Union of India & Anr. vs M/s Mohit Minerals Pvt. Ltd. Through Director Case

Union of India & Anr. vs M/s Mohit Minerals Pvt. Ltd. Through Director Case


Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 1390 of 2022
Union of India & Anr. ....Appellants
Versus
M/s Mohit Minerals Pvt. Ltd. Through Director .... Respondent
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J U D G M E N T
Dr Dhananjaya Y Chandrachud, J
A Introduction...........................................................................................................5
B Submissions .......................................................................................................12
B.1 Union of India...............................................................................................12
B.2 Respondent-assessees................................................................................28
C Constitutional Architecture of GST .....................................................................52
C. 1 Legislative History of the Constitution Amendment Act 2016.......................56
C.2 The nature of the recommendations of the GST Council.............................75
D Analysis ..............................................................................................................92
D.1 Statutory Provisions and Scheme of the IGST Act.......................................92
D.2 Do the impugned notifications suffer from excessive delegation? .............104
D.3 Charging Section: taxable person, taxable rate and manner of determining
value ...................................................................................................................108
D.4 Taxable event: Is an ocean freight transaction for import of goods a valid
category of supply of services under Section 5(3) of IGST Act? .........................114
D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state
supply or is it an extra-territorial tax?................................................................115
D.4.(b) Are importers service recipients under CIF contracts?.....................125
D.5 Applicability of Section 5(4) of IGST Act ....................................................135
D.6 Composite Supply and Issues of Double Taxation.....................................141
E Conclusion........................................................................................................150
PART A
5
A Introduction
1 The Union of India1 is in appeal against a judgment of a Division Bench of the
Gujarat High Court dated 23 January 2020. The High Court allowed a petition
instituted by the respondents under Article 226 for challenging the constitutionality of
two notifications of the Central Government. The bone of contention is whether an
Indian importer can be subject to the levy of Integrated Goods and Services Tax2 on
the component of ocean freight paid by the foreign seller to a foreign shipping line,
on a reverse charge basis.
2 The respondents import non-coking coal from Indonesia, South Africa and the
U.S. by ocean transport on a ‘Cost-Insurance-Freight’3 basis which is supplied to
domestic industries. The goods are transported from a place outside India, up-to the
customs station in India. The respondent pays customs duties on the import of coal,
which includes the value of ocean freight. In the case of a CIF contract, the freight
invoice is issued by the foreign shipping line to the foreign exporter, without the
involvement of the importer. Ocean freight is paid by the importer only when goods
are imported under a ‘Free-on-Board’4 contract. In the case of a high seas sale
transaction, the coal is purchased from the original buyer before it arrives at Indian
ports.
 1 “Union Government” or “Central Government” 2 “IGST” 3 “CIF” 4 “FOB”
PART A
6
3 Prior to the enforcement of the Goods and Services Tax5 regime, service tax
on ocean freight was exempted by Notification No. 25/2012-ST (Serial No. 34) dated
20 June 2012. This exemption was withdrawn by Notification No. 01/2017-ST dated
12 January 2017 which levied service tax on the importer, by a reverse charge
mechanism. With the advent of the GST regime, Notification No.8/2017- Integrated
Tax (Rate) dated 28 June 20176 was issued by the Central Government on the
advice of the Goods and Services Tax Council7
, in exercise of powers under Section
5(1), Section 6(1) and Section 20(iii)-(iv) of the Integrated Goods and Services Tax
Act 20178
, read with Section 15(5) and Section 16(1) of the Central Goods and
Services Act9
. Entry 9 of Notification 8/2017, effective from 1 July 2017, levied an
integrated tax at the rate of 5 per cent on the supply of specified services, including
transportation of goods, in a vessel from a place outside India up to the customs
station of clearance in India.
4 On 28 June 2017, the Central Government issued Notification 10/201710.
Serial 10 of Notification 10/2017 categorized the recipient of services of supply of
goods by a person in a non-taxable territory by a vessel to include an importer under
Section 2(26) of the Customs Act 1962.
5 Section 5(1) of the IGST Act authorises the levy of an integrated tax on all
inter-state supplies of goods and services or both. The integrated tax can also be
 5 “GST” 6 “Notification 8/2017” 7 “GST Council” 8 “IGST Act” 9 “CGST Act” 10 “Notification 10/2017”
PART A
7
levied on goods imported into India on the value determined under Section 3 of the
Customs Tariff Act 197511 at the point when customs duties are levied on the goods
under Section 12 of the Customs Act 196212. Section 11 of the IGST Act stipulates
that the place of supply of goods in the case of goods imported into India shall be
the place of the importer. Section 13(9) of the IGST Act contemplates that the place
of supply of services, in the case of transportation of goods shall be the destination
of the goods. The respondent alleges that the impugned notifications create an
element of double taxation, as ocean freight is included in the value of goods for the
purpose of customs duty which the importer is liable to pay. The respondent does
not dispute the liability of integrated tax on supply of service of transportation when it
imports goods on an FOB basis.
6 The respondent filed a writ petition before the Gujarat High Court challenging
Notification 8/2017 and Notification 10/201713 on the grounds that: (i) the
notifications are ultra vires the IGST Act and CGST Act; (ii) customs duty is levied
on the component of ocean freight and the levy of IGST on the freight element in the
course of transportation would amount to double taxation; (iii) though in the case of
high sea sales, the importer is a different entity yet this regime would tax the
respondent as the importer and the recipient of service; (iv) in the case of a CIF
contract, the supply of service of transport of goods in a vessel is by a foreign
shipping line located in a non-taxable territory to an exporter located in a non-
 11 “Customs Tariff Act” 12 “Customs Act” 13 Collectively referred as “impugned notifications”
PART A
8
taxable territory by a vessel outside the territory of India which cannot be subject to
tax under the IGST Act; (v) Notification 10/2017 transgresses the provisions of
Section 5(3) of the IGST 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;
and (vi) Entry 9(ii) and para 2 of Notification 8/2017, read with Notification 10/2017,
creates a deeming fiction and a separate taxable event which is not permissible in
law.
7 The Union of India urged before the High Court that although tax is being paid
twice on the value of ocean freight, it is not unconstitutional as the tax is on two
different aspects of the transaction, namely, the supply of service and import of
goods. The rationale for the impugned notifications, according to the Union
Government, is to remove the disparity between Indian and foreign shipping lines,
as the former are unable to claim input tax credit14 that forms a part of their
transportation costs, since supply of goods was hitherto exempt from service tax.
The levy of the integrated tax does not, according to the Union of India, impose an
additional cost on importers as the cost paid on inward transportation of goods and
import freight services is available to them as ITC.
8 Under the existing GST regime (presently under challenge), taxability of
ocean freight under different situations is tabulated below :
Service Availed Shipping Legal Provision Implication
 14 Interchangeably referred as “ITC”
PART A
9
Company
Import Indian Section 12(8) of
the IGST Act - the
place of supply of
services shall be
the location of the
recipient
Transaction is
liable for tax.
Importer can claim
the amount paid as
tax as input tax
credit
Export Indian Section 12(8) of
the IGST Act - the
place of supply of
services shall be
the location of the
recipient.
Transaction is
liable for tax. The
exporter can get
refund of input tax
credit used for
export.
Import Foreign Section 13(9) of
the IGST Act - the
place of supply of
services of
transportation of
goods shall be
place of destination
of such goods.
Transaction is
liable for tax as the
place of supply is
India. Tax will be
paid under reverse
charge and can be
claimed as input
tax credit.
PART A
10
Export Foreign Section 13(9) of
the IGST Act - the
place of supply of
services of
transportation of
goods shall be
place of destination
of such goods.
Since the place of
supply will be
outside India, the
transaction is not
liable for tax.
9 The Division Bench of the Gujarat High Court held that the impugned
notifications are unconstitutional for exceeding the powers conferred by the IGST
Act and the CGST Act. The High Court held:
(i) The importer of goods on a CIF basis is not the recipient of the transport
services as Section 2(93) of the CGST Act defines a recipient of services to
mean someone who pays consideration for the service, which is the foreign
exporter in this case;
(ii) Section 5(3) of the IGST Act enables the Government to stipulate categories
of supply, not specify a third-party as a recipient of such supply;
(iii) There is no territorial nexus for taxation since the supply of service of
transportation of goods is by a person in a non-taxable territory to another
person in a non-taxable territory from a place outside India up to the Indian
customs clearance station and this is neither an inter-state nor an intra-state
supply;
PART A
11
(iv) Section 2(11) of the IGST Act defines “import of service” to mean the supply
of service where the supplier of service is located outside India, the recipient
of service is located in India and the place of supply of service is in India;
(v) In this case, since the goods are transported on a CIF basis, the recipient of
service is the foreign exporter who is outside India;
(vi) Section 7(5)(c) of the IGST Act dealing with intra-state supply 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 determining the place of supply.
Neither of them will apply if both the supplier and recipient of service are
based outside India. The mere fact that the service terminates at India does
not make the service of supply of transportation to be taking place in India;
(viii) The provisions regarding time of supply, as contemplated in Section 20 of the
IGST Act and applicable to Section 13 of the IGST Act dealing with supply of
services, are applicable only vis-à-vis the actual recipient of the supply of
service, which is the foreign exporter in this case;
(ix) Section 15(1) of the CGST Act enables the determination of the value of the
supply, only between the actual supplier and actual recipient of the service;
(x) Since the importer is not the “recipient” of the service under Section 2(93) of
the CGST Act, it will not be in a position to avail ITC under Section 16(1) of
the CGST Act; and
PART B
12
(xi) Since the importer pays customs duties on the goods which include the value
of ocean freight, the impugned notifications impose double taxation through a
delegated legislation, which is impermissible.
B Submissions
B.1 Union of India
10 Mr N Venkataraman, learned Additional Solicitor General15 appearing on
behalf of the appellant – the Union of India – urged the following submissions:
A. Constitutional Architecture of IGST
(i) Under Article 286(2), Parliament is empowered to formulate inter alia the
principles for determining when a supply of goods or services takes place in
any of the ways mentioned in Article 286(1), which includes imports;
(ii) Article 269A enables the Union Government to levy GST on inter-state
supplies. The explanation to Article 269A(1) creates a deeming fiction that a
supply of goods or services in the course of imports is to be considered as a
supply of goods or services or both in the course of interstate trade;
(iii) Article 269A(5) enables Parliament to formulate the principles for determining
the place of supply and when a supply of goods and services or both takes
place in the course of inter-State trade or commerce. This constitutional
mandate finds legislative effect in the IGST Act;
 15 “ASG”
PART B
13
(iv) As contemplated in Article 286(2) read with Article 269A(1), the IGST Act
enacts provisions relating to the levy and collection of integrated tax (Section
5(1)), export of goods [Section 2(5)], export of services [Section 2(6)], import
of goods [Section 2(10)], import of services [Section 2(11)], location of
recipient of services [Section 2(14)] and location of supplier of services
[Section 2(15)];
(v) In terms of Article 269A(5), the IGST Act contemplates provisions for
determining the nature of inter-State supply (Section 7), supplies in territorial
waters (Section 9), place of supply of goods imported into or exported out of
India (Section 11), place of supply of services where the location of supplier
and recipient is in India (Section 12) and place of supply of services where the
location of supplier and recipient is outside India (Section 13).
B. Charging Section
(vi) The charge created by Section 5(1) of the IGST Act can extend to an ocean
freight transaction to be taxed in the hands of the importer. This creation of a
charge is in compliance with the essential components of taxation identified
by a Constitution Bench in Mathuram Agrawal v. State of Madhya
Pradesh16 and further elaborated on by this Court in Gobind Saran Ganga
Saran v. Commissioner of Sales Tax17.
 16 1999 (8) SCC 667 (“Mathuram Agrawal”) 17 AIR 1985 SC 1041 (“Gobind Saran Ganga Saran”)
PART B
14
(vii) The four fundamental principles of a taxing enactment are: the taxable event,
the person on whom the levy is imposed, the rate at which the levy is imposed
and the measure or the value to which the rate will be applied;
(viii) Section 5(1) fulfils the above components of taxation:
• Taxable event  “There shall be levied a tax called integrated goods
and services tax on all inter-State supplies of goods or services or both
except on the supply of alcoholic liquor for human consumption.”
• Taxable value  “On the value determined under Section 15 of the
CGST Act”
• Taxable rate  “At such rates not exceeding 40% as may be notified
by the Government on the recommendations of the Council and
collected in such manner as may be prescribed”
• Taxable person  “Shall be paid by the taxable person”
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 supply of goods or services or both instead of
the supplier of such goods or services or both under sub-Section (3) or subSection (4) of Section 9 of the CGST Act or under sub-Section (3) or subSection (4) of Section 5 of the IGST Act. The impugned notifications are
issued in exercise of the powers of the Union Government vested by the
aforesaid sections of the IGST Act or the CGST Act;
PART B
15
(x) A person covered by reverse charge becomes a taxable person in terms of
Section 2(107) of the CGST Act read with Section 24(iii) of the CGST Act.
Pertinently, Section 24(iii) of the CGST Act employs the language of “persons
who are required to pay tax under reverse charge” and not “persons who are
recipient of services under Section 2(93) of the CGST Act 2017”;
(xi) Section 5(3) of the IGST Act and Section 9(3) of the CGST Act permit the
Government, on the recommendation of the GST Council, to specify the
categories of goods or services or both, the tax for which shall be paid on
reverse charge basis by the recipient of such goods or services or both;
(xii) Presently, neither the provisions nor the rules have identified the taxable
persons for reverse charge. Hence, the impugned notifications are a
legitimate exercise of delegated legislation. Notification 10/2017 identifies an
importer as a recipient for the purposes of reverse charge. The power to issue
such a notification can be traced back 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 supply in terms of Section
7(4) read with Section 13(1) and 13(9) of the IGST Act. Although the
contracting parties are foreign, the critical limb of the transaction happens in
the taxable territory, namely, India. Hence, the transaction can also fall under
Section 7(5)(c) read with Section 13(1) and Section 13(9) of the IGST Act;
(xiv) Section 13(9) of the IGST Act stipulates that the place of supply of services of
transportation of goods other than by way of mail or courier shall be the place
PART B
16
of destination of such goods. Even though the contracting parties – the
foreign shipping line and the foreign exporter – are outside the territory of
India, the provision of service is for the Indian importer and consequently the
consumption and exhaustion of service which is a critical limb, both
commercially and legally, happens only in the hands of the Indian importer;
E. Time of Supply
(xv) Section 13(5) of the CGST Act contains a residual provision for determining
time of supply to be the date on which the tax is paid. Since the other subsections in Section 13 are not applicable for construing the time of supply,
Section 13(5) of the CGST Act would be applicable;
F. Composite Supply
(xvi) The CIF transaction and IGST on ocean freight are two independent
transactions, entitled to suffer independent levies and do not qualify as a
composite supply under Section 2(30) of the CGST;
(xvii) GST and customs duties are not exclusive means of taxation. GST is a
destination-based tax. The integrated tax is being sought to be imposed on
the supply of service and 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. Tax paid at an anterior stage is not double
taxation if it is included in the overall value;
(xviii) The discharge of reverse charge taxation does not make two independent
contracts as a composite contract. The contract between the foreign shipping
PART B
17
line and the foreign exporter is distinct and independent of the contract
between the foreign exporter and the Indian importer. Their concomitance
does not make them composite;
(xix) What is sought to be taxed on the supply of goods on CIF value basis is
traceable to the proviso to Section 5(1) read with Sections 3(7) and 3(8) of the
Customs Tariff Act. On the other hand, what is sought to be taxed under IGST
on reverse charge basis derives power under Section 5(1) (taxable person)
read with Section 24(iii) of the CGST Act and Section 5(3) of the IGST Act
and the impugned notifications;
(xx) A Constitution Bench of this Court in McDowell and Company Ltd. v.
Commercial Tax Officer18 has held that a single element can constitute the
basis of a levy and can also form part of the value for another transaction.
This cannot be termed as double taxation.
G. Extra-territoriality
(xxi) There is sufficient territorial nexus for the purpose of taxation since the
importer is the final beneficiary of a service provided by a foreign shipping line
by way of transportation up to the customs station of clearance in India. The
transaction between the foreign exporter and the foreign shipping line has a
nexus to the taxable territory of India. The importer is the beneficial owner of
the goods at the time of clearance. The appellant relies on the decisions of
this Court in M/s Electronic Corporation of India v. Commissioner of
 18 1985 (3) SCC 230 [“McDowell”]
PART B
18
Income Tax19 and GVK Industries v. Income Tax Officers20 where this
Court has upheld taxing statutes having a territorial nexus to India;
H. Service recipient
(xxii) There are six reasons to term an Indian importer as the recipient of service:
(a) Section 2(93)(c) of the CGST Act envisages a recipient of an intangible
service as one who does not pay consideration. In CIF transactions, the
Indian importer does not pay for ocean freight and yet receives the benefit
of transportation;
(b) Section 2 of the CGST Act is prefaced with “In this Act, unless the context
otherwise requires” which warrants a 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 impugned notifications issued thereunder,
allow any person to become a taxable person and such a taxable person
becomes the recipient of supply of goods or services or both. Once ‘any
person’ is identified as a taxable person for reverse charge under a
notification issued under 5(3) of IGST Act, by sheer default of the definition
of reverse charge under Section 2(98) of the CGST Act, such a taxable
person on reverse charge becomes a service recipient;
(d) Section 5(3) of the IGST Act clearly enables the identification of service
recipients, and not just categories of goods or services or both. Any
 19 1989 Supp 2 SCC 642 20 2011 (4) SCC 36 [“GVK Industries”]
PART B
19
contrary interpretation would be against the legislative intention. On a
conjoint reading of Section 5(3) of the IGST Act read with Section 2(93) of
the CGST Act, a service recipient can be identified through a notification;
(e) The definition of “supply” without consideration under Section 7(c) of the
CGST Act is not an exhaustive definition. Further, Section 2(31) of the
CGST Act defines consideration and does not restrict its payment to only
the owner of such goods and services; and
(f) Section 2(93)(c) of the CGST Act reads “..and any reference to a person to
whom a supply is made, shall be construed as a reference to the recipient
of the supply…”. A supply can be made to ‘a person’, ‘a registered person’
and ‘a taxable person’ and such a supply shall be construed to be a supply
to a recipient. Since the Indian importer would qualify under all the
aforementioned categories, it can be termed as recipient of the service.
I. Applicability of Section 5(4) of the IGST Act
(xxiii) In the alternative, the impugned notifications would be saved by Section 5(4)
of the IGST Act which permits the Union Government, on the
recommendations of the GST Council, to specify a class of registered persons
who shall in respect of specified categories of goods or services or both
received from an unregistered supplier, pay the tax on reverse charge basis
as the recipient and all the provisions of the Act would apply to such a
recipient;
(xxiv) It is admitted that the impugned notifications do not refer to Section 5(4) of the
IGST Act. However, it is settled law that once a power is available to grant or
PART B
20
identify the taxable person, taxable event, rate and measure, non-reference of
the source of power will not vitiate its exercise and application in given facts
and circumstances of the case;
J. Parliamentary legislation v. Excessive delegation
(xxv) This Court in Municipal Corporation of Delhi v. Birla Cotton Spinning and
Weaving Mills21 and Avinder Singh v. State of Punjab22 has held that only
essential legislative functions, such as policy guidelines and framework, need
to be performed by Parliament and the state legislatures. Once these are
made available through the exercise of plenary power, the rest of the details
can always emerge through the exercise of delegated powers;
(xxvi) The constitutional mandate of Articles 269A and 286 finds effect under the
IGST Act. The IGST Act, and specifically Section 5(1) therein, has defined the
subject matter of taxation (inter-state supply of goods and services), the
taxable person under Section 2(107) read with Section 24(iii) of the CGST
Act, a maximum cap of 40 per cent and determination of taxable value in
terms of Section 15 of the CGST Act. Only the identification of the taxable
person is delegated to the Union Government which makes its decisions on
the basis of the recommendations of the GST Council;
K. GST Council recommendations- Cooperative federalism and collaborative
federalism
 21 1968 (3) SCR 251 22 1979 (1) SCC 441
PART B
21
(xxvii) GST is a consumption tax and the tax jurisdiction extends to the place the
supply is consumed. Since the foreign shipping line or foreign exporter are
located in a non-taxable territory, the Indian importer has to be taxed on a
reverse charge basis since the service is consumed in India. The purpose is
to make the Indian shipping lines as competitive as foreign shipping lines. ITC
is available to the importer and the tax paid on such a reverse charge can be
offset in the importer’s output tax liability. Therefore, there is no additional
burden on the importer- it is a mere alteration of the mechanism;
(xxviii)The integrated tax was essential to level the playing field between foreign
shipping lines and Indian shipping lines since the former were not required to
charge any tax on the recipient of supply of service;
(xxix) The spirit of the cooperative federalism must guide the functioning of the GST
Council as envisaged in Article 279A(6). This was espoused by this Court in
Union of India v. VKC Footsteps India Private Limited23 where it was held
that there is a need for a harmonised structure of goods and service tax. The
GST Council is empowered to decide on every aspect of the GST law. The
recommendations of the GST Council are binding on the executive and the
legislature-while it frames laws relating to GST by the power under Article
246A;
(xxx) The GST Council recommends the law, rules and notifications through a
voting architecture that is prescribed in Article 279A(6) and quorum
 23 (2022) 2 SCC 603 (“VKC Footsteps”)
PART B
22
requirements in Article 279A(7). Every decision flows from one common
source;
(xxxi) The GST Council is the only constitutional body which acts as a converging
point or a platform for both the federal units to work in a harmonious manner
in structuring the goods and service tax, in the process of developing a
harmonised national market for goods and services;
(xxxii) Article 246A states that the power to legislate GST laws is only with the Union
of India and the States. Neither can Article 279A override Article 246A nor can
Article 246A be made subject to Article 279A. Judicial interpretation must
strike a harmony such that Parliament, the state legislatures and the GST
Council work in unison and harmony; and
(xxxiii)The constitutional scheme therefore envisages a two-step process. At the first
level of the GST Council, Article 279A(6) envisages cooperative federalism
and in the absence of either a non obstante clause in Article 279A or a
‘subject to’ clause in Article 246A, the need or requirement is that both the
Union and the States should be supportive of this cooperative federalism
through the process of collaborative federalism; and
(xxxiv) Section 5(1) of the IGST Act, by design, chooses to delegate certain
functions to the GST Council in order to achieve the legislative object. Even
though Article 246A does not subject Article 246A to Article 279A, the Union
and States after exercising their legislative power and discretion under Article
246A(1) have agreed to go by the recommendations of the GST Council in
every aspect of the GST law wherever required. This is the spirit of
PART B
23
collaborative federalism which must be respected by upholding the
constitutional validity of the impugned notifications.
11 The learned ASG has urged the following supplementary submissions by way
of rejoinder:
(i) The purpose of the integrated tax is to introduce a level playing field between
foreign shipping lines and Indian shipping lines. It is a settled principle that to
tax one subject, the revenue does not have to tax everything;
(ii) The respondents have contended that the tax on an Indian importer is on a
reverse charge basis, and therefore the importer does not fall under the
definition of a ‘taxable person’. However, Section 2(107) of the CGST Act
defines a taxable person as any person registered or liable to be registered
under Section 22 or Section 24 of the CGST Act. Section 24 classifies
persons liable for compulsory registration, and Section 24(iii) includes persons
governed by the reverse charge mechanism;
(iii) In Laghu Udyog Bharati v. Union of India24, this Court struck down the
imposition of service tax on a reverse charge basis since the legislature had
failed to identify the persons on whom service tax could be imposed, enforced
and collected. However, Section 2(107) read with Section 24(iii) of the CGST
Act specifically identifies the importer as a taxable person who is liable to pay
tax on a reverse charge basis. Section 24(iii) of the CGST Act also defines
persons liable to pay tax on reverse charge as taxable persons;
 24 1999 (6) SCC 418 (“Laghu Udyog”)
PART B
24
(iv) The respondents have argued that under Section 5(1) of the IGST Act, the
taxable value can be determined only through Section 15 of the CGST Act
and its corresponding rules. It was contended that Notification 8/2017
prescribes the valuation of 10% of CIF value for the first time, which violates
Section 5(1) of the IGST Act. The appellant submits that in terms of Section
15(4) and Section 15(5) of the CGST Act, Rules 27 to 31 of the Central Goods
and Service Tax Rules 201725 have been formulated. The Revenue can also
assess the transaction by taking aid of a residual method prescribed under
Rule 31 of the CGST Rules. Any discretion vested in quasi-judicial authorities
must be regulated. The corrigendum dated 30 June 2016 amending
Notification 8/2017 and prescribing the methodology for determining valuation
can be read as a guideline for dealing with infirmities in assessment practices.
