The Reverse Charge Mechanism (RCM) is a system of taxation where the liability to pay tax is shifted from the supplier of goods or services to the recipient of such goods or services. In a regular taxation system, the supplier is responsible for collecting and remitting the tax to the government. However, under RCM, the recipient becomes liable to pay the tax directly to the government, effectively reversing the charge.

In the case of ocean freight services, the RCM comes into play when the services are provided by a person located outside the country, and the recipient of the services is a registered taxpayer in the country. In other words, when a registered importer receives ocean freight services from a foreign service provider, they become liable to pay the applicable GST on the ocean freight charges. This shifts the tax liability from the foreign service provider to the importer, reversing the charge.

Prior to the enforcement of the Goods and Services Tax regime, service tax on ocean freight was exempted. However, this exemption was withdrawn by Notification No. 01/2017-ST dated 12/01/2017 which levied service tax on the importer, by a reverse charge mechanism.

In the GST regime, IGST was levied @ 5% 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.

Further, according to RCM Notification under GST, in the case of imports made by sea where the supplier outside the taxable territory has paid the freight amount to the liner outside India, the importer in India is responsible for paying the Integrated Goods and Services Tax (IGST) under the Reverse Charge Mechanism (RCM) on a CIF (Cost, Insurance, and Freight) basis.

RCM IGST is be calculated at 5% on actual freight value. However, If the actual freight value is not available, then taxpayer is liable to pay RCM IGST 5% on the deemed value of freight, that is 10% of CIF value of such imported goods.

Landmark Judgement

The landmark judgement of M/s Mohit Minerals Private Limited has brought a significant change in the law of RCM on Ocean Freight on CIF basis. Let us analyse the case law in detail:

M/s Mohit Minerals Private Limited is engaged in the imports of non-coking coal from U.S., South Africa and Indonesia by ocean transport on a ‘CIF’ basis. The company subsequently supplies the imported coal to domestic industries. The goods are transported by sea route from foreign port. During the import process, customs duties are paid on entire value, which encompass the value of ocean freight as well. Under a CIF contract, the foreign shipping line issues the freight invoice directly to the foreign exporter, without the importer’s direct involvement.

IGST is levied on goods imported into India on the value determined u/s 3 of the Customs Tariff Act 1975 at the point when customs duties are levied on the goods u/s 12 of the Customs Act 1962. Section 11 of the IGST Act specifies that the place of supply for goods imported into India is determined as the location of the importer. Additionally, Section 13(9) of the IGST Act states that the place of supply for services related to the transportation of goods is deemed to be the destination of the goods.

The Company challenged the impugned notifications that it created an element of double taxation. Ocean freight is included in the value of goods for the purpose of calculation of customs duty payable and he is also liable to pay RCM on deemed freight portion. It does not dispute the liability of IGST on supply of service of transportation when it imports goods on an FOB basis.

The company filed a writ petition with the Gujarat High Court, challenging the constitutionality of Notification 8/2017 and Notification 10/2017. The petition argued that these notifications are ultra vires and result in double taxation. The Division Bench of the Gujarat High Court ruled in favour of the company, declaring the notifications unconstitutional as they exceeded the powers granted by the Act.

The Union of India presented the argument that despite the foreign shipping line and foreign exporter being located outside the territory of India, the service provided is intended for the Indian importer. As a result, the consumption and utilization of the service, which hold crucial significance both commercially and legally, occur solely in the hands of the Indian importer. Therefore, the Indian importer must be taxed under the reverse charge mechanism as the service is consumed within India. Additionally, the Union of India emphasized that the CIF transaction and RCM IGST on ocean freight are separate and distinct transactions, each subject to their respective levies, and should not be considered as overlapping.

However, the company countered the argument that in case of CIF contracts, the customer contracts for a supply of delivered goods at the port of destination. The contract for the transportation of goods is established between the foreign exporter and the foreign shipper. Consequently, the party responsible for paying the 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 and thereby not liable to pay RCM on such service.

Finally, the Hon’ble Supreme Court on 19/05/2022 held that:

• The import of goods under a CIF (Cost, Insurance, and Freight) contract falls under the category of “inter-state” supply, making it eligible for IGST (Integrated Goods and Services Tax) when the importer becomes the recipient of shipping services.
• Since the Indian importer is already liable to pay IGST on the entire “composite supply,” which includes the supply of goods as well as the services of transportation, insurance, etc., imposing an additional Reverse Charge Mechanism (RCM) levy on the importer for the “supply of services” would violate the provisions of the GST Act.

