No GST on Ocean Freight Under RCM in CIF Contracts: Part I The Supreme Court of India brought an important resolution to a longstanding import taxation dispute by deciding that importers should not pay ocean freight GST under the reverse charge mechanism in Cost Insurance and Freight deals. Under the Supreme Court judgment, the supply of ocean freight through CIF terms does not require Indian importers to pay GST separately since the freight component becomes part of the imported goods' value. This decision creates tax clarity regarding double-tax assessment by conforming to international commercial trade standards. This blog explores the consequences of the judgment along with its impact on importers and GST regulation under Cost , Insurance , and Freight contracts.
What Are CIF Contracts? CIF (Cost, Insurance, and Freight) is an international shipping term that defines the seller’s responsibility in trade.
Key Features of a CIF Contract:
The seller (foreign exporter) bears the cost of the goods, marine insurance, and ocean freight up to the Indian port.
Buyer (Indian importer) pays a lump-sum amount that includes all the above components.
The shipping contract is signed between the foreign supplier and a foreign shipping line, not the Indian importer.
Real-World Example: A steel manufacturer in India imports goods from China under a CIF contract. The Chinese supplier books and pays for the ocean freight to the Mumbai port. The Indian importer receives the goods but has no role in booking or paying the freight.
Get to know about GST on Freight Charges
GST and Import Transactions When goods are imported into India, IGST (Integrated GST) is levied on the assessable value of the goods under the Customs Act. This value is inclusive of:
Cost of the goods.
Insurance.
Freight (i.e., the full CIF value)
This means the entire freight component is already taxed at the time of customs clearance.
The Controversy: GST on Ocean Freight via RCM Despite the IGST being levied on the full CIF value, the Indian government attempted to tax ocean freight services separately under RCM through two key notifications:
1. Notification No. 10/2017 – IGST (Rate) dated 28.06.2017
This notification made importers liable to pay IGST under RCM for ocean freight, even though they didn’t contract the service.
2. Notification No. 8/2017 – IGST (Rate) dated 28.06.2017
This defined the taxable value of ocean freight at 10% of the CIF value.
Legal Arguments Against the Levy 1. Double Taxation
IGST is already collected on CIF value (including freight).
Charging GST again on the freight component amounts to taxing the same service twice.
2. Wrong Party Taxed
The Indian importer isn’t the recipient of the freight service.
The actual service recipient is the foreign exporter.
3. Extraterritorial Application
Both the service provider (foreign shipping line) and the recipient (foreign exporter) are located outside India.
Levying GST on a transaction that happens entirely outside India’s taxable territory violates territorial nexus principles.
Gujarat High Court’s Landmark Ruling: Mohit Minerals Pvt. Ltd. v. Union of India In 2020, the Gujarat High Court delivered a groundbreaking verdict in the case of Mohit Minerals, where it held:
The notifications imposing RCM on ocean freight were ultra vires the IGST Act.
Importers under CIF contracts cannot be treated as service recipients.
Taxing ocean freight separately amounts to double taxation.
This verdict was a major victory for importers and set the stage for the Supreme Court appeal.
The Apex Verdict: Supreme Court Judgment in Mohit Minerals (2022) In 2022, the Supreme Court of India recognized the Gujarat High Court decision through the case known as:
Union of India v. Mohit Minerals Pvt. Ltd. Citation: (2022) 448 ITR 609 (SC)
Key Findings of the Supreme Court: 1. Importer, Not the Service Recipient
Under Section 2(93) of the CGST Act, the service recipient is the party who pays for the service.
In CIF contracts, the Indian importer neither contracts with nor pays the shipping line.
2. No Territorial Nexus
The freight service is rendered outside India between two foreign parties.
Therefore, such a supply cannot be taxed under Indian GST laws.
3. RCM Notifications Are Invalid
The Court ruled that delegated legislation (notifications) cannot override the parent statute.
Imposing GST on a party who is not the recipient goes beyond the legal provisions of the GST Act.
4. Double Taxation Confirmed
Since IGST is already paid on the CIF value, taxing freight again under RCM is constitutionally impermissible.
Implications of the Ruling Relief for Importers Importers no longer need to pay GST under RCM on ocean freight in CIF contracts.
Refund Eligibility Businesses that have paid GST on ocean freight under RCM may be eligible to claim refunds, subject to limitation periods and procedural compliance.
Clarified Tax Positions The verdict removes ambiguity and ensures consistent treatment across customs and GST valuation.
Conclusion Indian GST jurisprudence received a landmark decision when the Supreme Court issued its ruling in Mohit Minerals. Under the principles of GST, the Supreme Court ruled that service tax liability exists only between interacting parties who both receive and pay for services.
CIF contract importers now have reason to feel relieved since the court declared them free from RCM responsibilities on ocean freight costs. It also reinforces the constitutional principle that taxation must follow legal authority, not mere administrative instructions.
Are you in the transport business too? Don’t miss out on the Passengers Transport Services GST rate and SAC Code 9964
FAQs 1. Is GST applicable on ocean freight under CIF contracts? No, post the Supreme Court judgment in Mohit Minerals , GST is not applicable under RCM for ocean freight in CIF contracts.
2. What if IGST on freight was already paid under RCM? Importers may explore the possibility of claiming refunds for tax paid under RCM, subject to eligibility and within limitation periods.
3. Does this ruling apply to FOB (Free on Board) contracts? No, in FOB contracts, the Indian importer arranges and pays for the ocean freight. Therefore, the recipient of the service is the importer, and RCM may still apply.
4. Does this apply only to CIF contracts? Yes, the ruling specifically applies to CIF contracts, where the Indian importer is not the service recipient.
5. Is GST on freight applicable in FOB contracts? Yes. Under FOB (Free on Board) contracts, the Indian importer arranges and pays for the freight. In this case, GST under RCM may still apply.
6. Can I claim a refund for GST already paid under RCM? Possibly. Businesses may file for refunds under Section 54 of the CGST Act, subject to the time limits and documentary evidence.
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