It is only a reference or a guideline for making assessments. Even if it were to
be held inapplicable, the revenue can assess the transaction under Rule 31 of
the CGST Rules. Thus, Notification 8/2017 does not impinge on Rule 31 of
the CGST Rules but only aids uniformity;
(v) The respondents rely on Section 2(87) of the CGST Act and Section 5 of the
IGST Act to argue that prescription can 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 cases where the
valuation cannot be determined under Section 15(1). Rule 31 of the CGST
 25 “CGST Rules”
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25
Rules also enables the valuation to be conducted through “reasonable
means”. Thus, delegation is envisaged in the statutory mechanism;
(vi) If the expression “by the recipient” is to be given a static meaning as those
falling under Section 2(93) of the CGST Act, then one would be denuding the
power to notify persons for reverse charge under Sections 5(1) and 5(3) of the
IGST Act read with Section 24(iii) of the CGST Act.
(vii) Alternatively, the concept of reverse charge and notifying persons liable for
reverse charge is envisaged in the statutory mechanism. Section 2(98) of the
CGST Act defines reverse charge as imposed “only on the recipient”. Section
2(93) of the CGST Act defines a recipient. An Indian importer can be a
recipient in six ways that have been elaborated in the submissions. The Indian
importer does not pay any consideration of service in CIF imports since
consideration is paid by the foreign exporter. Section 2 is illustrative and not
rigid. A “person”, as defined under Section 2(84), is deemed to be the
recipient of a service if such person satisfies the conditions under 2(93) of the
CGST Act. Section 5(3) of the IGST Act contemplates the applicability of all
provisions of the Act to the recipient. The fact that consideration is paid by the
foreign exporter to the foreign shipping line does not vitiate the IGST Act’s
scheme which enables payment of tax on a reverse charge basis;
(viii) Section 13(9) of the IGST Act states that the destination of the goods shall be
the place of supply, which is on Indian territory. This Court in Union of India
PART B
26
v. Jalyan Udyog26 has held that deeming fictions can be created even by the
executive, i.e. through delegated legislation.
(ix) In case of a foreign exporter and a foreign shipping line, there is a nexus with
India since the importer would be Indian. Forward charge taxation is
envisaged in direct tax. Section 9(1)(6) of the Income Tax Act 1961 taxes a
non-resident outside India since the income is generated in India;
(x) The decision of this Court in BSNL v. Union of India27 on double taxation has
no applicability to this case since that was on the question of the overlap of
VAT and service tax in the pre-GST regime and was decided on the ground of
the impingement on the exclusive domain of the Union to impose service tax
under Entry 97, List I;
(xi) In the alternative, the integrated tax derives authority from Section 5(4) of the
IGST Act which permits the government to specify a class of registered
persons who receive goods or supplies from an unregistered supplier, who
shall pay the tax on a reverse charge basis as the recipient. If this section is
deemed applicable, then the importers would be liable for tax with effect from
1 February 2019, though exempted for the period from 13 October 2017 till 31
January 2019;
(xii) The creation of the GST Council under Article 279A embodies the spirit of
collaborative federalism. The GST Council is constitutionally mandated,
 26 1994 (1) SCC 318 27 2006 (3) SCC 1 (“BSNL”)
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27
particularly under Article 279A(6), to promote harmony and alignment
amongst the federal partners;
(xiii) Under Article 279A(4), decisions of the GST Council transform into
recommendations to the Unions and the States. The GST Council is the only
constitutional body that acts as a converging space or platform for the federal
units to work in a harmonious matter. The principal function of the GST
Council is to take decisions, which are conveyed as recommendations. These
recommendations have a unique constitutional status and they are overridden
in exceptional circumstances;
(xiv) It was contended by the respondents that instead of course correcting the
input tax mechanism, the revenue has chosen to tax the Indian importer on
reverse charge. This is more a policy than a perceptional issue. As long as
the tax is legal and valid, the manner and mode of taxation need not be
questioned. A better manner and mode would not result in the exercise of
legislative discretion being declared to be invalid or illegal; and
(xv) The integrated tax was introduced to ensure a level playing field between
foreign and Indian shipping lines. This objective must be appreciated while
determining constitutionality.
PART B
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B.2 Respondent-assessees
12 Mr V Sridharan, learned senior counsel appearing on behalf of the
respondents28 has urged the following submissions:
(i) Under Section 5(4) of the IGST Act, the Government cannot specify the
person liable to pay service tax on a reverse charge basis:
(a) Section 5(3) of the IGST Act provides that the Government may specify
the categories of supply of goods or services or both on which the tax
shall be paid on reverse charge basis by the recipient of the goods or
services. Thus, the power under Section 5(3) is only to specify the
categories of supply, while the liability to pay tax is fixed on the
recipient. The Government cannot specify the person liable to pay tax
on reverse charge basis under Section 5(3);
(b) Notification 10/2017 has been issued under Section 5(3) of the IGST
Act. Since the power flows from Section 5(3), the Government can by a
notification only specify the ‘categories of supply’, as the liability for tax
has been determined by Parliament;
(c) In contrast with Section 5(3), prior to the introduction of GST, Section
68(2) of the Finance Act 1994 provided that the service tax shall be
paid by “such person…as may be prescribed”. In that case, the liability
of tax was not determined by the legislation;
 28 In SLP(C) No. 3081 of 2021, SLP(C) No. 1625 of 2021 and SLP(C) No. 3760 of 2021
PART B
29
(d) Under the CGST Act and the IGST Act, the only place where a person
other than a supplier or recipient is made liable to pay tax is under
Section 5(5) of the IGST Act, where an electronic commerce operator
through whom supply is made is taxed; and
(e) In case the Parliament desired the tax to be collected from a person
other than a supplier or recipient, it would have expressly provided so
in the legislation. Since Parliament has specified the person liable for
tax, it is not a matter to be governed by delegated legislation;
(ii) Section 2(98) of the CGST Act defines ‘reverse charge’ as the liability to pay
tax by the recipient of supply of goods or services or both instead of the
supplier of such goods or services or both. In other words, only the recipient
can be made liable to pay tax under reverse charge basis and the reverse
charge cannot be disintegrated from the recipient of supply;
(iii) Section 5(3) clearly stipulates that (i) the tax shall be paid on a reverse charge
basis and (ii) the tax is payable by the recipient;
(iv) GST laws contemplate only one recipient for one supply:
(a) The interpretation of the ASG that the foreign exporter is the recipient
under clause (a) of Section 2(93) of the CGST Act and the Indian
importer is the recipient under clause (c) of Section 2(93) of the CGST
Act leads to absurdity;
(b) Under Section 2(93) of the CGST Act, a ‘recipient’ is defined with
reference to three situations- (a) where consideration is payable for the
supply of goods or services or both, (b) where no consideration is
PART B
30
payable for the supply of goods and (c) where no consideration is
payable for the supply of a service. Clauses (a), (b) and (c) of Section
2(93) are mutually exclusive and cannot apply simultaneously. In case
the supply of goods or services is for consideration, clause (a) applies
and the recipient is the person who is liable to pay the consideration;
(c) The question of who is the beneficiary of the supply or who has
received the supply are irrelevant in determining the ‘recipient’ under
Section 2(93) of the CGST Act;
(d) Whether a supply of service is an ‘inter-state supply’ under Section 7(3)
or ‘intra-state supply’ under Section 8(2) of the IGST Act depends on
the location of the supplier and the place of supply. In case there are
two recipients of a single supply, as argued by the ASG, then the
transaction may become inter-state as well as intra-state supply. Such
a situation has not been envisaged by Parliament;
(e) Only the recipient of the supply is entitled to avail input tax credit. In
case there are two recipients of a single supply, two persons will be
allowed to avail credit of tax by the supplier;
(f) The rate of tax is often dependent on the recipient of the supply. For
instance, services supplied to Government, local authorities or
charitable institutions, are exempted or liable to a lower rate of tax. If
there are two recipients, this would result in an anomaly; and
(g) Even in case of a three-party transaction involving supply of goods,
Section 10(1)(b) of the IGST Act provides that the place of supply of
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31
goods is the principal place of business of the recipient, and not the
person to whom the goods are delivered;
(v) The last leg of Section 2(93) of the CGST Act does not create a separate
category of recipient:
(a) Section 2(93) provides three categories of recipients, namely, where
consideration is payable for supply of goods or services; where no
consideration is payable for supply of goods; and where no
consideration is payable for supply of services;
(b) Section 2(93) also provides that any reference to a person to whom
supply is made shall be construed as a reference to the recipient of
supply and shall include an agent acting on behalf of the recipient; and
(c) The above provision implies that if the Act does not use the term
‘recipient’ but makes a reference to the person to whom supply is
made, then they shall be construed as a ‘recipient’. It does not
however, create a new category of recipient.
(vi) The taxable event for levy of GST is ‘supply’ of goods or service. In the
absence of supply, no tax can be levied under IGST, CGST or State Goods
and Services Tax Act29:
(a) Article 366(12A) of the Constitution defines the ‘goods and services tax’
as the tax on ‘supply’ of goods or services or both;
 29 “SGST”
PART B
32
(b) Section 5 of the IGST Act, which is the charging section for levy of tax,
also states that the IGST will be levied on all inter-State ‘supplies’ of
goods or services or both; and
(c) Each transaction has to be evaluated independently to determine its
taxability. The transaction of supply takes place between the
contracting parties, that is, at whose instance the supply is made;
(vii) The CGST Act does not envisage a taxable supply without consideration,
other than those specified in Schedule I:
(a) Clause (a) of Section 7(1) of the CGST Act defines the term ‘supply’ as
all forms of supply of goods or services made for a consideration in the
course of or in furtherance of business. Clause (b) of Section 7(1) of
the CGST Act provides that import of service for a consideration will be
included in the term ‘supply’ even if it is not made in the course or
furtherance of business. Clause (c) provides that activities specified in
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 of business and (ii) made for a
consideration. In clause (b), the condition of the supply being made in
the course of business is absent. In clause (c), the condition of supply
being made for a consideration has not been incorporated but this only
for activities provided in Schedule I; and
PART B
33
(c) The argument that supplies can be made without consideration for
activities other than those specified in 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 provides that integrated
tax in respect of supplies made by an unregistered supplier to a
registered person shall be paid by such person on reverse charge
basis as a recipient of supply;
(b) The section was a standalone section, operating on its own, and did
not require anything to be specified by way of a notification. Thus,
Notification 10/2017 cannot 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 February 2019 to provide that the
Government may, based on the recommendations of the GST Council,
by notification, specify a class of registered persons who shall, in
respect of supply of specified categories of goods or services or both
received from an unregistered supplier, pay the tax on reverse charge
basis as the recipient;
(d) The reliance placed by the Government on the amended Section 5(4)
of the IGST Act to justify Notification 10/2017 is erroneous as:
• There was no power to issue a notification specifying the class of
registered person liable to pay tax under reverse charge basis
under Section 5(4) at the time when the impugned notification was
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34
issued on 28 June 2017. The power has been granted by
amendment w.e.f. 1 February 2019;
• Section 2(93) of the CGST Act provides that any reference to a
person to whom supply is made shall be construed as reference to
the recipient of supply. Thus, the person under Section 5(4) who
has received the supply is the recipient of the supply. Even after
the amendment of Section 5(4), only the recipient can be specified
as a person liable to pay tax; and
• Section 2(98) of the CGST Act defines ‘reverse charge’ as the
liability to pay tax by the recipient of the supply instead of the
supplier. Thus, only the recipient can be made liable to pay tax on
a reverse charge basis;
(ix) Section 13(9) of the IGST Act is only relevant to determine the place of
supply and not the recipient of supply. Whether the supply of service is an
export of services under Section 2(6)(a) of the IGST Act or an import of
services under Section 2(11), read with Section 7(4) of the IGST Act; or an
inter-State supply of service, is not determined by Section 13(9);
(x) Notification 10/2017 has been issued on the recommendation of the GST
Council under Section 5(3) of the IGST Act and not under Article 279A of the
Constitution. If the GST Council intended to make a recommendation
deeming the importer as recipient of supply, then the proper course of
PART B
35
implementation would be to make an amendment in the IGST Act and seek
Parliamentary approval;
(xi) The objective of the tax or levy cannot validate an ultra vires levy:
(a) The Government has contended that the levy of tax on services of
transportation of goods into India provided by a person in a non-taxable
territory to a person in a non-taxable territory, has been introduced to
create parity for Indian shipping lines with foreign shippers;
(b) The notification for the levy and reverse charge has been lifted from the
erstwhile service tax regime into the GST regime without considering
the changes in language in Section 5(3) of the IGST Act as opposed to
Section 68(2) of the Finance Act 1994. Thus, the notification is ultra
vires the Act;
(xii) The scheme of IGST Act does not envisage a person other than the supplier
or the recipient as a person liable to pay tax:
(a) The time of supply of services is determined according to Section 20 of
the IGST Act along with Section 12 and 13 of the CGST Act. Section
12 deals with the time of supply of goods and Section 13 deals with the
time of supply of services;
(b) Section 13(1) states that the liability to pay tax on services arises at the
time of supply. Sub-section (2) determines the time of supply on
forward charge basis. Sub-section (3) deals with time of supply when
tax is payable on reverse charge basis. Under this sub-section, time of
supply of services is the earliest date of payment entered in the books
PART B
36
of accounts of the recipient or the date of debit in the bank account or
sixty days from the date of last issue of invoice by the supplier. Thus, a
person other than a recipient cannot determine the time of supply;
(c) Section 13(5) of the CGST Act is only relevant for determining the time
of supply in case of clandestine supply or evasion of tax and cannot be
used to determine time of supply for ocean freight services;
(d) The provisions relating to filing of returns apply whether a person is a
supplier or a recipient of supply, or apply only to an outward supply and
an inward supply. The supply of ocean freight service is neither an
inward supply nor an outward supply;
(xiii) In case of CIF contracts, the customer contracts for a supply of delivered
goods at the port of destination. The contract for transportation of goods is
entered into by the foreign exporter with the foreign shipper. Thus, the person
liable to pay consideration to the foreign shipper is the foreign exporter. The
importer of goods in India is not the person liable to pay the consideration,
and is thus, not the ‘recipient’ of the service;
(xiv) The contract of the Indian importer with the foreign exporter is for supply of
delivered goods. The service of transportation is a component of the supply of
goods similar to raw material, manufacturing cost or employee cost of the
supplier. To contend that the purchaser has received the supply of raw
material or the services of an employee is illogical. Similarly, the argument
that the Indian importer has received transportation services is irrational; and
PART B
37
(xv) Serial No. 9(ii) of Notification 8/2017 read with Para 4 and Serial No. 10 of
Notification No. 9 of 2017-Integrated Tax (Rate) dated 28 June 2019 describe
the services as provided by a person located in a non-taxable territory to a
person located in a non-taxable territory. These notifications recognise the
exporter as the recipient of the service of ocean freight;
(xvi) The argument of the ASG that the IGST paid on goods at the time of import is
a customs duty and not a tax, and thus, there is no dual levy of tax recovered
on ocean freight from the exporter is erroneous:
(a) The present case involves outright purchase of goods and thus, it is a
supply of goods under GST and an import of goods according to
customs law. The issue is whether the transaction is an import of goods
under customs law, but a 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 tax on goods imported into India
shall be levied and collected in accordance with Section 3 of the
Customs Tariff Act on the value as determined under the Customs
Tariff Act and at the point when duties of customs are levied under
Section 12 of the Customs Act;
(c) Section 3(7) of the Customs Tariff Act provides that any article
imported into India shall, in addition, be liable to integrated tax;
(d) Both the proviso to Section 5(1) of the IGST Act and Section 3(7) of the
Customs Tariff Act provide that goods imported into India shall be liable
to integrated tax;
PART B
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(e) The contention that the proviso to Section 5(1) of the IGST Act does
not contain the word ‘supply’ and thus, the tax is imposed on import of
goods irrespective of whether the transaction is supply or not, is
erroneous;
(f) The absence of the word ‘supply’ in the proviso will not lead to an
extreme result that the transaction of import of goods becomes leviable
to IGST even if it is not supply;
(g) The CGST Act has at various instances, such as Section 11(1), Section
12(1), Section 13(1) and Section 49(9), omitted the word ‘supply’ and
merely mentioned the liability to pay tax on goods or services;
(h) The proviso under Section 5(1) of the IGST Act read with Section 3(7)
of the Customs Tariff Act implies that the tax is leviable only on supply
of goods imported into India;
(i) The amount collected as IGST on import of goods is apportioned
between the Union and States as per Article 269A of the Constitution
which provides for apportionment of GST on inter-state supply of goods
or service. If import IGST was a customs duty, then the revenue
proceeds would be distributed in accordance with Article 270 of the
Constitution;
(j) At the introduction of GST, the understanding of the Government was
in consonance with the above legal position and accordingly, the
Government issued a notification exempting goods and services
imported from an SEZ unit or developer under the IGST Act.
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Subsequently, the Government rescinded the above exemption
notifications and issued separate notifications under the Customs Act
and IGST Act; and
(k) The Government has also issued various notifications exempting
payment of IGST in case of import of goods on lease or temporary
import basis. The intention of Government is not to impose IGST in
case of import of goods that do not amount to supply.
13 Mr Harish Salve, learned senior counsel, appearing on behalf of the
respondent30 has submitted:
(i) A CIF contract is an inclusive price covering cost of goods, insurance and
freight payable for carriage of goods to the destination specified in the
contract. The essence of the contract is that a seller having shipped the
goods in accordance with the contract, can fulfil his part of the bargain by
tendering to the buyer the proper shipping documents. If he does this, he is
not in breach even if the goods are lost before such tender. In the event of a
loss, the buyer must pay the price on tender of documents and his remedies
lie against the carrier but not the seller;
(ii) A CIF contract has two components: (i) price is paid for the freight, and (ii) the
buyer is never obligated to pay it. The owner of the vessel who enters into a
contract of affreightment has a privity of contract with the supplier of goods
 30 CA No. 13958 of 2020
PART B
40
and is rendering a service to the supplier. If the service is not received, then
the question of reverse charge does not arise;
(iii) Sections 5(3) and 5(4) of the IGST Act are merely machinery provisions for
collection of tax, and not the charging provision:
(a) Section 5(1) is the charging section which levies IGST. Since there is
no separate levy under Section 5(1) on ocean freight, as it is an import
of goods which already suffers IGST on CIF value, the question of
reverse charge does not arise;
(b) The proviso to Section 5(1) clarifies that the ‘value as determined’ is
only the measure of tax and not the subject of tax; and
(c) Section 5(3) cannot be treated as the charging section as it would
make it possible for the Government to impose separate taxes under
Sections 5(1) and 5(3) and charge for the services at both ends;
(iv) There must be a taxable event in the CIF contract of the kind contemplated
under the IGST Act. In case there is no such event, it cannot be created
through delegated legislation by the GST Council. There is an absence of a
statutory fiction by which a CIF contract can be split into a contract for supply
of goods and services, and creating a second layer of fiction by which the
shipper is rendering a service to the supplier of goods. Thus, the question of
levy of tax by the GST Council does not arise;
(v) In the transaction of import of coal on CIF basis in the present case, the
recipient will fall under clause (a) of Section 2(93) of the CGST Act as
consideration is payable for the service of shipping. The mere fact that an
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41
Indian is the recipient will not lead to the Indian recipient making the payment
separately under the contract of affreightment. The Indian recipient is only a
recipient of goods, not of service;
(vi) The law recognises and maintains the integrity of a CIF contract under
Section 2(30) read with Section 2(93), and Section 8. These sections maintain
the integrity of a composite contract by providing that where the goods come
with insurance and freight, the tax is imposed only on supply of goods;
(vii) The High Court has held that that the notifications under challenge were ultra
vires. The Government has not urged that any of these findings are incorrect
and has only contended that Section 5(1) of the IGST Act satisfies all
ingredients of a 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 notifications for 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 legislative function;
(ix) Entry 9(ii) of Notification 8/2017 imposes a tax on ocean freight in import of
goods. Such a power however, has not been provided in the statute;
(x) Para 4 of Notification 8/2017 determines the ‘value of service’ as 10% of the
CIF value, which is contrary to Section 15(1) of the CGST Act which says
‘transaction value’;
(xi) Article 366(12A) defines goods and services tax as involving only supply of
goods or services or both. Section 7 of the IGST Act has made a clear
distinction between standalone supply of goods, standalone supply of
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42
services and standalone supply of ‘goods or services or both’. Section 7(4)
treats standalone services imported into India as inter-State supply and does
not artificially bifurcate by assuming ocean freight in the transaction of import
of goods;
(xii) Section 13 of the IGST Act has no application in the case which relates to
import of goods and not services standalone. Section 13 applies to place of
supply of services, referring to standalone services, and does not use the
term ‘both’ to apply to supply of goods or services; and
(xiii) IGST Act has no extra-territorial application as the Act extends to the whole of
India. Under Section 2(109) of the CGST Act, taxable territory means the
territory to which the Act applies. Further, GVK Industries (supra) states that
Parliament may exercise its powers with respect to an extra-territorial aspect
when it has a nexus with India. It does not however empower delegated
legislation to exercise such power. Thus, the activity brought within the tax net
by the impugned notifications is contrary to the IGST Act.
14 Mr Arvind Datar, learned senior counsel, appearing on behalf of the
respondent31 has submitted:
(i) The levy of IGST on ocean freight by way of Notification No. 10/2017-
Integrated Tax (Rate) is extra-territorial and ultra vires Section 1 read with
Section 2(22) of the IGST Act:
 31 SLP (C) No. 3462 of 2021
PART B
43
(a) The levy imposed is on the service of transportation of goods rendered
by the shipping line to the foreign vendor/exporter, occurring outside
the territory of India, that is outside the taxable territory;
(b) The only nexus of the service with India is that the service results in the
import of goods into India. However, this activity is already subject to
IGST under the IGST Act and customs duty under the Customs Act;
(c) For a levy to be imposed under the IGST Act, the service must be a
‘supply’ under the provisions of IGST Act read with Section 7 of the
CGST Act. However, Section 1 of the CGST Act and IGST Act are
limited to the territory of India. Thus, any service received outside the
territory of India cannot be considered to be ‘supply’ under the IGST
Act or the CGST Act;
(d) To impose a levy on a service that is extra-territorial, there has to be a
deeming fiction in the form of a statutory provision which deems the
supply of transportation by a vessel to a non-resident exporter. In this
case, such a deeming fiction does not exist. Thus, the transportation
service cannot be deemed as a ‘supply’ under the IGST Act;
(e) Only once the service provided outside the territory of India is deemed
as a ‘supply’ by way of statute, can there be a determination of the
supplier and the recipient;
(f) By way of the impugned notification, the freight charges incurred
abroad are sought to be taxed in India on the ground that the service
recipient is in India. If this argument is accepted, then any service (such
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44
as insurance or incidental services) rendered abroad can be taxed in
India on the ground that the recipient is in India. This practice is in
contrast with international taxation laws and will lead to hardship for
Indian importers;
(g) Article 245(2) of the Constitution states that a law made by the
Parliament will not be invalid on the ground that it has extra-territorial
operation. However, the expression ‘law made by the Parliament’ does
not include executive notifications, even if made on the
recommendations of the GST Council; and
(h) Tax can be levied outside the territory of India by way of primary
legislation. For instance, under Sections 6 and 7 of the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and Other
Maritime Zones Act 1976, a legal fiction is created by which India has
the power to levy tax in the Exclusive Economic Zone and Continental
Shelf. Pursuant to this fiction, notifications levying customs duty on
supplies made to oil drilling rigs in the Continental Shelf have been
issued. In the absence of a primary legislation or statutory provision to
this effect, notifications cannot impose duties on activities occurring
outside India;
(ii) The value of a CIF contract is indivisible, making the computation of tax on
such a contract impossible:
(a) The only way to artificially dissect the value of a CIF contract is by way
of statute, which is absent in this case;
PART B
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(b) If such a division is allowed, then the Government will be able to tax not
just ocean freight, but also insurance services; and
(c) Levy on contracts on a CIF basis will lead to hardships for the Indian
recipients. The advantage of entering into CIF contracts is to ensure
that the foreign supplier is responsible for arranging transportation and
insurance. However, if a CIF contract is made subject to GST, then the
Indian importers will have to make their own arrangements to transport
the goods, book an insurance policy and arrange for shipping;
(iii) The ASG’s reliance on the nexus theory to justify the levy of GST on ocean
freight, by equating it to the imposition of income tax on income accruing in
India or customs duty imposed on goods imported into India- is erroneous:
(a) In case of imposition of income tax, the nexus is provided by way of a
deeming fiction under Section 5(2) of the Income Tax Act 1961, where
a non-resident is liable to tax only if the income is deemed to accrue or
arises in India;
(b) In case of customs duty, the taxing event is the goods entering the
territory of India; and
(c) In the absence of such a provision, the freight services rendered
outside India cannot be deemed to be received in India merely because
the recipient is in India.
