rajya Sabha examined proposedArticle 279A. It was suggested before the Select Committee that a‘dispute settlement body’ to adjudicate on disputes arising from the non-compliance of recommendations of the GST Council should beconstituted.[66] There was, in other words, suggestion to reintroduceArticle 279B as it found place in the 2011 Amendment Bill. TheGovernment submitted that Article 279A(11) provides the GST Councilwith the power to decide the ‘modalities’ of dispute resolution, whichmay range from mediation, arbitration or even judicial adjudicationdepending on the nature of dispute:

64 Speech of T.G Venkatesh Babu in Lok Sabha on 05.05.2015

65 Speech of Mr. Arun Jaitley in Lok Sabha on 08.08.2016

66 Select Committee, Report on the Constitution (One Hundred and Twenty SecondAmendment) Bill , 2014, (Submitted to the Rajya Sabha, 2015)

A“2.71 It may further be mentioned that Article 279A (11) onlyprovides that GST Council may decide the ‘modalities’ to resolvedisputes arising out of its recommendations. The ‘modalities’ couldinclude any dispute resolution mechanism which could be inter-alia negotiation, mediation, arbitration or even judicial authorityas deemed appropriate by the GST Council depending on the natureBof dispute before it. Thus, as per the proposed Bill, the GST Councilshall, by itself, not be resolving the disputes but decide on themodalities for resolving the disputes.”

41. The Government also submitted that the voting pattern betweenthe Union and the States does not provide unequal power to any one ofCthe constituent units:

“2.68 The structure of GST Council represents the federal natureof governance in this country. This has been done as per therecommendations of the Empowered Committee after theirmeeting in Bhubaneswar in January 2013, and also theDrecommendations of the Parliamentary Standing Committee. Thisprovision has been consciously adopted to ensure the federalbalance in the functioning of the GST Council, and also to enhanceco-operative federalism. The existing pattern of vote-share in theGST Council ensures that no decision can be taken by the CouncilEeither by the Centre or the States acting on their own. Hence,neither the States nor the Centre alone can take decision in theCouncil. Providing 3/4th weightage to the States would upset thefederal balance between the Centre and the States. Presently, inthe concurrent list, in case of any difference between Central andFState legislation, the Central legislation prevails. The presentweightage of votes in the GST Council would ensure that neitherthe Centre nor the States are able to take decision without thesupport of the other. In other words both would enjoy veto.

2.69 Further, with Centre holding only 1/3rd of the votes, theGCentre would require support of 20 States/Union Territories toget 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 thatlegislative history is not readily used in interpreting law, the modernHtrend of thinking on the subject has enabled courts to look into the history

of legislation to understand the full purport of the words used and themischief sought to be remedied by the law. In K.P Varghese v. ITO[67],this Court held that the “speech made by the mover of the Bill explainingthe reason for the introduction of the Bill can certainly be referred to forthe purpose of ascertaining the mischief sought to be remedied by thelegislation and the object and purpose for which the legislation is enacted.”In Kalpana Mehta v. Union of India[68], Chief Justice Dipak Misraheld that reports of the Parliamentary Committees and the speechesmade in the Parliament can be referred to identify the circumstancesthat led to the enactment of the legislation along with the intention of thelegislature:

“129. We have referred to these authorities to highlight that thereports or speeches have been referred to or not referred to forthe purposes indicated therein and when the meaning of statueis not clear or ambiguous, the circumstances that led to the passingof the legislation can be looked into in order to ascertain theintention of the legislature. It is because the reports assumesignificance and become relevant because they precede theformative process of legislation.”

43. The parliamentary debates and the legislative history of theconstitutional amendment, and the committee reports on Articles 246Aand 279A indicate that:

(i)The draft of Article 279B, in the 2011 Amendment Bill, whichsought to introduce GST Dispute Settlement Authority toadjudicate on any dispute ‘arising out of deviation’ from therecommendations of the GST Council was deleted. Thecurrent Article 279A(11) provides that the GST Council shalldevise mechanism to adjudicate on any dispute that ‘arisesout’ of the recommendations of the Council. The deletionof Article 279B while introducing the 2014 Amendment Billand the inclusion of Article 279(11) in the text of theConstitution has brought about two substantial changes: one,that instead of the creation of dispute settlement authority,the Council is vested with the power to decide on ‘modalities’of dispute resolution; and second, while Article 279Bstipulated that the authority shall adjudicate on ‘disputes

67 (1981) 4 SCC 173.

68 (2017) 7 SCC 295

388SUPREME COURT REPORTS

arising out of the deviation from the recommendations’,Article 279(11) states that the disputes arising outofrecommendations shall be resolved. The phrase ‘deviation’has been omitted. Before the Select Committee of the RajyaSabha, the Government had stated that disputes shall beresolved by modalities including mediation and arbitration.The Standing Committee of Finance in its report specificallyrecommended the deletion of Article 279B due to theconcerns raised by the States; and

(ii)Under the 2011 Amendment Bill, the GST Council couldrecommend only when unanimous decision would bereached. However, the Standing Committee of Finance hadrecommended that since it would be difficult to arrive at aconsensus due to the socio-economic diversity amongst theStates, the recommendations be made with majorityinstead of unanimity. While making this recommendation, itwas observed that if the GST Council functions like thepresent Empowered Committee where the differences areresolved amicably in an institutional mode, it would fosterthe spirit of cooperative federalism.

C.2 The nature of the recommendations of the GST CouncilEIndian federalism: Dialogue of cooperative federalism

44. The arguments in favour of reading the ‘recommendations’ ofthe GST Council as binding are two-fold[69]: first, if the GST Councilcannot make binding recommendations, the entire structure of GST willcollapse as each State would then levy conflicting tax and collectionFmechanism; and second, if the recommendations are non-binding, thenthere would be no dispute to be resolved under Article 279(11) as theStates would be free to disregard the recommendations. The argumentsagainst interpreting the ‘recommendations’ of the GST Council as bindingon the Union and the States are two-fold[70]: first, it would violate theGsupremacy of Parliament and State legislatures since both have

69 Alok Prasanna, ‘For mess of Potage: The GST’s promise of increased revenue tostates comes at the cost of the federal structure of the Constitution’ National LawSchool of India Review. Vol. 28, No. 2(2016), pp-97-113.

70 Ajitesh Kir, ‘India’s Goods and Services Tax: Unique Experiment in CooperativeFederalism and Constitutional Crisis in Waiting’ Canadian Tax Journal (2021) 69:2,H391-445.

simultaneous power to legislate on GST; and second, it would violatethe fiscal federalism of the States since the Centre has one-third voteshare and the States collectively have two-third vote share. Therefore,no recommendation on three-fourths majority can be passed withoutthe consent of the Centre.

45. One of the important characteristics of federal polity is thedistribution of legislative power between the Union and the States. MrH M Seervai while arguing that India is federal nation, referred to theexclusive power of taxation held by the States to establish that the Stateswere not merely given the power to legislate on ‘subordinate’ matters:

“If by ‘subordinate’ is meant ‘not important’, then, with respect,the present writer does not agree with Prof. Wheare’s assessmentof the exclusive State List. Public order, the police, administrationof justice, local government, public health and sanitation, to mentionbut few, are matters of great importance; and so are agriculture,water (subject to Union control of the waters of inter-State rivers),land, and fisheries. Again, the allocation of taxes between theUnion and the States is mutually exclusive, and the taxes allottedexclusively to the States are not negligible. Thus sales tax is anexpanding source of revenue in India as it becomes increasinglyindustrialized under the successive five year plans. In theindustrialized State of Maharashtra, the yield from Sales Tax wasabout Rs. 1,580 million for the year of 1971-72, and the estimatefor the year 1972-3 was about Rs. 1,780 million.

(k) The view that unimportant matters were assigned to the Statescannot be sustained in face of the very important subjects assignedto the States in List II, and the same applies to taxing powers ofthe States which are made mutually exclusive of the taxing powersof the Union so that ordinarily the States have independent sourceof revenue of their own. The legislative entries relating to taxes inList II show that the sources of revenue available to the Statesare substantial and would increasingly become more substantial.In addition to the exclusive taxing powers of the States, the Statesbecome entitled either to appropriate taxes collected by the Unionor to share in the taxes collected by the Union.”

AJustice PB Sawant writing for himself and Justice Kuldip Singh inSR Bommai v. Union of India[71], referred to the exclusive and equallegislative distribution of heads of taxation to establish the federal natureof the Indian Constitution.[72] Therefore, the exclusive powers held by theStates and the Centre on matters of taxation was regarded as an importantfeature of India’s federal polity. The Constitution Amendment Act 2016Balters the legislative distribution between the Centre and the State onindirect taxation by providing Parliament and State legislatures with‘simultaneous powers’ and no provision for repugnancy. Therefore,according to Article 246A, both Parliament and the State Legislaturepossess equal power to legislate on aspects of GST. It is the contentionCof the Union that the recommendation of the GST Council should bebinding on Parliament and the State Legislatures precisely because equalpower is granted to both the federal units. The Union has argued that ifthe recommendations are not binding, then it would lead to an impassewhere different Central and State legislations could be guiding the samefield.D

46. Article 246A vests Parliament and the State Legislatures witha unique, simultaneous law-making power on GST. It is in this contextthat the role of the GST Council gains significance. The recommendationsof the GST Council are not based on unanimous decision but on athree-fourth majority of the members present and voting, where the

EUnion’s vote counts as one-third, while the States’ votes have weightageof two-thirds of the total votes cast. There are two significant attributionsof the voting system in the GST Council. First, the GST Council has anunequal voting structure, where the States collectively have two-thirdvoting share and the Union has one-third voting share; and second,

Fsince India has multi-party system, it is possible that the party in powerat the Centre may or may not be in power in various States. Therefore,the GST Council is not only an avenue for the exercise of cooperativefederalism but also for political contestation across party lines. Thus, thediscussions in the GST Council impact both federalism and democracy.The constitutional design of the Constitution Amendment Act 2016 is suiGgeneris since it introduces unique features of federalism. Article 246Atreats the Centre and States as equal units by conferring simultaneouspower of enacting law on GST.. Article 279A in constituting the GST

71 (1994) 3 SCC 1H72 Prasanna (n 69)

Council envisions that neither the Centre nor the States can actindependent of the other.

47. The dual federalism model or the autonomy model views theconstituting units of the Centre and States as autonomous, independentand competing units. This model is also termed as competitive federalism,where the constituent units ‘compete’ with each other. Proponents ofthe cooperative federalism model argue that it is mistake to view eachunit as separate autonomous entity. According to the theory ofcooperative federalism, integration and not autonomy is the objectivethat federalism seeks to achieve.[73] 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 theintegrated approach of the federal units.[74] This Court in State (NCT ofDelhi) v. Union of India[75],has observed that India follows the model ofcooperative federalism where the Union and the State Governmentsneed to iron out the differences that arise in the course of the path ofdevelopment. Chief Justice Dipak Mishra elucidated on the concept ofcooperative federalism:

“119. Thus, the idea behind the concept of collaborative federalismis negotiation and coordination so as to iron out the differenceswhich may arise between the Union and the State Governmentsin their respective pursuits of development. The Union Governmentand the State Governments should endeavour to address thecommon problems with the intention to arrive at solution byshowing statesmanship, combined action and sincere cooperation.In collaborative federalism, the Union and the State Governmentsshould express their readiness to achieve the common objectiveand work together for achieving it. In functional Constitution,the authorities should exhibit sincere concern to avoid any conflict.This concept has to be borne in mind when both intend to rely onthe constitutional provision as the source of authority. We areabsolutely unequivocal that both the Centre and the States mustwork within their spheres and not think of any encroachment. But

73 Robert A. Schapiro, ‘Justice Steven’s theory of Interactive Federalism’ 74 FordhamL. Rev. 2133 (2006)

74 Jessica Bulman-Pozen and Heather K. Gerken, ‘Uncooperative Federalism’ Yale LawJournal, Vol. 118. No. 7 (May, 2009), pp. 1256-131075 (2018) 8 SCC 501

Ain the context of exercise of authority within their spheres, thereshould be perception of mature statesmanship so that theconstitutionally bestowed responsibilities are shared by them. Suchan approach requires continuous and seamless interaction betweenthe Union and the State Governments.”

B48. The Indian Constitution has sometimes been described asquasi-federal or Constitution with ‘centralising drift’. This is becausewhen the Constitution is read as whole, the Union is granted largershare of the power. Instances of this centralising drift can be traced toArticles 254, 248, and 353. However, there are instances such as Article246A, where the Centre and the States are conferred equal power.CMerely because few provisions of the Constitution provide the Unionwith greater share of power, the provisions in which the federal unitsare envisaged to possess equal power cannot be construed in favour ofthe Union. The Union and the States have simultaneous power tolegislate on GST. The GST Council has the power to makeDrecommendations on wide range of subjects relating to GST. Since theConstitution does not envisage repugnancy provision to resolveinconsistencies between the Central and State laws on GST, the GSTCouncil must ideally function, as provided by Article 279A(6), in aharmonised manner to reach workable fiscal model through cooperationand collaboration.E

49. The federal system is means to accommodate the needs ofa pluralistic society to function in democratic manner. It attempts toreconcile the desire of unity and commonality along with the desire fordiversity and autonomy. Democracy and federalism are interdependenton each other for their survival such that federalism would only be stableFin well-functioning democracies. Additionally, the constituent units in afederal polity check the exercise of power of one another to prevent onegroup from exercising dominant power. The Indian Constitution, thoughnecessarily federal does confer the Union with higher share of powerin certain situations to prevent chaos and provide security.[76] However,Geven if the federal units are not entirely autonomous as in the traditionalfederal system, the units still wield power. The relationship between twoconstituent units that are not autonomous but rely on each other for theirfunctioning is not in practice always collaborative or cooperative. If theStates have been conferred lesser power they can still resist the mandates

of the Union by using different forms of political contestation as permittedby constitutional design. Such contestation furthers both the principle offederalism and democracy. When the federal units are vested withunequal power, the collaboration between them is not necessarilycooperative. Harmonised decision thrives not just on cooperation butalso on contestation. Indian federalism is dialogue in which the Statesand the Centre constantly engage in conversations. Such dialogues canbe placed on two ends of the spectrum - collaborative discussions thatcooperative federalism fosters at one end of the spectrum and interstitialcontestation at the other end. Jessica Bulman and Heather K, in theiressay connote interstitial contestation as ‘uncooperative federalism’.[77]They argue that the States which possess lesser power could use licenceddissent, dissent by using regulatory gaps or by civil disobedience such aspassing resolution against the decision of the Central Government asmeans of contestation. Differentiating the forms of cooperative federalismfrom the dissent in uncooperative federalism, the authors state:“We think the best proxy for distinguishing dissent from routinenegotiations is whether the state’s action can be fairly understoodas an effort to change national policy. An attempt to obtain anaccommodation or modification of federal policy within the stateshould usually be understood as an example of cooperativebargaining. An attempt to contest and alter national policy is rightlyunderstood as dissent.”