Further, on 04/11/2022, the CBIC Board decided not to file any Review Petition against the order, thereby affirming the decision of the supreme court to not levy RCM on Ocean Freight on CIF basis.

Refund of RCM paid on Ocean Freight

Since the law itself has been challenged and declared ultra vires of the Act, what happens to the RCM paid on Ocean Freight from the inception of the GST Act till the verdict. Whether we can claim refund of the Output RCM or not. It all depends upon the situation as described under:

• Taxpayers, who have paid Output RCM on Ocean freight, claimed corresponding Input Tax Credit and even utilized the whole Input tax credit, will not be eligible for any refund for the given judgement.
• However, if the taxpayer has paid Output RCM on Ocean freight but not utilized entire input tax credit till today, then such balance in GST credit ledger can be applied for refund.

Even in the case where the taxpayer has paid entire Output RCM on Ocean freight but not claimed input tax credit at all, then in such case as well such tax was excess paid to the government and can now be applied for refund.

Refund Process for GST RCM on Ocean Freight

The refund process for GST RCM on ocean freight can be summarized as follows:

Eligibility:

To claim a refund, the recipient of the services (importer) must be a registered taxpayer under the GST regime. He should have paid the RCM and not claimed Input Tax Credit or not utilized Input Tax Credit till the date of refund.

Documentation:

The importer should maintain proper documentation to support the claim for refund. This includes the invoice issued by the foreign service provider, the shipping bill, and any other relevant documents related to the import transaction.

Filing the Refund Application:

The importer needs to file a refund application in the prescribed format, typically online through the GST portal. The application should include details of the import transaction, such as the shipping bill number, date of import, and amount of tax paid under RCM.

Verification and Processing:

Upon receipt of the refund application, the tax authorities will verify the supporting documents and the accuracy of the claim. They may request for further information or clarification, as they may seek it necessary. Once satisfied, the authorities will process the refund.

Refund Disbursement:

The approved refund amount will be disbursed to the importer’s designated bank account through the Electronic Fund Transfer (EFT) system.

Conclusion

RCM on Ocean Freight has been a litigative topic since the inception of GST. After landmark judgement of Supreme Court, the law has been clarified and there has been way out for refund procedure. Understanding the refund process for GST RCM on ocean freight is essential for Importers. It enables importers to navigate the complexities of taxation, comply with GST regulations, and ensure efficient management of their working capital. By comprehending the eligibility criteria, documentation requirements, and necessary steps involved in the refund process, businesses can maximize their refund entitlements and maintain transparency in their tax compliance.

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Leasehold rights on land play a crucial role in various real estate transactions and business operations. Many units are set up on leasehold land provided by state industrial development corporation.

What is Assignment of Leasehold Rights?

• The assignment of leasehold rights on land refers to the transfer of the leasehold interest or rights from one party to another.
• It involves the transfer of the rights and obligations associated with a lease agreement from the original lessee (assignor) to a new party (assignee).

Leasehold rights on land typically arise when a lessee enters into a lease agreement with the lessor to use and occupy the land for a specific period, usually for commercial, industrial, or residential purposes. The lessee holds the leasehold rights, which include the right to possess and use the land within the terms and conditions outlined in the lease agreement.

However, there may be situations where the original lessee, for various reasons, decides to transfer or assign their leasehold rights to another party for consideration. This can occur when the lessee wants to exit the lease, restructure their business operations, or transfer the lease to a new owner.

The assignment of leasehold rights involves a formal agreement between the assignor and assignee that outlines the terms of the transfer. The assignor relinquishes their rights and responsibilities as the original lessee, while the assignee assumes those rights and obligations for the remaining lease term.

It is important to note that the assignment of leasehold rights does not necessarily involve the transfer of ownership of the land itself. The assignee steps into the shoes of the original lessee and continues to hold the leasehold interest for the remaining term specified in the lease agreement.

The assignment of leasehold rights on land can have various legal, financial, and operational implications for both the assignor and assignee. It is crucial for all parties involved to carefully review the terms of the lease agreement, understand their rights and obligations, and ensure compliance with any legal or regulatory requirements related to the assignment.

Income Tax implication:

Lease hold rights is a capital asset as per Section 2(14) of the Income Tax Act,1961 and Assignment of lease hold rights falls under definition of transfer u/sec. 2(47) of the Income Tax Act by way of relinquishment of rights in Immovable property.

