The Bombay High Court has rendered a significant verdict concerning the payment of service tax not applicable for ocean freights or sea transportation services, marking a pivotal shift in taxation policy.
In a case that drew upon precedent from the Gujarat High Court, specifically the SAL Steel Ltd. vs. Union of India matter, the Bombay High Court ruled that no tax should be imposed under the Integrated Goods and Services Tax Act, 2007, on ocean freight for services provided by entities situated in non-taxable territories. This decision sets a crucial legal precedent, emphasising the limitations on tax levies pertaining to international transportation services.
The petitioner in this case, a company operating under the purview of the Companies Act, 1956, is engaged in the manufacturing of various types of yarn at its facility in Silvassa. As part of its manufacturing operations, the petitioner imports raw materials such as purified terephthalic acid (PTA) and monoethylene glycol (MEG) from foreign suppliers under CIF contracts, wherein the responsibility for transportation up to the Indian customs station is borne by the foreign supplier. Additionally, the petitioner imports spare parts and accessories for its machinery under similar arrangements.
Despite these arrangements, the tax department conducted an audit and issued a final report demanding payment of service tax for the period between April 2017 and June 2017, based on the value of imports listed in the petitioner’s bills of entry. The petitioner complied with this demand, paying the service tax along with interest, as required.
The legal backdrop against which this case unfolds is marked by amendments to taxation laws, particularly the Finance Act, of 1994, which underwent significant restructuring with the introduction of the ‘Negative List of Taxation Scheme’ in 2012. However, subsequent amendments and notifications, including those related to the imposition of service tax not applicable on ocean freights, have sparked contention.
Under the GST regime, the imposition of Integrated Goods and Services Tax (IGST) on the transportation of goods by vessel from a place outside India to the customs station for clearance in India has been a subject of debate. The petitioner contends that such levies on the importer, under a reverse charge mechanism, are arbitrary and unconstitutional, especially considering that the importer neither provides nor receives the services in question.
The court’s ruling underscores the need for clarity and coherence in taxation policies, especially concerning international transactions. While the petitioner is entitled to a refund of the duty paid, subject to the proper filing of a refund application, this case serves as a clarion call for a nuanced understanding of tax laws to prevent undue financial burden on businesses engaged in international trade.
This Bombay HC ruling aligns with the Gujarat HC judgment and brings clarity for businesses. Importers won’t be burdened with service tax on ocean freight under CIF contracts. This ruling provides a sigh of relief for importers who faced service tax on ocean freights. For expert guidance on navigating complex tax laws and claiming refunds, contact Vakilsearch and connect with experienced legal professionals.
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