(iv) The importer is not the ‘recipient’ of services under Section 2(93) of the CGST
Act:
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(a) Under clause (c) of Section 2(93), when there is no consideration
payable for the supply of services, then the person to whom the
services are rendered is the service recipient. However, in this case,
the importer is not the service recipient as the importer does not pay
the consideration or receive the services;
(b) The argument of the ASG that the importer is a ‘recipient’ as they are
the ultimate beneficiary enlarges the scope of Section 2(93) by adding
words that are absent in the statute;
(c) Even if the ultimate beneficiary is considered to be the recipient, the
importer is not the beneficiary of the service of transportation of goods.
Under the terms of a CIF contract, the foreign vendor is obligated to
arrange for transportation of goods for which he engages the services
of a shipping line. Thus, the foreign vendor is the ultimate beneficiary;
(d) The importer is only the beneficiary of the imported goods, whose value
is taxable as customs duty under the Customs Tariff Act as well as
under the IGST Act; and
(e) Additionally, reliance cannot be placed on clause(c) of Section 2(93) as
it only refers to those supplies for which consideration is not paid as
mentioned in Schedule I of the CGST Act. This schedule enumerates
the activities deemed as supplies without consideration.
(v) Imposition of IGST on ocean freight will lead to double taxation:
(a) Section 3(7) of the Customs Tariff Act states that goods imported into
India will be subject to IGST under Section 5 of the IGST Act, on the
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value as determined 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 of Value of Imported
Goods) Rules 2007 includes cost of transportation and insurance in the
value of goods, which forms the basis of the levy of IGST under the
proviso to Section 5 of the IGST Act. The impugned levy of IGST on
ocean freight would thus amount to double taxation on the same
transaction;
(vi) The ASG’s reliance on ‘aspect theory’ to justify the impugned levy is
erroneous:
(a) The ASG relied on the ‘aspect theory’ and submitted that the impugned
notification taxes the ‘service’ element of ocean freight, while the
‘goods’ element is taxed under the proviso to Section 5 of the IGST
Act. However, such an approach is impermissible according to the
decision of this Court in BSNL (supra);
(b) The aspect theory is inapplicable as the freight element is included by
levying IGST; and
(c) The aspect theory in India permits taxation of two different aspects or
features of a transaction. For instance, in a catering contract, supply of
food was subject to value added tax and the service aspect was
subject to service tax. However, the aspect theory does not permit
double taxation of the same amount or value
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(vii) The GST Council which has been created by Article 279A of the Constitution
is a recommendatory body, whose recommendations can be implemented by
either amending the CGST Act or the IGST Act or by issuing a notification.
However, notifications issued cannot be ultra vires the parent legislation;
(viii) The principles of cooperative federalism are not relevant in this case as they
were not adjudicated before the High Court. The appeal must test the
correctness of the impugned judgment without expanding its scope; and
(ix) Interpretation of Article 279A of the Constitution was not an issue before the
High Court and the present appeal should be restricted to the validity of the
impugned notification.
15 In addition to the above, Mr Vikram Nankani, learned senior counsel,
appearing on behalf of the respondent32 urged the following submissions:
(i) Section 7(4) of the IGST Act provides that supply of services imported into the
territory of India shall be treated as a supply of services in the course of interstate trade or commerce. Section 2(11) of the IGST Act defines “import of
services” when the supplier of service is located outside India, the recipient of
service is located in India and the place of supply of service is in India. When
these provisions are read together, it implies that in case of import of services
into the territory of India, the location of the supplier of services is outside
India and the location of the recipient is in India. Thus the IGST Act covers
 32 SLP(C) No. 843/2021
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either import of goods or import of services and not services subsumed into
the value of goods imported into India;
(ii) The IGST Act was never intended to apply to the importer of goods on a CIF
basis as the services are provided and consumed before the goods reach
India and have no nexus with the Indian importer;
(iii) The transaction between two persons located outside India is not chargeable
under Section 5(1) read with the proviso and 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 the IGST Act;
(iv) Section 13(9) of the IGST Act, which states that the place of supply of
services of transportation of goods is the destination of the goods, cannot be
read in isolation. Read with Section 7(4) of the IGST Act, it implies that in
case of import of services, the supplier must be outside India while recipient
must be in India; and
(v) The test of ‘ultimate beneficiary’ relied upon by the ASG does not have
statutory backing since the charging section, that is Section 5, makes the
recipient of the services liable to pay tax. The Indian importer is not a party to
the CIF contract between the foreign exporter and the shipping line.
16 Mr Uchit Sheth, counsel appearing on behalf of the respondents33 submitted:
(i) The importers in a CIF contract do not have any privity of contract with the
supplier of the transportation service since they neither make payment of
 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. 2736/2021
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consideration to the service provider, nor avail any service. The importers
only purchase and import goods;
(ii) The impugned levy is contrary to the object and purpose of the IGST Act.
Section 5 of the IGST Act clarifies that so far as imported goods are
concerned, IGST is levied at the point of clearance of goods for home
consumption and on the total value (including value additions till that point).
This was also clarified by Circular no. 3/1/2018-IGST dated 25 May 2018
issued by the Central Board of Indirect Taxes and Customs. The impugned
levy of IGST on the freight element of CIF contracts and high seas purchase
contracts is ultra vires as IGST is paid on the total value of goods;
(iii) In Ispat Industries Ltd. v. Commissioner of Customs34, in the context of
imposition of customs duty, it was held that in a CIF contract, the freight is
part of the price paid to the seller and further addition of transportation
charges is contrary to the statutory provisions; and
(iv) The judgment of this Court in Union of India v. Jalyan Udyog35 which states
that a legal fiction can be created even by delegated legislation, is
inapplicable as in that case, the fiction created was within the parameters of
the parent provision. In this case, the fiction violates Section 5(3) of the IGST
Act.
 34 (2006) 12 SCC 583 35 (1994) 1 SCC 318
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17 Mr Rajesh Kumar Gautam, learned counsel appearing on behalf of the
intervenor36 in SLP(C) No. 13958/2020, has submitted that the argument of the ASG
that the levy has been introduced to create a level playing field is fallacious as:
(i) Prior to 2016, all import transportation, whether undertaken by Indian or
foreign shipping lines was outside the scope of levy. Service tax was imposed
on import transactions undertaken by Indian shipping lines only to allow them
to avail CENVAT credit. This credit was protected even though no service tax
was payable on export transportation. Further, Indian importers availing
services of foreign shipping lines were liable to pay service tax under reverse
charge. This position continued under the GST regime and the only
transaction outside the ambit was when the foreign exporter availed the
services of a foreign shipping line to transport goods to India; and
(ii) The introduction of levy of service tax or GST on import transactions was by
way of an incentive to Indian shipping lines. Thus, it cannot now be contended
that the level playing field has been affected because of this levy.
18 Similar submissions have been addressed by Dr C Manickam37, Mr Rajat
Mittal38and Mr Abhishek A Rastogi39, which we have not recorded separately for the
sake of brevity.
19 The rival submissions will now be analysed.
 36 IA No. 118754/2021 in SLP(C) No. 37 Appearing for the respondent in SLP(C) No. 3680/2021 38 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. 13958/2020
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C Constitutional Architecture of GST
20 Before we proceed to analyse the vires of the impugned notifications, it is
pertinent to contextualize the constitutional architecture of the GST. The Constitution
(One Hundred and First Amendment Act) 201640 was enacted on 8 September 2016
introducing Article 246A and 279A. Article 246A stipulates that both the Parliament
and the State legislatures 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 every
State, have power to make laws with respect to goods and
services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to
goods 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 of
goods and services tax referred to in clause (5) of Article 279A,
take effect from the date recommended by the Goods and
Services Tax Council.”
Article 279A constitutes the GST Council which shall make recommendations to the
Union and the States on a wide range of subjects relating to GST:
‘‘279A. (1) The President shall, within sixty days from the date
of commencement of the Constitution (One Hundred and First
Amendment) Act, 2016, by order, constitute a Council to be
called the Goods and Services Tax Council.
(2) The Goods and Services Tax Council shall consist of the
following members, namely:—
(a) the Union Finance Minister...................... Chairperson;
(b) the Union Minister of State in charge of Revenue or
Finance................................................................ Member;
(c) the Minister in charge of Finance or Taxation or any other
Minister nominated by each State
Government........................................................Members.
(3) The Members of the Goods and Services Tax Council
referred to in sub-clause (c) of clause (2) shall, as soon as
may be, choose one amongst themselves to be the Vice-
 40 “Constitution Amendment Act 2016”
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Chairperson of the Council for such period as they may
decide.
(4) The Goods and Services Tax Council shall make
recommendations to the Union and the States on— (a) the
taxes, cesses and surcharges levied by the Union, the States
and the local bodies which may be subsumed in the goods
and services tax;
(b) the goods and services that may be subjected to, or
exempted from 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 the course of inter-State trade or commerce under article
269A and the principles that govern the place of supply;
(d) the threshold limit of turnover below which goods and
services may be exempted from goods and services tax;
(e) the rates including floor rates with bands of goods and
services tax;
(f) any special rate or rates for a specified period, to raise
additional resources during any natural calamity or disaster;
(g) special provision with respect to the States of Arunachal
Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya,
Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and
Uttarakhand; and (h) any other matter relating to the goods
and services tax, as the Council may decide.
(5) The Goods and Services Tax Council shall recommend
the date on which the goods and services tax be levied on
petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas and aviation turbine fuel.
(6) While discharging the functions conferred by this article,
the Goods and Services Tax Council shall be guided by the
need for a harmonised structure of goods and services tax
and for the development of a harmonised national market for
goods and services.
(7) One-half of the total number of Members of the Goods
and Services Tax Council shall constitute the quorum at its
meetings.
(8) The Goods and Services Tax Council shall determine the
procedure in the performance of its functions.
(9) Every decision of the Goods and Services Tax Council
shall be taken at a meeting, by a majority of not less than
three-fourths of the weighted votes of the members present
and voting, in accordance with the following principles,
namely:—
(a) the vote of the Central Government shall have a
weightage of one third of the total votes cast, and (b) the
votes of all the State Governments taken together shall have
a weightage of two-thirds of the total votes cast, in that
meeting.
(10) No act or proceedings of the Goods and Services Tax
Council shall be invalid merely by reason of—
(a) any vacancy in, or any defect in, the constitution of the
Council; or
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(b) any defect in the appointment of a person as a Member of
the Council; or
(c) any procedural irregularity of the Council not affecting the
merits of the case.
(11)The Goods and Services Tax Council shall establish a
mechanism 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
on one side and one or more other States on the other side;
or
(c) between two or more States, arising out of the
recommendations of the Council or implementation thereof.’’
21 The Union Government has contended that the recommendations of the GST
Council are binding on the legislature and the executive. It was submitted that since
the recommendations are binding, the rule making power of the Government under
the provisions of the IGST Act and CGST Act, exercisable on the ‘recommendations’
of the GST Council, are also very wide. The arguments of the Union Government
are as follows:
(i) A combined reading of Articles 246A and 279A elucidates that the GST
Council is the ultimate decision-making body in framing the GST law since it
is a constitutional body that acts as a converging platform for both the Union
and the States;
(ii) The functions and role of the GST Council are unique and incomparable to
other constitutional bodies. Therefore, interpretations of other provisions of
the Constitution do not have precedential value while interpreting the role of
the GST Council;
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(iii) The power of the Parliament and the State Legislature under Article 246A and
the power of the GST Council under Article 279A must be balanced and
harmonised, such that neither overrides the other:
(a) Though Article 279A does not begin with a non-obstante clause
overriding Article 246A, the latter would not override the former. The
core theme of GST law – as it emanates from Article 279(6) – is
cooperation and harmony. A system premised on cooperation cannot
provide inter se supremacy. Therefore, Article 279A has rightly not
been given an overriding effect over Article 246A; and
(b) Article 246A vests the Parliament and the State legislatures with the
power to enact laws on GST. This function, if delegated would amount
to abdication of the Parliament’s constitutional function. Therefore,
Article 246A cannot be made subject to Article 279A.
(iv) The ordinary legislative process for enacting a statute is that bills are
introduced and voted on by the legislature. However, Article 264A departs
from this as the framing of the policy, discussion on the policy, and decision
making are vested with the GST Council. The Parliament or the State
Legislature cannot legislate a law on GST under Article 246A independent of
the recommendations of the GST Council. A reading of Sections 5, 6 and 22
of the IGST Act indicates that the legislature and the executive are bound by
the recommendations of the GST Council on three preliminary provisions,
namely charge, exemption and rule-making power. Therefore, Parliament
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bound itself to the recommendations of the GST Council by enacting the IGST
Act and CGST Act; and
(v) The recommendations by the GST Council are transformed into legislation on
a combined reading of Article 279A and Sections 5,6, and 22 of the IGST Act
2017 and Sections 9,11, and 164 of the CGST Act.
C. 1 Legislative History of the Constitution Amendment Act 2016
Statement of Objects and Reasons
22 As early as in 2004, the Task Force on implementation of the Fiscal
Responsibility and Budget Management Act 2003 had recommended a shift to
consumption taxes to increase efficiency in production and enhance international
competitiveness of Indian goods and services. The need for such an enormous
change in the tax regime arose out of the distortions in the then existing indirect tax
regime which suffered from the drawback of multiplicity of taxes, taxable events,
compliances, and authorities. For instance, the rate of the sales tax and value added
tax on the same goods would differ across India. Several states would impose entry
taxes on goods before the goods entered their boundaries. The First Discussion
Paper on Goods and Services Tax in India released by the Empowered Committee
in November 2009 explained the rationale for introducing the GST regime in the
following terms:41
“The introduction of GST at the Central level will not only
include comprehensively more indirect Central Taxes and
integrate goods and service taxes for the purpose of set-off
relief, but may also lead to revenue gain for the Centre
 41 Empowered Committee, First Discussion Paper on Goods and Services Tax, (2009) Pars 1.13-1.14
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through widening of the dealer base by capturing value added
addition in the distributive trade and increased compliance.
In the existing State-level VAT structure there are also certain
short comings as follows. There are, for instance, even now,
several taxes which are in the nature of indirect tax on goods
and services, such as luxury tax, entertainment tax, etc., and
yet not subsumed n the VAT. Moreover, in the present Statelevel VAT scheme, CENVAT load on the goods remains
included in the value to be taxed under State VAT, and
contributing to that extent a cascading effect on account of
CENVAT element. This CENVAT load needs to be removed.
[…]
However, for this GST to be introduced at the State-level, it is
essential that the States should be given the power of levy of
taxation of all services. This power of levy of service taxes
has so long been only with Centre. A Constitutional
Amendment will be made for giving this power also to the
States. Moreover, with the introduction of GST, burden of
Central Sales Tax (CST) will also be removed. The GST at
the State-level is, therefore, justified for (a) additional power
of levy of taxation of services for the States, (b) system of
comprehensive set-off relief, including set-off for cascading
burden of CENVAT and services taxes, (c) subsuming of
several taxes in the GST and (d) removal of burden for CST.
Because of the removal of taxes in the GST, the burden of tax
under GST on goods will, in general, fall.”
23 Parliament introduced the Constitution (One Hundred and Fifteenth
Amendment) Bill 201142 which sought to amend the provisions of the Constitution to
introduce the GST regime. The Speaker of the Lok Sabha referred the 2011
Amendment Bill to the Parliamentary Standing Committee on Finance. The
Constitution (One Hundred and Twenty-Second Amendment) Bill 201443 was
introduced after incorporating the recommendations of the Standing Committee. The
2014 Amendment Bill was introduced to replace almost all the indirect taxes that
were levied by the State Governments and the Union Government, with a singular
tax system to eliminate the cascading effect of multiple taxes and to provide for a
 42 “2011 Amendment Bill” 43 “2014 Amendment Bill”
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common national market. The Statement of Objects and Reasons of the 2014
Amendment Bill reads as follows:
“The Constitution is proposed to be amended to introduce the
goods and services tax for conferring concurrent taxing
powers on the Union as well as the States including Union
territory with Legislature to make laws for levying goods and
services tax on every transaction of supply of goods or
services or both. The goods and services tax shall replace
a number of indirect taxes being levied by the Union and
the State Governments and is intended to remove
cascading effect of taxes and provide for a common
national market for goods and services. The proposed
Central and State goods and services tax will be levied on all
transactions involving supply of goods and services, except
those which are kept out of the purview of the goods and
services tax.”
(emphasis supplied)
24 The Finance Minister while introducing the 2014 Amendment Bill in
Parliament noted that the object of the constitutional amendment is to bring about a
“certain amount of convergence between these taxes so that the taxation
mechanism becomes extremely simple”.44 He also highlighted the fact that there
was no uniformity in the tax rates and structure across the States. The Statement of
Objects and Reasons and the debates and speeches in the legislature indicate the
intent behind the introduction of the Bill.45 The legislative history, the statement of
objects and reasons of the Bill and the speech made when the bill was introduced
indicate the mischief that Articles 246A and 279A to the Constitution sought to
remedy, which is to simplify the indirect tax regime to prevent the complexities
inherent in and the cascading effect of a multiplicity of taxes.
Simultaneous Legislative distribution
 44 Speech by Arun Jaitley in Lok Sabha on 24.4.2015; Tarun Jain, Goods and Services Tax: Constitutional Law and
Policy (EBC 2018) 16 45 Abhiram Singh v. CD Commachen, (2017) 2 SCC 629
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25 Article 246 read with the Seventh Schedule vests Parliament and the State
Legislatures with the power to make laws on subject matters listed in the Seventh
Schedule of the Constitution. Before the introduction of Articles 246A and 279A by
the Constitution Amendment Act 2016, the legislative powers of the Union and the
States on taxation were exclusive. The general subjects of legislation constitute one
group in the Union List (entries 1 to 81) and the State List (entries 1 to 44). The
subject heads related to taxation are clubbed together in both the Union and the
State lists (entries 82 to 92B in the Union list and entries 45 to 63 in the State list).
The concurrent list does not include any entry related to taxation.46 For example,
while the Union primarily has the power to impose income taxes, except from
agriculture47, the State has the power to impose tax on agricultural income48.
Therefore, both the Union and the States had a separate and an exclusive domain
over specific heads of taxation. The Union and the State could not impose tax under
the same head since the concurrent list did not include an entry for taxes. This
Court, in its decision in Hoecst Pharmaceuticals Ltd. v. State of Bihar49,
recognised the exclusive powers held by the Union and the State on taxation. The
three-Judge Bench observed that:
“75. Legislative relations between the Union and the States
inter se with reference to the three Lists in Schedule VII
cannot be understood fully without examining the general
features disclosed by the entries contained in those Lists” :
Seervai in his Constitutional Law of India, 3rd Edn., Vol. 1 at
pp. 81-82. A scrutiny of Lists I and II of the Seventh Schedule
 46 Entry 47 of the concurrent list mentions that “fees in respect of any of the matters in this 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
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would show that there is no overlapping anywhere in the
taxing power and the Constitution gives independent sources
of taxation to the Union and the States. Following the scheme
of the Government of India Act, 1935, the Constitution has
made the taxing power of the Union and of the States
mutually exclusive and thus avoided the difficulties which
have arisen in some other Federal Constitutions from
overlapping powers of taxation.
76. It would therefore appear that there is a distinction made
between general subjects of legislation and taxation. The
general subjects of legislation arc dealt with in one group of
entries and power of taxation in a 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 the separation of taxation powers between the
Union and the States by mutually exclusive lists. In List I,
Entries 1 to 81 deal with general 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 also brought out by
the fact that in List III, the Concurrent Legislative List, there is
no entry relating to a tax, but it only contains an entry relating
to levy of fees in respect of matters given in that list other
than court-fees. Thus, in our Constitution, a conflict of the
taxing power of the Union and of the States cannot arise.
That being so, it is difficult to comprehend the submission that
there can be intrusion by a law made by Parliament under
Entry 33 of List III into a forbidden field viz. the State's
exclusive power to make a law with respect to the levy and
imposition of a tax on sale or purchase of goods relatable to
Entry 54 of List II of the Seventh Schedule. It follows that the
two laws viz. sub-section (3) of Section 5 of the Act and para
21 of the Control Order issued by the Central Government
under sub-section (1) of Section 3 of the Essential
Commodities Act, operate on two separate and distinct fields
and both are capable of being obeyed. There is no question
of any clash between the two laws and the question of
repugnancy does not come into play.”
26 In the pre-GST regime, the Union had the exclusive power to impose indirect
taxes, that is, on inter-state sale of goods, customs duty, service tax, and excise
duty. The States had the exclusive power to impose tax on intra-State sale of goods,
luxury tax, entertainment tax, purchase tax, and taxes on gambling and betting. The
GST regime has subsumed all the indirect taxes. Article 246A which was introduced
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by the Constitution Amendment Act 2016 vests the Parliament and the State
legislatures with the concurrent power to make laws with respect to GST.
27 The distribution of legislative power between federating units- the Union and
the States, is among the paramount features of a federal Constitution.
50 Articles 246
and 254 have been central to the debate on the federal nature of the Indian
Constitution. Article 246A, is a ‘special provision with respect to goods and service
tax,’ and begins with a non-obstante clause overriding Articles 246 and 254. Article
246 sets down the constitutional framework defining the legislative competence of
Parliament and the State legislatures. Article 254 provides the framework for
addressing inconsistency between central and state laws on matters in the
Concurrent list. Article 246A entrusts Parliament and State legislatures the power to
legislate on the goods and services tax. The power of the States is however subject
to the conferment of an exclusive domain to Parliament to levy the goods and
services tax where the supply of goods or services takes place in the course of interstate trade and commerce.
28 In Union of India v. Mohit Mineral Pvt. Ltd.51, this Court while deciding the
constitutional validity of the GST (Compensation to States) Act 2017 noted that the
Constitution Amendment Act 2016 introduced changes in the legislative powers of
the Parliament and State legislature relating to indirect taxation. It observed that the
amendment “confers concurrent taxing powers on the Union as well as the States
 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
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for levying GST on transactions of supply of goods or services or both”. In Baiku v.
State Tax Officer, GST52, a writ petition was filed challenging the legality of the
notices and assessment orders issued under the Kerala Value Added Tax Act
200353 for the assessment years 2010-11 and 2011-12. The notices and orders
were challenged on the ground that the authorities did not have the jurisdiction to
issue them since the amendments introduced to Section 25(1) of the KVAT Act
through the Kerala Finance Acts 2017 and 2018 did not operate retrospectively. The
Kerala High Court had to decide whether the Kerala State legislature had the
legislative competence to amend the KVAT Act after the introduction of Article 246A
to the Constitution, and the repeal of KVAT pursuant to the amendment. The Court
noted that the special power introduced by Article 246A allows Parliament and the
State legislatures to ‘simultaneously’ make laws.54 Subsequently, while explaining
the ‘simultaneous’ nature of power held by Parliament and State legislature, it was
observed that the power under Article 246A can be exercised simultaneously by the
State legislature and Parliament and none hold any ‘unilateral or exclusive’
legislative power55.