50. Such form of contestation or as the authors term it,‘uncooperative federalism’ is valuable since “it is desirable to have somelevel of friction, some amount of state contestation, some deliberation-generating froth in our democratic system.”[78] Therefore, the States canuse various forms of contestation if they disagree with the decision ofthe Centre. Such forms of contestation are also within the framework ofIndian federalism. The GST Council is not merely constitutional bodyrestricted to the indirect tax system in India but is also an important focalpoint to foster federalism and democracy.

51. One of the important features of Indian federalism is ‘fiscalfederalism’. reading of the Statement of Objects and Reasons of the2014 Amendment Bill, the Parliamentary reports and speeches indicatethat Articles 246A and 279A were introduced with the objective of

77 Bulman-Pozen and K. Gerken (n 74)

78 Ibid, page 1284

Aenhancing cooperative federalism and harmony between the States andthe Centre. However, the Centre has one-third vote share in the GSTCouncil. This coupled with the absence of the repugnancy provision inArticle 246A indicates that recommendations of the GST Council cannotbe binding. Such an interpretation would be contrary to the objective ofintroducing the GST regime and would also dislodge the fine balance onBwhich Indian federalism rests. Therefore, the argument that if therecommendations of the GST Council are not binding, then the entirestructure of GST would crumble does not hold water. Such reading ofthe provisions of the Constitution diminishes the role of the GST Councilas constitutional body formed to arrive at decisions by collaborationCand contestation of ideas.

The contextual meaning of ‘recommendations’

52. The phrase ‘recommendation’ is used in numerous provisionsin the Constitution but the import of the phrase differs contextually. Basedon the submission of the Union Government, there are five categoriesDinto which the phrase ‘recommendation’ has been deployed in theConstitution:

(i)Category 1: Recommendation by the President prior to layingbefore the Parliament for voting: Articles 3, 109, 111, 113,117, 203, 207, 255 and 274 discuss the recommendations ofEthe President or the Governor. Here the authorityrecommending the initiation of the discussion and thedecision-making authority are different.

(ii)Category 2: Recommendation followed by consultation:Article 233 uses the phrases ‘consultation’ andF‘recommendation’. Article 233(1) states that the districtjudge shall be appointed by the Governor in ‘consultation’with the High Court. Clause 2 states that the criteria forthe appointment of person who is not already in the serviceof the Union or the State is that he should have been aGpleader or an advocate for at least seven years and heshould be recommended by the High Court for theappointment to the post of District Judge. There is two-step process for appointment, first, the candidature mustbe recommended by the High Court; and second, therecommended candidate is appointed by the Governor inH‘consultation’ with the High Court.

(iii)Category 3: Recommendation with accountability: ArticlesA243I, 243Y, 280, 281, 338, 338B and 340. Articles 243I and243Y stipulate that the Finance Commission shall make‘recommendations’ to the Governor on apportionment oftaxes to the Panchayats and Municipalities. Article 280states that it “shall be the duty of the Commission to makeBrecommendations to the President” on the principlesgoverning distribution of taxes between the Union and theStates. Article 281 fosters accountability by providing thatevery recommendation made by the Finance Commissionshall be laid before the House together with an explanatorymemorandum on the action taken on such recommendations.CArticle 338(5)(e) states that the National Commission forScheduled Castes shall present report to the Presidentannually listing the measures that should be taken to enhancethe protection and development of the Scheduled Caste.Article 338(6) states that the President shall cause the reportDto be laid before the Parliament along with memorandumexplaining the action taken on the recommendations or thereason for non-acceptance, if any. Article 338A is similarprovision on the recommendatory nature of the NationalCommission for Scheduled Tribes. The President has theEpower to appoint Commission to investigate the conditionsof Backward Classes. The Commission is required toinvestigate the matters referred to them and present reportalong with recommendations to the President which shallbe laid before the Parliament along with an explanationmemorandum.F

(iv)Category 4: Non-qualifying recommendation: ThePresidential Order to establish an Inter State Council dated28 May 1990 issued by the Ministry of Home Affairs, andArticle 263. Article 263 provides that the President may, inpublic interest, establish an Inter-State Council which shallmake recommendations for better coordination of policyand action. The Inter-State Council was constituted by theInter-State Council Order 1990 consisting of the PrimeMinister, Chief Ministers of all States, Chief Ministers ofUnion Territories and six Ministers of Cabinet rank.

A(v)Category 5: Recommendations which are obligatory innature: Articles 270, 275, 344, 349 and 371A: Article 344establishes the Commission and Committee of Parliamenton Official Languages. Article 344(2) states that it shall bethe duty of the Commission to make recommendations tothe President on the usage of official languages. Clause 3Bstates that recommendations shall be made having dueregard to the industrial, cultural and scientific advancementof India and the claim of non-Hindi speaking persons. Article344(4) constitutes Committee of the members of the LokSabha and Rajya Sabha. The Committee will have toCexamine the recommendations of the Commission andreport its opinion to the President. The President afterconsidering the report, shall issue directions in accordancewith the whole or any part of the report. Article 349 dealswith the special procedure for enactment of law relating tolanguage in the first fifteen years from the commencementDof the Constitution. Articles 270 and 275 stipulate that thepercentage of tax apportionment and fixation of the grantsfor the States from the Consolidated Fund of India shall beordered by the President on the recommendation of theFinance Commission.

53. survey the above provisions indicates that the nature andmeaning of the term ‘recommendation’ differs contextually. All theprovisions qualify the nature of recommendation. For instance, in categoryone, the recommendation of the President is for the initiation of thediscussion; in category two, decision on the recommendation is arrivedFupon ‘consultation’; in category three, the decision-making authority hasto submit an explanatory note on the action or inaction taken on therecommendations.; in category four, the recommendations are notqualified. Article 263 only states that the Inter-State Council has dutyto recommend. There is no further explanation on whether theGrecommendation ought to be mandatorily accepted, or deliberated upon;in category five, the recommendations of the authority are expresslystated to be ‘binding’ on the decision-making authority.

54. The GST Council which is constitutional body is entrustedwith the duty to make recommendations on wide range of areasconcerning GST. The GST Council has plenary powers under ArticleH

279A (4)(h) where it could make recommendations on ‘any other matter’related to GST as the Council may decide. The GST Council has toarrive at its recommendations through harmonised deliberation betweenthe federal units as provided in clause 6 of Article 279A. Unlike theother provisions of the Constitution which provide that recommendationsshall be made to the President or the Governor, Article 279A states thatthe recommendations shall be made to the ‘Union and the States’. Therecommendation of the GST Council made under Article 279A is non-qualified. That is, there is no explanation on the value of such arecommendation. Yet the notion that the recommendations of the GSTCouncil transform into legislation in and of themselves under Article246A would be farfetched. If the GST Council was intended to be adecision-making authority whose recommendations transform tolegislation, such qualification would have been included in Articles 246Aor 279A. Neither does Article 279A begin with non-obstante clausenor does Article 246A provide that the legislative power is ‘subject to’Article 279A.

55. The Constitution employs the phrase ‘consultation’ in certaincontexts. For example, Article 320(3) states that the Public ServiceCommission shall be ‘consulted’ on matters relating to civil posts. Article320(3) reads as follows:

“(3) The Union Public Service Commission or the State PublicService Commission, as the case may be, shall be consulted—

(a) on all matters relating to methods of recruitment to civil servicesand for civil posts;

(b) on the principles to be followed in making appointments tocivil services and posts and in making promotions and transfersfrom one service to another and on the suitability of candidatesfor such appointments, promotions or transfers;

(emphasis supplied)

56. If the GST Council were intended to be constitutional bodywhose recommendations transform into legislation without any interveningact, there would have been an express provision in Article 246A. Article279A does not mandate tabling the recommendations in the legislaturelike the provisions in category 3, where the recommendations have to be

Amandatorily tabled in the legislature along with an explanatory note. Onlythe secondary legislation which is framed based on the recommendationsof the Council under the provisions of the CGST Act[79] and IGST Act[80]is mandated to be tabled before the Houses of the Parliament. The useof the phrase ‘recommendations to the Union or States’ indicates thatthe GST Council is recommendatory body aiding the Government inBenacting legislation on GST.

57. In Manohar v. State of Maharashtra[81], two-judge Benchof this Court while interpreting Section 20(2) of the Right to InformationAct 2005 observed that the phrase ‘recommendation’ must be interpretedin contradistinction to ‘direction’ or ‘mandate’. It was observed as follows:C

“22. We may notice that proviso to Section 20(1) specificallycontemplates that before imposing the penalty contemplated underSection 20(1), the Commission shall give reasonable opportunityof being heard to the officer concerned. However, there is nosuch specific provision in relation to the matters covered underDSection 20(2). Section 20(2) empowers the Central or the StateInformation Commission, as the case may be, at the time of decidinga complaint or appeal for the reasons stated in that section, torecommend for disciplinary action to be taken against the CentralPublic Information Officer or the State Public Information Officer,Eas the case may be, under the relevant service rules. Power torecommend disciplinary action is power exercise of which mayimpose penal consequences. When such recommendation isreceived, the disciplinary authority would conduct the disciplinaryproceedings in accordance with law and subject to satisfaction ofthe requirements of law. It is “recommendation” and not aF“mandate” to conduct an enquiry. “Recommendation” must beseen in contradistinction to “direction” or “mandate”. Butrecommendation itself vests the delinquent Public InformationOfficer or State Public Information Officer with consequenceswhich are of serious nature and can ultimately produce prejudicialGresults including misconduct within the relevant service rules andinvite minor and/or major penalty.”

79 Section 166 of the CGST Act

80 Section 24 of the IGST Act

H81 (2012) 13 SCC 14

In Naraindas Indurkhya v. State of Madhya Pradesh[82], aConstitution Bench observed that ‘recommendation’ has persuasivevalue. In this case, this Court was dealing with the question of whethertextbooks ‘recommended’ by the Board could be held to be in effectimmediately. The Court observed:

“15. … there is basic distinction between recommendation andprescription of text book. When text book is prescribed by anappropriate authority having legal power to do so, it has to befollowed by the schools. Prescription of text book carries with ita binding obligation to follow the text book. There is no suchobligation when text book is merely recommended.Recommendation has merely persuasive effect, it being open tothe schools to accept the recommendation or to reject it as theythink fit. The schools may use the recommended text book orthey may not according as the Principals choose. That is why noconferment of statutory power is needed to enable the Board torecommend text books and no question of ultra vires can arise insuch case. Now the text books which formed the subject matterof the notifications dated April 5, 1972, April 25, 1972, April 26and May 17, 1972 were merely recommended and not prescribedby the Board and being only recommended text books asdistinguished from prescribed text books, they obviously could notbe said to be ‘in force’ immediately before the appointed day.Section 4, sub-section (2) did not, therefore, apply in respect ofthese text books and they could not be regarded as text booksprescribed under Section 4, sub-section (2).”

In numerous cases, this Court has reiterated that recommendationscannot create binding and enforceable rights, in contradistinction to a‘direction’ or ‘mandate’.[83]

‘’Interpretation of recommendation vis-à-vis the provisions ofIGST Act and CGST Act

58. The contention of the Union is that the recommendations ofthe GST Council are binding since Parliament and the State legislatures

82 (1974) 4 SCC 788

83 Union of India v. Pradip Kumar Dey, (2000) 8 SCC 580; Kesoram Industries andCotton Mills Ltd. v. CWT, (1966) 2 SCR 688; Som Mittal v. Government of Karnataka,(2008) 3 SCC 753; State of AP v. T. Gopalakrishnan Murthi, (1976) 2 SCC 883.

Ahave agreed to align themselves with the recommendations as is evidentfrom the provisions of the IGST Act and CGST Act. Certain provisionsof the IGST Act, CGST Act and SGST Acts expressly provide that therule-making power delegated to the Government shall be exercised onthe recommendations of the GST Council. For instance, Section 5 of theIGST Act provides that the taxable event, taxable rate and taxable valueBshall be notified by the government on the “recommendations of theCouncil”. Similarly, the power of the Central Government to exemptgoods or services or both from levy of tax shall be exercised on therecommendations of the GST Council under Section 6 of the IGST Act.Section 22 provides that the Government may exercise its rule makingCpower on the recommendations of the GST Council. The CGST Actalso provides for similar provisions in Sections 9, 11 and 164.

