2018 (3) TMI 633 - AT - Service Tax

Supply of tangible goods services - Liability of service tax - vessels and dredgers chartered by them from foreign owners - reverse charge mechanism - interpretation of statute - exclusion clause in Section 65(105)(zzzzj) of the finance Act, 1994 - Held that - in the present case, vessels / dredgers were transferred to the appellant with right of possession and effective control of such vessels / dredgers. The exclusion for tax liability as provided in the tax entry for supply of tangible goods is applicable to the present case. An identical dispute with reference to the very same tax entry came up before the Tribunal in Petronet LNG Ltd. Vs. Commissioner of Service Tax, New Delhi 2013 (11) TMI 1011 - CESTAT NEW DELHI where the Tribunal elaborately examined the terms of charter agreement and various decisions of High Courts and Apex Court before arriving at the conclusion that the charter agreement, both long term and short term, conform to all substantive ingredients as would constitute the transactions as transfer of right to use goods. Therefore, the transactions fall within the exclusionary clause of section 65(105)(zzzzj) of the Act, consequently outside the purview of taxable service. In the present case, there is a transfer of right of possession and effective control of the vessel / dredger to the appellant. This arrangement is outside the purview of service tax liability under a supply of tangible goods services . Demand of the service tax on customs duty and entry tax paid on imported equipment, which were reimbursed by the recipient of service - Held that - the appellant have discharged service tax on the considerations received for such services. These reimbursable expenses are considered as expenditure to provide such services and are accordingly sought to be included in terms of Rule 5(1). Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Liability of the appellant to pay service tax on hiring of dredgers/vessels from foreign companies under 'Supply of Tangible Goods Service' on reverse charge basis.
2. Inclusion of customs duty, entry tax, etc., paid by clients on the import of materials used for dredging services in the taxable value for dredging services.

Issue-wise Detailed Analysis:

1. Service Tax Liability on Hiring of Dredgers/Vessels:

The appellants argued that the demand for service tax under 'Supply of Tangible Goods' is not sustainable because the Charter Party Agreement transferred the right to use the vessels to the appellant, thus the transaction cannot be taxed as a service. They emphasized that the agreement provided for a standard Bareboat Charter, where the appellant had full possession and effective control of the vessels. Clauses 9, 12, 14, 20, and 21 of the Charter Agreement were specifically cited to support this claim. The original authority's finding that the appellants did not have legal right and effective control was contested, stating that the restrictions on sub-chartering and usage area did not affect the right to possession and control.

The Revenue opposed, arguing that the exclusion for tax under 'Supply of Tangible Goods Service' applies only when there is a transfer of right of possession and effective control, which they claimed was not present in this case. They highlighted that the appellants had no unrestricted right to use the vessels and that mere custody did not exclude tax liability.

Upon review, the Tribunal noted that the key issue was whether there was a transfer of right of possession and effective control. The Bareboat Charter indicated that the vessels were under the appellant's full possession and control, with responsibilities for maintenance, operation, and legal compliance. The Tribunal referred to Black's Dictionary and previous decisions, including Petronet LNG Ltd. vs. Commissioner of Service Tax, New Delhi, which supported the appellant's position. They concluded that the arrangement constituted a transfer of right of possession and effective control, thus falling within the exclusion clause of section 65(105)(zzzzj) of the Finance Act, 1994.

2. Inclusion of Customs Duty and Entry Tax in Taxable Value:

The appellants contended that customs duty and entry tax on imported equipment, reimbursed by clients, should not be included in the taxable value for dredging services. They argued that these were statutory levies not considered as part of the consideration for the service. The Revenue, however, argued that these expenditures should form part of the gross value under Rule 5(1) of Service Tax (Valuation) Rules, 2006.

The Tribunal noted that Rule 5(1) had been struck down by the Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India. Even otherwise, the Tribunal found that these were actual expenses reimbursed by clients and not considerations for rendering taxable services. The Board's Circular dated 13.4.2016 clarified that taxes and duties are not consideration for services and cannot be subjected to service tax. Consequently, the customs duty reimbursed by clients could not be included in the taxable value.

Conclusion:

The Tribunal set aside the impugned order, concluding that the appellant had the right of possession and effective control of the vessels, thus not liable for service tax under 'Supply of Tangible Goods Service.' Additionally, customs duty and entry tax reimbursed by clients were not to be included in the taxable value for dredging services. The appeals were allowed.

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