29 In its decision in VKC Footsteps (supra), this Court noticed the changes in
the constitutional scheme introduced by Article 246A. One of us (Dr DY
Chandrachud) writing for the two-judge Bench observed:
 52 2019 SCC OnLine Ker 5362 53 “KVAT Act” 54 Paragraph 19 of the judgement. 55 Paragraph 22 of the judgment.
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“52. Article 246-A has brought about several changes in the
constitutional scheme:
52.1.Firstly, Article 246-A defines the source of power as well
as the 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
both to Parliament and the State Legislatures, save and
except for the exclusive power of Parliament to enact GST
legislation where the supply of goods or services takes place
in the course of inter-State trade or commerce.
52.3.Thirdly, Article 246-A embodies the constitutional
principle of simultaneous levy as distinct from the
principle of concurrence. Concurrence, which operated
within the fold of the Concurrent List, was regulated by
Article 254.”
 (emphasis supplied)
30 Article 246A provides Parliament and the State legislature with the concurrent
power to legislate on GST. Article 246A has a non-obstante provision which
overrides Article 254. Article 246 A does not provide a repugnancy clause. Unlike
Article 254 which stipulates that the law made by Parliament on a subject in the
Concurrent list shall prevail over conflicting laws made by the State legislature, the
constitutional design of Article 246A does not stipulate the manner in which such
inconsistency between the laws made by Parliament and the State legislature on
GST can be resolved. The concurrent power exercised by the legislatures under
Article 246A is termed as a ‘simultaneous power’ to differentiate it from the
constitutional design on exercise of concurrent power under Article 246, the latter
being subject to the repugnancy clause under Article 254. The constitutional role
and functions of the GST Council must be understood in the context of the
simultaneous legislative power conferred on Parliament and the State legislatures. It
is from that perspective that the role of the GST Council becomes relevant.
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Role of the GST Council
31 The Thirteenth Finance Commission set up the Task Force on GST. The Task
Force recommended that the Empowered Committee of State Finance Ministers
may, upon the introduction of GST, be transformed into a permanent constitutional
body known as the ‘Council of Finance Ministers’. The Task Force had
recommended that:
(i) The Council would be responsible for modification in the design of dual GST
regulating the indirect tax system;
(ii) The Council would make decisions on the principle of majority and not
unanimity. The initial decision would be approved by the Union and threefourths of the States. The subsequent changes to the decision could be made
upon an agreement of the Union and two-third of the States;
(iii) The body would maintain the ‘existing balance of federal fiscal powers’ since
both the Union and the States would surrender their fiscal autonomy to
change to the GST regime;56
(iv) The basis for levy should be common for both the Union and the States upon
agreement. This could be on the lines of the GST law in Australia, where both
the Union and the States will have to agree before any change in the rate or
base of GST could be implemented;57 and
 56 Tarun Jain, Goods and Services Tax: Constitutional Law and Policy (EBC 2018) 117 57 Thirteenth Finance Commission, Report of the Task Force on GST (2009) Para 10.5
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(v) If the States deviate from the collectively agreed position on GST rates, a
mechanism ought to be established by which the defaulting State pays
penalty58.
32 The 2011 Amendment Bill sought to include Article 279A in the Constitution
which constituted the GST Council. The provision stipulated the constitution of the
Council, the role of the Council and the quorum necessary for making decisions:
“279-A. Goods and Services Tax Council.— (1) The President
shall, within sixty days from the date of commencement of the
Constitution (One Hundred and First Amendment) Act, 2016,
by order, constitute a Council to be called the Goods and
Services Tax Council.
 (2) The Goods and Services Tax Council shall consist of
the following members, namely:—
 (a) the Union Finance Minister – Chairperson;
 (b) the Union Minister of State in charge of Revenue or
Finance – Member;
 (c) the Minister in charge of Finance or Taxation or any
other Minister nominated by each State GovernmentMembers.
(3) The Members of the Goods and Services Tax Council
referred to in sub-clause (c) of clause (2) shall, as soon as
may be, choose one amongst themselves to be the ViceChairperson of the Council for such period as they may
decide.
 (4) The Goods and Services Tax Council shall make
recommendations to the
Union and the States on—
 (a) the taxes, cesses and surcharges levied by the Centre,
the States and the local bodies which may be subsumed in
the goods and services tax;
 (b) the goods and services that may be subjected to or
exempted from the goods and services tax;
 (c) the threshold limit of turnover below which goods and
services tax may be exempted;
 (d) the rates of goods and services tax; and
 (e) any other matter relating to the goods and services tax,
as the Council may decide.
 (5) While discharging the functions conferred by this
article, the Goods and Services Tax Council shall be guided
by the need for a harmonised structure of goods and services
 58 Ibid, paragraph 9.8
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tax and for the development of a harmonised national market
for goods and services.
 (6) One-third of the total number of members of the
Goods and Services Tax Council shall constitute the quorum
at its meetings.
 (7) The Goods and Services Tax Council shall determine
the procedure in the performance of its functions.
 (8) Every decision of the Goods and Services Tax Council
taken at a meeting shall be with the consensus of all the
members present at the meeting.
 (9) No act or proceedings of the Goods and Services Tax
Council shall 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 a person as a
Member of the Council; or
 (c) any irregularity in the procedure of the Council not
affecting the merits of the case.
Explanation.—For the purposes of this article, “State’’
includes a Union territory with Legislature.”
33 According to the draft of Article 279A, as it found place in the 2011
Amendment Bill, every decision of the GST Council had to be taken with the
consensus of all the members present at the meeting. The Bill also provided for the
establishment of a GST Dispute Settlement Authority to adjudicate on any complaint
referred to it by a State Government or the Union Government, arising out of
deviation from any recommendations of the Council that resulted in the loss of
revenue or which affected the harmonised structure of the GST. The draft provision
also provided that Parliament may by law provide that no Court other than the
Supreme Court shall exercise jurisdiction in respect of the dispute. The draft of
Article 279B, as in the 2011 Amendment Bill, reads as follows:
“279B. (1) Parliament may, by law, provide for the
establishment of a Goods and Services Tax Dispute
Settlement Authority to adjudicate any dispute or complaint
referred to it by a State Government or the Government of
India arising out of a deviation from any of the
recommendations of the Goods and Services Tax Council
constituted under article 279A that results in a loss of revenue
to a State Government or the Government of India or affects
the harmonised structure of the goods and services tax.
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(2) The Goods and Services Tax Dispute Settlement Authority
shall consist of a Chairperson and two other members.
(3) The Chairperson of the Goods and Services Tax Dispute
Settlement Authority shall be a person who has been a Judge
of the Supreme Court or Chief Justice of a High Court to be
appointed by the President on the recommendation of the
Chief Justice of India.
(4) The two other members of the Goods and Services Tax
Dispute Settlement Authority shall be persons of proven
capacity and expertise in the field of law, economics or public
affairs to be appointed by the President on the
recommendation of the Goods and Services Tax Council.
(5) The Goods and Services Tax Dispute Settlement Authority
shall pass suitable orders including interim orders.
(6) A law made under clause (1) may specify the powers
which may be exercised by the Goods and Services Tax
Dispute Settlement Authority and provide for the procedure to
be followed by it.
(7) Notwithstanding anything in this Constitution, Parliament
may by law provide that no Court other than the Supreme
Court shall exercise jurisdiction in respect of any such
adjudication or dispute or complaint as is referred to in clause
(1).
Explanation.— For the purpose of this article, “State’’ includes
a Union territory with Legislature.”
34 The Standing Committee on Finance, Ministry of Finance in its 73rd report on
the 2011 Amendment Bill explained the salient features of the Amendment Bill
introducing the GST regime.59 It was noted that the GST Council will be a joint forum
for the Union and the States to discuss issues on GST and the recommendations of
the GST Council will be a benchmark and guiding force for the Union and State
Governments.60 In the same vein, it was observed that the legislature will be free to
exercise its power on all issues recommended by the Council:61
“(c) A Goods and Services Tax Council (Article 279A) will be
created, which will be a joint forum for the Centre and the
States to discuss important issues relating to GST so that the
objective of having a harmonized structure for GST and a
 59 Standing Committee on Finance, The Constitution (One Hundred and Fifteenth Amendment) 2011 (73rd report,
2013)
60 Ibid, paragraph 12 61 Ibid
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harmonized national market can be achieved. This Council
would function under the Chairmanship of the Union Finance
Minister and will have Minister in charge of Finance/Taxation
or Minister nominated by each of the States and UTs with
legislatures, as members. The Council will make
recommendations to the Union and the States on important
parameters like rates, exemption list, threshold limits, etc. The
recommendations made by this Council will act as benchmark
or guidance to Union as well as State Governments. The
Parliament and well as State Legislatures will be free to
exercise their power on all issues recommended by the
Council. One-third of the total number of Members of the
Council will constitute the quorum of GST council. It is further
provided that the decisions of the GST Council shall be with
the consensus of all members present at the meeting. This is
to protect the interests of each State and the Centre when the
Council takes a decision.
(d)In exercise of their powers, these legislative bodies may
deviate from the recommendations of the Council and
may act in a manner which is prejudicial to the harmonious
working of GST or which adversely impacts the revenue of
some other State/Central Government. Such deviations or
actions are required to be kept to the minimum, if the
objective of having a common national market and
smooth working of GST is to be achieved. It is accordingly
proposed to set up Goods & Services Tax Dispute Settlement
Authority (Article 279B), which may be approached by the
affected Government (whether the Centre or the States)
seeking redressal for any loss caused by any action due to a
deviation from the recommendations made by the Goods &
Services Tax Council or for adversely affecting the
harmonious structure and implementation of the GST.”
(emphasis supplied)
35 The Committee also sought the opinion of the Attorney General through the
Department of Legal Affairs on whether the recommendations of the GST Council
would undermine the power of the legislature. In response, the Attorney General
stated that though the GST Council has the power to make recommendations, both
Parliament and State legislatures, have the power to either accept or reject those
recommendations.62 The Attorney General stated:
“This is an important point which has been raised and the
short answer to it is that it is certainly open to Parliament to
 62 Ibid, paragraph 63
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approve any recommendation. However, this does not mean
that the GSTC recommendations will have no value. Having
regarding to the nature of the Constitution of GSTC, the
Council would have performed useful role in making
recommendations but the ultimate authority whether to accept
such recommendations can and must rest only in the
Legislatures, namely, Parliament and the State Legislatures.
In this view of the matter, the setting up of the GSTC does not
strike at the root of the legislative powers over Finance. The
powers of the legislature over Finance are sacrosanct and are
not affected by the setting up of the GSTC.”
36 The States raised concerns over the establishment of the GST Dispute
Settlement Authority on the ground that such authority would have the power to
override the supremacy of Parliament and the State Legislatures since a legislation,
though constitutional, could be struck down if it deviated from the recommendations
of the GST Council. The Committee, while addressing the concerns raised by the
States recommended that the provision establishing the GST Dispute Settlement
Authority be omitted since it would affect the fiscal autonomy of the States. It was
further recommended that a provision be made in Article 279A itself empowering the
GST Council to resolve disputes arising out of its recommendations:
“60. On the GST Dispute Settlement Authority, the Chairman,
Empowered Committee of State Finance Ministers stated that
most of the States have expressed the view that the provision
pertaining to the GST Dispute Settlement Authority should be
omitted as this authority shall have powers of overriding the
supremacy of the Parliament and the State Legislatures. It
shall affect the fiscal autonomy of the States.
61. The Constitution confers autonomy on the
Parliament and the State Legislatures to legislate within
the respective fields assigned to them and the fact that a
statute enacted by a competent Legislative body can be
called into question on grounds of deviations from the
recommendations of an essentially executive body, albeit
Constitutional, is being construed as undermining the
supremacy of the Legislature. Keeping in view the
concerns expressed by the States, and the fact that the
proposed provision of GST Dispute Settlement Authority
will affect the fiscal autonomy of the Parliament and the
State Legislatures, the proposed Article 279B providing
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for GST Dispute Settlement Authority may be omitted.
However, any dispensation involving multiple partners does
require a mechanism to resolve disputes. A provision can be
made in Article 279A itself empowering the GST Council to
decide about the mechanism to resolve the disputes arising
out of its recommendations.”
(emphasis supplied)
37 The Committee reiterated in its conclusion that the GST Council would only
play a ‘constructive and enabling role’ vis-à-vis the legislature and would not
override the role of the legislature63:
“The Committee would thus expect the proposed GST
Council to follow the principles of cooperative federalism and
democratic governance. As this will be a political and a
recommendatory body, it would be in a position to play a
constructive and enabling role vis-à-vis the Legislature, which
needless to emphasise, would remain supreme in matters of
legislation including taxation. In the Committee’s view the
mandate entrusted to the GST Council under the proposed
Article 279A of the Constitution (Amendment) Bill does not in
any way alter the existing constitutional scheme in so far as
the Legislature, both Union and State, is concerned.”
38 Taking into account the recommendations of the Standing Committee,
Parliament introduced the 2014 Amendment Bill in which Article 279B was deleted
and the GST Council was given the power under Article 279A(11) to devise a
mechanism of dispute resolution. The GST Council consists of the Union Finance
Minister as the Chairperson, the Union Minister of State in charge of Revenue or
Finance and the Minister in charge of Finance or Taxation or any other Minister
nominated by the State Government. The role of the GST Council is to make
recommendations to the Union and the States on seven specific categories
revolving around GST including principles of levy and apportionment of GST. Clause
(h) of Article 279A(1) also provides the Council with plenary power by which it can
 63 Ibid, paragraph 15
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make recommendations with respect to ‘any other matter relating to GST’, as the
Council may decide. Clause (6) stipulates that the recommendations of the GST
Council shall be guided by the ‘need for a harmonised structure of goods and
services tax’. One half of the total number of members of the Council shall constitute
the quorum for meetings. Clause (9) provides that the Council shall take a decision
with three-fourths majority of the members present and voting. The vote of the Union
Government is given the weightage of one-third of the total votes cast, and the votes
of the State Governments are given a weightage of two-thirds of the total votes.
Parliamentary Debates
39 The inclusion of Article 279A in the 2014 Amendment Bill raised two important
concerns in Parliament: first, the GST Council could effectively override the
legislative sovereignty of Parliament and the State legislatures; and second, the
fiscal autonomy of the States would be diminished since the Centre has the power to
stall a consensus reached by all the States. On 5 May 2015, a Member of
Parliament from the State of Tamil Nadu raised the concern that the GST Council
would diminish the role of the States in fiscal policy:64
“The GST Council as proposed in the Amendment will make
recommendations on a whole range of issues relating to
subsuming of taxes, cesses and surcharges under GST,
exemption for goods and services, model GST laws, etc. This
will override the supremacy of the legislature both at the
Centre and the States in taxation matters. In the GST
Council, the Union Government has one-third weightage in
vote and only two-third of the weightage in vote is given to
States and Union Territories. Voting rights of States and
Union Territories are equal irrespective of their size. We, are
therefore, opposed to the idea of GST Council as a
 64 Speech of T.G Venkatesh Babu in Lok Sabha on 05.05.2015
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constitutional body as it compromises the autonomy of the
States including in fiscal matters.”
In response, the Finance Minister had said65:
“Once you get into the GST pipeline, the States and the
Centre will have to interact together; and once they interact
together, the State of Tamil Nadu will be involved in
determining and taking decisions relating to the States. So,
none of us is going to be surrendering his or her authority or
autonomy. We are both going to be pooling our sovereignty
together so that we are able to create a new taxation
mechanism.”
40 A Select Committee of the Rajya Sabha examined proposed Article 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 be constituted.66 There was, in other words, a suggestion to
reintroduce Article 279B as it found place in the 2011 Amendment Bill. The
Government submitted that Article 279A(11) provides the GST Council with the
power to decide the ‘modalities’ of dispute resolution, which may range from
mediation, arbitration or even judicial adjudication depending on the nature of
dispute:
“2.71 It may further be mentioned that Article 279A (11) only
provides that GST Council may decide the ‘modalities’ to
resolve disputes arising out of its recommendations. The
‘modalities’ could include any dispute resolution mechanism
which could be inter-alia negotiation, mediation, arbitration or
even a judicial authority as deemed appropriate by the GST
Council depending on the nature of dispute before it. Thus, as
per the proposed Bill, the GST Council shall, by itself, not be
resolving the disputes but decide on the modalities for
resolving the disputes.”
 65 Speech of Mr. Arun Jaitley in Lok Sabha on 08.08.2016 66 Select Committee, Report on the Constitution (One Hundred and Twenty Second Amendment) Bill , 2014,
(Submitted to the Rajya Sabha, 2015)
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41 The Government also submitted that the voting pattern between the Union
and the States does not provide unequal power to any one of the constituent units:
“2.68 The structure of GST Council represents the federal
nature of governance in this country. This has been done as
per the recommendations of the Empowered Committee after
their meeting in Bhubaneswar in January 2013, and also the
recommendations of the Parliamentary Standing Committee.
This provision has been consciously adopted to ensure the
federal balance in the functioning of the GST Council, and
also to enhance co-operative federalism. The existing pattern
of vote-share in the GST Council ensures that no decision
can be taken by the Council either by the Centre or the States
acting on their own. Hence, neither the States nor the Centre
alone can take a decision in the Council. Providing 3/4th
weightage to the States would upset the federal balance
between the Centre and the States. Presently, in the
concurrent list, in case of any difference between Central and
State legislation, the Central legislation prevails. The present
weightage of votes in the GST Council would ensure that
neither the Centre nor the States are able to take a decision
without the support of the other. In other words both would
enjoy a veto.
2.69 Further, with Centre holding only 1/3rd of the votes, the
Centre would require support of 20 States/Union Territories to
get a 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 that legislative
history is not readily used in interpreting a law, the modern trend of thinking on the
subject has enabled courts to look into the history of a legislation to understand the
full purport of the words used and the mischief sought to be remedied by the law. In
K.P Varghese v. ITO67, this Court held that the “speech made by the mover of the
Bill explaining the reason for the introduction of the Bill can certainly be referred to
for the purpose of ascertaining the mischief sought to be remedied by the legislation
and the object and purpose for which the legislation is enacted.” In Kalpana Mehta
 67 (1981) 4 SCC 173.
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v. Union of India68, Chief Justice Dipak Misra held that reports of the Parliamentary
Committees and the speeches made in the Parliament can be referred to identify the
circumstances that led to the enactment of the legislation along with the intention of
the legislature:
“129. We have referred to these authorities to highlight that
the reports or speeches have been referred to or not referred
to for the purposes indicated therein and when the meaning
of a statue is not clear or ambiguous, the circumstances that
led to the passing of the legislation can be looked into in order
to ascertain the intention of the legislature. It is because the
reports assume significance and become relevant because
they precede the formative process of a legislation.”
43 The parliamentary debates and the legislative history of the constitutional
amendment, and the committee reports on Articles 246A and 279A indicate that:
(i) The draft of Article 279B, in the 2011 Amendment Bill, which sought to
introduce a GST Dispute Settlement Authority to adjudicate on any dispute
‘arising out of deviation’ from the recommendations of the GST Council was
deleted. The current Article 279A(11) provides that the GST Council shall
devise a mechanism to adjudicate on any dispute that ‘arises out’ of the
recommendations of the Council. The deletion of Article 279B while
introducing the 2014 Amendment Bill and the inclusion of Article 279(11) in
the text of the Constitution has brought about two substantial changes: one,
that instead of the creation of a dispute settlement authority, the Council is
vested with the power to decide on ‘modalities’ of dispute resolution; and
second, while Article 279B stipulated that the authority shall adjudicate on
‘disputes arising out of the deviation from the recommendations’, Article
 68 (2017) 7 SCC 295
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279(11) states that the disputes arising out of recommendations shall be
resolved. The phrase ‘deviation’ has been omitted. Before the Select
Committee of the Rajya Sabha, the Government had stated that disputes
shall be resolved by modalities including mediation and arbitration. The
Standing Committee of Finance in its report specifically recommended the
deletion of Article 279B due to the concerns raised by the States; and
(ii) Under the 2011 Amendment Bill, the GST Council could recommend only
when a unanimous decision would be reached. However, the Standing
Committee of Finance had recommended that since it would be difficult to
arrive at a consensus due to the socio-economic diversity amongst the
States, the recommendations be made with a majority instead of unanimity.
While making this recommendation, it was observed that if the GST Council
functions like the present Empowered Committee where the differences are
resolved amicably in an institutional mode, it would foster the spirit of
cooperative federalism.
C.2 The nature of the recommendations of the GST Council
Indian federalism: Dialogue of cooperative federalism
44 The arguments in favour of reading the ‘recommendations’ of the GST
Council as binding are two-fold69: first, if the GST Council cannot make binding
recommendations, the entire structure of GST will collapse as each State would then
levy a conflicting tax and collection mechanism; and second, if the recommendations
 69 Alok Prasanna, ‘For a mess of Potage: The GST’s promise of increased revenue to states comes at the cost of the
federal structure of the Constitution’ National Law School of India Review. Vol. 28, No. 2(2016), pp-97-113.
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are non-binding, then there would be no dispute to be resolved under Article 279(11)
as the States would be free to disregard the recommendations. The arguments
against interpreting the ‘recommendations’ of the GST Council as binding on the
Union and the States are two-fold70: first, it would violate the supremacy of
Parliament and State legislatures since both have a simultaneous power to legislate
on GST; and second, it would violate the fiscal federalism of the States since the
Centre has a one-third vote share and the States collectively have a two-third vote
share. Therefore, no recommendation on a three-fourths majority can be passed
without the consent of the Centre.
45 One of the important characteristics of a federal polity is the distribution of
legislative power between the Union and the States. Mr H M Seervai while arguing
that India is a federal nation, referred to the exclusive power of taxation held by the
States to establish that the States were 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 assessment of the exclusive State List. Public
order, the police, administration of justice, local government,
public health and sanitation, to mention but a 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 the Union
and the States is mutually exclusive, and the taxes allotted
exclusively to the States are not negligible. Thus sales tax is
an expanding source of revenue in India as it becomes
increasingly industrialized under the successive five year
plans. In the industrialized State of Maharashtra, the yield
from Sales Tax was about Rs. 1,580 million for the year of
 70 Ajitesh Kir, ‘India’s Goods and Services Tax: A Unique Experiment in Cooperative Federalism and a Constitutional
Crisis in Waiting’ Canadian Tax Journal (2021) 69:2, 391-445.
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1971-72, and the estimate for the year 1972-3 was about Rs.
1,780 million.
[…]
(k) The view that unimportant matters were assigned to the
States cannot be sustained in face of the very important
subjects assigned to the States in List II, and the same
applies to taxing powers of the States which are made
mutually exclusive of the taxing powers of the Union so that
ordinarily the States have independent source of revenue of
their own. The legislative entries relating to taxes in List II
show that the sources of revenue available to the States are
substantial and would increasingly become more substantial.
In addition to the exclusive taxing powers of the States, the
States become entitled either to appropriate taxes collected
by the Union or to a share in the taxes collected by the
Union.”
Justice PB Sawant writing for himself and Justice Kuldip Singh in SR Bommai v.
Union of India71, referred to the exclusive and equal legislative distribution of heads
of taxation to establish the federal nature of the Indian Constitution.72 Therefore, the
exclusive powers held by the States and the Centre on matters of taxation was
regarded as an important feature of India’s federal polity. The Constitution
Amendment Act 2016 alters the legislative distribution between the Centre and the
State on indirect 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 Legislature possess equal power to
legislate on aspects of GST. It is the contention of the Union that the
recommendation of the GST Council should be binding on Parliament and the State
Legislatures precisely because equal power is granted to both the federal units. The
Union has argued that if the recommendations are not binding, then it would lead to
 71 (1994) 3 SCC 1 72 Prasanna (n 69)
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an impasse where different Central and State legislations could be guiding the same
field.