59. The provisions of the IGST Act and CGST Act which providethat the Union Government is to act on the recommendations of theGST Council must be interpreted with reference to the purpose of theDenactment, which is to create uniform taxation system. The GST wasintroduced since different States could earlier provide different tax slabsand different exemptions. The recommendations of the GST Councilare made binding on the Government when it exercises its power tonotify secondary legislation to give effect to the uniform taxation system.EThe Council under Article 279A has wide recommendatory powers onmatters related to GST where it has the power to makerecommendations on subject matters that fall outside the purview ofthe rule-making power under the provisions of the IGST and CGSTAct. Merely because few of the recommendations of the GST Councilare binding on the Government under the provisions of the CGST ActFand IGST Act, it cannot be argued that all of the GST Council’srecommendations are binding. As matter of first principle, the provisionsof the Constitution, which is the grundnorm of the nation, cannot beinterpreted based on the provisions of primary legislation. It is only theprovisions of primary legislation that can be interpreted with referenceGto the Constitution. The legislature amends the Constitution by exercisingits constituent power and legislates by exercising its legislative power.The constituent power of the legislature is of higher constitutional orderas compared to its legislative power. Even if it is Parliament that hasenacted laws making the recommendations of the GST Council bindingon the Central Government for the purpose of notifying secondaryH

legislations, it would not mean that all the recommendations of the Councilmade by virtue of its power under Article 279A have binding force onthe legislature.

60. With this background and context, we shall now proceed toanalyse the scheme of the GST legislation and whether the impugnedlevy, imposed on the recommendations of the GST Council, is valid andpermissible under law.

Analysis

D.1 Statutory Provisions and Scheme of the IGST Act[84]

61. The IGST Act enables the Central Government to imposeIGST on inter-state supply of goods and services. The Preamble to theIGST Act describes it as:

“An Act to make provision for levy and collection of tax oninter-State supply of goods or services or both by the CentralGovernment and for matters connected therewith or incidentalthereto.”

In aiding the levy and collection of IGST, the IGST Act providesfor comprehensive scheme for determining the nature of supply, timeof supply and place of supply.

62. Statutory interpretation will determine whether the IGST Actconfers the powers on the Central Government, in consultation with theGST Council, to designate imports as supply of services under Section5(3) of the IGST and whether the importer can be considered as therecipient of such supply, liable to pay tax on reverse charge basis.Further, it will determine if the Central Government, in consultation withthe GST Council, has the powers to designate the importer as recipientof service under 5(4) of the IGST Act, when goods are imported on aCIF basis. The critical fact in this case is that the service of shipping inthese CIF contracts is availed by the non-taxable exporter who engagesand pays foreign shipping line of their choice, without the involvementof the importer. In contrast, in FOB contracts, the Indian importer paysfor the services of shipping and directly deals with the shipping line. Therespondents herein are importers of non-coking coal on CIF basis.

84 Note: In order to facilitate convenience while reading the judgment, some of thestatutory provisions are reflected in more than one place in the judgment.

A63. Section 5 of the IGST Act provides for the levy and collectionof tax on inter-State supplies of goods or services. The power to imposesuch 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 andservices tax on all inter-State supplies of goods or services or both.Section 5 reads as follows:B

“5. Levy and collection.— (1) Subject to the provisions of sub-section (2), there shall be levied tax called the integrated goodsand services tax on all inter-State supplies of goods or services orboth, except on the supply of alcoholic liquor for humanCconsumption, on the value determined under section 15 of theCentral Goods and Services Tax Act and at such rates, notexceeding forty per cent., as may be notified by the Governmenton the recommendations of the Council and collected in suchmanner as may be prescribed and shall be paid by the taxableDperson:

Provided that the integrated tax on goods imported into Indiashall be levied and collected in accordance with the provisionsof section 3 of the Customs Tariff Act, 1975 on the value asdetermined under the said Act at the point when duties ofEcustoms are levied on the said goods under section 12 of theCustoms Act, 1962.”

The proviso to Section 5(1) of the IGST Act clarifies that the taxis levied on goods imported into India, in accordance with Section 3 ofthe Customs Tariff Act 1975. The value is determined under the CustomsFTariff Act at the point when the customs duties are levied in accordancewith the Customs Act.

64. The payment of IGST on reverse-charge basis iscontemplated in sub-sections (3) and (4) of Section 5. Sub-section (3)Gprovides that IGST may be paid on reverse charge basis on specifiedcategories of supply of goods or services or both. The Central Governmentis empowered to specify these categories on the recommendations ofthe GST Council. Hence, on its plain terms, the payment of IGST on areverse charge basis is envisaged on specific categories of supply ofgoods or services, or both as notified by the Central Government. TheHtax on reverse charge basis is payable by the recipient of such goodsor services, or both. The power, in other words, is to specify categoriesof goods or services (or both). The provision does not empower thegovernment to specify the recipient of the supply of goods or services.The unamended Sub-section (4) of Section 5[85] provided that the tax inrespect of the supply of goods or services by an unregistered supplier,shall be paid on reverse charge basis by specified registered person,as the recipient of such supply of goods or services. The above provisionsread as follows:

“(3) The Government may, on the recommendations of the Council,by notification, specify categories of supply of goods or servicesor both, the tax on which shall be paid on reverse charge basis bythe recipient of such goods or services or both and all the provisionsof this Act shall apply to such recipient as if he is the person liablefor paying the tax in relation to the supply of such goods or servicesor both.

(4) The integrated tax in respect of the supply of taxable goods orservices or both by supplier, who is not registered, to registeredperson shall be paid by such person on reverse charge basis asthe recipient and all the provisions of this Act shall apply to suchrecipient as if he is the person liable for paying the tax in relationto the supply of such goods or services or both.”

65. On 28 June 2017, the Central Government issued Notification8/2017, in exercise of its powers under Section 5(1), Section 6(1) andSection 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:

85 Sub-Section 4 of Section 5 was amended by The Integrated Goods and Services Tax

(Amendment) 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 class of registered persons who shall, in respect of supply of specifiedcategories of goods or services or both received from an unregistered supplier, pay thetax 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 personliable for paying the tax in relation to such supply of goods or services or both.”

ABC

By Entry 9(ii) of Notification 8/2017, an integrated tax of 5 percent was levied on supply of specified services, including transportationof goods in vessel from place outside India up to the customs stationof clearance in India.

66. On 28 June 2017, Notification 10/2017 was issued by theECentral Government in exercise of powers conferred by Section 5(3) ofthe IGST Act. Notification 10/2017 specified the importer as the recipientof transportation of service when the supplier is location in non-taxableterritory and the service of transportation is supplied by person in anon-taxable territory. Entry 10 of Notification 10/2017 states the following:

Thus, Entry 10 of Notification 10/2017 deems an importer of goodsas the ‘recipient of service’ of transportation of goods by foreignHshipping line.

67. Both the impugned notifications, Notification 8/2017 andNotification 10/2017, have been challenged as ultra vires the IGST Act.Before adverting to the challenges raised by the parties, it becomesnecessary to advert to some of the key provisions contained in the CGSTAct, IGST Act and Customs Act. These provisions are necessary torespond to several contentions raised by the respondents, including: (i)whether the taxable event stipulated by the impugned notificationsconstitutes ‘supply’ under the IGST Act; (ii) whether the importer ofgoods on CIF basis can be deemed to be the ‘recipient’ of shippingservices when they do not pay the consideration; and (iii) whether theimport of goods constitutes composite supply, among others.68. The provisions of the IGST Act apply to the whole of India asprovided under Section 1. Section 5 of the IGST Act is the chargingsection. Sub-section (1) of Section 5 provides that the levy of IGST shallbe paid by the taxable person. The term ‘taxable person’ is defined inSection 2(107) of the CGST Act:

“(107) “taxable person” means person who is registered or liableto 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 therecipient of supply of goods or services or both instead of thesupplier of such goods or services or both under sub-section (3)or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services TaxAct;”

As defined in the above clause, under the reverse chargemechanism, the liability to pay is on the recipient of the supply of goodsor services, as opposed to the supplier of goods or services. Section24(iii) of the CGST Act provides for compulsory registration of “personswho are required to pay tax under the reverse charge”.

“24. Compulsory registration in certain cases.—Notwithstandinganything contained in sub-section (1) of Section 22, the followingcategories of persons shall be required to be registered under thisAct,—

(i) persons making any inter-State taxable supply;

(ii) casual taxable persons making taxable supply;

406SUPREME COURT REPORTS

[2022] 9 S.C.R.

A(iii) persons who are required to pay tax under reversecharge;

(xii) such other person or class of persons as may be notifiedby the Government on the recommendations of theBCouncil.”

(emphasis supplied)

70. Section 2 (105) of the CGST Act defines the ‘supplier’ inrelation to goods or services as:C“(105) “supplier” in relation to any goods or services or both, shallmean the person supplying the said goods or services or both andshall include an agent acting as such on behalf of such supplier inrelation to the goods or services or both supplied;”

71. Section 2(93) of the CGST Act defines the ‘recipient’ of supplyDof goods or services or both and provides:

“(93) “recipient” of supply of goods or services or both, means—

(a) where consideration is payable for the supply of goods orservices or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, theEperson to whom the goods are delivered or made available, or towhom possession or use of the goods is given or made available;and

(c) where no consideration is payable for the supply of service,the person to whom the service is rendered,Fand any reference to person to whom supply is made shall beconstrued as reference to the recipient of the supply and shallinclude an agent acting as such on behalf of the recipient in relationto the goods or services or both supplied;”

G72. Sections 2(14) and 2(15) of the IGST Act define the locationof the recipient of services and the supplier of services as follows:

“(14) “location of the recipient of services” means,––

(a) where supply is received at place of business for whichthe registration has been obtained, the location of such place ofHbusiness;

(b) where supply is received at place other than the place ofbusiness for which registration has been obtained (a fixedestablishment elsewhere), the location of such fixed establishment;

(c) where supply is received at more than one establishment,whether the place of business or fixed establishment, the locationof the establishment most directly concerned with the receipt ofthe supply; and

(d) in absence of such places, the location of the usual place ofresidence of the recipient;

(15) “location of the supplier of services” means,––

(a) where supply is made from place of business for whichthe registration has been obtained, the location of such place ofbusiness;

(b) where supply is made from place other than the place ofbusiness for which registration has been obtained (a fixedestablishment elsewhere), the location of such fixed establishment;

(c) where supply is made from more than one establishment,whether the place of business or fixed establishment, the locationof the establishment most directly concerned with the provisionof the supply; and

(d) in absence of such places, the location of the usual place ofresidence of the supplier;”

73. Chapter IV of the IGST Act determines the nature of thesupply. Section 7 of the IGST Act determines the nature of supply asinter-State supply, Section 8 provides for intra-State supply and Section9 provides for supplies in territorial waters.

74. Section 7 of the IGST Act lay down the conditions for supplyto be construed as an “inter-State supply”. The relevant provisions,particularly sub-Sections (3) and (4) of Section 7 are as follows:

“7. Inter-State supply.—(1) Subject to the provisions of Section10, supply of goods, where the location of the supplier and theplace of supply are in—

(a) two different States;

(b) two different Union territories; or

(c) State and Union territory,

[2022] 9 S.C.R.

Ashall be treated as supply of goods in the course of inter-Statetrade or commerce.

(3) Subject to the provisions of Section 12, supply of services,where the location of the supplier and the place of supply are in—B

(a) two different States;

(b) two different Union territories; or

(c) State and Union territory,

Cshall be treated as supply of services in the course of inter-Statetrade or commerce.

(4) Supply of services imported into the territory of Indiashall be treated to be supply of services in the course ofinter-State trade or commerce.”

(emphasis supplied)

75. The term ‘supply’ has been defined in the IGST Act withreference to the CGST Act. Section 2(21) of the IGST Act providesthat:

“(21) “supply” shall have the same meaning as assigned to it inEsection 7 of the Central Goods and Services Tax Act”

Section 7(1) of the CGST Act provides that:

“7. Scope of supply.

(1) For the purposes of this Act, the expression “supply” includes—

F(a) all forms of supply of goods or services or both such as sale,transfer, barter, exchange, licence, rental, lease or disposal madeor agreed to be made for consideration by person in the courseor furtherance of business;

G[(aa) the activities or transactions, by person, other than anindividual, 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 clarifiedthat, notwithstanding anything contained in any other law for thetime being in force or any judgment, decree or order of any Court,H

tribunal or authority, the person and its members or constituentsshall be deemed to be two separate persons and the supply ofactivities or transactions inter se shall be deemed to take placefrom one such person to another;]

[(b) import of services for consideration whether or notin the course or furtherance of business; [and]

(c) the activities specified in Schedule I, made or agreed tobe made without consideration;”

(emphasis supplied)

The term ‘taxable territory’ is defined in Section 2(22) of the IGSTAct to mean the “territory to which the provisions of this Act [IGSTAct] apply”.

76. Section 13 of the IGST Act deals with determining the placeof supply of services where the location of supplier or location of recipientis outside India:

“13. Place of supply of services where location of supplier orlocation of recipient is outside India.—

(1) The provisions of this section shall apply to determine theplace of supply of services where the location of the supplier ofservices or the location of the recipient of services is outside India.

(2) The place of supply of services except the servicesspecified in sub-sections (3) to (13) shall be the location ofthe recipient of services:

Provided that where the location of the recipient of services is notavailable in the ordinary course of business, the place of supplyshall be the location of the supplier of services.

(3) The place of supply of the following services shall be thelocation where the services are actually performed, namely:—

(6) Where any services referred to in sub-section (3) or sub-section (4) or sub-section (5) is supplied at more than one location,including location in the taxable territory, its place of supply shallbe the location in the taxable territory.

A(9) The place of supply of services of transportation of goods,other than by way of mail or courier, shall be the place ofdestination of such goods.

(10) The place of supply in respect of passenger transportationservices shall be the place where the passenger embarks on theBconveyance for continuous journey.

(12) The place of supply of online information and database accessor retrieval services shall be the location of the recipient of services.

Explanation.—For the purposes of this sub-section, personreceiving such services shall be deemed to be located in the taxableCterritory, if any two of the following non-contradictory conditionsare satisfied, namely:—

(a) the location of address presented by the recipient of servicesthrough internet is in the taxable territory;

D(b) the credit card or debit card or store value card or chargecard or smart card or any other card by which the recipient ofservices settles payment has been issued in the taxable territory;

(c) the billing address of the recipient of services is in the taxableterritory;

E(d) the internet protocol address of the device used by the recipientof services is in the taxable territory;

(e) the bank of the recipient of services in which the accountused for payment is maintained is in the taxable territory;

F(f) the country code of the subscriber identity module card usedby the recipient of services is of taxable territory;

(g) the location of the fixed land line through which the service isreceived by the recipient is in the taxable territory.

