2016 (8) TMI 852 - AT - Service Tax

Refund of service tax paid inadvertently on non-taxable services - Operation and Maintenance Management of Well Stimulation Vessel - period from 16.6.2005 to 31.3.2006 - Classification of service - Ship Management service or Maintenance or Repair services - Whether the composite contract cannot be vivisected for taxing the taxable components repair and maintenance - Valuation - inclusion or reimbursement of expenses - difference of opinion - Majority Decision Held that - the tax levy is not crystallized by the mere execution of a contract promising to render service on the agreed terms; section 65(105(zzg) makes it necessary that some repair or maintenance must have been undertaken for a consideration for the tax liability to arise. In proceeding to deny the claim of the assessee for refund, the undertaking, if any, of repairs or maintenance has not been ascertained by the original authority. The operator of a ship or vessel under an O&M contract is also bound to maintain the vessel in a sea-worthy manner in the course of its operation by husbanding her with due diligence and care; such an obligation may not even require maintenance as contemplated in section 65(64) of Finance Act, 1994. Not to be overlooked also is the performance of service on goods or equipment with goods having the specific import supra. It may not be entirely correct in describing a ship or vessel as equipment though equipment may be fitted on board rendering the ascertainment thereof by the original authority to be that much more complex. It is also moot whether a ship or vessel may, with some degree of accuracy, be described as goods. Logically, the oceans and the seas are equivalences of land and the inextricability of a vessel or ship from the waters should bring them within the ambit of immoveable. Ships before launch and for breaking up are goods but vessels or ships that are afloat are not goods except for the time that they are the subject of a sale agreement. That ships, vessels and motor vehicles need not exclusively be goods is also apparent in section 2 of Customs Act, 1962; they could also be conveyances. As conveyances, ships/vessels and motor vehicles move easily on water or land but, not being goods that are amenable to severance from land/water, are not distinguishable from immoveable property. Consequently, the legislative intent to tax repairs or maintenance of conveyance under section 65(105)(zzg) of Finance Act, 1994 may not be so apparent. Motor vehicles were specifically excluded from its purview owing to existence of another taxable entry on 1st July 2003. Exclusion may not have been considered to be necessary for ships/vessels because the taxable entry came into effect on a much later date. It is clear that the later entry was not carved out of an existing entry; neither was there any partial recasting of an existing entry to bring any part of any existing entry within the newer entry. The two entries continue to have an independent existence after 1st May 2006. Judicial pronouncements have made clear that the extent of legislative intent to tax in such situations is easily ascertainable. Classification of service in question under Ship Management Service under Section 65(95a) upheld. The service provided during the disputed period from 16.06.2005 to 31.03.2006, is not taxable, being composite service, and cannot be vivisected, also on the ground that Ship Management Service is not taxable prior to 01.05.2006. Refund allowed with interest - Decided against the revenue.

Summary

Issues Involved:
1. Classification of the service provided by the respondent.
2. Taxability of the service prior to 1.5.2006.
3. Inclusion of reimbursable expenses in the taxable value.
4. Application of the doctrine of unjust enrichment.
5. Entitlement to refund of service tax paid.

Issue-wise Detailed Analysis:

1. Classification of the Service Provided by the Respondent:
The primary issue was whether the service provided by the respondent, M/s. Shipping Corporation of India Ltd. (SCI), to M/s. ONGC, under the "Operation and Maintenance Management of Well Stimulation Vessel" contract, fell under 'Maintenance or Repair' service or 'Ship Management' service. The Commissioner (Appeals) held that the service was a composite service comprising operations and maintenance management, primarily characterized as 'Ship Management' service, which became taxable only from 1.5.2006. The Tribunal agreed that after 1.5.2006, the activity was most aptly covered under 'Ship Management' service. However, for the period in dispute (16.6.2005 to 31.3.2006), it needed to be examined whether the activities would be covered under 'Maintenance or Repair' service.

2. Taxability of the Service Prior to 1.5.2006:
The Tribunal noted that prior to 1.5.2006, the service was categorized as 'Maintenance or Repair' service, which included maintenance or repair of properties, whether immovable or not. The Tribunal concluded that certain activities under the contract related to 'Operations' were not taxable, while others related to 'Maintenance or Repair' were taxable. However, the Tribunal also acknowledged that the word 'Management' was introduced in the category of 'Maintenance or Repair' service from 1.5.2006, thus complicating the classification for the period prior to this date.

3. Inclusion of Reimbursable Expenses in the Taxable Value:
The Tribunal examined whether the appellant was liable to pay service tax on the entire value of the services provided, including reimbursable expenses. It was noted that the expenses incurred by SCI were reimbursed by ONGC on a cost-to-cost basis. The Tribunal referred to Board Circulars clarifying that service tax is payable on the agency commission earned and not on reimbursable expenditure. The Tribunal found that the expenses incurred were indeed reimbursed by ONGC, indicating that SCI acted as a pure agent.

4. Application of the Doctrine of Unjust Enrichment:
The respondent informed the department that they had not received a refund of service tax from ONGC and that the amount was shown in their balance sheet as service tax receivable. Thus, the doctrine of unjust enrichment was not applicable.

5. Entitlement to Refund of Service Tax Paid:
The Tribunal remanded the matter to the Commissioner to identify the activities covered under 'Maintenance or Repair' service and determine the value of taxable services accordingly. However, the Tribunal also noted that the entire expenses were reimbursed by ONGC, and SCI acted as a pure agent, thus supporting the respondent's claim for refund.

Separate Judgment by Member (Judicial):
The Member (Judicial) disagreed with the remand and held that the entire contract was a composite service of 'Ship Management', which was not taxable prior to 1.5.2006. The Member (Judicial) emphasized that the respondent acted as a pure agent, and the reimbursable expenses should not be taxed. The appeal of the Revenue was dismissed, and the respondent was entitled to a refund of the service tax paid.

Majority Order:
The majority upheld the classification of the service under 'Ship Management Service' and concluded that the service provided during the disputed period was not taxable. The appellant was entitled to a refund of the service tax paid, and the adjudicating authority was directed to disburse the refundable amount with interest.

Conclusion:
The Tribunal concluded that the service provided by SCI was a composite service of 'Ship Management', which was not taxable prior to 1.5.2006. The respondent was entitled to a refund of the service tax paid for the period prior to 1.5.2006, and the adjudicating authority was directed to process the refund with interest.