46 Article 246A vests Parliament and the State Legislatures with a unique,
simultaneous law-making power on GST. It is in this context that the role of the GST
Council gains significance. The recommendations of the GST Council are not based
on a unanimous decision but on a three-fourth majority of the members present and
voting, where the Union’s vote counts as one-third, while the States’ votes have a
weightage of two-thirds of the total votes cast. There are two significant attributions
of the voting system in the GST Council. First, the GST Council has an unequal
voting structure, where the States collectively have a two-third voting share and the
Union has a one-third voting share; and second, since India has a multi-party
system, it is possible that the party in power at 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 cooperative federalism but also for political contestation across party
lines. Thus, the discussions in the GST Council impact both federalism and
democracy. The constitutional design of the Constitution Amendment Act 2016 is sui
generis since it introduces unique features of federalism. Article 246A treats the
Centre and States as equal units by conferring a simultaneous power of enacting
law on GST.. Article 279A in constituting the GST Council envisions that neither the
Centre nor the States can act independent of the other.
47 The dual federalism model or the autonomy model views the constituting units
of the Centre and States as autonomous, independent and competing units. This
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model is also termed as competitive federalism, where the constituent units
‘compete’ with each other. Proponents of the cooperative federalism model argue
that it is a mistake to view each unit as a separate autonomous entity. According to
the theory of cooperative federalism, integration and not autonomy is the objective
that 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 the integrated approach of the federal
units.74 This Court in State (NCT of Delhi) v. Union of India75, has observed that
India follows the model of cooperative federalism where the Union and the State
Governments need to iron out the differences that arise in the course of the path of
development. Chief Justice Dipak Mishra elucidated on the concept of cooperative
federalism:
“119. Thus, the idea behind the concept of collaborative
federalism is negotiation and coordination so as to iron out
the differences which may arise between the Union and the
State Governments in their respective pursuits of
development. The Union Government and the State
Governments should endeavour to address the common
problems with the intention to arrive at a solution by showing
statesmanship, combined action and sincere cooperation. In
collaborative federalism, the Union and the State
Governments should express their readiness to achieve the
common objective and work together for achieving it. In a
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 on the constitutional provision
as the source of authority. We are absolutely unequivocal that
both the Centre and the States must work within their spheres
and not think of any encroachment. But in the context of
exercise of authority within their spheres, there should be
perception of mature statesmanship so that the
 73 Robert A. Schapiro, ‘Justice Steven’s theory of Interactive Federalism’ 74 Fordham L. Rev. 2133 (2006) 74 Jessica Bulman-Pozen and Heather K. Gerken, ‘Uncooperative Federalism’ Yale Law Journal, Vol. 118. No. 7
(May, 2009), pp. 1256-1310 75 (2018) 8 SCC 501
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constitutionally bestowed responsibilities are shared by them.
Such an approach requires continuous and seamless
interaction between the Union and the State Governments.”
48 The Indian Constitution has sometimes been described as quasi-federal or a
Constitution with a ‘centralising drift’. This is because when the Constitution is read
as a whole, the Union is granted a larger share of the power. Instances of this
centralising drift can be traced to Articles 254, 248, and 353. However, there are
instances such as Article 246A, where the Centre and the States are conferred
equal power. Merely because a few provisions of the Constitution provide the Union
with a greater share of power, the provisions in which the federal units are
envisaged to possess equal power cannot be construed in favour of the Union. The
Union and the States have a simultaneous power to legislate on GST. The GST
Council has the power to make recommendations on a wide range of subjects
relating to GST. Since the Constitution does not envisage a repugnancy provision to
resolve inconsistencies between the Central and State laws on GST, the GST
Council must ideally function, as provided by Article 279A(6), in a harmonised
manner to reach a workable fiscal model through cooperation and collaboration.
49 The federal system is a means to accommodate the needs of a pluralistic
society to function in a democratic manner. It attempts to reconcile the desire of
unity and commonality along with the desire for diversity and autonomy. Democracy
and federalism are interdependent on each other for their survival such that
federalism would only be stable in well-functioning democracies. Additionally, the
constituent units in a federal polity check the exercise of power of one another to
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prevent one group from exercising dominant power. The Indian Constitution, though
necessarily federal does confer the Union with a higher share of power in certain
situations to prevent chaos and provide security.76 However, even if the federal units
are not entirely autonomous as in the traditional federal system, the units still wield
power. The relationship between two constituent units that are not autonomous but
rely on each other for their functioning is not in practice always collaborative or
cooperative. If the States have been conferred lesser power they can still resist the
mandates of the Union by using different forms of political contestation as permitted
by constitutional design. Such contestation furthers both the principle of federalism
and democracy. When the federal units are vested with unequal power, the
collaboration between them is not necessarily cooperative. Harmonised decision
thrives not just on cooperation but also on contestation. Indian federalism is a
dialogue in which the States and the Centre constantly engage in conversations.
Such dialogues can be placed on two ends of the spectrum - collaborative
discussions that cooperative federalism fosters at one end of the spectrum and
interstitial contestation at the other end. Jessica Bulman and Heather K, in their
essay connote interstitial contestation as ‘uncooperative federalism’.77 They argue
that the States which possess lesser power could use licenced dissent, dissent by
using regulatory gaps or by civil disobedience such as passing a resolution against
the decision of the Central Government as means of contestation. Differentiating the
 76 Seervai (n 50) 77 Bulman-Pozen and K. Gerken (n 74)
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forms of cooperative federalism from the dissent in uncooperative federalism, the
authors state:
“We think the best proxy for distinguishing dissent from
routine negotiations is whether the state’s action can be fairly
understood as an effort to change national policy. An attempt
to obtain an accommodation or modification of federal policy
within the state should usually be understood as an example
of cooperative bargaining. An attempt to contest and alter
national policy is rightly understood as dissent.”
50 Such form of contestation or as the authors term it, ‘uncooperative federalism’
is valuable since “it is desirable to have some level of friction, some amount of state
contestation, some deliberation-generating froth in our democratic system.”78
Therefore, the States can use various forms of contestation if they disagree with the
decision of the Centre. Such forms of contestation are also within the framework of
Indian federalism. The GST Council is not merely a constitutional body restricted to
the indirect tax system in India but is also an important focal point to foster
federalism and democracy.
51 One of the important features of Indian federalism is ‘fiscal federalism’. A
reading of the Statement of Objects and Reasons of the 2014 Amendment Bill, the
Parliamentary reports and speeches indicate that Articles 246A and 279A were
introduced with the objective of enhancing cooperative federalism and harmony
between the States and the Centre. However, the Centre has a one-third vote share
in the GST Council. This coupled with the absence of the repugnancy provision in
Article 246A indicates that recommendations of the GST Council cannot be binding.
Such an interpretation would be contrary to the objective of introducing the GST
 78 Ibid, page 1284
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regime and would also dislodge the fine balance on which Indian federalism rests.
Therefore, the argument that if the recommendations of the GST Council are not
binding, then the entire structure of GST would crumble does not hold water. Such a
reading of the provisions of the Constitution diminishes the role of the GST Council
as a constitutional body formed to arrive at decisions by collaboration and
contestation of ideas.
The contextual meaning of ‘recommendations’
52 The phrase ‘recommendation’ is used in numerous provisions in the
Constitution but the import of the phrase differs contextually. Based on the
submission of the Union Government, there are five categories into which the
phrase ‘recommendation’ has been deployed in the Constitution:
(i) Category 1: Recommendation by the President prior to laying before the
Parliament for voting: Articles 3, 109, 111, 113, 117, 203, 207, 255 and 274
discuss the recommendations of the President or the Governor. Here the
authority recommending the initiation of the discussion and the decisionmaking authority are different.
(ii) Category 2: Recommendation followed by consultation: Article 233 uses the
phrases ‘consultation’ and ‘recommendation’. Article 233(1) states that the
district judge shall be appointed by the Governor in ‘consultation’ with the
High Court. Clause 2 states that the criteria for the appointment of a person
who is not already in the service of the Union or the State is that he should
have been a pleader or an advocate for at least seven years and he should
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be recommended by the High Court for the appointment to the post of a
District Judge. There is a two-step process for appointment, first, the
candidature must be recommended by the High Court; and second, the
recommended candidate is appointed by the Governor in ‘consultation’ with
the High Court.
(iii) Category 3: Recommendation with accountability: Articles 243I, 243Y, 280,
281, 338, 338B and 340. Articles 243I and 243Y stipulate that the Finance
Commission shall make ‘recommendations’ to the Governor on apportionment
of taxes to the Panchayats and Municipalities. Article 280 states that it “shall
be the duty of the Commission to make recommendations to the President”
on the principles governing distribution of taxes between the Union and the
States. Article 281 fosters accountability by providing that every
recommendation made by the Finance Commission shall be laid before the
House together with an explanatory memorandum on the action taken on
such recommendations. Article 338(5)(e) states that the National Commission
for Scheduled Castes shall present a report to the President annually listing
the measures that should be taken to enhance the protection and
development of the Scheduled Caste. Article 338(6) states that the President
shall cause the report to be laid before the Parliament along with a
memorandum explaining the action taken on the recommendations or the
reason for non-acceptance, if any. Article 338A is a similar provision on the
recommendatory nature of the National Commission for Scheduled Tribes.
The President has the power to appoint a Commission to investigate the
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conditions of Backward Classes. The Commission is required to investigate
the matters referred to them and present a report along with
recommendations to the President which shall be laid before the Parliament
along with an explanation memorandum.
(iv) Category 4: Non-qualifying recommendation: The Presidential Order to
establish an Inter State Council dated 28 May 1990 issued by the Ministry of
Home Affairs, and Article 263. Article 263 provides that the President may, in
public interest, establish an Inter-State Council which shall make
recommendations for better coordination of policy and action. The Inter-State
Council was constituted by the Inter-State Council Order 1990 consisting of
the Prime Minister, Chief Ministers of all States, Chief Ministers of Union
Territories and six Ministers of Cabinet rank.
(v) Category 5: Recommendations which are obligatory in nature: Articles 270,
275, 344, 349 and 371A: Article 344 establishes the Commission and
Committee of Parliament on Official Languages. Article 344(2) states that it
shall be the duty of the Commission to make recommendations to the
President on the usage of official languages. Clause 3 states that
recommendations shall be made having due regard to the industrial, cultural
and scientific advancement of India and the claim of non-Hindi speaking
persons. Article 344(4) constitutes a Committee of the members of the Lok
Sabha and Rajya Sabha. The Committee will have to examine the
recommendations of the Commission and report its opinion to the President.
The President after considering the report, shall issue directions in
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accordance with the whole or any part of the report. Article 349 deals with the
special procedure for enactment of law relating to language in the first fifteen
years from the commencement of the Constitution. Articles 270 and 275
stipulate that the percentage of tax apportionment and fixation of the grants
for the States from the Consolidated Fund of India shall be ordered by the
President on the recommendation of the Finance Commission.
53 A survey the above provisions indicates that the nature and meaning of the
term ‘recommendation’ differs contextually. All the provisions qualify the nature of
recommendation. For instance, in category one, the recommendation of the
President is for the initiation of the discussion; in category two, a decision on the
recommendation is arrived upon ‘consultation’; in category three, the decisionmaking authority has to submit an explanatory note on the action or inaction taken
on the recommendations.; in category four, the recommendations are not qualified.
Article 263 only states that the Inter-State Council has a duty to recommend. There
is no further explanation on whether the recommendation ought to be mandatorily
accepted, or deliberated upon; in category five, the recommendations of the
authority are expressly stated to be ‘binding’ on the decision-making authority.
54 The GST Council which is a constitutional body is entrusted with the duty to
make recommendations on a wide range of areas concerning GST. The GST
Council has plenary powers under Article 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 through harmonised
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deliberation between the federal units as provided in clause 6 of Article 279A. Unlike
the other provisions of the Constitution which provide that recommendations shall be
made to the President or the Governor, Article 279A states that the
recommendations shall be made to the ‘Union and the States’. The recommendation
of the GST Council made under Article 279A is non-qualified. That is, there is no
explanation on the value of such a recommendation. Yet the notion that the
recommendations of the GST Council transform into legislation in and of themselves
under Article 246A would be farfetched. If the GST Council was intended to be a
decision-making authority whose recommendations transform to legislation, such a
qualification would have been included in Articles 246A or 279A. Neither does Article
279A begin with a non-obstante clause nor does Article 246A provide that the
legislative power is ‘subject to’ Article 279A.
55 The Constitution employs the phrase ‘consultation’ in certain contexts. For
example, Article 320(3) states that the Public Service Commission shall be
‘consulted’ on matters relating to civil posts. Article 320(3) reads as follows:
“(3) The Union Public Service Commission or the State Public
Service Commission, as the case may be, shall be
consulted—
(a) on all matters relating to methods of recruitment to civil
services and for civil posts;
(b) on the principles to be followed in making appointments to
civil services and posts and in making promotions and
transfers from one service to another and on the suitability of
candidates for such appointments, promotions or transfers;
[…]”
(emphasis supplied)
56 If the GST Council were intended to be a constitutional body whose
recommendations transform into legislation without any intervening act, there would
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have been an express provision in Article 246A. Article 279A does not mandate
tabling the recommendations in the legislature like the provisions in category 3,
where the recommendations have to be mandatorily tabled in the legislature along
with an explanatory note. Only the secondary legislation which is framed based on
the recommendations of the Council under the provisions of the CGST Act79 and
IGST Act80 is mandated to be tabled before the Houses of the Parliament. The use
of the phrase ‘recommendations to the Union or States’ indicates that the GST
Council is a recommendatory body aiding the Government in enacting legislation on
GST.
57 In Manohar v. State of Maharashtra81, a two-judge Bench of this Court while
interpreting Section 20(2) of the Right to Information Act 2005 observed that the
phrase ‘recommendation’ must be interpreted in contradistinction to ‘direction’ or
‘mandate’. It was observed as follows:
“22. We may notice that proviso to Section 20(1) specifically
contemplates that before imposing the penalty contemplated
under Section 20(1), the Commission shall give a reasonable
opportunity of being heard to the officer concerned. However,
there is no such specific provision in relation to the matters
covered under Section 20(2). Section 20(2) empowers the
Central or the State Information Commission, as the case
may be, at the time of deciding a complaint or appeal for the
reasons stated in that section, to recommend for disciplinary
action to be taken against the Central Public Information
Officer or the State Public Information Officer, as the case
may be, under the relevant service rules. Power to
recommend disciplinary action is a power exercise of which
may impose penal consequences. When such a
recommendation is received, the disciplinary authority would
conduct the disciplinary proceedings in accordance with law
and subject to satisfaction of the requirements of law. It is a
 79 Section 166 of the CGST Act 80 Section 24 of the IGST Act 81 (2012) 13 SCC 14
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“recommendation” and not a “mandate” to conduct an
enquiry. “Recommendation” must be seen in contradistinction
to “direction” or “mandate”. But recommendation itself vests
the delinquent Public Information Officer or State Public
Information Officer with consequences which are of serious
nature and can ultimately produce prejudicial results including
misconduct within the relevant service rules and invite minor
and/or major penalty.”
In Naraindas Indurkhya v. State of Madhya Pradesh82, a Constitution Bench
observed that a ‘recommendation’ has persuasive value. In this case, this Court was
dealing with the question of whether textbooks ‘recommended’ by the Board could
be held to be in effect immediately. The Court observed:
“15. … there is a basic distinction between recommendation
and prescription of a text book. When a text book is
prescribed by an appropriate authority having legal power to
do so, it has to be followed by the schools. Prescription of a
text book carries with it a binding obligation to follow the text
book. There is no such obligation when a text book is merely
recommended. Recommendation has merely a persuasive
effect, it being open to the schools to accept the
recommendation or to reject it as they think fit. The schools
may use the recommended text book or they may not
according as the Principals choose. That is why no
conferment of statutory power is needed to enable the Board
to recommend text books and no question of ultra vires can
arise in such a case. Now the text books which formed the
subject matter of the notifications dated April 5, 1972, April
25, 1972, April 26 and May 17, 1972 were merely
recommended and not prescribed by the Board and being
only recommended text books as distinguished from
prescribed text books, they obviously could not be said to be
‘in force’ immediately before the appointed day. Section 4,
sub-section (2) did not, therefore, apply in respect of these
text books and they could not be regarded as text books
prescribed under Section 4, sub-section (2).”
In numerous cases, this Court has reiterated that recommendations cannot create
binding and enforceable rights, in contradistinction to a ‘direction’ or ‘mandate’.83
 82 (1974) 4 SCC 788 83 Union of India v. Pradip Kumar Dey, (2000) 8 SCC 580; Kesoram Industries and Cotton 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.
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Interpretation of ‘recommendation’ vis-à-vis the provisions of IGST Act and CGST
Act
58 The contention of the Union is that the recommendations of the GST Council
are binding since Parliament and the State legislatures have agreed to align
themselves with the recommendations as is evident from the provisions of the IGST
Act and CGST Act. Certain provisions of the IGST Act, CGST Act and SGST Acts
expressly provide that the rule-making power delegated to the Government shall be
exercised on the recommendations of the GST Council. For instance, Section 5 of
the IGST Act provides that the taxable event, taxable rate and taxable value shall be
notified by the government on the “recommendations of the Council”. Similarly, the
power of the Central Government to exempt goods or services or both from levy of
tax shall be exercised on the recommendations of the GST Council under Section 6
of the IGST Act. Section 22 provides that the Government may exercise its rule
making power on the recommendations of the GST Council. The CGST Act also
provides for similar provisions in Sections 9, 11 and 164.
59 The provisions of the IGST Act and CGST Act which provide that the Union
Government is to act on the recommendations of the GST Council must be
interpreted with reference to the purpose of the enactment, which is to create a
uniform taxation system. The GST was introduced since different States could
earlier provide different tax slabs and different exemptions. The recommendations of
the GST Council are made binding on the Government when it exercises its power
to notify secondary legislation to give effect to the uniform taxation system. The
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Council under Article 279A has wide recommendatory powers on matters related to
GST where it has the power to make recommendations on subject matters that fall
outside the purview of the rule-making power under the provisions of the IGST and
CGST Act. Merely because a few of the recommendations of the GST Council are
binding on the Government under the provisions of the CGST Act and IGST Act, it
cannot be argued that all of the GST Council’s recommendations are binding. As a
matter of first principle, the provisions of the Constitution, which is the grundnorm of
the nation, cannot be interpreted based on the provisions of a primary legislation. It
is only the provisions of a primary legislation that can be interpreted with reference
to the Constitution. The legislature amends the Constitution by exercising its
constituent power and legislates by exercising its legislative power. The constituent
power of the legislature is of a higher constitutional order as compared to its
legislative power. Even if it is Parliament that has enacted laws making the
recommendations of the GST Council binding on the Central Government for the
purpose of notifying secondary legislations, it would not mean that all the
recommendations of the Council made by virtue of its power under Article 279A
have a binding force on the legislature.
60 With this background and context, we shall now proceed to analyse the
scheme of the GST legislation and whether the impugned levy, imposed on the
recommendations of the GST Council, is valid and permissible under law.
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D Analysis
D.1 Statutory Provisions and Scheme of the IGST Act84
61 The IGST Act enables the Central Government to impose IGST on inter-state
supply of goods and services. The Preamble to the IGST Act describes it as:
“An Act to make a provision for levy and collection of tax on interState supply of goods or services or both by the Central
Government and for matters connected therewith or incidental
thereto.”
In aiding the levy and collection of IGST, the IGST Act provides for a comprehensive
scheme for determining the nature of supply, time of supply and place of supply.
62 Statutory interpretation will determine whether the IGST Act confers the
powers on the Central Government, in consultation with the GST Council, to
designate imports as a supply of services under Section 5(3) of the IGST and
whether the importer can be considered as the recipient of such supply, liable to pay
tax on a reverse charge basis. Further, it will determine if the Central Government, in
consultation with the GST Council, has the powers to designate the importer as a
recipient of a service under 5(4) of the IGST Act, when goods are imported on a CIF
basis. The critical fact in this case is that the service of shipping in these CIF
contracts is availed by the non-taxable exporter who engages and pays a foreign
shipping line of their choice, without the involvement of the importer. In contrast, in
FOB contracts, the Indian importer pays for the services of shipping and directly
 84 Note: In order to facilitate convenience while reading the judgment, some of the statutory provisions are reflected in
more than one place in the judgment.
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deals with the shipping line. The respondents herein are importers of non-coking
coal on a CIF basis.
63 Section 5 of the IGST Act provides for the levy and collection of tax on interState supplies of goods or services. The power to impose such 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 and services tax on all inter-State supplies of goods or
services or both. Section 5 reads as follows:
“5. Levy and collection.— (1) Subject to the provisions of subsection (2), there shall be levied a tax called the integrated goods
and services tax on all inter-State supplies of goods or services
or both, except on the supply of alcoholic liquor for human
consumption, on the value determined under section 15 of the
Central Goods and Services Tax Act and at such rates, not
exceeding forty per cent., as may be notified by the Government
on the recommendations of the Council and collected in such
manner as may be prescribed and shall be paid by the taxable
person:
Provided that the integrated tax on goods imported into India
shall be levied and collected in accordance with the provisions of
section 3 of the Customs Tariff Act, 1975 on the value as
determined under the said Act at the point when duties of
customs are levied on the said goods under section 12 of the
Customs Act, 1962.”
The proviso to Section 5(1) of the IGST Act clarifies that the tax is levied on goods
imported into India, in accordance with Section 3 of the Customs Tariff Act 1975.
The value is determined under the Customs Tariff Act at the point when the customs
duties are levied in accordance with the Customs Act.
64 The payment of IGST on a reverse-charge basis is contemplated in subsections (3) and (4) of Section 5. Sub-section (3) provides that IGST may be paid on
a reverse charge basis on specified categories of supply of goods or services or
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both. The Central Government is empowered to specify these categories on the
recommendations of the GST Council. Hence, on its plain terms, the payment of
IGST on a reverse charge basis is envisaged on specific categories of supply of
goods or services, or both as notified by the Central Government. The tax on a
reverse charge basis is payable by the recipient of such goods or services, or both.
The power, in other words, is to specify categories of goods or services (or both).
The provision does not empower the government to specify the recipient of the
supply of goods or services. The unamended Sub-section (4) of Section 585 provided
that the tax in respect of the supply of goods or services by an unregistered supplier,
shall be paid on a reverse charge basis by a specified registered person, as the
recipient of such supply of goods or services. The above provisions read as follows:
“(3) The Government may, on the recommendations of the
Council, by notification, specify categories of supply of goods or
services or both, the tax on which shall be paid on reverse
charge basis by the recipient of such goods or services or both
and all the provisions of this Act shall apply to such recipient as if
he is the person liable for paying the tax in relation to the supply
of such goods or services or both.
(4) The integrated tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a
registered person shall be paid by such person on reverse
charge basis as the recipient and all the provisions of this Act
shall apply to such recipient as if he is the person liable for
paying the tax in relation to the supply of such goods or services
or both.”
 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 a class of registered
persons who shall, in respect of supply of specified categories of goods or services or both received from an
unregistered supplier, pay the tax 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 person liable for paying the tax in
relation to such supply of goods or services or both.”
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65 On 28 June 2017, the Central Government issued Notification 8/2017, in
exercise of its powers under Section 5(1), Section 6(1) and Section 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:
SI
No.
Chapter,
Section or
Heading
Description of Service Rate (per
cent)
Condition
9
Heading
9965
(Goods
transport
services)
[…] […] […]
(ii) Transport of goods in a
vessel including services provided
or agreed to be provided by a
person located in non-taxable
territory to a person located in
non-taxable territory by way of
transportation of goods by a
vessel from a place outside India
up to the customs station of
clearance in India up to the
customs stations of clearance in
India.
5 Provided that
credit of input
tax charged on
goods (other
than on ships,
vessels
including bulk
carriers, tankers)
used in
supplying the
service has not
been taken
Explanation:
This condition
will not apply
where the
supplier of
service is
located in nontaxable territory.
[Please refer to
Explanation no.
(iv)]
By Entry 9(ii) of Notification 8/2017, an integrated tax of 5 per cent was levied on
supply of specified services, including transportation of goods in a vessel from a
place outside India up to the customs station of clearance in India.
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66 On 28 June 2017, Notification 10/2017 was issued by the Central
Government in exercise of powers conferred by Section 5(3) of the IGST Act.
Notification 10/2017 specified the importer as the recipient of transportation of
service when the supplier is location in a non-taxable territory and the service of
transportation is supplied by a person in a non-taxable territory. Entry 10 of
Notification 10/2017 states the following:
SI
No.