(13) In order to prevent double taxation or non-taxation of theGsupply of service, or for the uniform application of rules, theGovernment shall have the power to notify any description ofservices or circumstances in which the place of supply shall bethe place of effective use and enjoyment of 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 inthe 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 ofthe CGST Act, while the value of taxable supply is determined underSection 15 of the CGST Act.

78. Section 13 of the CGST Act states that the liability to pay taxon services arises at the time of supply. Sub-section (3) of Section 13provides for the time of supply when tax is paid on reverse chargebasis:

“13. Time of supply of services.

(3) In case of supplies in respect of which tax is paid or liable tobe paid on reverse charge basis, the time of supply shall be theearlier of the following dates, namely:—

(a) the date of payment as entered in the books of account of therecipient or the date on which the payment is debited in his bankaccount, whichever is earlier; or

(b) the date immediately following sixty days from the date ofissue of invoice or any other document, by whatever name called,in lieu thereof by the supplier:

Provided that where it is not possible to determine the time ofsupply under clause (a) or clause (b), the time of supply shall bethe date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by associated enterprises,where the supplier of service is located outside India, the time ofsupply shall be the date of entry in the books of account of therecipient of supply or the date of payment, whichever is earlier.”

Sub-section (5) of Section 13 provides for the time of supply whenit cannot be determined under sub-Section (2), (3) or (4):

“(5) Where it is not possible to determine the time of supply underthe provisions of sub-section (2) or sub-section (3) or sub-section(4), the time of supply shall—

(a) in case where periodical return has to be filed, be the dateon which such return is to be filed; or

(b) in any other case, be the date on which the tax is paid.”

79. Section 15 of the CGST Act provides for the determination ofthe value of taxable supply. Sub-section (1) provides that the value ofBsupply of goods or services shall be the transaction value; sub-section(2) provides that the value of supply shall include taxes, duties, fees etc.charged separately under the goods and services tax regime, incidentalexpenses, interest, late fee penalty, etc. Sub-sections (4) and (5) providefor the value of the supply of goods or services if it cannot be determinedCunder sub-section (1).

“15. Value of taxable supply.—(1) The value of supply of goodsor services or both shall be the transaction value, which is theprice actually paid or payable for the said supply of goods orservices or both where the supplier and the recipient of the supplyDare not related and the price is the sole consideration for the supply.

(4) Where the value of the supply of goods or services or bothcannot be determined under sub-section (1), the same shall bedetermined 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 theGovernment on the recommendations of the Council shall bedetermined in such manner as may be prescribed.”

FD.2 Do the impugned notifications suffer from excessivedelegation?

80. Article 286(1) stipulates that the State shall not levy tax whenthe supply of goods or services takes place outside the State or in thecourse of import or export of goods or services from the territory ofGIndia. Clause (2) of Article 286 states that Parliament may by lawformulate principles for determining when there is supply of goods orservices as prescribed by clause (1):

“286(1): No law of State shall impose, or authorize the impositionof, tax, or authorize the imposition of, tax on the supply ofgoods 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, orexport of the goods or services or both out of, the territory ofIndia.

(2) Parliament may by law formulate principles for determiningwhen supply of goodsor of services or both in any of the waysmentioned in clause (1).”

81. Article 269A provides that GST on supplies in the course ofinter-state trade or commerce shall be levied and collected by the UnionGovernment. The manner of apportionment between the Union and theStates has to be provided by Parliament on the recommendations of theGST Council. The explanation to Article 269A(1) states that supply ofgoods or services in the course of import shall be deemed to be supply inthe course of inter-State trade or commerce. Clause (5) provides thatParliament may by law formulate principles for determining the place ofsupply and when the supply of goods or services takes place in thecourse of inter-state trade or commerce:

“269A. (1) Goods and services tax on supplies in the courseof inter-State trade or commerce shall be levied andcollected by the Government of India and such tax shall beapportioned between the Union and the States in the manneras may be provided by Parliament by law on therecommendations of the Goods and Services Tax Council.

Explanation — For the purposes of this clause, supply ofgoods, or of services, or both in the course of import intothe territory of India shall be deemed to be supply of goods,or of services, or both in the course of inter-State trade orcommerce.

(5) Parliament may, by law, formulate the principles for determiningthe place of supply, and when supply of goods, or of services, orboth takes place in the course of inter-State trade or commerce.”

(emphasis supplied)

82. Articles 269A stipulates that Parliament may by law formulateprinciples for determining: (a) the place of supply and; (b) when the

Asupply of goods or services or both takes place in the course of inter-State trade or commerce. Article 286(1) empowers Parliament toformulate the principles by law for determining when supply of goodsor services, or both, takes place (a) outside the state; and (b) in thecourse of import into or export outside the territory of India. Parliamentenacted the IGST Act prescribing the principles as required under ArticlesB269A and 286(1). The provisions of the IGST Act deal with the levy andcollection of tax (Section 5(1)), export of goods and services (Section2(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-StateCsupply (Section 7), supplies in territorial waters (Section 9), place ofsupply with respect to import to India and export from India (Section11), and place of supply of services where the location of the supplierand recipient is in India and outside India (Sections 12 and 13).

83. The contention of the respondents is that Section 5(3) of theDIGST Act only delegates the power to identify the categories of goodsor services on which the tax shall be paid on reverse charge basis. It iscontended that since Notification 10/2017 identifies an importer as aservice recipient for the purposes of Section 5(3), it is ultra vires theparent Act on the ground of excessive delegation.

E84. The legislature is required to perform its essential legislativefunctions. Once the skeletal structure of the policy is framed by thelegislature, the details can emerge through delegated legislations.[86] It isa settled position that the legislature cannot delegate its ‘essentiallegislative functions’.[87] The essential legislative functions with respectto the GST law are the levy of tax, subject matter of tax, taxable person,Frate of taxation and value for the purpose of taxation. The principlesgoverning these essential aspects of taxation find place in the IGST Act:Section 5(1) identifies the subject matter of taxation as inter-State suppliesof goods, services or both; Section 2(107) of the CGST Act identifies ataxable person; Section 5(1) provides maximum cap of 40% as theGrate of taxation; and Section 5(1) stipulates that the value of taxation bedetermined under Section 15 of the CGST Act.

86 Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills, AIR1968 SC 1232; Avinder Singh v. State of Punjab, 1979 1 SCC 137

87 In re Delhi Laws Act 1912, AIR 1951 SC 332; Edward Mills Co. Ltd. v. State ofHAjmer, AIR 1955 SC 25; A.N Parasaran v. State of Tamil Nadu, (1989) 4 SCC 683

85. Section 2(98) of the CGST Act defines “reverse charge” asthe liability of the recipient of the supply of goods or services or both topay tax instead of the supplier. Section 2(93) of the CGST Act defines“recipient” with reference to three situations (i) when consideration ispayable for the supply of goods or services or both; (ii) when noconsideration is payable for the supply of goods; and (iii) when noconsideration is payable for the supply of services. In the first situation,the recipient is the person by whom consideration is payable. In thesecond situation, the recipient is the person to whom (a) the goods aredelivered or made available; or (b) possession or the use of the goods isgiven or made available. The CGST Act also stipulates two-foldrequirement for recipient to be taxed on reverse charge basis- therecipient must be ‘person’ as defined under Section 2(84) of the CGST;and the person is “taxable person” only if registered or is liable to beregistered under Section 22 or Section 24. Section 24(iii) of the CGSTAct states that persons who are required to pay tax under reverse chargemust be registered. Therefore, both the IGST and CGST Act clearlydefine reverse charge, recipient and taxable persons. Thus, the essentiallegislative functions vis-à-vis reverse charge have not been delegated.

86. Section 5(3) of the IGST Act provides the Government thepower to specify categoriesof supply of goods or services or both onwhich tax shall be paid on reverse charge basis by the recipient. TheGovernment is to exercise this power on the recommendation of theGST Council. The Government in exercise of its power under Section5(3) of the IGST Act issued the impugned Notification 10/2017 specifyingthe ‘categories of the supply’ which shall be subject to reverse charge.The notification, besides specifying the criteria, has also mentioned thecorresponding recipient in those categories. As discussed above, theIGST Act and the CGST Act define reverse charge and prescribe theentity that is to be taxed for these purposes. Therefore, the stipulation ofthe recipient in each of the categories is only clarificatory. TheGovernment by notification did not specify taxable entity different fromthat which is prescribed in Section 5(3) of the IGST Act for the purposesof reverse charge.

D.3 Charging Section: taxable person, taxable rate andmanner of determining value

87. In determining the vires of the impugned notifications, fewpreliminary contentions raised by the respondents would have to be

Aaddressed. The respondents have argued that no charge has been createdfor the ocean freight transaction to be taxed in the hands of the importer.It has been alleged that only Section 5(1) is charging provision andSections 5(3) and 5(4) cannot independently create charge.

88. In assessing this claim, this Court is bound by decision of theBConstitution Bench in Mathuram Agrawal (supra) which has identifiedthree essential elements of taxation:

(i)The subject of the tax;

(ii)The person who is liable to pay the tax; and

(iii)The rate at which the tax is to be paid.

This test has been further elaborated by two-judge Bench ofthis Court in Gobind Saran Ganga Saran (supra) by further requiringthe designation of the measure or the value to which the rate of the taxwill be applied. Thus, the four canons of taxation are as follows:

(i)The taxable event;D

(ii)The person on whom the levy is imposed;

(iii)The rate at which the levy is imposed; and

(iv)The measure or the value to which the rate will be applied.

89. Section 5(1) of the IGST Act specifically identifies the fourEcanons of taxation: (i) the inter-State supply of goods and services asthe taxable event; (ii) the “taxable person” as the person on whom thelevy is imposed; (iii) the taxable rate as such rate notified by the UnionGovernment on the recommendation of the GST Council, capped at fortyper cent; and (iv) the taxable value as the value determined under Section15 of the CGST Act.F

90. Section 5(3) and Section 5(4) of the IGST Act are inextricablylinked with Section 5(1) of the IGST Act which is the charging provision.They must be construed together in determining the vires of the taxation.In CIT v. Srinivas Setty[88], three-judge Bench of this Court hasheld that the machinery provisions of an Act and the charging sectionsGare inextricably linked. The Court observed:

“A transaction to which those provisions cannot be applied mustbe regarded as never intended by Section 45 to be the subject ofthe charge. This inference flows from the general arrangement

of the provisions of the Income Tax Act, where under each headof income the charging provision is accompanied by set ofprovisions for computing the income subject to that charge. Thecharacter of the computation provisions in each case bearsa relationship to the nature of charge. Thus the chargingsection and the computation provisions together constitutean integrated code. When there is case to which thecomputation provisions cannot apply at all, it is evident that such acase was not intended to fall within the charging section.”

(emphasis supplied)

Taxable person

91. The respondents have alleged that the importer cannot bevalidly termed as taxable person. However, this argument has to failon close reading of the impugned notifications alongside Sections 2(107)and 24 of the CGST Act. Section 24(iii) of the CGST Act mandatespersons required to pay tax under reverse charge to be compulsorilyregistered under the CGST Act. Section 2(107) of the CGST Act definesa “taxable person” to mean person who is registered or liable to beregistered under Section 24 of the CGST Act. Neither Section 2(107)nor Section 24 of the CGST Act qualify the imposition of reverse chargeon “recipient of service” and broadly impose it on “the persons whoare required to pay tax under reverse charge”. Since the impugnednotification 10/2017 identifies the importer as the recipient liable to paytax on reverse charge basis under Section 5(3) of the IGST Act, theargument of the failure to identify specific person who is liable to paytax does not stand.92. The decision in Laghu Udyog (supra), rendered by two-judge Bench of this Court, invalidated certain service tax rules formulatedunder the Finance Act 1997 to give effect to the collection of servicetax. Section 66 read with Section 68(1)(a) of the Finance Act 1997specifically identified the taxable person to include only those personsresponsible for collecting the service tax. The rules had sought to effecta reverse charge by identifying the customers of goods transport operatorsand of clearing and forwarding agents as the assessee, even thoughthey were not responsible for collecting the service tax. The basis fornullifying the rules was that the Finance Act 1997 did not enable theimposition of such reverse charge on the person who is not supplyingthe service. The Court held:

A“9. Section 68(1-A) is special provision which has been insertedby the Finance Act, 1997. According to Section 68(1) “everyperson who was providing the taxable service is the one who isrequired to collect the service tax at the rate specified in Section66”. With respect to the taxable services referred in Items (g) to(r) of clause (41) of Section 65, Section 68(1-A) provides that theBservice tax for such service shall be collected from such personand in such manner as may be prescribed and to such person allthe provisions shall apply as if he is the person responsible forcollecting the service tax in relation to such service. As we readSection 68 it does not in any way seek to alter or change theCcharge of service tax levied under Section 66, which is on theperson responsible for collecting the service tax. It also does notto our mind, in any way, amend any of the clauses of Section 65which contain the definitions of different expressions. All thatSection 68(1-A) enables to be done is that with regard to theassessees or the persons who are responsible for collecting theDservice tax, the individual or the officer concerned can be identifiedand it is that person who would be person responsible forcollecting the service tax. In other words this provision, namely,Section 68(1-A) cannot be so interpreted as to make aperson an assessee even though he may not be responsibleEfor collecting the service tax. The service tax is levied byreason of the services which are offered. The imposition ison the person rendering the service. Of course, it may bean indirect tax; it may be possible that the same is passedon to the customer but as far as the levy and assessmentare concerned it is the person rendering the service whoFalone can be regarded as an assessee and not the customer.This is the only way in which the provisions can be readharmoniously.

