Shipping Industry – A Complex Saga

It is often seen that exporters have approached Freight Forwarding Agency or Shipping Agency to move their goods either from their place of business or from Port of lading to the Port of Destination located outside the geographical location of India, in short in the present case, Freight Forwarder or Shipping Agency provides logistics solutions to its customers for outbound shipments.

Based on customer’s requirement, the Freight Forwarding Agency/ Shipping Agency approaches various service providers, such as goods transport agency, customs house agents, clearing forwarding agency, shipping lines etc and negotiate their charges for the consignment proposed to be undertaken. Freight Forwarding Agency/ Shipping Agency shall then communicate the fee quote to its customer, with charges for each activity undertaken by the applicant specifically bifurcated.

Second Model

It is also mostly seen that exporters have approached logistics solution providers who neither be a Shipping Agency nor a Freight Forwarder, but with the help of all the service providers namely freight forwarders, Shipping Agency, Clearing Forwarding Agent, goods transport agency and other freight partners, move the goods of exporter either from their place of business or from Port of lading to the Port of Destination.

In the above scenario, aforesaid services can be bifurcated into two parts -

1. Services of transportation of goods from Indian Port to Foreign Port [SAC – 996531].
2. Other Services related to pre-shipment activities and post-shipment [ SAC Code 996711 or SAC Code 99712 or SAC Code 99713 or SAC Code 996799]

Now, it is required to analyse whether above two types of services are naturally invisible bundled/composite supply service or in nature of divisible bundled/ mixed supply.

Now let’s understand how the entire chain of activities have been performed.

Outbound Shipments

Now, let’s analyse each activity to understand whether aforesaid activities are to be considered as naturally/invisible bundled service/ composite service or divisible bundled/ mixed supply

1. Handling of documentation of exported goods - Freight Forwarding Agency: This service relates to handling of documentation for export of goods by air or sea. These services are provided based on the export permission granted by ground handling service at the Customs Authorities. These services are carried out at the Cargo Complex, which is a Customs area, by an authorised agency. Logistic service provider executes a contract with Freight Forwarding Agency for handling of documentation for export of goods by sea.
2. Customs Clearance Services – Customs House Agents: This service relates to customs clearance services under a separate license issued under the Customs House Agent Licensing Regulations, 2004. Logistics Service provider executes a contract with Customs House Agents for clearing the goods from Customs Authority.
3. Transportation of goods in a vessel – Shipping Agency: Freight Forwarding Agency or logistic service provider make a contact with Shipping Line on principal-to-principal basis and notably here Freight Forwarding Agency is not acting with Shipping Line as an agent of its customer. Thus, in case the cargo consignment is damaged during the transportation, the applicant shall have an independent right against the carrier to recover damages in accordance with the Carriage Act and the Montreal Convention. In majority of the cases, applicant as the carrier shall further issue a House Airways Bill upon its customer, i.e., the original consignor, as the shipper. The applicant’s customer shall have independent access to contractual remedies and rights available under the Carriage Act and the Montreal Convention against the applicant.
4. Loading/unloading abroad, Customs Clearance abroad – Freight Partner: Entire gamut of activities, starting from loading and unloading exported goods in abroad to clearance of goods from Customs Authorities has been executed by another freight partner.

In the present case, the purpose of the service provider (namely logistic solution provider) is to provide logistic solutions to its customers, comprising aforesaid four services/activities and same are mutually exclusive and can be provided on a standalone basis as well. Further, the earning of the applicant for all services rendered shall be the differential between the fee charged from the customer and the charges paid to the sub-contractors and hence service fees towards each activity being undertaken can be easily bifurcated.

• Composite Supply is defined under Section 2(30) of CGST Act 2017 to mean 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.
• Mixed Supply is defined under Section 2(74) of CGST Act 2017 to mean two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for single price where such supply does not constitute a composite supply.
• In terms of Section 8 of CGST Act 2017, the tax liability on composite and mixed supplies shall be determined in the following manner, namely –

1. 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.
2. 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.

In the above case, the activities/services such as handling of documentation of export of goods, customs clearance services, transportation of goods in a vessel, loading/unloading of goods and customs clearance services at abroad are not naturally bundled services and also are mutually exclusive and more importantly all those services can be provided on standalone basis. In view of the same, the aforesaid activities should not fall under Composite Supply.

Now, in the event service provider raises one single invoice towards provision of all the aforesaid services/activities, then same qualifies as mixed supply and accordingly GST shall be at rate of such supply out of two or more services, which attracts the highest rate. e.g., service provider raises single invoice towards all the aforesaid activities then GST shall be leviable at the rate of such supply out of all supplies which attracts the highest rate. Further, service provider (i.e., logistic solution provider) also may also consider to raise separate invoices for each activity.

Now, let’s understand both scenarios with the help of following illustration –

Scenario – 1: Raising Separate Invoices In Respect Of Each Provision Of Service

** Service Provider at its own motion can charge GST @5% or @18% on the invoice in respect of provision of transport of goods in a vessel. However, in the event service provider charges GST @5%, then service provider cannot take input tax credit on goods (Other than ships, vessels including bulk carriers and tankers) used in supplying the service.

Scenario – 2: Raising Single Invoice In Respect Of Provision Of All Services

Since in the present case, service provider raises single invoice in respect of provision of all services, GST shall be leviable at the highest rate i.e., @18% on gross invoice value. e.g., in the present case GST shall be leviable @18% on INR 2500/-.

It is general practice among small logistics solution providers to raise a single invoice on exporters towards provision of transportation of goods and other support services in relation to outbound shipments, but they often fail to charge highest tax rate @18% despite said combination of supplies are mixed supply in nature, instead they charge the lowest tax rate @5% on the entire invoice amount. This tax position is highly vulnerable and there is a high possibility of tax dispute in the near future. In order to avoid the same, it is advisable to identify each element of bundle of services and raise separate invoices to exporters by way of charging appropriate GST rate in the invoices.

Views are personal.