Category of Supply of
Services
Supplier of Recipient of Service
0)
(2) (3) (4)
10
Services supplied by a person
located in non-taxable territory
by way of transportation of
goods by a vessel from a place
outside India up to the customs
station of clearance in India
A person
located in nontaxable territory
Importer, as defined in clause (26)
of section 2 of the Customs Act
1962 (52 of 1962), located in the
taxable territory
Thus, Entry 10 of Notification 10/2017 deems an importer of goods as the ‘recipient
of service’ of transportation of goods by a foreign shipping line.
67 Both the impugned notifications, Notification 8/2017 and Notification 10/2017,
have been challenged as ultra vires the IGST Act. Before adverting to the
challenges raised by the parties, it becomes necessary to advert to some of the key
provisions contained in the CGST Act, IGST Act and Customs Act. These provisions
are necessary to respond to several contentions raised by the respondents,
including: (i) whether the taxable event stipulated by the impugned notifications
constitutes a ‘supply’ under the IGST Act; (ii) whether the importer of goods on a CIF
basis can be deemed to be the ‘recipient’ of shipping services when they do not pay
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the consideration; and (iii) whether the import of goods constitutes a composite
supply, among others.
68 The provisions of the IGST Act apply to the whole of India as provided under
Section 1. Section 5 of the IGST Act is the charging section. Sub-section (1) of
Section 5 provides that the levy of IGST shall be paid by the taxable person. The
term ‘taxable person’ is defined in Section 2(107) of the CGST Act:
“(107) “taxable person” means a person who is registered or
liable to 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 the
recipient of supply of goods or services or both instead of the
supplier of such goods or services or both under sub-section (3)
or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax
Act;”
As defined in the above clause, under the reverse charge mechanism, the liability to
pay is on the recipient of the supply of goods or services, as opposed to the supplier
of goods or services. Section 24(iii) of the CGST Act provides for compulsory
registration of “persons who are required to pay tax under the reverse charge”.
“24. Compulsory registration in certain cases.—Notwithstanding
anything contained in sub-section (1) of Section 22, the following
categories of persons shall be required to be registered under
this Act,—
(i) persons making any inter-State taxable supply;
(ii) casual taxable persons making taxable supply;
(iii) persons who are required to pay tax under reverse
charge;
[…..]
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(xii) such other person or class of persons as may be
notified by the Government on the recommendations of the
Council.”
(emphasis supplied)
70 Section 2 (105) of the CGST Act defines the ‘supplier’ in relation to goods or
services as:
“(105) “supplier” in relation to any goods or services or both, shall
mean the person supplying the said goods or services or both
and shall include an agent acting as such on behalf of such
supplier in relation to the goods or services or both supplied;”
71 Section 2(93) of the CGST Act defines the ‘recipient’ of supply of goods or
services or both and provides:
“(93) “recipient” of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or
services or both, the person who is liable to pay that
consideration;
(b) where no consideration is payable for the supply of goods, the
person to whom the goods are delivered or made available, or to
whom possession or use of the goods is given or made available;
and
(c) where no consideration is payable for the supply of a service,
the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be
construed as a reference to the recipient of the supply and shall
include an agent acting as such on behalf of the recipient in
relation to the goods or services or both supplied;”
72 Sections 2(14) and 2(15) of the IGST Act define the location of the recipient of
services and the supplier of services as follows:
“(14) “location of the recipient of services” means,––
(a) where a supply is received at a place of business for which
the registration has been obtained, the location of such place of
business;
(b) where a supply is received at a place other than the place of
business for which registration has been obtained (a fixed
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establishment elsewhere), the location of such fixed
establishment;
(c) where a supply is received at more than one establishment,
whether the place of business or fixed establishment, the location
of the establishment most directly concerned with the receipt of
the supply; and
(d) in absence of such places, the location of the usual place of
residence of the recipient;
(15) “location of the supplier of services” means,––
(a) where a supply is made from a place of business for which
the registration has been obtained, the location of such place of
business;
(b) where a supply is made from a place other than the place of
business for which registration has been obtained (a fixed
establishment elsewhere), the location of such fixed
establishment;
(c) where a supply is made from more than one establishment,
whether the place of business or fixed establishment, the location
of the establishment most directly concerned with the provision of
the supply; and
(d) in absence of such places, the location of the usual place of
residence of the supplier;”
73 Chapter IV of the IGST Act determines the nature of the supply. Section 7 of
the IGST Act determines the nature of supply as inter-State supply, Section 8
provides for intra-State supply and Section 9 provides for supplies in territorial
waters.
74 Section 7 of the IGST Act lay down the conditions for a supply to be
construed as an “inter-State supply”. The relevant provisions, particularly subSections (3) and (4) of Section 7 are as follows:
“7. Inter-State supply.—(1) Subject to the provisions of Section
10, supply of goods, where the location of the supplier and the
place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of goods in the course of inter-State
trade or commerce.
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[…..]
(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) a State and a Union territory,
shall be treated as a supply of services in the course of interState trade or commerce.
(4) Supply of services imported into the territory of India
shall be treated to be a supply of services in the course of
inter-State trade or commerce.”
(emphasis supplied)
75 The term ‘supply’ has been defined in the IGST Act with reference to the
CGST Act. Section 2(21) of the IGST Act provides that:
“(21) “supply” shall have the same meaning as assigned to it in
section 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-
-
(a) all forms of supply of goods or services or both such as sale,
transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in
the course or furtherance of business;
[(aa) the activities or transactions, by a person, other than an
individual, 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 clarified
that, notwithstanding anything contained in any other law for the
time being in force or any judgment, decree or order of any
Court, tribunal or authority, the person and its members or
constituents shall be deemed to be two separate persons and the
supply of activities or transactions inter se shall be deemed to
take place from one such person to another;]
[(b) import of services for a consideration whether or not in
the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to
be made without a consideration;”
(emphasis supplied)
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The term ‘taxable territory’ is defined in Section 2(22) of the IGST Act to mean the
“territory to which the provisions of this Act [IGST Act] apply”.
76 Section 13 of the IGST Act deals with determining the place of supply of
services where the location of supplier or location of recipient is outside India:
“13. Place of supply of services where location of supplier or
location of recipient is outside India.—
(1) The provisions of this section shall apply to determine the
place of supply of services where the location of the supplier of
services or the location of the recipient of services is outside
India.
(2) The place of supply of services except the services
specified in sub-sections (3) to (13) shall be the location of
the recipient of services:
Provided that where the location of the recipient of services is not
available in the ordinary course of business, the place of supply
shall be the location of the supplier of services.
(3) The place of supply of the following services shall be the
location where the services are actually performed, namely:—
[…..]
(6) Where any services referred to in sub-section (3) or subsection (4) or sub-section (5) is supplied at more than one
location, including a location in the taxable territory, its place of
supply shall be the location in the taxable territory.
[….]
(9) The place of supply of services of transportation of
goods, other than by way of mail or courier, shall be the
place of destination of such goods.
(10) The place of supply in respect of passenger transportation
services shall be the place where the passenger embarks on the
conveyance for a continuous journey.
(12) The place of supply of online information and database
access or retrieval services shall be the location of the recipient
of services.
Explanation.—For the purposes of this sub-section, person
receiving such services shall be deemed to be located in the
taxable territory, if any two of the following non-contradictory
conditions are satisfied, namely:—
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(a) the location of address presented by the recipient of services
through internet is in the taxable territory;
(b) the credit card or debit card or store value card or charge card
or smart card or any other card by which the recipient of services
settles payment has been issued in the taxable territory;
(c) the billing address of the recipient of services is in the taxable
territory;
(d) the internet protocol address of the device used by the
recipient of services is in the taxable territory;
(e) the bank of the recipient of services in which the account
used for payment is maintained is in the taxable territory;
(f) the country code of the subscriber identity module card used
by the recipient of services is of taxable territory;
(g) the location of the fixed land line through which the service is
received by the recipient is in the taxable territory.
(13) In order to prevent double taxation or non-taxation of the
supply of a service, or for the uniform application of rules, the
Government shall have the power to notify any description of
services or circumstances in which the place of supply shall be
the place of effective use and enjoyment of a 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 in the 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 of the CGST Act, while the value of taxable supply
is determined under Section 15 of the CGST Act.
78 Section 13 of the CGST Act states that the liability to pay tax on services
arises at the time of supply. Sub-section (3) of Section 13 provides for the time of
supply when tax is paid on a reverse charge basis:
“13. Time of supply of services.
[…]
(3) In case of supplies in respect of which tax is paid or liable to
be paid on reverse charge basis, the time of supply shall be the
earlier of the following dates, namely:--
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(a) the date of payment as entered in the books of account of the
recipient or the date on which the payment is debited in his bank
account, whichever is earlier; or
(b) the date immediately following sixty days from the date of
issue 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 of
supply under clause (a) or clause (b), the time of supply shall be
the 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 of
supply shall be the date of entry in the books of account of the
recipient of supply or the date of payment, whichever is earlier.”
Sub-section (5) of Section 13 provides for the time of supply when it cannot be
determined under sub-Section (2), (3) or (4):
“(5) Where it is not possible to determine the time of supply under
the provisions of sub-section (2) or sub-section (3) or sub-section
(4), the time of supply shall—
(a) in a case where a periodical return has to be filed, be the date
on 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 of the value of
taxable supply. Sub-section (1) provides that the value of supply 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, incidental expenses, interest, late fee penalty, etc. Sub-sections
(4) and (5) provide for the value of the supply of goods or services if it cannot be
determined under sub-section (1).
“15. Value of taxable supply.—(1) The value of a supply of goods
or services or both shall be the transaction value, which is the
price actually paid or payable for the said supply of goods or
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services or both where the supplier and the recipient of the
supply are not related and the price is the sole consideration for
the supply.
[….]
(4) Where the value of the supply of goods or services or both
cannot be determined under sub-section (1), the same shall be
determined in such manner as may be prescribed.
(5) Notwithstanding anything contained in sub-section (1) or subsection (4), the value of such supplies as may be notified by the
Government on the recommendations of the Council shall be
determined in such manner as may be prescribed.”
D.2 Do the impugned notifications suffer from excessive delegation?
80 Article 286(1) stipulates that the State shall not levy tax when the supply of
goods or services takes place outside the State or in the course of import or export
of goods or services from the territory of India. Clause (2) of Article 286 states that
Parliament may by law formulate principles for determining when there is a supply of
goods or services as prescribed by clause (1):
“286(1): No law of a State shall impose, or authorize the
imposition of, a tax, or authorize the imposition of, a tax on the
supply of goods 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, or
export of the goods or services or both out of, the territory of
India.
(2) Parliament may by law formulate principles for determining
when a supply of goods or of services or both in any of the ways
mentioned in clause (1).”
81 Article 269A provides that GST on supplies in the course of inter-state trade
or commerce shall be levied and collected by the Union Government. The manner of
apportionment between the Union and the States has to be provided by Parliament
on the recommendations of the GST Council. The explanation to Article 269A(1)
states that supply of goods or services in the course of import shall be deemed to be
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supply in the course of inter-State trade or commerce. Clause (5) provides that
Parliament may by law formulate principles for determining the place of supply and
when the supply of goods or services takes place in the course of inter-state trade or
commerce:
“269A. (1) Goods and services tax on supplies in the course
of inter-State trade or commerce shall be levied and
collected by the Government of India and such tax shall be
apportioned between the Union and the States in the manner
as may be provided by Parliament by law on the
recommendations of the Goods and Services Tax Council.
Explanation — For the purposes of this clause, supply of
goods, or of services, or both in the course of import into
the territory of India shall be deemed to be supply of goods,
or of services, or both in the course of inter-State trade or
commerce.
[…]
(5) Parliament may, by law, formulate the principles for
determining the place of supply, and when a supply of goods, or
of services, or both takes place in the course of inter-State trade
or commerce.”
(emphasis supplied)
82 Articles 269A stipulates that Parliament may by law formulate principles for
determining: (a) the place of supply and; (b) when the supply of goods or services or
both takes place in the course of inter-State trade or commerce. Article 286(1)
empowers Parliament to formulate the principles by law for determining when a
supply of goods or services, or both, takes place (a) outside the state; and (b) in the
course of import into or export outside the territory of India. Parliament enacted the
IGST Act prescribing the principles as required under Articles 269A and 286(1). The
provisions of the IGST Act deal with the levy and collection of tax (Section 5(1)),
export of goods and services (Section 2(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-State
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supply (Section 7), supplies in territorial waters (Section 9), place of supply with
respect to import to India and export from India (Section 11), and place of supply of
services where the location of the supplier and recipient is in India and outside India
(Sections 12 and 13).
83 The contention of the respondents is that Section 5(3) of the IGST Act only
delegates the power to identify the categories of goods or services on which the tax
shall be paid on reverse charge basis. It is contended that since Notification 10/2017
identifies an importer as a service recipient for the purposes of Section 5(3), it is
ultra vires the parent Act on the ground of excessive delegation.
84 The legislature is required to perform its essential legislative functions. Once
the skeletal structure of the policy is framed by the legislature, the details can
emerge through delegated legislations.86 It is a settled position that the legislature
cannot delegate its ‘essential legislative functions’.87 The essential legislative
functions with respect to the GST law are the levy of tax, subject matter of tax,
taxable person, rate of taxation and value for the purpose of taxation. The principles
governing these essential aspects of taxation find place in the IGST Act: Section
5(1) identifies the subject matter of taxation as inter-State supplies of goods,
services or both; Section 2(107) of the CGST Act identifies a taxable person;
Section 5(1) provides a maximum cap of 40% as the rate of taxation; and Section
 86 Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills, AIR 1968 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 of Ajmer, AIR 1955 SC 25; A.N
Parasaran v. State of Tamil Nadu, (1989) 4 SCC 683
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5(1) stipulates that the value of taxation be determined under Section 15 of the
CGST Act.
85 Section 2(98) of the CGST Act defines “reverse charge” as the liability of the
recipient of the supply of goods or services or both to pay tax instead of the supplier.
Section 2(93) of the CGST Act defines “recipient” with reference to three situations
(i) when consideration is payable for the supply of goods or services or both; (ii)
when no consideration is payable for the supply of goods; and (iii) when no
consideration is payable for the supply of services. In the first situation, the recipient
is the person by whom consideration is payable. In the second situation, the
recipient is the person to whom (a) the goods are delivered or made available; or (b)
possession or the use of the goods is given or made available. The CGST Act also
stipulates a two-fold requirement for a recipient to be taxed on reverse charge basisthe recipient must be a ‘person’ as defined under Section 2(84) of the CGST; and
the person is a “taxable person” only if registered or is liable to be registered under
Section 22 or Section 24. Section 24(iii) of the CGST Act states that persons who
are required to pay tax under reverse charge must be registered. Therefore, both the
IGST and CGST Act clearly define reverse charge, recipient and taxable persons.
Thus, the essential legislative functions vis-à-vis reverse charge have not been
delegated.
86 Section 5(3) of the IGST Act provides the Government the power to specify
categories of supply of goods or services or both on which tax shall be paid on a
reverse charge basis by the recipient. The Government is to exercise this power on
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the recommendation of the GST Council. The Government in exercise of its power
under Section 5(3) of the IGST Act issued the impugned Notification 10/2017
specifying the ‘categories of the supply’ which shall be subject to reverse charge.
The notification, besides specifying the criteria, has also mentioned the
corresponding recipient in those categories. As discussed above, the IGST Act and
the CGST Act define reverse charge and prescribe the entity that is to be taxed for
these purposes. Therefore, the stipulation of the recipient in each of the categories
is only clarificatory. The Government by notification did not specify a taxable entity
different from that which is prescribed in Section 5(3) of the IGST Act for the
purposes of reverse charge.
D.3 Charging Section: taxable person, taxable rate and manner of
determining value
87 In determining the vires of the impugned notifications, a few preliminary
contentions raised by the respondents would have to be addressed. The
respondents have argued that no charge has been created for the ocean freight
transaction to be taxed in the hands of the importer. It has been alleged that only
Section 5(1) is a charging provision and Sections 5(3) and 5(4) cannot
independently create a charge.
88 In assessing this claim, this Court is bound by a decision of the Constitution
Bench in Mathuram Agrawal (supra) which has identified three essential elements
of taxation:
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(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 a two-judge Bench of this Court in Gobind
Saran Ganga Saran (supra) by further requiring the designation of the measure or
the value to which the rate of the tax will be applied. Thus, the four canons of
taxation are as follows:
(i) The taxable event;
(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 four canons of taxation:
(i) the inter-State supply of goods and services as the taxable event; (ii) the “taxable
person” as the person on whom the levy is imposed; (iii) the taxable rate as such a
rate notified by the Union Government on the recommendation of the GST Council,
capped at forty per cent; and (iv) the taxable value as the value determined under
Section 15 of the CGST Act.
90 Section 5(3) and Section 5(4) of the IGST Act are inextricably linked with
Section 5(1) of the IGST Act which is the charging provision. They must be
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construed together in determining the vires of the taxation. In CIT v. B C Srinivas
Setty88, a three-judge Bench of this Court has held that the machinery provisions of
an Act and the charging sections are inextricably linked. The Court observed:
“A transaction to which those provisions cannot be applied must
be regarded as never intended by Section 45 to be the subject of
the charge. This inference flows from the general arrangement of
the provisions of the Income Tax Act, where under each head of
income the charging provision is accompanied by a set of
provisions for computing the income subject to that charge. The
character of the computation provisions in each case bears
a relationship to the nature of charge. Thus the charging
section and the computation provisions together constitute
an integrated code. When there is a case to which the
computation provisions cannot apply at all, it is evident that such
a case was not intended to fall within the charging section.”
(emphasis supplied)
Taxable person
91 The respondents have alleged that the importer cannot be validly termed as a
taxable person. However, this argument has to fail on a close reading of the
impugned notifications alongside Sections 2(107) and 24 of the CGST Act. Section
24(iii) of the CGST Act mandates persons required to pay tax under reverse charge
to be compulsorily registered under the CGST Act. Section 2(107) of the CGST Act
defines a “taxable person” to mean a person who is registered or liable to be
registered under Section 24 of the CGST Act. Neither Section 2(107) nor Section 24
of the CGST Act qualify the imposition of reverse charge on a “recipient of service”
and broadly impose it on “the persons who are required to pay tax under reverse
charge”. Since the impugned notification 10/2017 identifies the importer as the
recipient liable to pay tax on a reverse charge basis under Section 5(3) of the IGST
 88 AIR 1981 SC 972
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Act, the argument of the failure to identify a specific person who is liable to pay tax
does not stand.
92 The decision in Laghu Udyog (supra), rendered by a two-judge Bench of this
Court, invalidated certain service tax rules formulated under the Finance Act 1997 to
give effect to the collection of service tax. Section 66 read with Section 68(1)(a) of
the Finance Act 1997 specifically identified the taxable person to include only those
persons responsible for collecting the service tax. The rules had sought to effect a
reverse charge by identifying the customers of goods transport operators and of
clearing and forwarding agents as the assessee, even though they were not
responsible for collecting the service tax. The basis for nullifying the rules was that
the Finance Act 1997 did not enable the imposition of such a reverse charge on the
person who is not supplying the service. The Court held:
“9. Section 68(1-A) is a special provision which has been
inserted by the Finance Act, 1997. According to Section 68(1)
“every person who was providing the taxable service is the one
who is required to collect the service tax at the rate specified in
Section 66”. With respect to the taxable services referred in Items
(g) to (r) of clause (41) of Section 65, Section 68(1-A) provides
that the service tax for such service shall be collected from such
person and in such manner as may be prescribed and to such
person all the provisions shall apply as if he is the person
responsible for collecting the service tax in relation to such
service. As we read Section 68 it does not in any way seek to
alter or change the charge of service tax levied under Section 66,
which is on the person responsible for collecting the service tax.
It also does not to our mind, in any way, amend any of the
clauses of Section 65 which contain the definitions of different
expressions. All that Section 68(1-A) enables to be done is that
with regard to the assessees or the persons who are responsible
for collecting the service tax, the individual or the officer
concerned can be identified and it is that person who would be a
person responsible for collecting the service tax. In other words
this provision, namely, Section 68(1-A) cannot be so
interpreted as to make a person an assessee even though he
may not be responsible for collecting the service tax. The
service tax is levied by reason of the services which are
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offered. The imposition is on the person rendering the
service. Of course, it may be an indirect tax; it may be
possible that the same is passed on to the customer but as
far as the levy and assessment are concerned it is the
person rendering the service who alone can be regarded as
an assessee and not the customer. This is the only way in
which the provisions can be read harmoniously.
[…]
10. By amending the definition of “person responsible for
collecting of service tax” in the impugned rules with regard to
services provided by the clearing and forwarding agents and the
goods transport operator a person responsible is said to be the
client or the customer of the clearing and forwarding agents and
the goods transporter. 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 the definition of that expression occurring in
Section 65 of the Act. However, with regard to the services
rendered by the clearing and forwarding agents and the goods
transport operator the definitions contained in Rule 2(d)(xii) and
(xvii), which seek to make the customers or the clients as the
assessee, are clearly in conflict with Sections 65 and 66 of the
Act.”
(emphasis supplied)
The decision in Laghu Udyog (supra) has no applicability to the facts of the present
case since Parliament has statutorily incorporated the concept of a reverse charge
under Sections 5(3) and 5(4) of the IGST Act. The impugned notification 10/2017
clearly specifies a taxable person who is liable to pay a reverse charge that is
envisaged in the statute. Thus, the impugned notifications cannot be invalidated for
an alleged failure to identify a taxable person.
Taxable value
93 By a corrigendum dated 8 June 2016, Notification 8/2017 was amended to
include the measure of taxable value to be ten per cent of the CIF value. Section
5(1) of the IGST Act enables the taxable value to be determined under Section 15 of
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the CGST Act. The respondents have 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 methods for 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 both
cannot be determined under sub-section (1), the same shall be
determined in such manner as may be prescribed.
(5) Notwithstanding anything contained in sub-section (1) or subsection (4), the value of such supplies as may be notified by the
Government on the recommendations of the Council shall be
determined in such manner as may be prescribed.”
Rules 27 to 31 of Chapter IV of the CGST Rules 2017, prescribe the manner of
determining value of supply. Rule 31 also provides for residual powers to the GST
Council for prescribing modes of valuation.
“31. Residual method for determination of value of supply of
goods or services or both.— Where the value of supply of goods
or services or both cannot be determined under Rules 27 to 30,
the same shall be determined using reasonable means
consistent with the principles and the general provisions of
Section 15 and the provisions of this Chapter:
Provided that in the case of supply of services, the supplier may
opt for this rule, ignoring Rule 30.”
94 The respondents have urged that the determination of the value of supply has
to be specified only through rules, and not by notification. However, this would be an
unduly restrictive interpretation. Parliament has provided the basic framework and
 89 “Section 15: Value of Taxable Supply- (1) The value of a supply of goods or services or both shall be the
transaction value, which is the price actually paid or payable for the said supply of goods or services or both where
the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”
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delegated legislation provides necessary supplements to create a workable
mechanism. Rule 31 of the CGST Rules 2017 specifically provides for a residual
power to determine valuation in specific cases, using reasonable means that are
consistent with the principles of Section 15 of the CGST Act. This is where the value
of the supply of goods cannot be determined in accordance with Rules 27 to 30 of
the CGST Rules 2017. Thus, the impugned notification 8/2017 cannot be struck
down for excessive delegation when it prescribes 10 per cent of the CIF value as the
mechanism for imposing tax on a reverse charge basis.
D.4 Taxable event: Is an ocean freight transaction for import of goods a
valid category of supply of services under Section 5(3) of IGST Act?
95 The other limb for contesting the validity of the impugned notification is with
respect to its identification of a “taxable event”. The question that falls for the
determination is whether the impugned notifications issued in 2017, under Section
5(3) of the IGST Act, validly prescribe a taxable event that constitutes an inter-State
supply of goods and services with the importer being a recipient of shipping services
in CIF transactions.
96 The analysis of whether import of goods under CIF contracts constitutes a
valid import of service has to be answered on two prongs: (i) whether classification
of imports as a specific category of supply of shipping service is valid under Section
5(3) read with Section 5(1) of the IGST Act; and (ii) whether the recipient of the
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imported goods is also a recipient of shipping services in CIF transactions under
Section 5(3).