10. By amending the definition of “person responsible for collectingof service tax” in the impugned rules with regard to servicesprovided by the clearing and forwarding agents and the goodstransport operator person responsible is said to be the client orthe customer of the clearing and forwarding agents and the goodstransporter. 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 thedefinition of that expression occurring in Section 65 of the Act.However, with regard to the services rendered by the clearingand forwarding agents and the goods transport operator thedefinitions contained in Rule 2(d)(xii) and (xvii), which seek tomake the customers or the clients as the assessee, are clearly inconflict with Sections 65 and 66 of the Act.”

(emphasis supplied)

The decision in Laghu Udyog (supra) has no applicability to thefacts of the present case since Parliament has statutorily incorporatedthe concept of reverse charge under Sections 5(3) and 5(4) of theIGST Act. The impugned notification 10/2017 clearly specifies taxableperson who is liable to pay reverse charge that is envisaged in thestatute. Thus, the impugned notifications cannot be invalidated for analleged failure to identify taxable person.

Taxable value

93. By corrigendum dated 8 June 2016, Notification 8/2017 wasamended to include the measure of taxable value to be ten per cent ofthe CIF value. Section 5(1) of the IGST Act enables the taxable value tobe determined under Section 15 of the CGST Act. The respondentshave argued that the value has to be strictly determined by Section 15(1)[89]of the CGST Act and not by way of delegated legislation. However,Sections 15(4) and 15(5) enable delegated legislation to prescribe methodsfor determination of value, on the recommendations of the GST Council.Section 15 is extracted below :

“Section 15- Value of Taxable Supply:

(4) Where the value of the supply of goods or services or bothcannot be determined under sub-section (1), the same shall bedetermined in such manner as may be prescribed.

89 “Section 15: Value of Taxable Supply- (1) The value of supply of goods or servicesor both shall be the transaction value, which is the price actually paid or payable for thesaid supply of goods or services or both where the supplier and the recipient of thesupply are not related and the price is the sole consideration for the supply.”

A(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by theGovernment on the recommendations of the Council shall bedetermined in such manner as may be prescribed.”

Rules 27 to 31 of Chapter IV of the CGST Rules 2017, prescribeBthe manner of determining value of supply. Rule 31 also provides forresidual powers to the GST Council for prescribing modes of valuation.

“31. Residual method for determination of value of supply of goodsor services or both.— Where the value of supply of goods orservices or both cannot be determined under Rules 27 to 30, thesame shall be determined using reasonable means consistent withCthe principles and the general provisions of Section 15 and theprovisions of this Chapter:

Provided that in the case of supply of services, the supplier mayopt for this rule, ignoring Rule 30.”

D94. The respondents have urged that the determination of thevalue of supply has to be specified only through rules, and not bynotification. However, this would be an unduly restrictive interpretation.Parliament has provided the basic framework and delegated legislationprovides necessary supplements to create workable mechanism. Rule31 of the CGST Rules 2017 specifically provides for residual power toEdetermine valuation in specific cases, using reasonable means that areconsistent with the principles of Section 15 of the CGST Act. This iswhere the value of the supply of goods cannot be determined inaccordance with Rules 27 to 30 of the CGST Rules 2017. Thus, theimpugned notification 8/2017 cannot be struck down for excessivedelegation when it prescribes 10 per cent of the CIF value as theFmechanism for imposing tax on reverse charge basis.D.4 Taxable event: Is an ocean freight transaction for importof goods valid category of supply of services under Section 5(3)of IGST Act?

G95. The other limb for contesting the validity of the impugnednotification is with respect to its identification of “taxable event”. Thequestion that falls for the determination is whether the impugnednotifications issued in 2017, under Section 5(3) of the IGST Act, validlyprescribe taxable event that constitutes an inter-State supply of goodsand services with the importer being recipient of shipping services inHCIF transactions.

96. The analysis of whether import of goods under CIF contractsconstitutes valid import of service has to be answered on two prongs:(i) whether classification of imports as specific category of supply ofshipping service is valid under Section 5(3) read with Section 5(1) ofthe IGST Act; and (ii) whether the recipient of the imported goods isalso recipient of shipping services in CIF transactions under Section5(3).

D.4.(a) Do imported goods procured on CIF basisconstitute an inter-state supply or is it an extra-territorial tax?

97. Notification 8/2017 specifically delineates the service that isaccompanied with the transportation of goods from non-taxable territoryas specified category of service under Section 5(3) of the IGST Act.This categorization taxes the recipient of such transportation service ona reverse charge basis. The respondents have argued that the supply ofservice of shipping in CIF contract is from the foreign shipping line tothe foreign exporter. It is alleged that this transaction has no territorialnexus to India and does not constitute “supply” that can be taxed withinthe meaning of the CGST Act and IGST Act.

98. We shall now advert to certain key provisions relevant todetermine whether the taxable event in the present case that is, “servicessupplied by person located in non-taxable territory by way oftransportation of goods by vessel from place outside India up to thecustoms station of clearance in India” constitutes an ‘inter-State supply’for the purposes of the charging Section 5(1) of the IGST Act, read withSections 5(3) and the unamended Section 5(4).

99. Section 5(1) levies IGST on all “inter-state supplies” of goodsor services or both. Section 5(3) of the IGST Act confers power on theCentral Government, on the recommendation of the GST Council, tospecify categories of supply of goods or services or both where the taxshall be paid on reverse charge basis by the recipient. While analysingthe respondents’ contention, it is important to contextualize the purposeof GST and the constitutional amendment to effect it. In moderncommerce, the distinction between goods and services is increasinglybecoming matter of degree than substance. GST seeks to focus on thetaxation of “supply” of goods or services. The provisions of the IGSTand CGST Act focus on implementing workable machinery to adequatelycapture the complexities of supply in global and digital age.

422SUPREME COURT REPORTS

100. The term ‘supply’ has been defined in the IGST Act withreference to the CGST Act. Section 2(21) of the IGST Act providesthat:

“(21) “supply” shall have the same meaning as assigned to it insection 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 madeor agreed to be made for consideration by person in the courseor furtherance of business;

[(aa) the activities or transactions, by person, other than anindividual, 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 clarifiedthat, notwithstanding anything contained in any other law for thetime being in force or any judgment, decree or order of any Court,tribunal or authority, the person and its members or constituentsshall be deemed to be two separate persons and the supply ofactivities or transactions inter se shall be deemed to take placefrom one such person to another;]

[(b) import of services for consideration whether or notin the course or furtherance of business; [and]

(c) the activities specified in Schedule I, made or agreed tobe made without consideration;

(3) Subject to the provisions of sub-sections (1), (1-A) and (2),the Government may, on the recommendations of the Council,specify, by notification, the transactions that are to be treated as—

(a) supply of goods and not as supply of services; or

(b) supply of services and not as supply of goods.”

(emphasis supplied)

Further, Section 7 of the IGST Act defines the scope of inter-State supply. Section 7(4) of the IGST Act states that “supply of servicesimported into the territory of India shall be treated to be supply ofservices in the course of inter-State trade or commerce”:

“7. Inter-State supply.—

(1) Subject to the provisions of Section 10, supply of goods, wherethe location of the supplier and the place of supply are in—

(a) two different States;

(b) two different Union territories; or

(c) State and Union territory,

shall be treated as supply of goods in the course of inter-Statetrade or commerce.

(2) Supply of goods imported into the territory of India, till theycross the customs frontiers of India, shall be treated to be supplyof goods in the course of inter-State trade or commerce.

(3) Subject to the provisions of Section 12, supply of services,where the location of the supplier and the place of supply are in—

(a) two different States;

(b) two different Union territories; or

(c) State and Union territory,

shall be treated as supply of services in the course of inter-Statetrade or commerce.

(4) Supply of services imported into the territory of Indiashall be treated to be supply of services in the course ofinter-State trade or commerce.

(emphasis supplied)

101. Section 7 of the CGST Act defines the term “supply” with abroad brush and provides for an inclusive definition. Section 7(1)(b) ofthe CGST Act considers import of services for consideration toconstitute “supply”. Section 7(1)(c) of the CGST Act captures any andall activities in Schedule 1 of the CGST Act, irrespective of whether

Athey are made for consideration. Additionally, Section 7(3) confers thepower on the Central Government to specify which transactions are tobe treated as supply of goods and not supply of services, and vice-versa. Section 7(4) of the IGST Act states that supply of servicesimported into India would be considered as supply of services in thecourse of “inter-State trade or commerce”. Thus, an Indian importerBcould also be considered as an importer of the service of shipping whichis liable to IGST on inter-state supply, if the activity falls within thedefinition of “import of service” for the IGST Act and CGST Act.102. The term ‘importer’ is not defined in the IGST Act or theCGST Act. Section 2(26) of the Customs Act defines an ‘importer’ as:C“(26) “importer”, in relation to any goods at any time betweentheir importation and the time when they are cleared for homeconsumption, includes [any owner, beneficial owner] or any personholding himself out to be the importer”

DThe term ‘import of goods’ is defined in Section 2(10) of the CGSTAct as:

“(10) “import of goods” with its grammatical variations and cognateexpressions, means bringing goods into India from place outsideIndia”

E“Import of services” is defined in Section 2(11) of the CGST Act as:“(11) ‘‘import of services” means the supply of any service,where––

(i) the supplier of service is located outside India;F(ii) the recipient of service is located in India; and

(iii) the place of supply of service is in India;”

The conditions for an “import of service” would entail threeaspects: (i) the supplier of service must be located outside India; (ii) therecipient of the service must be located in India; and (iii) the place ofGsupply of service ought to be in India. The respondents have argued thatconditions (ii) and (iii) are not satisfied in the case of CIF contracts sincethe recipient of shipping services would be the foreign exporter and theplace of supply would be the place of business of such foreign exporter.However, in interpreting the expressions “recipient” and “place of supply”,Hthis Court would have to analyse these terms vis-à-vis the IGST Act and

the CGST Act and not exclusively from the provisions of the contractbetween the foreign exporter and the foreign shipping line.

103. Chapter V of the IGST Act provides for methodologies todetermine the place of supply of goods or services or both. Section 13 ofthe IGST Act provides the place of supply of services where the locationof the supplier or location of recipient is outside India:

“13. Place of supply of services where location of supplier orlocation of recipient is outside India-—

(1) The provisions of this section shall apply to determine theplace of supply of services where the location of the supplier ofservices or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specifiedin sub-sections (3) to (13) shall be the location of the recipient ofservices:

Provided that where the location of the recipient of services is notavailable in the ordinary course of business, the place of supplyshall be the location of the supplier of services.

(9) The place of supply of services of transportation ofgoods, other than by way of mail or courier, shall be theplace of destination of such goods.”

(emphasis supplied)

Section 13(9) of the IGST Act appears to create deeming fiction,where in case of supply of services of transportation of goods by asupplier located outside India, the place of supply would be the place ofdestination of such goods. The supplier, the foreign shipping line, in thiscase would be non-taxable person. However, its services in CIFcontract for transport of goods would enter Indian taxable territory asthe destination of such goods. The place of supply of shipping service bya foreign shipping line, would thus be India.

104. The respondents argued that since Section 7(1)(b) of theCGST Act does not define “supply” of import of service withoutconsideration, other than the ones specified in Schedule 1, this would beinapplicable to importers with CIF contracts as the consideration is paidby the exporter. Thus, the importer of goods cannot be said to be an

Aimporter of shipping service since the latter is not an import of servicefor consideration under Section 7(1)(b) of the CGST Act. However,this argument misses out on some crucial definitions. The term ‘supply’has been defined in the IGST Act with reference to the CGST Act.Thus, the three conditions for “import of services” under Section 2(11)(iii)must be understood with reference to the provisions of the CGST andBIGST Acts, including the provisions for determination of place of supplyunder Section 13(9) of the IGST Act. As mentioned previously, Section13(9) of the IGST Act creates deeming fiction of place of supply oftransportation services to be in India when the destination of goods is inIndia. In this case, it is clear the supplier of service- the foreign shippingCline - is located outside India; and the place of supply is India. Accordingly,Section 13 of the CGST Act would be applicable to determine the timeof such supply.

105. The respondents have argued that the ocean freighttransaction cannot be considered as “supply” since Section 7(1)(b) ofDthe IGST act requires the import of service to be for “consideration”.The definition of “consideration” in Section 2(31) of the CGST Act isinstructive:

“(31) “consideration” in relation to the supply of goods or servicesor both includes—

E(a) any payment made or to be made, whether in money orotherwise, in respect of, in response to, or for theinducement of, the supply of goods or services or both,whether by the recipient or by any other person but shall notinclude any subsidy given by the Central Government or StateFGovernment;

(b) the monetary value of any act or forbearance, in respect of, inresponse to, or for the inducement of, the supply of goods orservices or both, whether by the recipient or by any other personbut shall not include any subsidy given by the Central Governmentor State Government:G

Provided that deposit given in respect of the supply of goods orservices or both shall not be considered as payment made forsuch supply unless the supplier applies such deposit asconsideration for the said supply;”

(emphasis supplied)

Thus, Section 2(31) of the CGST Act defines ‘consideration’ toinclude payment made or to be made, in money or any other form, forthe inducement of supply of goods or services to be made by the recipientor by any other person. Thus, in the case of goods imported on CIFbasis, the fact that consideration is paid by the foreign exporter to theforeign shipping line would not stand in the way of it being considered asa “supply of service” under Section 7(4) of the IGST Act which is madefor consideration, thereby constituting “supply of service” in the courseof inter-state trade or commerce that can be subject to IGST underSection 5(1) of the IGST Act.

