Section 5(4) of the IGST Act confers the power of creating a deeming fiction on the delegated legislation: Supreme Court

The Supreme Court ruled that Section 5(4) of the IGST Act confers the power of creating a deeming fiction on the delegated legislation.


The Union of India is in appeal against a judgment of a Division Bench of the Gujarat High Court. 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 Tax on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis. 

The respondents import non-coking coal from Indonesia, South Africa and the U.S. by ocean transport on a ‘Cost-Insurance-Freight’ 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’ contract. In the case of a high seas sale transaction, the coal is purchased from the original buyer before it arrives at Indian ports.


N Venkataraman, Additional Solicitor General, appearing on behalf of the appellant – the Union of India – urged that under Article 286(2) of the constitution, the 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. Article 269A enables the Union Government to levy GST on inter-state supplies. 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;

The ASG further urged that 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. 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.

Senior Advocate V Sridharan, appearing on behalf of the respondents, urged that under Section 5(4) of the IGST Act, the Government cannot specify the person liable to pay service tax on a reverse charge basis. 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). 

Court observation 

The three judge bench of Justice Dhananjaya Y Chandrachud, Justice Surya Kant and Justice Vikram Nathnoted that the respondents have alleged that the importer cannot be validly termed as a taxable person. 

The court said that 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. 


The court concluded that the recommendations of the GST Council are not binding on the Union and States as 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. 

The court stated that 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.   

The court added that 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.

The court held that 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. 

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

Citation: Civil Appeal No. 1390 of 2022

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