Case deserving clarification for Cause: Applicability of Service Tax – not on freight but yes on Demurrage

[dipsang vadhel]

Upon introduction of new code of Taxation of Service based on Negative list & reverse charge mechanism, The contributory to the treasurer- the tax payer is facing too much uncertainty on Taxation.Easy to comply Tax laws are the demand of the day. It is expected from Revenue department to take initiative to clarify the tax implications which may be beyond competence of a common tax payer. Such Initiative will help the tax payer before he/she lands in to costly affair of Tax litigation. Such honest attempt to clarify such issues will go in long way not only faster and better collection of Taxes but also make the written policy document to work towards its intents.

The article is an attempt to bring out one such area where there is no Service Tax on transportation of goods of national importance but  still there is ServiceTax on Demurrage incurred in connection with transportation of such goods!!

The commodities of national importance, on the transportation (by Rail or road )of which there is no service Tax, are relief materials, defence or military equipments, postal mail or mail bags, household effects, newspaper or magazines, agricultural produce, foodstuff and chemical fertilizer etc. It is also to be noted that the equal and efficient distribution of such commodities is of uttermost importance to the nation as whole.

The concerned zonal railway offices do not charge service tax on freight payable for transportation of such goods. However, the concerned zonal railway offices have continued to charge service Tax on Demurrage payable in relation to transportation of such goods.

As the trade normally understands and also as envisaged under Section 2 (11) of the Railways Act, 1989, Demurrage is considered to be a charge for detention of carriage (transport related) after expiry of free time, if any, allowed for such detention. Even as per section 30 of the Railways Act, 1989 whereby the Demurrage charge itself is fixed, also states that it is incidental to or connection with the carriage of goods (i.e. transportation) only. This being the case, demurrage charges is nothing but charges for storage of such goods in relation to transportation by rail.

In this connection, It is important to refer  to Section 66 F (2) and (3) of the Finance Act regarding Taxability of 'bundled services'. 'Bundled service' means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. In the present case, Services of transportation is combined with Storage of carriage.

Further, taxability of such service depends upon whether such services are various elements of a bundled service are naturally bundled in the ordinary course of business or otherwise. The concept of Bundled service has been very well explained in Educational guide released by CBEC. In present case, the “demurrage charges” for storage of such goods by railways can be said to be naturally bundled with the transportation by rail service because

1. The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service, such services shall be considered as service naturally bundled in the ordinary course of business.  In the present case, Transportation of such goods is main service & storage of such goods in Carriage beyond free allowed period is an incidental or ancillary service which helps in better enjoyment of main service.
2. The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business. Generally, the customers of Service of transportation of such goods also expect the storage of such goods in Carriage till the necessary arrangement of properly unloading the material can be made.
3. Majority of service providers in a particular area of business provide similar bundle of services. Generally, the Service of transportation of such goods also accompanied by service of the storage of such goods in Carriage till the necessary arrangement of properly unloading such goods can be made.
4. The different elements are not available separately. If such goods are not transported by rail, the railways do not provide the service of storage of such goods in a carriage. Thus, service of storage of such goods is not available as standalone service. The Railway Act also supports understanding that the demurrage is incidental to or connection with the carriage of goods (i.e. transportation) only.

If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character. Since in the present case, Service of transportation of such goods & service of the storage of such goods in Carriage (till the necessary arrangement of properly unloading such goods can be made) should be considered as naturally bundled Service and should be treated as Service of transportation of fertilizer which gives such bundled service its essential character.

In view of above, the author is of the view that demurrage charges in relation to transportation of such goods should also be treated as exempt from service Tax. However, the concerned Zonal railway offices have continued to charge service Tax on Demurrage payable in relation to transportation of such goods.This is not only issues of industries or economics but this undue levy has inflationary impact and is issue of well being of common man as the commodities exempted are the ones which are of special importance to the nation as a whole and public at large.

The publication of Educational guide is also very well acknowledged initiative of the Board and has proven to be of immense help to tax payers’ particularly in understanding new Tax code at the time of implementation. Let us hope that the Board again takes up an uncommon initiative of identifying and clarifying such issues of public interest.