106. At this stage, we note that the respondents have alsochallenged the impugned levy on the ground that the transaction takesplace beyond the territory of India and is thus, extra territorial in nature.Mr Arvind Datar and Mr Harish Salve, learned senior counsel haveurged that the service of transportation occurs outside India, that is outsidethe taxable territory and bears nexus with India only as the destinationof goods is India. However, the submission is that since the import ofgoods is taxed under Section 5(1) as ‘supply of goods’, there remains noterritorial nexus of the transportation service with the Indian territory.An extension of this argument is that in case Parliament seeks to levy atax outside its territory, it makes deeming fiction in the statute and notby way of delegated legislation.107. Constitution Bench in GVK Industries (supra), consideredthe question whether Parliament is competent to enact legislation withregard to extra-territorial aspects of certain events. Answering thequestion in affirmative, Justice Sudarshan Reddy, speaking for theConstitution Bench, held:

“124. […]

The answer to the above would be yes. However, Parliamentmay exercise its legislative powers with respect to extra-territorialaspects or causes—events, things, phenomena (howsoevercommonplace they may be), resources, actions or transactions,and the like—that occur, arise or exist or may be expectedto do so, naturally or on account of some human agency, inthe social, political, economic, cultural, biological,environmental or physical spheres outside the territory ofIndia, and seek to control, modulate, mitigate or transform

Athe effects of such extra-territorial aspects or causes, or inappropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have,some impact on, or effect in, or consequences for: (a) theterritory of India, or any part of India; or (b) the interestsBof, welfare of, well-being of, or security of inhabitants ofIndia, and Indians.

125. It is important for us to state and hold here that the powersof legislation of Parliament with regard to all aspects or causesthat are within the purview of its competence, including withCrespect to extra-territorial aspects or causes as delineated above,and as specified by the Constitution, or implied by its essentialrole in the constitutional scheme, ought not to be subjected tosome priori quantitative tests, such as “sufficiency” or“significance” or in any other manner requiring predeterminedDdegree of strength. All that would be required would be thatthe connection to India be real or expected to be real, andnot illusory or fanciful.

126. Whether particular law enacted by Parliament doesshow such real connection, or expected real connection,Ebetween the extra-territorial aspect or cause and somethingin India or related to India and Indians, in terms of impact,effect or consequence, would be mixed matter of factsand of law. Obviously, where Parliament itself posits degree ofsuch relationship, beyond the constitutional requirement that it bereal and not fanciful, then the courts would have to enforce suchFa requirement in the operation of the law as matter of that lawitself, and not of the Constitution:”

(emphasis supplied)

The decision in GVK Industries (supra) clearly recognises theGpower of Parliament to legislate over events occurring extra-territorially.The only requirement imposed by the Court is that such an event musthave real connection to India.

108. The impugned levy on the supply of transportation serviceby the shipping line to the foreign exporter to import goods into India hasa two-fold connection: first, the destination of the goods is India andH

thus, clear territorial nexus is established with the event occurringoutside the territory; and second, the services are rendered for the benefitof the Indian importer. Thus, the transaction does have nexus with theterritory of India.

109. As an alternative, the respondents submitted that though thelevy may have nexus with the Indian territory, the levy of tax extra-territorially must be provided by Parliament through statute and not bythe Union Government through delegated legislation. We do not find anyapplicability of this submission to the facts at hand. As stated above, theIGST Act under Section 13(9) recognises the place of supply of servicesas the destination of goods when the supplier is located outside India.Since the destination of goods is India, the statute itself is broad enoughto cover taxable event that has extra-territorial aspects, which bears anexus to India.110. In determining the vires of the impugned notifications, theonly question that falls for determination is whether the importer of goodscan be considered as the recipient of the service of shipping in CIFcontracts.

D.4.(b)Are importers service recipients under CIF contracts?

111. The impugned notification 8/2017, inter alia, identifies severalcategories of supply of services such as hotels, restaurants, transportationby rail/road/air and legal and accounting services. The respondents, asimporters of goods under CIF transactions, are aggrieved by the followingcategorization:

“Transport of goods in vessel including services provided oragreed to be provided by person located in non-taxable territoryto person located in non-taxable territory by way of transportationof goods by vessel from a, place outside India up to the customsstation of clearance in India up to the customs station of clearancein India.”

The respondents are aggrieved by the fact that this categorization,coupled with impugned notification 10/2017, deems the importer of goodsas the recipient of the service of shipping, irrespective of whether theimport of goods was on the basis of CIF or FOB contract.

112. Section 5(3) of the IGST Act enables taxation of the recipientsof certain specified categories of supply of services on reverse charge

Abasis. It is pertinent to note that the tax is payable “by the recipient” ofsuch services, in contradistinction to broad language such as “any personas may be prescribed” which was otherwise used in Section 98(2) ofthe Finance Act 1994 which taxed services. Section 5(3) states:

“(3) The Government may, on the recommendations of the Council,Bby notification, specify categories of supply of goods or servicesor both, the tax on which shall be paid on reverse charge basis bythe recipient of such goods or services or both and all theprovisions of this Act shall apply to such recipient as if he is theperson liable for paying the tax in relation to the supply of suchgoods or services or both…”C

(emphasis supplied)

The term “recipient” of supply of service has been exhaustivelydefined by Section 2(93) of the CGST Act:

“(93) “recipient” of supply of goods or services or both, means—D(a) where consideration is payable for the supply of goods orservices or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, theperson to whom the goods are delivered or made available, or towhom possession or use of the goods is given or made available;Eand

(c) where no consideration is payable for the supply of aservice, the person to whom the service is rendered,

and any reference to person to whom supply is madeFshall be construed as reference to the recipient of thesupply and shall include an agent acting as such on behalf of therecipient in relation to the goods or services or both supplied;”

(emphasis supplied)

Thus, the language employed in Section 2(93)(a) of the CGSTGAct clearly stipulates that when consideration is payable for the supplyof services, the recipient would mean the person who is liable to pay thatconsideration. However, when no consideration is payable for the supplyof service, Section 2(93)(c) states that the recipient shall be the personto whom the service is rendered. Further, Section 2(93) provides thatH“any reference to person to whom supply is made shall be construed

as reference to the recipient”. Hence, where the statute refers to aperson to whom supply is made, it has to be construed as referenceto the recipient of service.

113. In CIF transaction, the foreign exporter contracts with aforeign shipping line. The service of shipping is rendered by the foreignshipping line to the foreign exporter and the consideration is accordinglypayable by the latter to the former. The cost of such shipping may forma component of the price that is eventually charged to the importer,based on the negotiated terms. If an FOB contract were to be negotiated,the importer would independently avail of the service of shipping andpay for the consideration. The Union Government has argued that importof goods on CIF basis would be construed as import of services wheresub-clause (c) of Section 2(93) applies to determine the recipient. Therespondents have argued that the importer in CIF contract can beconsidered as recipient of the service only in colloquial sense. Themere destination of the service of shipping would not convert it into aservice vis-à-vis the importer without any elements of contract. Hence,they urge that in the absence of specific deeming provisions in the statute,over-arching principles of privity of contract are relevant for interpretingthe term “recipient” deployed in Section 5(3) of the IGST.

114. The Union Government has argued that Section 2 of theCGST Act is prefaced with the term “unless the context otherwiserequires”, and hence would enable taxation of the importer on reversecharge basis as the “recipient” of service under Section 2(93). However,this argument overlooks the context of Section 5(3) of the IGST Actwhich reiterates the taxable person to be the recipient of the service andonly enables the Union Government to notify categories of inter-statesupply of goods and services.

115. The Union Government has attempted to make far-fetchedargument that Section 24(iii) of the CGST Act mandating compulsoryregistration of persons liable to pay tax on reverse charge basis extendsto designating any person to pay the tax on reverse charge basis,irrespective of their status as either recipient or supplier of service.This argument inverts the identification of category of goods andservices under Section 5(3) and the recipient therein, who is then liableto compulsorily register themselves under Section 24(iii) of the CGSTAct. The power of the Central Government to designate persons andcategories of supply for reverse charge derives from Sections 5(3) and

A5(4) of the IGST Act and not Section 24(iii) of the CGST Act whichmandates the compulsorily registration as logical corollary to ensuretax collection. Section 2(98) of the CGST Act, which defines “reversecharge” reiterates that it means the “liability to pay tax by the recipientof supply of goods or services or both instead of the supplier…”. Itcannot be construed to imply that any taxable person identified forBpayment of reverse charge would automatically become the recipient ofsuch goods or service. The deeming fiction of treating the importer as arecipient must be found in the IGST Act. As it currently stands, Section5(3) of the IGST Act enables the delegated legislation to create deemingfiction on categories of supply of goods/services alone.C116. Interpreting the term “by the recipient” vis-à-vis the categoriesof goods and services identified in Section 5(3) of the IGST Act shouldnecessarily be governed by the principles governing the definition of“recipient” under Section 2(93) of the CGST Act. Contrary to thearguments of the Union Government, such an interpretation would notDannihilate the mandate of compulsory registration under Section 24(iii)of the CGST Act. It would be applicable to suitably worded provisions inthe CGST or IGST Act which permit the Central Government to identifya taxable person for reverse charge. In any event, it would be applicableto all the recipients liable for reverse charge under Sections 5(3) and5(4) of the IGST Act. The ineffectiveness of tax collection mechanismEunder Section 24(iii) of the CGST Act cannot be argued to obfuscate theconcept of “recipient” of good or service that is uniformly understoodacross the IGST Act, CGST Act and tax jurisprudence.

117. The Union Government has argued that the expression “bythe recipient” in Section 5(3) of the IGST Act does not impede theFauthority of the GST Council in making recommendations for issuanceof notifications for identifying such persons who shall be governed byreverse charge and once the identification is complete, such taxableperson would automatically be interpreted as “the recipient”. Thisargument requires the Court to completely discard the principles ofGdetermining the recipient of service and replace it with whichevertaxable person is identified. The appellant may argue for such aninterpretation to achieve favourable outcome in this case. However, inmatters of inter-state supply when the supplier and recipient are withinthe territory of India, this Court would have to follow this artificiallybifurcated interpretation which identifies recipients vis-à-vis the natureH

of service and supply in some cases, and by simple equation of theidentified taxable person in others without considering the literal andcontextual definition of recipient. This is against settled rules ofinterpretation and would be an act of judicial legislation. If Parliament’sintention were to designate certain persons for reverse charge,irrespective of them being the recipient of such goods and services, itmust make suitable amendment to confer such power for exercise ofdelegated legislation.

118. The only argument that supports the case of the appellant isthat of Section 13(9) of the IGST Act read together with Section 2(93)(c)of the CGST Act which defines “recipient”. As noted in Section D.4.(a)above, Section 13(9) of the IGST Act creates the deeming fiction ofplace of supply of service to be the destination of goods when they aretransported by means other than mail or courier. No specific exemptionsfor importers have been carved out. This Court is inclined to accept thisreasoning and read it into the definition of recipient in Section 2(93) ofthe CGST Act which is as follows:

“(93) “recipient” of supply of goods or services or both, means—

(a) where consideration is payable for the supply of goods orservices or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, theperson to whom the goods are delivered or made available, or towhom possession or use of the goods is given or made available;and

(c) where no consideration is payable for the supply of service,the person to whom the service is rendered,

and any reference to person to whom supply is madeshall be construed as reference to the recipient of thesupply and shall include an agent acting as such on behalf of therecipient in relation to the goods or services or both supplied;”

(emphasis supplied)

Since reference to person to whom supply is made, is areference to the recipient, the place of supply is critical. By virtue ofSection 13(9) of the IGST Act, the place of supply is the destination ofgoods. The time of supply is then determined through the provisions ofSection 13 of the CGST Act. Sections 2(14) and 2(15) of the IGST Act

Aalso define the location of the recipient and supplier of services withrespect to the physical location where the supply of services is made orreceived.

“(14) _location of the recipient of services means,––

(a) where supply is received at place of business for whichBthe registration has been obtained, the location of such place ofbusiness;

(b) where supply is received at place other than the placeof business for which registration has been obtained (a fixedestablishment elsewhere), the location of such fixed establishment;C(c) where supply is received at more than one establishment,whether the place of business or fixed establishment, the locationof the establishment most directly concerned with the receipt ofthe supply; and

D(d) in absence of such places, the location of the usual place ofresidence of the recipient;

(15) location of the supplier of services means,––

(a) where supply is made from place of business for whichthe registration has been obtained, the location of such place ofEbusiness;(b) where supply is made from place other than the place ofbusiness for which registration has been obtained (a fixedestablishment elsewhere), the location of such fixed establishment;

(c) where supply is made from more than one establishment,Fwhether the place of business or fixed establishment, the locationof the establishment most directly concerned with the provisionof the supply; and

(d) in absence of such places, the location of the usual place ofresidence of the supplier;”G

(emphasis supplied)

In such scenario, when the place of supply of services is deemedto be the destination of goods under Section 13(9) of the IGST Act, thesupply of services would necessarily be “made” to the Indian importer,who would then be considered as “recipient” under the definition ofH

Section 2(93)(c) of the CGST Act. The supply can thus be construed asbeing “made” to the Indian importer who becomes the recipient underSection 2(93)(c) of the CGST Act.

119. This conclusion comports with the philosophy of the GST tobe consumption and destinated based tax. The services of shipping areimported into India for the purpose of consumption that is routed throughthe import of goods. Although the consideration for shipping is payableby the foreign supplier to the foreign shipping line in CIF contracts, theprice is consequently factored into the price of the shipment. The ultimatebenefactor of the shipping service is also the importer in India who willfinally receive the goods at destination which is within the taxableterritory of India. Thus, the meaning of the term “recipient” in the IGSTAct will have to be understood within the context laid down in the taxingstatute (IGST and CGST Act) and not by strict application ofcommercial principles.120. Some of the respondents have argued that the possibility oftwo different recipients of services would create absurdities sincewhether supply of service is an inter-state supply under Section 7(3)or intra-state supply under Section 8(2) of IGST Act depends on thelocation of the supplier and the place of supply, which in most cases isthe location of the recipient of service. Since there can effectively betwo recipients on reading of Section 2(93)(a) and (c) of the CGSTAct, the respondents argue that the transaction may simultaneouslybecome an inter-state or intra-state supply. This could also mean thattwo recipients can claim ITC. However, this argument is inapplicable tothe case at hand since Sections 7(3) and 8(2) of the IGST Act do notconflate the concept of imports. Section 8(2) deals with scenario wherethe location of the supplier and place of supply are within the sameState/Union Territory in India. This is inapplicable to determining importswhere the supplier is located outside India. Similarly, Section 7(3) dealswith inter-state supply within the territory of India. Further, both thesesections are subject to the provisions of Section 12 of the IGST Actwhere both- the supplier and recipient are located in India. Section 12 ofthe IGST Act does not create the deeming fiction under Section 13(9) ofthe IGST Act which is applicable only when the supplier is located outsideIndia. The applicable section in this case would be Section 7(4) of theIGST Act which clearly stipulates that “Supply of services importedinto the territory of India shall be treated to be supply of services

Ain the course of inter-State trade or commerce”. Thus, no absurdity iscreated by the deeming fiction argued by the Union Government. In noscenario would the foreign exporter be claiming ITC in India.