• Assignment as discussed herewith results into capital gain tax implication u/sec. 45 of Income Tax Act.
• Leased Land Property assigned for a consideration is cost of Acquisition for the capital purpose. Holding period of Lease beyond 3 years is considered as long-term Capital Asset and tax rate applicable is 20% plus applicable surcharge and cess. Short term capital Asset has holding period less than 3 years and normal rate of tax would be applicable.
• Further, since the Lease hold right is neither a Land nor Building, provisions of Section 50C, which deems the Stamp Duty Value as Consideration in case if the actual consideration is less than Stamp Duty Value shall not apply.
• Further, since the Lease hold right is neither a Land nor Building, provisions of Section 50C, which deems the Stamp Duty Value as Consideration in case if the actual consideration is less than Stamp Duty Value shall not apply.
• Wherein Capital Gains on Land is liable to be taxed as Long Term Capital Gains and Capital Gains on Structure is liable to tax short term capital gain.
• Other view is Entire Gains on Transaction is treated as short term capital gain.

GST Implications:

The Goods and Services Tax (GST), introduced in India in 2017, has brought significant changes to the taxation system. It is important to understand the implications of GST on the assignment of leasehold rights on land and how it affects different stakeholders involved.

As per Section 7(1) of the CGST Act, 2017, supply” includes:

All forms of supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
Thus, under the GST regime, leasehold rights on land can be considered as a supply of services and thereby subject to taxation.

Upfront amount called as premium, salami, cost, price, development charges or by any other name payable in respect of long term lease of 30 years, or more of industrial plots or infrastructure development plots for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 50 % or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area subject to following conditions:

• the leased plots shall be used for industrial or financial activity in an industrial or financial business area
• the State Government shall monitor and enforce the condition as per the order issued by the State Government
• in case of any violation or subsequent change of land use, the original lessor, original lessee as well as any subsequent lessee or buyer or owner shall be jointly and severally liable to pay tax along with the applicable interest and penalty
• the lease agreement entered shall incorporate in the terms and conditions that the tax was exempted on the long term lease of the plots by the original lessor to the original lessee subject to above condition and the parties to the said agreements undertake to comply with the same.

Thus, GST on assignment of lease hold rights has been classified as exempt only if it falls within the ambit of above entry satisfying all the conditions.

Contradictory View:

As per Section 7(2)(a) of the CGST Act 2017 read along with Entry no. 5 of Schedule III, sale of land is treated neither as supply of goods nor as supply of services.

As per the Registration Act 1880, “immovable Property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass.

As per the General Clauses Act 1897:, “Immovable property’ shall include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth”.

Leasehold rights can be construed as benefit arising from land, thereby treating the same as Immovable Property or Land itself for the purpose of Registration Act attracting Stamp Duty and registration charges. Thus, as per State Governments, the assignment of leasehold rights on land is considered as a transfer of ownership for state revenue purposes.

Irony created due to non-alignment of definition of Assignment of Lease hold rights under Registration Act and GST leading to double taxation as the individuals or businesses involved in the assignment of leasehold rights on land must comply with both the state revenue requirements, such as stamp duty and the GST obligations.

It is important to note that under the erstwhile service tax regime in India, the assignment of leasehold rights on land was specifically listed as an exempted service. This means that no service tax was applicable on such assignments, regardless of the purpose of the lease (residential, commercial, or industrial). The exemption from service tax on the assignment of leasehold rights was provided to avoid double taxation since the leasehold rights were considered immovable property, and the transfer of immovable property was already subject to other taxes, such as stamp duty.

Burning issue in MIDC Areas for GST Matter

Thousands of units in Maharashtra including Thane, Navi Mumbai, Pune, Nagpur etc have not paid GST on assignment of lease considering this as sale of land and assuming that the exemption under Sr. No. 41 of notification No. 12/2017 dated 28.06.2017 would be available to them. However, it does not cover subsequent transfers of lease premium on assignment of leasehold right.

Also, there are many GST Advance Rulings stating that long term lease cannot be equivalent to sale of land and would be taxable under the GST law, thereby confirming GST on such supply.

Thus, the GST department has also started issuing notices under the CGST Act 2017 on the assignment of lease hold rights charging 18% GST on the total value of the assignment agreement.

While, the State Revenue department is considering this assignment of lease as sale of land and building and thus charging full stamp duty and registration charges accordingly.

The above contradictory views from the GST Laws and State Laws are creating multiplicity of taxes for the same transactions, which should not be viable in the eyes of the law. Thus, the government should hence analyse the situation and take pertinent action on urgent basis.

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