D.4.(a) Do imported goods procured on a CIF basis constitute an inter-state
supply or is it an extra-territorial tax?
97 Notification 8/2017 specifically delineates the service that is accompanied
with the transportation of goods from a non-taxable territory as a specified category
of service under Section 5(3) of the IGST Act. This categorization taxes the recipient
of such transportation service on a reverse charge basis. The respondents have
argued that the supply of service of shipping in a CIF contract is from the foreign
shipping line to the foreign exporter. It is alleged that this transaction has no
territorial nexus to India and does not constitute “supply” that can be taxed within the
meaning of the CGST Act and IGST Act.
98 We shall now advert to certain key provisions relevant to determine whether
the taxable event in the present case that is, “services supplied by a person located
in a non-taxable territory by way of transportation of goods by a vessel from a place
outside India up to the customs station of clearance in India” constitutes an ‘interState supply’ for the purposes of the charging Section 5(1) of the IGST Act, read
with Sections 5(3) and the unamended Section 5(4).
99 Section 5(1) levies IGST on all “inter-state supplies” of goods or services or
both. Section 5(3) of the IGST Act confers power on the Central Government, on the
recommendation of the GST Council, to specify categories of supply of goods or
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services or both where the tax shall be paid on a reverse charge basis by the
recipient. While analysing the respondents’ contention, it is important to
contextualize the purpose of GST and the constitutional amendment to effect it. In
modern commerce, the distinction between goods and services is increasingly
becoming a matter of degree than substance. GST seeks to focus on the taxation of
“supply” of goods or services. The provisions of the IGST and CGST Act focus on
implementing a workable machinery to adequately capture the complexities of
supply in a global and digital age.
100 The term ‘supply’ has been defined in the IGST Act with reference to the
CGST Act. Section 2(21) of the IGST Act provides that:
“(21) “supply” shall have the same meaning as assigned to it in
section 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 made
or agreed to be made for a consideration by a person in the
course or furtherance of business;
[(aa) the activities or transactions, by a person, other than an
individual, 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 clarified
that, notwithstanding anything contained in any other law for the
time being in force or any judgment, decree or order of any Court,
tribunal or authority, the person and its members or constituents
shall be deemed to be two separate persons and the supply of
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activities or transactions inter se shall be deemed to take place
from one such person to another;]
[(b) import of services for a consideration whether or not in
the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to
be made without a 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) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a 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 services imported into the territory of India
shall be treated to be a supply of services in the course of inter-State trade or
commerce”:
“7. Inter-State supply.—
(1) Subject to the provisions of Section 10, supply of goods,
where the location of the supplier and the place of supply are
in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of goods in the course of inter-State
trade or commerce.
(2) Supply of goods imported into the territory of India, till they
cross the customs frontiers of India, shall be treated to be a
supply of 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;
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(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of interState trade or commerce.
(4) Supply of services imported into the territory of India
shall be treated to be a supply of services in the course of
inter-State trade or commerce.
[…]”
(emphasis supplied)
101 Section 7 of the CGST Act defines the term “supply” with a broad brush and
provides for an inclusive definition. Section 7(1)(b) of the CGST Act considers import
of services for a consideration to constitute “supply”. Section 7(1)(c) of the CGST
Act captures any and all activities in Schedule 1 of the CGST Act, irrespective of
whether they are made for a consideration. Additionally, Section 7(3) confers the
power on the Central Government to specify which transactions are to be treated as
a supply of goods and not a supply of services, and vice-versa. Section 7(4) of the
IGST Act states that supply of services imported into India would be considered as a
supply of services in the course of “inter-State trade or commerce”. Thus, an Indian
importer could also be considered as an importer of the service of shipping which is
liable to IGST on inter-state supply, if the activity falls within the definition of “import
of service” for the IGST Act and CGST Act.
102 The term ‘importer’ is not defined in the IGST Act or the CGST Act. Section
2(26) of the Customs Act defines an ‘importer’ as:
“(26) "importer", in relation to any goods at any time between
their importation and the time when they are cleared for home
consumption, includes [any owner, beneficial owner] or any
person holding himself out to be the importer”
The term ‘import of goods’ is defined in Section 2(10) of the CGST Act as:
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“(10) “import of goods” with its grammatical variations and
cognate expressions, means bringing goods into India from a
place outside India”
“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;
(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 three aspects: (i) the supplier
of service must be located outside India; (ii) the recipient of the service must be
located in India; and (iii) the place of supply of service ought to be in India. The
respondents have argued that conditions (ii) and (iii) are not satisfied in the case of
CIF contracts since the recipient of shipping services would be the foreign exporter
and the place of supply would be the place of business of such foreign exporter.
However, in interpreting the expressions “recipient” and “place of supply”, this 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 contract between the foreign exporter and the
foreign shipping line.
103 Chapter V of the IGST Act provides for methodologies to determine the place
of supply of goods or services or both. Section 13 of the IGST Act provides the place
of supply of services where the location of the supplier or location of recipient is
outside India:
“13. Place of supply of services where location of supplier or
location of recipient is outside India—
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(1) The provisions of this section shall apply to determine the
place of supply of services where the location of the supplier of
services or the location of the recipient of services is outside
India.
(2) The place of supply of services except the services specified
in sub-sections (3) to (13) shall be the location of the recipient of
services:
Provided that where the location of the recipient of services is not
available in the ordinary course of business, the place of supply
shall be the location of the supplier of services.
[…]
(9) The place of supply of services of transportation of
goods, other than by way of mail or courier, shall be the
place of destination of such goods.”
(emphasis supplied)
Section 13(9) of the IGST Act appears to create a deeming fiction, where in case of
supply of services of transportation of goods by a supplier located outside India, the
place of supply would be the place of destination of such goods. The supplier, the
foreign shipping line, in this case would be a non-taxable person. However, its
services in a CIF contract for transport of goods would enter Indian taxable territory
as the destination of such goods. The place of supply of shipping service by a
foreign shipping line, would thus be India.
104 The respondents argued that since Section 7(1)(b) of the CGST Act does not
define “supply” of import of service without consideration, other than the ones
specified in Schedule 1, this would be inapplicable to importers with CIF contracts as
the consideration is paid by the exporter. Thus, the importer of goods cannot be said
to be an importer of shipping service since the latter is not an import of service for a
consideration under Section 7(1)(b) of the CGST Act. However, this argument
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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 and IGST Acts, including the provisions for determination of
place of supply under Section 13(9) of the IGST Act. As mentioned previously,
Section 13(9) of the IGST Act creates a deeming fiction of place of supply of
transportation services to be in India when the destination of goods is in India. In this
case, it is clear the supplier of service- the foreign shipping line - is located outside
India; and the place of supply is India. Accordingly, Section 13 of the CGST Act
would be applicable to determine the time of such supply.
105 The respondents have argued that the ocean freight transaction 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:
“(31) “consideration” in relation to the supply of goods or services
or both includes—
(a) any payment made or to be made, whether in money or
otherwise, in respect of, in response to, or for the
inducement of, the supply of goods or services or both,
whether by the recipient or by any other person but shall not
include any subsidy given by the Central Government or a State
Government;
(b) the monetary value of any act or forbearance, in respect of, in
response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person
but shall not include any subsidy given by the Central
Government or a State Government:
Provided that a deposit given in respect of the supply of goods or
services or both shall not be considered as payment made for
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such supply unless the supplier applies such deposit as
consideration for the said supply;”
(emphasis supplied)
Thus, Section 2(31) of the CGST Act defines ‘consideration’ to include payment
made or to be made, in money or any other form, for the inducement of supply of
goods or services to be made by the recipient or by any other person. Thus, in the
case of goods imported on a CIF basis, the fact that consideration is paid by the
foreign exporter to the foreign shipping line would not stand in the way of it being
considered as a “supply of service” under Section 7(4) of the IGST Act which is
made for a consideration, thereby constituting “supply of service” in the course of
inter-state trade or commerce that can be subject to IGST under Section 5(1) of the
IGST Act.
106 At this stage, we note that the respondents have also challenged the
impugned levy on the ground that the transaction takes place beyond the territory of
India and is thus, extra territorial in nature. Mr Arvind Datar and Mr Harish Salve,
learned senior counsel have urged that the service of transportation occurs outside
India, that is outside the taxable territory and bears a nexus with India only as the
destination of goods is India. However, the submission is that since the import of
goods is taxed under Section 5(1) as ‘supply of goods’, there remains no territorial
nexus of the transportation service with the Indian territory. An extension of this
argument is that in case Parliament seeks to levy a tax outside its territory, it makes
a deeming fiction in the statute and not by way of delegated legislation.
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107 A Constitution Bench in GVK Industries (supra), considered the question
whether Parliament is competent to enact legislation with regard to extra-territorial
aspects of certain events. Answering the question in affirmative, Justice B
Sudarshan Reddy, speaking for the Constitution Bench, held:
“124. […]
The answer to the above would be yes. However, Parliament
may exercise its legislative powers with respect to extraterritorial aspects or causes—events, things, phenomena
(howsoever commonplace they may be), resources, actions
or transactions, and the like—that occur, arise or exist or
may be expected to do so, naturally or on account of
some human agency, in the social, political, economic,
cultural, biological, environmental or physical spheres
outside the territory of India, and seek to control,
modulate, mitigate or transform the effects of such extraterritorial aspects or causes, or in appropriate 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) the territory of India, or
any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.
125. It is important for us to state and hold here that the
powers of legislation of Parliament with regard to all aspects
or causes that are within the purview of its competence,
including with respect to extra-territorial aspects or causes as
delineated above, and as specified by the Constitution, or
implied by its essential role in the constitutional scheme,
ought not to be subjected to some a priori quantitative tests,
such as “sufficiency” or “significance” or in any other manner
requiring a predetermined degree of strength. All that would
be required would be that the connection to India be real
or expected to be real, and not illusory or fanciful.
126. Whether a particular law enacted by Parliament does
show such a real connection, or expected real
connection, between the extra-territorial aspect or cause
and something in India or related to India and Indians, in
terms of impact, effect or consequence, would be a
mixed matter of facts and of law. Obviously, where
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Parliament itself posits a degree of such relationship, beyond
the constitutional requirement that it be real and not fanciful,
then the courts would have to enforce such a requirement in
the operation of the law as a matter of that law itself, and not
of the Constitution:”
(emphasis supplied)
The decision in GVK Industries (supra) clearly recognises the power of Parliament
to legislate over events occurring extra-territorially. The only requirement imposed
by the Court is that such an event must have a real connection to India.
108 The impugned levy on the supply of transportation service by the shipping
line to the foreign exporter to import goods into India has a two-fold connection: first,
the destination of the goods is India and thus, a clear territorial nexus is established
with the event occurring outside the territory; and second, the services are rendered
for the benefit of the Indian importer. Thus, the transaction does have a nexus with
the territory of India.
109 As an alternative, the respondents submitted that though the levy may have a
nexus with the Indian territory, the levy of tax extra-territorially must be provided by
Parliament through statute and not by the Union Government through delegated
legislation. We do not find any applicability of this submission to the facts at hand.
As stated above, the IGST Act under Section 13(9) recognises the place of supply of
services as the destination of goods when the supplier is located outside India.
Since the destination of goods is India, the statute itself is broad enough to cover a
taxable event that has extra-territorial aspects, which bears a nexus to India.
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110 In determining the vires of the impugned notifications, the only question that
falls for determination is whether the importer of goods can be considered as the
recipient of the service of shipping in CIF contracts.
D.4.(b) Are importers service recipients under CIF contracts?
111 The impugned notification 8/2017, inter alia, identifies several categories of
supply of services such as hotels, restaurants, transportation by rail/road/air and
legal and accounting services. The respondents, as importers of goods under CIF
transactions, are aggrieved by the following categorization:
“Transport of goods in a vessel including services provided or
agreed to be provided by a person located in non-taxable territory
to person located in non-taxable territory by way of transportation
of goods by a vessel from a, place outside India up to the
customs station of clearance in India up to the customs station of
clearance in India.”
The respondents are aggrieved by the fact that this categorization, coupled with
impugned notification 10/2017, deems the importer of goods as the recipient of the
service of shipping, irrespective of whether the import of goods was on the basis of a
CIF or FOB contract.
112 Section 5(3) of the IGST Act enables taxation of the recipients of certain
specified categories of supply of services on a reverse charge basis. It is pertinent to
note that the tax is payable “by the recipient” of such services, in contradistinction to
broad language such as “any person as may be prescribed” which was otherwise
used in Section 98(2) of the Finance Act 1994 which taxed services. Section 5(3)
states:
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“(3) The Government may, on the recommendations of the
Council, by notification, specify categories of supply of goods or
services or both, the tax on which shall be paid on reverse
charge basis by the recipient of such goods or services or
both and all the provisions of this Act shall apply to such recipient
as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both…”
(emphasis supplied)
The term “recipient” of a supply of service has been exhaustively defined by Section
2(93) of the CGST Act:
“(93) “recipient” of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or
services or both, the person who is liable to pay that
consideration;
(b) where no consideration is payable for the supply of goods, the
person to whom the goods are delivered or made available, or to
whom possession or use of the goods is given or made available;
and
(c) where no consideration is payable for the supply of a
service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made
shall be construed as a reference to the recipient of the
supply and shall include an agent acting as such on behalf of the
recipient in relation to the goods or services or both supplied;”
(emphasis supplied)
Thus, the language employed in Section 2(93)(a) of the CGST Act clearly stipulates
that when a consideration is payable for the supply of services, the recipient would
mean the person who is liable to pay that consideration. However, when no
consideration is payable for the supply of a service, Section 2(93)(c) states that the
recipient shall be the person to whom the service is rendered. Further, Section 2(93)
provides that “any reference to a person to whom supply is made shall be construed
as a reference to the recipient”. Hence, where the statute refers to a person to whom
a supply is made, it has to be construed as a reference to the recipient of service.
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113 In a CIF transaction, the foreign exporter contracts with a foreign shipping
line. The service of shipping is rendered by the foreign shipping line to the foreign
exporter and the consideration is accordingly payable by the latter to the former. The
cost of such shipping may form a 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 and
pay for the consideration. The Union Government has argued that import of goods
on a CIF basis would be construed as import of services where sub-clause (c) of
Section 2(93) applies to determine the recipient. The respondents have argued that
the importer in a CIF contract can be considered as a recipient of the service only in
a colloquial sense. The mere destination of the service of shipping would not convert
it into a service vis-à-vis the importer without any elements of a contract. Hence,
they urge that in the absence of specific deeming provisions in the statute, overarching principles of privity of contract are relevant for interpreting the term
“recipient” deployed in Section 5(3) of the IGST.
114 The Union Government has argued that Section 2 of the CGST Act is
prefaced with the term “unless the context otherwise requires”, and hence would
enable taxation of the importer on a reverse charge basis as the “recipient” of
service under Section 2(93). However, this argument overlooks the context of
Section 5(3) of the IGST Act which reiterates the taxable person to be the recipient
of the service and only enables the Union Government to notify categories of interstate supply of goods and services.
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115 The Union Government has attempted to make a far-fetched argument that
Section 24(iii) of the CGST Act mandating compulsory registration of persons liable
to pay tax on a reverse charge basis extends to designating any person to pay the
tax on a reverse charge basis, irrespective of their status as either a recipient or a
supplier of service. This argument inverts the identification of a category of goods
and services under Section 5(3) and the recipient therein, who is then liable to
compulsorily register themselves under Section 24(iii) of the CGST Act. The power
of the Central Government to designate persons and categories of supply for
reverse charge derives from Sections 5(3) and 5(4) of the IGST Act and not Section
24(iii) of the CGST Act which mandates the compulsorily registration as a logical
corollary to ensure tax collection. Section 2(98) of the CGST Act, which defines
“reverse charge” reiterates that it means the “liability to pay tax by the recipient of
supply of goods or services or both instead of the supplier…”. It cannot be construed
to imply that any taxable person identified for payment of reverse charge would
automatically become the recipient of such goods or service. The deeming fiction of
treating the importer as a recipient must be found in the IGST Act. As it currently
stands, Section 5(3) of the IGST Act enables the delegated legislation to create a
deeming fiction on categories of supply of goods/services alone.
116 Interpreting the term “by the recipient” vis-à-vis the categories of goods and
services identified in Section 5(3) of the IGST Act should necessarily be governed
by the principles governing the definition of “recipient” under Section 2(93) of the
CGST Act. Contrary to the arguments of the Union Government, such an
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interpretation would not annihilate the mandate of compulsory registration under
Section 24(iii) of the CGST Act. It would be applicable to suitably worded provisions
in the CGST or IGST Act which permit the Central Government to identify a taxable
person for a reverse charge. In any event, it would be applicable to all the recipients
liable for reverse charge under Sections 5(3) and 5(4) of the IGST Act. The
ineffectiveness of a tax collection mechanism under Section 24(iii) of the CGST Act
cannot be argued to obfuscate the concept of a “recipient” of a good or service that
is uniformly understood across the IGST Act, CGST Act and tax jurisprudence.
117 The Union Government has argued that the expression “by the recipient” in
Section 5(3) of the IGST Act does not impede the authority of the GST Council in
making recommendations for issuance of notifications for identifying such persons
who shall be governed by reverse charge and once the identification is complete,
such taxable person would automatically be interpreted as “the recipient”. This
argument requires the Court to completely discard the principles of determining the
recipient of a service and replace it with whichever taxable person is identified. The
appellant may argue for such an interpretation to achieve a favourable outcome in
this case. However, in matters of inter-state supply when the supplier and recipient
are within the territory of India, this Court would have to follow this artificially
bifurcated interpretation which identifies recipients vis-à-vis the nature of service and
supply in some cases, and by a simple equation of the identified taxable person in
others without considering the literal and contextual definition of recipient. This is
against settled rules of interpretation and would be an act of judicial legislation. If
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Parliament’s intention were to designate certain persons for reverse charge,
irrespective of them being the recipient of such goods and services, it must make a
suitable amendment to confer such power for exercise of delegated legislation.
118 The only argument that supports the case of the appellant is that of Section
13(9) of the IGST Act read together with Section 2(93)(c) of the CGST Act which
defines a “recipient”. As noted in Section D.4.(a) above, Section 13(9) of the IGST
Act creates the deeming fiction of place of supply of service to be the destination of
goods when they are transported by means other than mail or courier. No specific
exemptions for importers have been carved out. This Court is inclined to accept this
reasoning and read it into the definition of recipient in Section 2(93) of the CGST Act
which is as follows:
“(93) “recipient” of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or
services or both, the person who is liable to pay that
consideration;
(b) where no consideration is payable for the supply of goods, the
person to whom the goods are delivered or made available, or to
whom possession or use of the goods is given or made available;
and
(c) where no consideration is payable for the supply of a service,
the person to whom the service is rendered,
and any reference to a person to whom a supply is made
shall be construed as a reference to the recipient of the
supply and shall include an agent acting as such on behalf of the
recipient in relation to the goods or services or both supplied;”
(emphasis supplied)
Since a reference to a person to whom a supply is made, is a reference to the
recipient, the place of supply is critical. By virtue of Section 13(9) of the IGST Act,
the place of supply is the destination of goods. The time of supply is then
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determined through the provisions of Section 13 of the CGST Act. Sections 2(14)
and 2(15) of the IGST Act also define the location of the recipient and supplier of
services with respect to the physical location where the supply of services is made
or received.
“(14) ―location of the recipient of services means,––
(a) where a supply is received at a place of business for which
the registration has been obtained, the location of such place of
business;
(b) where a supply is received at a place other than the place of
business for which registration has been obtained (a fixed
establishment elsewhere), the location of such fixed
establishment;
(c) where a supply is received at more than one establishment,
whether the place of business or fixed establishment, the location
of the establishment most directly concerned with the receipt of
the supply; and
(d) in absence of such places, the location of the usual place of
residence of the recipient;
(15) location of the supplier of services means,––
(a) where a supply is made from a place of business for which
the registration has been obtained, the location of such place of
business;
(b) where a supply is made from a place other than the place of
business for which registration has been obtained (a fixed
establishment elsewhere), the location of such fixed
establishment;
(c) where a supply is made from more than one establishment,
whether the place of business or fixed establishment, the location
of the establishment most directly concerned with the provision of
the supply; and
(d) in absence of such places, the location of the usual place of
residence of the supplier;”
(emphasis supplied)
In such a scenario, when the place of supply of services is deemed to be the
destination of goods under Section 13(9) of the IGST Act, the supply of services
would necessarily be “made” to the Indian importer, who would then be considered
as a “recipient” under the definition of Section 2(93)(c) of the CGST Act. The supply
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can thus be construed as being “made” to the Indian importer who becomes the
recipient under Section 2(93)(c) of the CGST Act.
119 This conclusion comports with the philosophy of the GST to be a consumption
and destinated based tax. The services of shipping are imported into India for the
purpose of consumption that is routed through the import of goods. Although the
consideration for shipping is payable by the foreign supplier to the foreign shipping
line in CIF contracts, the price is consequently factored into the price of the
shipment. The ultimate benefactor of the shipping service is also the importer in
India who will finally receive the goods at a destination which is within the taxable
territory of India. Thus, the meaning of the term “recipient” in the IGST Act will have
to be understood within the context laid down in the taxing statute (IGST and CGST
Act) and not by a strict application of commercial principles.
120 Some of the respondents have argued that the possibility of two different
recipients of services would create absurdities since whether a 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 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 a reading of Section 2(93)(a) and (c) of the CGST Act, the
respondents argue that the transaction may simultaneously become an inter-state or
intra-state supply. This could also mean that two recipients can claim ITC. However,
this argument is inapplicable to the case at hand since Sections 7(3) and 8(2) of the
IGST Act do not conflate the concept of imports. Section 8(2) deals with a scenario
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where the location of the supplier and place of supply are within the same
State/Union Territory in India. This is inapplicable to determining imports where the
supplier is located outside India. Similarly, Section 7(3) deals with inter-state supply
within the territory of India. Further, both these sections are subject to the provisions
of Section 12 of the IGST Act where both- the supplier and recipient are located in
India. Section 12 of the IGST Act does not create the deeming fiction under Section
13(9) of the IGST Act which is applicable only when the supplier is located outside
India. The applicable section in this case would be Section 7(4) of the IGST Act
which clearly stipulates that “Supply of services imported into the territory of India
shall be treated to be a supply of services in the course of inter-State trade or
commerce”. Thus, no absurdity is created by the deeming fiction argued by the
Union Government. In no scenario would the foreign exporter be claiming ITC in
India.
121 The respondents’ arguments of identification of two recipients do not have
any bearing on the determination of the present dispute as the foreign exporter is
not sought to be taxed in this case. In the digital age, the concepts of supplier and
recipient of service have also been altered and are not necessarily understood as
two parties with a direct chain of supply. The IGST Act tends to create several such
deeming fictions to adequately capture such complexities. For instance, Section 5(5)
of the IGST Act taxes the electronic commerce operator as the supplier of service in
spite of it only being a conduit, in the commercial sense. These deeming fictions
need to be respected for the purpose of the statute, as long as they have
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constitutional and parliamentary sanction. Similarly, Section 2(14)(c) of the IGST Act
recognizes the possibility of the supply being received in more than one
establishment:
“(14) “location of the recipient of services” means,—
(a) where a supply is received at a place of business for which
the registration has been obtained, the location of such place of
business;
(b) where a supply is received at a place other than the place of
business for which registration has been obtained (a fixed
establishment elsewhere), the location of such fixed
establishment;
(c) where a supply is received at more than one establishment,
whether the place of business or fixed establishment, the location
of the establishment most directly concerned with the receipt of
the supply; and
(d) in absence of such places, the location of the usual place of
residence of the recipient;”
122 Section 13 of the IGST Act is critical to effectively meet the aim of the GST
statute to tax the destination of supplies, as opposed to their origins. The deeming
fiction therein is critical to interpret the charging provision under the IGST Act
(Section 5). The respondents’ argument for the irrelevance of determining the
beneficiary of the supply or who has received the supply in view of the definition of
‘recipient’ of Section 2(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 a departure from the previous policy of taxing
sale/consignments and focuses on the taxing of supplies. The concept of a supplycentric and destination-based tax runs through the scheme of the statutory
provisions and the proposals issued by the GST Council. Thus, an amendment to
the Constitution was introduced in the form of Article 366(12-A) to create a tax on
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the supply of goods, or services, or both. In the commercial reality of the times, the
conceptual lines between goods and services wear thin. Hence, the focus is on the
taxation of supply, as opposed to the creation of neat compartments between goods
and services. Section 7(1)(c) of the CGST Act specifically characterizes import of
services for a consideration to constitute “supply”. The only question that falls for
determination is whether the imports of goods on a CIF basis would also constitute
import of shipping services, by way of deeming fiction. We have held that Section
5(3) of the IGST does not confer the powers on the Central Government to create a
deeming fiction vis-à-vis who constitutes the recipient. Section 5(3) merely enables
the Central Government to identify certain categories of goods and services, where
the recipient of such services is subject to a reverse charge, as opposed to the usual
mode of taxation where the supplier of the service is charged on a forward charge
basis. However, Section 13(9) of the IGST Act read with Section 2(93)(c) of the
CGST Act inherently create a deeming fiction of the importer of goods to be the
recipient of shipping service.