121. The respondents’ arguments of identification of two recipientsdo not have any bearing on the determination of the present dispute asBthe foreign exporter is not sought to be taxed in this case. In the digitalage, the concepts of supplier and recipient of service have also beenaltered and are not necessarily understood as two parties with directchain of supply. The IGST Act tends to create several such deemingfictions to adequately capture such complexities. For instance, Section5(5) of the IGST Act taxes the electronic commerce operator as theCsupplier of service in spite of it only being conduit, in the commercialsense. These deeming fictions need to be respected for the purpose ofthe statute, as long as they have constitutional and parliamentary sanction.Similarly, Section 2(14)(c) of the IGST Act recognizes the possibility ofthe supply being received in more than one establishment:D“(14) “location of the recipient of services” means,—

(a) where supply is received at place of business for whichthe registration has been obtained, the location of such place ofbusiness;

E(b) where supply is received at place other than the place ofbusiness for which registration has been obtained (a fixedestablishment elsewhere), the location of such fixed establishment;

(c) where supply is received at more than one establishment,whether the place of business or fixed establishment, the locationFof the establishment most directly concerned with the receipt ofthe supply; and

(d) in absence of such places, the location of the usual place ofresidence of the recipient;”

122. Section 13 of the IGST Act is critical to effectively meet theGaim of the GST statute to tax the destination of supplies, as opposed totheir origins. The deeming fiction therein is critical to interpret the chargingprovision under the IGST Act (Section 5). The respondents’ argumentfor the irrelevance of determining the beneficiary of the supply or whohas received the supply in view of the definition of ‘recipient’ of SectionH2(93) of the CGST Act mis-reads Section 2(93) which identifies the

recipient, inter alia, on the basis of the person to whom “supply is made”i.e. the place of supply.

123. GST laws mark departure from the previous policy of taxingsale/consignments and focuses on the taxing of supplies. The concept ofa supply-centric and destination-based tax runs through the scheme ofthe statutory provisions and the proposals issued by the GST Council.Thus, an amendment to the Constitution was introduced in the form ofArticle 366(12-A) to create tax on the supply of goods, or services, orboth. In the commercial reality of the times, the conceptual lines betweengoods and services wear thin. Hence, the focus is on the taxation ofsupply, as opposed to the creation of neat compartments between goodsand services. Section 7(1)(c) of the CGST Act specifically characterizesimport of services for consideration to constitute “supply”. The onlyquestion that falls for determination is whether the imports of goods on aCIF basis would also constitute import of shipping services, by way ofdeeming fiction. We have held that Section 5(3) of the IGST does notconfer the powers on the Central Government to create deeming fictionvis-à-vis who constitutes the recipient. Section 5(3) merely enables theCentral Government to identify certain categories of goods and services,where the recipient of such services is subject to reverse charge, asopposed to the usual mode of taxation where the supplier of the serviceis charged on forward charge basis. However, Section 13(9) of theIGST Act read with Section 2(93)(c) of the CGST Act inherently createa deeming fiction of the importer of goods to be the recipient of shippingservice.

D.5 Applicability of Section 5(4) of IGST Act

124. By way of an arguendo, the Union Government has arguedthat if the importers do not qualify as service recipients, the impugnednotifications would derive their validity from Section 5(4) of the IGSTAct. The unamended Section 5(4) of the IGST Act stated as follows:

“(4) The integrated tax in respect of the supply of taxablegoods or services or both by supplier, who is notregistered, to registered person shall be paid by suchperson on reverse charge basis as the recipient and all theprovisions of this Act shall apply to such recipient as if he is theperson liable for paying the tax in relation to the supply of suchgoods or services or both.”

(emphasis supplied)

AOn 29 August 2018, Section 5(4) was amended by Amending Act32 of 2018, to state the following:

“(4) The Government may, on the recommendations of theCouncil, by notification, specify class of registered personswho shall, in respect of supply of specified categories ofBgoods or services or both received from an unregisteredsupplier, pay the tax on reverse charge basis as therecipient of such supply of goods or services or both, andall the provisions of this Act shall apply to such recipient as if he isthe person liable for paying the tax in relation to such supply ofgoods or services or both.”C

(emphasis supplied)

The amended Section 5(4) came into effect on 1 February 2019[90].Amending Act 32 of 2018 enables the Central Government to create adeeming fiction of declaring class of registered persons “as the recipient”Dof the supply of taxable goods or service. In deploying the language “asthe”, and not “by the” recipient, the applicability of the definition ofrecipient vis-à-vis Section 2(93) of the CGST Act is no longer necessaryfor determining the validity of such notification. The effect of theAmending Act 32 of 2018 has been as follows:- (i) the powers of theCentral Government to specify through notificationhas been clarified;Eand (ii) the power to specify class of registered persons as the recipienthas been recognised.125. The Union Government has argued that Notifications 8/2017and 10/2017 dated 28 June 2017 issued under Section 5(3) may also beread as issued under Section 5(4) of the IGST, in which case, the importersFwould be liable to tax with effect from 1 February 2019 though exemptedfor the period 13 October 2017 – 31 January 2019.

126. The respondents have argued that the amended andunamended Section 5(4) do not save the impugned notifications sincethey still make the reference to the term “recipient”. However, theGrespondents crucially miss out that Section 5(4) employs the language“as the recipient”, in contradistinction to Section 5(3) of the IGST Actwhich uses “by the recipient”. We have held that recipient includes theimporter in Part above. Further, Section 5(4) clarifies that it may

designate class of registered persons as the recipient, therebybroadening the scope of Section 2(93) of the CGST Act, which is anywayan inclusive definition since Section 2 is prefaced with “unless thecontext otherwise requires”.

127. It is settled law that non-reference of the source of powermay not vitiate its exercise and application in given facts andcircumstances of case. In Union of India v. Tulsi Ram Patel[91], aConstitution Bench held that when source of power legally exists, anon-reference or an incorrect reference during its exercise does notvitiate the action. Speaking in the context of the Railway Service Ruleswhich did not account for the power of the Disciplinary Authority underArticle 311(2), this Court held:

“126. As pointed out earlier, the source of authority of particularofficer to act as disciplinary authority and to dispense with theinquiry is derived from the service rules while the source of hispower to dispense with the disciplinary inquiry is derived from thesecond proviso to Article 311(2). There cannot be an exercise ofa power unless such power exists in law. If such power does notexist in law, the purported exercise of it would be an exercise of anon-existent power and would be void. The exercise of poweris, therefore, always referable to the source of such power andmust be considered in conjunction with it. The Court’s attentionin Challappancase [(1976) 3 SCC 190 : 1976 SCC (L&S) 398 :(1976) 1 SCR 783] was not drawn to this settled position in lawand hence the error committed by it in considering Rule 14 of theRailway Servants Rules by itself and without taking into accountthe second proviso to Article 311(2). It is also well settled thatwhere source of power exists, the exercise of such poweris referable only to that source and not to some other sourceunder which were that power exercised, the exercise ofsuch power would be invalid and without jurisdiction.Similarly, if source of power exists by reading togethertwo provisions, whether statutory or constitutional, and theorder refers to only one of them, the validity of the ordershould be upheld by construing it as an order passed underboth those provisions. Further, even the mention of wrong

Aprovision or the omission to mention the provision whichcontains the source of power will not invalidate an orderwhere the source of such power exists. (See Dr RamManohar Lohia v. State of Bihar [AIR 1966 SC 740 : (1966) 1SCR 709, 721 : 1966 Cri LJ 608] and Municipal Corporation ofthe City of Ahmedabad v. Ben Hiraben Manilal [(1983) 2 SCCB422 : (1983) 2 SCR 676, 681] .) The omission to mention in theimpugned orders the relevant clause of the second proviso or therelevant service rule will not, therefore, have the effect ofinvalidating the orders and the orders must be read as havingbeen made under the applicable clause of the second proviso toCArticle 311(2) read with the relevant service rule. It may bementioned that in none of the matters before us has it beencontended that the disciplinary authority which passed theimpugned order was not competent to do so.”

(emphasis supplied)

128. Similarly, in Titagarh Paper Mills v. Orissa StateElectricity Board[92], three-judge Bench of this Court, in the contextof the Electricity Supply Act 1948, held that mislabelling of the sourceof power would not vitiate its exercise:

“9. …..But, if there is one principle more well settled than anyEother, it is that, when an authority takes action which is within itscompetence, it cannot be held to be invalid, merely because itpurports to be made under wrong provision, if it can be shownto be within its power under any other provision. mere wrongdescription of the source of power — mere wrong label —Fcannot invalidate the action of an authority, if it is otherwise withinits power..”

Thus, as long as source of power to legislate or issue notificationis available, the lack of mention, an incorrect reference or mistakedoes not vitiate the exercise of such power.

G129. The impugned notifications were issued with the intention ofcreating level playing field between the Indian and foreign shippinglines. In the Eighteenth GST Council meeting held on 31 June 2017, theagenda of taxing importers on reverse charge basis was discussed:

H92 1975 2 SCC 436

“”Para 6.7.1: Agenda Item 3(v)- Value for the purpose of levy ofGST on transportation of goods by vessel from place outsideIndia up to the customs station in India

6.7.1. In the existing Service Tax Law, with view to providelevel playing field to the Indian shipping companies, it has beenprovided that in cases where the goods are imported by an importerin India on CIF (Cost, Insurance and Freight) basis and the serviceof transportation of goods by vessel from place outside Indiaup to the customs station in India is provided by person locatedin non-taxable territory (a foreign shipping line) to person locatedin 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 purchasesgoods on CIF basis, he may not have the invoice issued by theshipping line for freight and may not know the amount of freightcharged by the foreign shipping line from the foreign supplier; itwas stipulated in the Service Tax Rules that in such cases theimporter shall have the option to pay an amount calculated at therate of 1.4% of the CIF value of imported goods. This provisionwas stipulated on the basis that freight roughly constitutes 10% ofthe CJF value of goods on an average. Under GST too, it wasdecided that the liability to pay GST on such transportation serviceprovided by foreign shipping line to foreign supplier shall be ofthe importer in India and the notifications are being issuedaccordingly. It is proposed that the similar provision deeming valueof such service at 10% of the CIF value may be incorporated inthe IGST notification. Considering the nature of the service, thisprovision is not required in the CGST, SGST or UTGSTnotifications. The Council approved the proposal.

8(v)…..in respect of agenda item 3 the Council approved toincorporate provision in the IGST notification that in caseswhere the goods are imported by an importer in India on CIFbasis and the service of transportation of goods by vessel froma place outside India up to the customs station in India is providedby person located in non-taxable territory (a foreign shippingline) to person located in non-taxable territory (overseassupplier/exporter of goods) and in case the importer did not know

Athe amount of freight charged by the foreign shipping line fromthe foreign supplier the deemed value of such service shall be10% of the CIF value.”

130. The impugned notifications were issued after the GST Counciltook note of the fact that since transport of imported goods by IndianBshipping lines to India is not treated as export of service, the Indianshipping lines pay IGST on the same on forward charge basis. On theother hand, on the same transportation service, the foreign shipping linesare not required to pay tax as they are not taxable persons in India.Therefore, to provide level playing field to Indian shipping lines, theimporter in India has been made liable to pay IGST on transportation ofCgoods by foreign shipping lines on reverse charge basis. If Indian shippinglines continue to be taxed and not their competitors, namely, the foreignshipping lines, the margins arising out of taxation from GST would notcreate level playing field and drive the Indian shipping lines out ofbusiness.D

131. It was contended by the respondents that instead of coursecorrecting the input tax mechanism, the Union Government has chosento tax the Indian importer on reverse charge. However, this Court is notin position to adjudicate the desirability of taxation scheme, as longas it is legally issued. Commenting on the efficacy of the tax interventionEwith 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 permissibleunder Section 5 of the IGST Act, we shall now advert to the argumentsraised by the respondents regarding the impugned notifications amountingFto double taxation. The respondents have submitted before this Courtthat the transaction between the foreign exporter and the respondents isalready subject to IGST under Sections 5 of the IGST Act read withSections 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 ofGtransportation service, by designating the importer as the recipient wouldamount to double taxation.

133. The transaction at hand involves three parties- the foreignexporter, the Indian importer and the shipping line. The first leg of thetransaction involves CIF contract, wherein the foreign exporter sellsthe goods to the Indian importer and the cost of insurance and freightH

are the responsibility of the foreign exporter. In other words, the foreignexporter is liable to ensure that the goods reach their place of destinationand the Indian importer pays the transaction value to the exporter. Thesecond leg of the transaction involves an agreement between the foreignexporter and the shipping line (whether foreign or Indian) for providingservices for transport of goods to the destination, i.e., in the territory ofIndia.

134. On the first leg of the transaction, between the foreignexporter and the Indian importer, the latter is liable to pay IGST on thetransaction value of goods under Section 5(1) of the IGST Act read withSection 3(7) and 3(8) of the Customs Tariff Act. Although this transactioninvolves the provision of services such as insurance and freight it fallsunder the ambit of ‘composite supply’. We note from the writtensubmissions of the Union that the ASG has fairly submitted that thistransaction would include value elements of freight and insurance, andyet the IGST is levied as tax on supply of goods only. Such transactionsare termed as “composite supply” under the CGST Act.

135. Section 2(30) of the CGST Act defines “composite supply”

“(30) “composite supply” means supply made by taxableperson to recipient consisting of two or more taxable supplies ofgoods or services or both, or any combination thereof, which arenaturally bundled and supplied in conjunction with each other inthe ordinary course of business, one of which is principal supply;

Illustration.— Where goods are packed and transported withinsurance, the supply of goods, packing materials, transportand insurance is composite supply and supply of goods is aprincipal supply;”

136. Section 2(30) of the CGST Act clearly provides that atransaction may have two or more taxable supplies, where one of themis principal supply. The illustration to Section 2(30) further clarifiesthat transaction such as the CIF contract for supply of goods reflectsa composite supply under the CGST Act, where the principal supply isthe supply of goods.

137. The tax liability on composite supply is provided under Section8 of the CGST Act.

A“8. Tax liability on composite and mixed supplies.— The tax liabilityon composite or mixed supply shall be determined in thefollowing manner, namely:—

(a) composite supply comprising two or more supplies,one of which is principal supply, shall be treated as aBsupply of such principal supply; and

(b) mixed supply comprising two or more supplies shall be treatedas supply of that particular supply which attracts the highestrate of tax.”

(emphasis supplied)

Section 8 of the CGST Act provides that the tax liability on acomposite supply which comprises of two or more supplies, will only belevied on the ‘principal supply’. In CIF transaction, the principal supply,according to Section 2(30), is supply of goods. Thus, the tax would belevied as if the transaction was one of supply of goods.D

138. Section 20 of the IGST Act provides that the provisionsrelating to ‘composite supply’ under the CGST Act would apply mutatismutandis under the IGST Act. By extension, the IGST in transactionof composite supply would be levied on the principal supply of goods.

139. The respondents have urged before this Court that theEimpugned levy which seeks to impose IGST on the ‘service’ aspect ofthe 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 theIGST Act. In contrast, the Union Government has submitted that theFimpugned levy is on the second leg of the transaction, which is standalonecontract between the foreign exporter and the foreign shipping line. Thus,the Union has urged that the contract between the foreign exporter andthe foreign shipping line- of which the Indian importer is not party-cannot be deemed to be part of ‘composite supply’. While the first legof the transaction, between the foreign exporter and Indian importer, isG(according to the submission) composite supply, the second leg is anindependent transaction. In this regard, the Union has relied on thedecision of this Court in McDowell (supra) to contend that singleelement can constitute levy and part of the value for anothertransaction. Further the Union Government has urged that the levy is onHdifferent aspects of the transaction.

140. We are unable to agree with the Union Government on thiscount. The aspect theory that the Union Government has relied on findsits place in various decisions of this Court, such as in Federation ofHotels & Restaurant Association of India v. Union of India[93] andBSNL (supra).

141. In Federation of Hotels & Restaurants Association ofIndia (supra), challenge was raised regarding the imposition of anexpenditure tax by the Union Government. In discussing the variousaspects of transaction, this Court, speaking through Justice MNVenkatachaliah (as the learned Chief Justice then was), observed that

“31. Indeed, the law “with respect to” subject mightincidentally “affect” another subject in some way; but thatis not the same thing as the law being on the latter subject.There might be overlapping; but the overlapping must bein law. The same transaction may involve two or moretaxable events in its different aspects. But the fact that thereis an overlapping does not detract from the distinctivenessof the aspects. Lord Simonds in Governor General-in-Council v. Province of Madras [AIR 1945 PC 98 : 1945 FCR179, 193] in the context of concepts of Duties of Excise and Taxon Sale of Goods said:

“... The two taxes, the one levied on manufacturer in respectof his goods, the other on vendor in respect of, his sales,may, as is there pointed out, in one sense overlap. But in lawthere is no overlapping. The taxes are separated and distinctimposts. If in fact they overlap, that may be because the taxingauthority, imposing duty of excise, finds it convenient toimpose that duty at the moment when the excisable articleleaves the factory or workshop for the first time on theoccasion of its sale....””

(emphasis supplied)

There is no doubt that different aspects of transaction can betaxed through separate provisions. However, this Court in BSNL (supra)observed that the aspect theory does not allow the value of goods to beincluded in services and vice versa. In BSNL (supra), this Court dealt

Awith the question of whether provision of telephone services involved atransfer 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 tolevy sales tax on sales provided that the necessary concomitantsBof sale are present in the transaction and the sale is distinctlydiscernible in the transaction. This does not however allow theState to entrench upon the Union List and tax services by includingthe cost of such service in the value of the goods. Even in thosecomposite contracts which are by legal fiction deemed to bedivisible under Article 366(29-A), the value of the goods involvedCin the execution of the whole transaction cannot be assessed tosales tax.”

142. In the present case, the question is whether the imposition ofIGST on supply of services can be sustained when there is concomitantimposition of IGST on supply of goods. However, we must first analyseDthe context in which the IGST is levied on the import of goods in thiscase.

143. The provisions of composite supply in the CGST Act (andthe IGST Act) play specific role in the levy of GST. The idea ofintroducing ‘composite supply’ was to ensure that various elements of aEtransaction are not dissected and the levy is imposed on the bundle ofsupplies altogether. This finds specific mention in the illustration providedunder Section 2(30) of CGST Act, where the principal supply is that ofgoods. Thus, the intent of the Parliament was that transaction whichincludes different aspects of supply of goods or services and which areFnaturally bundled together, must be taxed as composite supply.144. It is true that in this case, the first leg of the transactionbetween the foreign exporter and the Indian importer is compositesupply, while the second leg, between the foreign exporter and theshipping line may, from perspective, be regarded as standaloneGtransaction. Both of them are independent transactions and ordinarily,the IGST could be levied on both sets of transactions- one as supply ofgoods (under the ambit of composite supply) and the other as supply ofservices. However, the impugned notifications seek to tax the importeras the deemed recipient of the supply of service. The ASG has advancedan interpretation of Sections 5(3) and 5(4) of the IGST Act, read withH

Section 2(93) of the CGST Act to contend that the importer can beclassified as the ‘recipient’ of the services. On this interpretation, wehave upheld the validity of the impugned notifications under Sections5(3) and 5(4) of the IGST Act in Section D.2-D.5 of this judgment. Therespondents as matter of fact urged that (i) the Indian importer is notprivy to the contract between the foreign exporter and the foreign shippingline; (ii) the Indian importer does not pay consideration to the foreignshipping line; and (iii) the Indian importer does not receive any servicesfrom the foreign shipping line since the transportation services are providedby the foreign shipping line to the foreign exporter. The ASG, whileadvancing arguments on behalf of the Union Government, has opposedthese submissions. The Union Government has urged that this Courtmust look beyond the text of the contract between the foreign shippingline and the foreign exporter to identify the Indian importer as the recipientof the services. This Court has upheld the validity of the impugnednotifications on this ground. The Union Government is contradicting themain plank of its submission now by contending that the two legs of thetransaction are separate standalone agreements. That would imply, thatwhile on the one hand the Union Government seeks to levy tax on theIndian importer by going beyond the text of the contract between theforeign shipping line and foreign exporter (for the purpose of identifyingthe Indian importer as the recipient of services), on the other hand, asfar as the submissions on composite supply are concerned, the UnionGovernment urges that the contracts must be viewed as separatetransactions, operating in silos. We are unable to subscribe to this view.The Union of India cannot be heard to urge arguments of convenience –treating the two legs of the transaction as connected when it seeks toidentify the Indian importer as recipient of services while on the otherhand, treating the two legs of the transaction as independent when itseeks to tide over the statutory provisions governing composite supply.

145. This Court is bound by the confines of the IGST and CGSTAct to determine if this is composite supply. It would not be permissibleto ignore the text of Section 8 of the CGST Act and treat the twotransactions as standalone agreements. In CIF contract, the supply ofgoods is accompanied by the supply of services of transportation andinsurance, the responsibility for which lies on the seller (the foreignexporter in this case). The supply of service of transportation by theforeign shipper forms part of the bundle of supplies between the foreignexporter and the Indian importer, on which the IGST is payable under

ASection 5(1) of the IGST Act read with Section 20 of the IGST Act,Section 8 and Section 2(30) of the CGST Act. To levy the IGST on thesupply of the service component of the transaction would contradict theprinciple enshrined in Section 8 and be in violation of the scheme of theGST legislation. Based on this reason, we are of the opinion that whilethe impugned notifications are validly issued under Sections 5(3) andB5(4) of the IGST Act, it would be in violation of Section 8 of the CGSTAct and the overall scheme of the GST legislation. As noted earlier,under Section 7(3) of the CGST Act, the Central Government has thepower to notify an import of goods as an import of services and vice-versa:C“7. Scope of supply--—

(3) Subject to the provisions of [sub-sections (1), (1A) and (2)]16,the Government may, on the recommendations of the Council,Dspecify, by notification, the transactions that are to be treated as—

(a) supply of goods and not as supply of services; or

(b) supply of services and not as supply of goods.”

No such power can be noticed with respect to interpreting acomposite supply of goods and services as two segregable supply ofEgoods and supply of services.

146. The High Court in the impugned judgment has observed that:

“What has led to the present day problems in the implementationof the GST:

F132. The GST is implemented by subsuming various indirect taxes.The difficulty which is being experienced today in properimplementation of the GST is because of the erroneousmisconception of law, or rather, erroneous assumption onthe part of the delegated legislation that service tax is anGindependent levy as it was prior to the GST and it go vivisectthe transaction of supply to levy more taxes on certaincomponents completely overlooking or forgetting the basicconcept of composite supply introduced in the GSTlegislation 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 bymaking the Constitutional (101[st]) Amendment Act, 2016 to mergeall taxes levied on the goods and services to one tax known as theGST.

133. It appears that despite having levied and collected theintegrated tax under the IGST Act, 2017, on import of goods onthe entire value which includes the Ocean Freight through theimpugned notifications, once again the integrated tax is being leviedunder an erroneous misconception of law that separate tax canbe levied on the services components (freight), which is otherwiseimpermissible under the scheme of the GST legislation made underthe CA Act, 2016.

134. All the learned senior counsel are right in theirsubmission that if such an erroneous impression is notcorrected and if such trend continues, then in future eventhe other components of supply of goods, such as, insurance,packaging, loading/unloading, labour, etc. may also beartificially vivisected by the delegated legislation to onceagain levy the GST on the supply on which the tax is alreadycollected.

215. Thus, having paid the IGST on the amount of freightwhich is included in the value of the imported goods, theimpugned notifications levying tax again as supply ofservice, without any express sanction by the statute, areillegal and liable to be struck down.”

(emphasis supplied)

147. We are in agreement with the High Court to the extent thata tax on the supply of service, which has already been included by thelegislation as tax on the composite supply of goods, cannot be allowed.

Conclusion

148. Based on the above discussion, we have reached the followingconclusion:

(i)The recommendations of the GST Council are not bindingon the Union and States for the following reasons:

A(a)The deletion of Article 279B and the inclusion ofArticle 279(1) by the Constitution Amendment Act2016 indicates that the Parliament intended for therecommendations of the GST Council to only have apersuasive value, particularly when interpreted alongwith the objective of the GST regime to fosterBcooperative federalism and harmony between theconstituent units;

(b)Neither does Article 279A begin with non-obstanteclause nor does Article 246A state that it is subjectto the provisions of Article 279A. The ParliamentCand the State legislatures possess simultaneous powerto legislate on GST. Article 246A does not envisagea repugnancy provision to resolve the inconsistenciesbetween the Central and the State laws on GST. The‘recommendations’ of the GST Council are theDproduct of collaborative dialogue involving theUnion and States. They are recommendatory innature. To regard them as binding edicts would disruptfiscal federalism, where both the Union and the Statesare conferred equal power to legislate on GST. It isnot imperative that one of the federal units mustEalways possess higher share in the power for thefederal units to make decisions. Indian federalism isa dialogue between cooperative and uncooperativefederalism where the federal units are at liberty touse different means of persuasion ranging fromFcollaboration to contestation; and

(c)The Government while exercising its rule-makingpower under the provisions of the CGST Act andIGST Act is bound by the recommendations of theGST Council. However, that does not mean that allthe recommendations of the GST Council made byvirtue of the power Article 279A (4) are binding onthe legislature’s power to enact primary legislations;

(ii)On conjoint reading of Sections 2(11) and 13(9) of theIGST Act, read with Section 2(93) of the CGST Act, theHimport of goods by CIF contract constitutes an “inter-

state” supply which can be subject to IGST where theAimporter of such goods would be the recipient of shippingservice;

(iii)The IGST Act and the CGST Act define reverse chargeand prescribe the entity that is to be taxed for these purposes.The specification of the recipient – in this case the importerB– by Notification 10/2017 is only clarificatory. TheGovernment by notification did not specify taxable persondifferent from the recipient prescribed in Section 5(3) ofthe IGST Act for the purposes of reverse charge;

(iv)Section 5(4) of the IGST Act enables the CentralGovernment to specify class of registered persons as therecipients, thereby conferring the power of creating adeeming fiction on the delegated legislation;

(v)The impugned levy imposed on the ‘service’ aspect of thetransaction is in violation of the principle of ‘compositeDsupply’ enshrined under Section 2(30) read with Section 8of the CGST Act. Since the Indian importer is liable to payIGST on the ‘composite supply’, comprising of supply ofgoods and supply of services of transportation, insurance,etc. in CIF contract, separate levy on the Indian importerEfor the ‘supply of services’ by the shipping line would be inviolation of Section 8 of the CGST Act.

149. For the reasons stated above, the appeals are accordinglydismissed.

150. Pending application(s) if any, stand disposed of.

Divya Pandey(Assisted by : Preetam Bharti, LCRA)

Appeals dismissed.