D.5 Applicability of Section 5(4) of IGST Act
124 By way of an arguendo, the Union Government has argued that if the
importers do not qualify as service recipients, the impugned notifications would
derive their validity from Section 5(4) of the IGST Act. The unamended Section 5(4)
of the IGST Act stated as follows:
“(4) The integrated tax in respect of the supply of taxable
goods or services or both by a supplier, who is not
registered, to a registered person shall be paid by such
person on reverse charge basis as the recipient and all the
provisions of this Act shall apply to such recipient as if he is the
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person liable for paying the tax in relation to the supply of such
goods or services or both.”
(emphasis supplied)
On 29 August 2018, Section 5(4) was amended by Amending Act 32 of 2018, to
state the following:
“(4) The Government may, on the recommendations of the
Council, by notification, specify a class of registered
persons who shall, in respect of supply of specified
categories of goods or services or both received from an
unregistered supplier, pay the tax 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 person liable for paying the tax in relation to such supply
of goods or services or both.”
(emphasis supplied)
The amended Section 5(4) came into effect on 1 February 201990. Amending Act 32
of 2018 enables the Central Government to create a deeming fiction of declaring a
class of registered persons “as the recipient” of the supply of taxable goods or
service. In deploying the language “as the”, and not “by the” recipient, the
applicability of the definition of recipient vis-à-vis Section 2(93) of the CGST Act is
no longer necessary for determining the validity of such a notification. The effect of
the Amending Act 32 of 2018 has been as follows:- (i) the powers of the Central
Government to specify through a notification has been clarified; and (ii) the power to
specify a class of registered persons as the recipient has been recognised.
125 The Union Government has argued that Notifications 8/2017 and 10/2017
dated 28 June 2017 issued under Section 5(3) may also be read as issued under
Section 5(4) of the IGST, in which case, the importers would be liable to tax with
 90 Notification No. G.S.R. 67(E) dated 29 January 2019
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effect from 1 February 2019 though exempted for the period 13 October 2017 – 31
January 2019.
126 The respondents have argued that the amended and unamended Section
5(4) do not save the impugned notifications since they still make the reference to the
term “recipient”. However, the respondents crucially miss out that Section 5(4)
employs the language “as the recipient”, in contradistinction to Section 5(3) of the
IGST Act which uses “by the recipient”. We have held that recipient includes the
importer in Part D above. Further, Section 5(4) clarifies that it may designate a class
of registered persons as the recipient, thereby broadening the scope of Section
2(93) of the CGST Act, which is anyway an inclusive definition since Section 2 is
prefaced with “unless the context otherwise requires”.
127 It is settled law that non-reference of the source of power may not vitiate its
exercise and application in given facts and circumstances of a case. In Union of
India v. Tulsi Ram Patel91, a Constitution Bench held that when a source of power
legally exists, a non-reference or an incorrect reference during its exercise does not
vitiate the action. Speaking in the context of the Railway Service Rules which did not
account for the power of the Disciplinary Authority under Article 311(2), this Court
held:
“126. As pointed out earlier, the source of authority of a particular
officer to act as a disciplinary authority and to dispense with the
inquiry is derived from the service rules while the source of his
power to dispense with the disciplinary inquiry is derived from the
second proviso to Article 311(2). There cannot be an exercise of
a power unless such power exists in law. If such power does not
 91 1985 3 SCC 398
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exist in law, the purported exercise of it would be an exercise of a
non-existent power and would be void. The exercise of a power
is, therefore, always referable to the source of such power and
must be considered in conjunction with it. The Court's attention
in Challappancase [(1976) 3 SCC 190 : 1976 SCC (L&S) 398 :
(1976) 1 SCR 783] was not drawn to this settled position in law
and hence the error committed by it in considering Rule 14 of the
Railway Servants Rules by itself and without taking into account
the second proviso to Article 311(2). It is also well settled that
where a source of power exists, the exercise of such power
is referable only to that source and not to some other source
under which were that power exercised, the exercise of such
power would be invalid and without jurisdiction. Similarly, if
a source of power exists by reading together two provisions,
whether statutory or constitutional, and the order refers to
only one of them, the validity of the order should be upheld
by construing it as an order passed under both those
provisions. Further, even the mention of a wrong provision
or the omission to mention the provision which contains the
source of power will not invalidate an order where the
source of such power exists. (See Dr Ram Manohar
Lohia v. State of Bihar [AIR 1966 SC 740 : (1966) 1 SCR 709,
721 : 1966 Cri LJ 608] and Municipal Corporation of the City of
Ahmedabad v. Ben Hiraben Manilal [(1983) 2 SCC 422 : (1983) 2
SCR 676, 681] .) The omission to mention in the impugned
orders the relevant clause of the second proviso or the relevant
service rule will not, therefore, have the effect of invalidating the
orders and the orders must be read as having been made under
the applicable clause of the second proviso to Article 311(2) read
with the relevant service rule. It may be mentioned that in none of
the matters before us has it been contended that the disciplinary
authority which passed the impugned order was not competent to
do so.”
(emphasis supplied)
128 Similarly, in Titagarh Paper Mills v. Orissa State Electricity Board92, a
three-judge Bench of this Court, in the context of the Electricity Supply Act 1948,
held that a mislabelling of the source of power would not vitiate its exercise:
“9. …..But, if there is one principle more well settled than any
other, it is that, when an authority takes action which is within its
competence, it cannot be held to be invalid, merely because it
purports to be made under a wrong provision, if it can be shown
to be within its power under any other provision. A mere wrong
description of the source of power — a mere wrong label —
 92 1975 2 SCC 436
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139
cannot invalidate the action of an authority, if it is otherwise within
its power..”
Thus, as long as a source of power to legislate or issue a notification is available,
the lack of a mention, an incorrect reference or mistake does not vitiate the exercise
of such power.
129 The impugned notifications were issued with the intention of creating a level
playing field between the Indian and foreign shipping lines. In the Eighteenth GST
Council meeting held on 31 June 2017, the agenda of taxing importers on a reverse
charge basis was discussed:
““Para 6.7.1: Agenda Item 3(v)- Value for the purpose of levy of
GST on transportation of goods by a vessel from a place outside
India up to the customs station in India
6.7.1. In the existing Service Tax Law, with a view to provide
level playing field to the Indian shipping companies, it has been
provided that in cases where the goods are imported by an
importer in India on CIF (Cost, Insurance and Freight) basis and
the service of transportation of goods by a vessel from a place
outside India up to the customs station in India is provided by a
person located in non-taxable territory (a foreign shipping line) to
a person located in 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 purchases goods on CIF basis, he may not have the
invoice issued by the shipping line for freight and may not know
the amount of freight charged by the foreign shipping line from
the foreign supplier; it was stipulated in the Service Tax Rules
that in such cases the importer shall have the option to pay an
amount calculated at the rate of 1.4% of the CIF value of
imported goods. This provision was stipulated on the basis that
freight roughly constitutes 10% of the CJF value of goods on an
average. Under GST too, it was decided that the liability to pay
GST on such transportation service provided by a foreign
shipping line to a foreign supplier shall be of the importer in India
and the notifications are being issued accordingly. It is proposed
that the similar provision deeming value of such service at 10%
of the CIF value may be incorporated in the IGST notification.
Considering the nature of the service, this provision is not
required in the CGST, SGST or UTGST notifications. The Council
approved the proposal.
PART D
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[….]
8(v)…..in respect of agenda item 3 the Council approved to
incorporate a provision in the IGST notification that in cases
where the goods are imported by an importer in India on CIF
basis and the service of transportation of goods by a vessel from
a place outside India up to the customs station in India is
provided by a person located in non-taxable territory (a foreign
shipping line) to a person located in non-taxable territory
(overseas supplier/exporter of goods) and in case the importer
did not know the amount of freight charged by the foreign
shipping line from the foreign supplier the deemed value of such
service shall be 10% of the CIF value.”
130 The impugned notifications were issued after the GST Council took note of
the fact that since transport of imported goods by Indian shipping lines to India is not
treated as export of service, the Indian shipping lines pay IGST on the same on a
forward charge basis. On the other hand, on the same transportation service, the
foreign shipping lines are not required to pay tax as they are not taxable persons in
India. Therefore, to provide a level playing field to Indian shipping lines, the importer
in India has been made liable to pay IGST on transportation of goods by foreign
shipping lines on a reverse charge basis. If Indian shipping lines continue to be
taxed and not their competitors, namely, the foreign shipping lines, the margins
arising out of taxation from GST would not create a level playing field and drive the
Indian shipping lines out of business.
131 It was contended by the respondents that instead of course correcting the
input tax mechanism, the Union Government has chosen to tax the Indian importer
on reverse charge. However, this Court is not in a position to adjudicate the
desirability of a taxation scheme, as long as it is legally issued. Commenting on the
PART D
141
efficacy of the tax intervention with 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 permissible under Section 5
of the IGST Act, we shall now advert to the arguments raised by the respondents
regarding the impugned notifications amounting to double taxation. The respondents
have submitted before this Court that the transaction between the foreign exporter
and the respondents is already subject to IGST under Sections 5 of the IGST Act
read with Sections 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 of transportation
service, by designating the importer as the recipient would amount to double
taxation.
133 The transaction at hand involves three parties- the foreign exporter, the Indian
importer and the shipping line. The first leg of the transaction involves a CIF
contract, wherein the foreign exporter sells the goods to the Indian importer and the
cost of insurance and freight are the responsibility of the foreign exporter. In other
words, the foreign exporter is liable to ensure that the goods reach their place of
destination and the Indian importer pays the transaction value to the exporter. The
second leg of the transaction involves an agreement between the foreign exporter
and the shipping line (whether foreign or Indian) for providing services for transport
of goods to the destination, i.e., in the territory of India.
PART D
142
134 On the first leg of the transaction, between the foreign exporter and the Indian
importer, the latter is liable to pay IGST on the transaction value of goods under
Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariff
Act. Although this transaction involves the provision of services such as insurance
and freight it falls under the ambit of ‘composite supply’. We note from the written
submissions of the Union that the ASG has fairly submitted that this transaction
would include value elements of freight and insurance, and yet the IGST is levied as
a tax on supply of goods only. Such transactions are termed as “composite supply”
under the CGST Act.
135 Section 2(30) of the CGST Act defines “composite supply” as
“(30) “composite supply” means a supply made by a taxable
person to a recipient consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are
naturally bundled and supplied in conjunction with each other in
the ordinary course of business, one of which is a principal
supply;
Illustration.— Where goods are packed and transported with
insurance, the supply of goods, packing materials, transport and
insurance is a composite supply and supply of goods is a
principal supply;”
136 Section 2(30) of the CGST Act clearly provides that a transaction may have
two or more taxable supplies, where one of them is a principal supply. The
illustration to Section 2(30) further clarifies that a transaction such as the CIF
contract for supply of goods reflects a composite supply under the CGST Act, where
the principal supply is the supply of goods.
PART D
143
137 The tax liability on composite supply is provided under Section 8 of the CGST
Act.
“8. Tax liability on composite and mixed supplies.— The tax
liability on a composite or a mixed supply shall be determined in
the following manner, namely:—
(a) a composite supply comprising two or more supplies,
one of which is a principal supply, shall be treated as a
supply of such principal supply; and
(b) a mixed supply comprising two or more supplies shall be
treated as a supply of that particular supply which attracts the
highest rate of tax.”
(emphasis supplied)
Section 8 of the CGST Act provides that the tax liability on a composite supply which
comprises of two or more supplies, will only be levied on the ‘principal supply’. In a
CIF transaction, the principal supply, according to Section 2(30), is supply of goods.
Thus, the tax would be levied as if the transaction was one of supply of goods.
138 Section 20 of the IGST Act provides that the provisions relating to ‘composite
supply’ under the CGST Act would apply mutatis mutandis under the IGST Act. By
extension, the IGST in a transaction of composite supply would be levied on the
principal supply of goods.
139 The respondents have urged before this Court that the impugned levy which
seeks to impose IGST on the ‘service’ aspect of the 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 the IGST Act. In contrast, the Union Government has submitted that
the impugned levy is on the second leg of the transaction, which is a standalone
contract between the foreign exporter and the foreign shipping line. Thus, the Union
PART D
144
has urged that the contract between the foreign exporter and the foreign shipping
line- of which the Indian importer is not a party- cannot be deemed to be a part of
‘composite supply’. While the first leg of the transaction, between the foreign
exporter and Indian importer, is (according to the submission) a composite supply,
the second leg is an independent transaction. In this regard, the Union has relied on
the decision of this Court in McDowell (supra) to contend that a single element can
constitute a levy and a part of the value for another transaction. Further the Union
Government has urged that the levy is on different aspects of the transaction.
140 We are unable to agree with the Union Government on this count. The aspect
theory that the Union Government has relied on finds its place in various decisions
of this Court, such as in Federation of Hotels & Restaurant Association of India
v. Union of India93 and BSNL (supra).
141 In Federation of Hotels & Restaurants Association of India (supra), a
challenge was raised regarding the imposition of an expenditure tax by the Union
Government. In discussing the various aspects of a transaction, this Court, speaking
through Justice MN Venkatachaliah (as the learned Chief Justice then was),
observed that
“31. Indeed, the law “with respect to” a subject might
incidentally “affect” another subject in some way; but
that is not the same thing as the law being on the latter
subject. There might be overlapping; but the overlapping
must be in law. The same transaction may involve two or
more taxable events in its different aspects. But the fact
that there is an overlapping does not detract from the
 93 (1989) 3 SCC 634
PART D
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distinctiveness of the aspects. Lord Simonds in Governor
General-in-Council v. Province of Madras [AIR 1945 PC 98 :
1945 FCR 179, 193] in the context of concepts of Duties of
Excise and Tax on Sale of Goods said:
“... The two taxes, the one levied on a manufacturer in
respect of his goods, the other on a vendor in respect of, his
sales, may, as is there pointed out, in one sense overlap. But
in law there is no overlapping. The taxes are separated and
distinct imposts. If in fact they overlap, that may be because
the taxing authority, imposing a duty of excise, finds it
convenient to impose that duty at the moment when the
excisable article leaves the factory or workshop for the first
time on the occasion of its sale....””
(emphasis supplied)
There is no doubt that different aspects of a transaction can be taxed through
separate provisions. However, this Court in BSNL (supra) observed that the aspect
theory does not allow the value of goods to be included in services and vice versa.
In BSNL (supra), this Court dealt with the question of whether provision of telephone
services involved a transfer 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
to levy sales tax on sales provided that the necessary
concomitants of a sale are present in the transaction and the
sale is distinctly discernible in the transaction. This does not
however allow the State to entrench upon the Union List and
tax services by including the cost of such service in the value
of the goods. Even in those composite contracts which are by
legal fiction deemed to be divisible under Article 366(29-A),
the value of the goods involved in the execution of the whole
transaction cannot be assessed to sales tax.”
142 In the present case, the question is whether the imposition of IGST on supply
of services can be sustained when there is a concomitant imposition of IGST on
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146
supply of goods. However, we must first analyse the context in which the IGST is
levied on the import of goods in this case.
143 The provisions of composite supply in the CGST Act (and the IGST Act) play
a specific role in the levy of GST. The idea of introducing ‘composite supply’ was to
ensure that various elements of a transaction are not dissected and the levy is
imposed on the bundle of supplies altogether. This finds specific mention in the
illustration provided under Section 2(30) of CGST Act, where the principal supply is
that of goods. Thus, the intent of the Parliament was that a transaction which
includes different aspects of supply of goods or services and which are naturally
bundled together, must be taxed as a composite supply.
144 It is true that in this case, the first leg of the transaction between the foreign
exporter and the Indian importer is a composite supply, while the second leg,
between the foreign exporter and the shipping line may, from a perspective, be
regarded as a standalone transaction. Both of them are independent transactions
and ordinarily, 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 impugned notifications seek to tax the importer as the deemed
recipient of the supply of service. The ASG has advanced an interpretation of
Sections 5(3) and 5(4) of the IGST Act, read with Section 2(93) of the CGST Act to
contend that the importer can be classified as the ‘recipient’ of the services. On this
interpretation, we have upheld the validity of the impugned notifications under
Sections 5(3) and 5(4) of the IGST Act in Section D.2-D.5 of this judgment. The
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respondents as a matter of fact urged that (i) the Indian importer is not privy to the
contract between the foreign exporter and the foreign shipping line; (ii) the Indian
importer does not pay consideration to the foreign shipping line; and (iii) the Indian
importer does not receive any services from the foreign shipping line since the
transportation services are provided by the foreign shipping line to the foreign
exporter. The ASG, while advancing arguments on behalf of the Union Government,
has opposed these submissions. The Union Government has urged that this Court
must look beyond the text of the contract between the foreign shipping line and the
foreign exporter to identify the Indian importer as the recipient of the services. This
Court has upheld the validity of the impugned notifications on this ground. The Union
Government is contradicting the main plank of its submission now by contending
that the two legs of the transaction are separate standalone agreements. That would
imply, that while on the one hand the Union Government seeks to levy tax on the
Indian importer by going beyond the text of the contract between the foreign
shipping line and foreign exporter (for the purpose of identifying the Indian importer
as the recipient of services), on the other hand, as far as the submissions on
composite supply are concerned, the Union Government urges that the contracts
must be viewed as separate transactions, 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 to
identify the Indian importer as a recipient of services while on the other hand,
treating the two legs of the transaction as independent when it seeks to tide over the
statutory provisions governing composite supply.
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145 This Court is bound by the confines of the IGST and CGST Act to determine if
this is a composite supply. It would not be permissible to ignore the text of Section 8
of the CGST Act and treat the two transactions as standalone agreements. In a CIF
contract, the supply of goods is accompanied by the supply of services of
transportation and insurance, the responsibility for which lies on the seller (the
foreign exporter in this case). The supply of service of transportation by the foreign
shipper forms a part of the bundle of supplies between the foreign exporter and the
Indian importer, on which the IGST is payable under Section 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 the supply of the service component of the transaction would
contradict the principle enshrined in Section 8 and be in violation of the scheme of
the GST legislation. Based on this reason, we are of the opinion that while the
impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST
Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of
the GST legislation. As noted earlier, under Section 7(3) of the CGST Act, the
Central Government has the power to notify an import of goods as an import of
services and vice-versa:
“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,
specify, by notification, the transactions that are to be treated
as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.”
PART D
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No such power can be noticed with respect to interpreting a composite supply of
goods and services as two segregable supply of goods 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
implementation of the GST:
132. The GST is implemented by subsuming various indirect
taxes. The difficulty which is being experienced today in
proper implementation of the GST is because of the
erroneous misconception of law, or rather, erroneous
assumption on the part of the delegated legislation that
service tax is an independent levy as it was prior to the
GST and it go vivisect the transaction of supply to levy
more taxes on certain components completely
overlooking or forgetting the basic concept of composite
supply introduced in the GST legislation 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 by
making the Constitutional (101st) Amendment Act, 2016 to
merge all taxes levied on the goods and services to one tax
known as the GST.
133. It appears that despite having levied and collected the
integrated tax under the IGST Act, 2017, on import of goods
on the entire value which includes the Ocean Freight through
the impugned notifications, once again the integrated tax is
being levied under an erroneous misconception of law that
separate tax can be levied on the services components
(freight), which is otherwise impermissible under the scheme
of the GST legislation made under the CA Act, 2016.
134. All the learned senior counsel are right in their
submission that if such an erroneous impression is not
corrected and if such a trend continues, then in future
even the other components of supply of goods, such as,
insurance, packaging, loading/unloading, labour, etc.
may also be artificially vivisected by the delegated
legislation to once again levy the GST on the supply on
which the tax is already collected.
[…]
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215. Thus, having paid the IGST on the amount of freight
which is included in the value of the imported goods, the
impugned notifications levying tax again as a supply of
service, without any express sanction by the statute, are
illegal and liable to be struck down.”
(emphasis supplied)
147 We are in agreement with the High Court to the extent that a tax on the supply
of a service, which has already been included by the legislation as a tax on the
composite supply of goods, cannot be allowed.
E Conclusion
148 Based on the above discussion, we have reached the following conclusion:
(i) The recommendations of the GST Council are not binding on the Union and
States for the following reasons:
(a) The deletion of Article 279B and the inclusion of Article 279(1) by the
Constitution Amendment Act 2016 indicates that the Parliament intended
for the recommendations of the GST Council to only have a persuasive
value, particularly when interpreted along with the objective of the GST
regime to foster cooperative federalism and harmony between the
constituent units;
(b) Neither does Article 279A begin with a non-obstante clause nor does
Article 246A state that it is subject to the provisions of Article 279A. The
Parliament and the State legislatures possess simultaneous power to
legislate on GST. Article 246A does not envisage a repugnancy provision
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to resolve the inconsistencies between the Central and the State laws on
GST. The ‘recommendations’ of the GST Council are the product of a
collaborative dialogue involving the Union and States. They are
recommendatory in nature. To regard them as binding edicts would disrupt
fiscal federalism, where both the Union and the States are conferred equal
power to legislate on GST. It is not imperative that one of the federal units
must always possess a higher share in the power for the federal units to
make decisions. Indian federalism is a dialogue between cooperative and
uncooperative federalism where the federal units are at liberty to use
different means of persuasion ranging from collaboration to contestation;
and
(c) The Government while exercising its rule-making power under the
provisions of the CGST Act and IGST Act is bound by the
recommendations of the GST Council. However, that does not mean that
all the recommendations of the GST Council made by virtue of the power
Article 279A (4) are binding on the legislature’s power to enact primary
legislations;
(ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with
Section 2(93) of the CGST Act, the import of goods by a CIF contract
constitutes an “inter-state” supply which can be subject to IGST where the
importer of such goods would be the recipient of shipping service;
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(iii) The IGST Act and the CGST Act define reverse charge and prescribe the
entity that is to be taxed for these purposes. The specification of the recipient
– in this case the importer – by Notification 10/2017 is only clarificatory. The
Government by notification did not specify a taxable person different from the
recipient prescribed in Section 5(3) of the IGST Act for the purposes of
reverse charge;
(iv) Section 5(4) of the IGST Act enables the Central Government to specify a
class of registered persons as the recipients, thereby conferring the power of
creating a deeming fiction on the delegated legislation;
(v) The impugned levy imposed on the ‘service’ aspect of the transaction is in
violation of the principle of ‘composite supply’ enshrined under Section 2(30)
read with Section 8 of the CGST Act. Since the Indian importer is liable to pay
IGST on the ‘composite supply’, comprising of supply of goods and supply of
services of transportation, insurance, etc. in a CIF contract, a separate levy
on the Indian importer for the ‘supply of services’ by the shipping line would
be in violation of Section 8 of the CGST Act.
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149 For the reasons stated above, the appeals are accordingly dismissed.
150 Pending application(s) if any, stand disposed of.
…….…………………………...............................J.
 [Dr Dhananjaya Y Chandrachud]
…….…………………………...............................J.
 [Surya Kant]
…….…………………………...............................J.
 [Vikram Nath]
New Delhi;
May 19, 2022

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