2015 (12) TMI 1057 - AT - Service Tax

Demand of service tax - Royalty charges or lease rental - whether the monthly Royalty charges collected by the appellant towards Development of VIIth Berth as Container Terminal and its operation and maintenance on BOT basis is taxable under port services or otherwise - Penalty u/s 76 & 78 - Held that - As per Article 7.3.5 of the agreement in consideration of the said agreement there is a initial lump sum payment of ₹ 45 Million for the licence. In addition there is a monthly royalty payment as stipulated in Article 7.3.5.2. and the present demand is only on the monthly royalty charges collected for the licencee and not on the lumpsum payment. From the above it is proved beyond doubt that the royalty charges received by the appellants is for overall consideration towards the development of VIIth Berth as container terminal under the above BOT agreement and rightly falls under port services and the amount of royalty charges are rightly chargeable to service tax under port services. Therefore, the appellant s contention that they have not provided any service except leasing/ renting of the berth and the amount is only towards lease/rent of vacant land is not at all justified and not supported by law. The licencee cannot change the design and drawing once approved by the appellant without prior consent of the TPT. This clearly shows the indirect activities/services rendered by the appellant on the development of the above project which clearly falls under Port Services. The appellant contended that the said Royalty Charges are received only towards Renting/leasing of the vacant land and not for any services rendered whereas on perusal of the entire Licence Agreement, we failed to see the word Renting or Leasing of the Property is used in any of the articles of the agreement. Further, we find that the Licence agreement dt. 15.7.98 entered by appellant for development of Container Terminal is a self-contained document envisaging every details of the project. It is not only lists out terms and conditions of operation and maintenance but brings out minute details, specification of the logistics, staffing, reporting. Therefore, BOT agreement cannot be compared or equated to any normal agreement of leasing of property. The term Licence used in the present BOT agreement is to include the Licensor, Licensed Premises and Licence period and they are used with full meaning and these cannot be by any stretch of imagination can be called or termed as Lessor or Leased Premises or Lease Period. Therefore, the appellant s claim that they have only leased out portion of the port area and received lease amount as Royalty charges has no basis and the monthly Royalty charges are worked out as per Appendix 12, based on Tonnage handling is in totality of all the services rendered either direct or indirect as stipulated in the various Articles of the Agreement and it is only for the port services i.e. Development of Container Terminal for handling of vessels and goods. There is no obligation of GMB brought out in the said order. Further, GMB has granted rebate of 80% wharfage to be adjusted against the cost of construction of jetty by UCL. Whereas in the present case there is a clear obligation of Licensor i.e. TPT is set out in the agreement and there is no rebate granted by TPT to PSA towards construction cost. TPT received Lump sum payment in addition to Royalty charges. The agreement of GMB in the above case is entirely different from the Licence agreement of TPT in the present case. Therefore, we find that the ratio of the Hon ble Supreme Court case law of GMB case relied by appellant is clearly distinguishable on the facts and the same is not applicable to the present case. Similarly, the Tribunal decisions relied by the appellant in the case of Cochin Port Trust and Gujarat Chem Port Terminal also clearly distinguishable from the facts of the present case. Royalty charges received by the appellant from Licensee as per Licence Agreement for Development of VII Berth as Container Terminal, operation and maintenance on BOT basis is chargeable to service tax under Port Service. - service tax demand was confirmed on the gross monthly royalty charges received during the disputed period without allowing cum tax benefit. It is settled law that appellants are eligible for the cum tax benefit on the total amount received as monthly royalty charges. Accordingly, we hold that appellants are eligible for cum tax benefit on the gross amount received and after allowing the cum tax value benefit the revised demand is liable to be upheld. As regards imposition of penalty on the appellant, both under Section 76 and 78 of Finance Act, we find that the appellants, a PSU are duly registered with Department and paying service tax regularly on the Port Services rendered from the beginning. The appellants are under bonafide belief that the said charges are not taxable during the relevant period. We also find that the appellants regularly paying service tax on the Royalty charges w.e.f. 1.6.2007. Therefore, we are of the view that there was a reasonable and bonafide cause for appellant s failure to pay service tax. Therefore, by invoking Section 80 of Finance Act, we set aside the penalty imposed under Section 76 and 78. Monthly Royalty Charges received by the appellants from their Licensee during the period under dispute for the development of Seventh Operation and Maintenance on BOT basis as per the Licence Agreement dt. 15.7.1998 are chargeable to service tax under Port Services . The demand is upheld but for the cum tax benefit. The penalty imposed under Section 76 and 78 are waived - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Taxability of monthly royalty charges under "Port Services."
2. Applicability of service tax on leasing/renting of immovable property.
3. Invocation of the extended period for demand.
4. Imposition of penalties under Sections 76 and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Taxability of Monthly Royalty Charges under "Port Services":
The primary issue was whether the monthly royalty charges collected by the appellant for the development and operation of Berth No. VII as a container terminal on a Build, Operate, and Transfer (BOT) basis were taxable under "Port Services." The definition of "Port Services" under Section 65(82) of the Finance Act, 1994, includes any service rendered by a port in relation to a vessel or goods. The tribunal found that the activities and services provided by the appellant, such as entry, berthing, sailing, pilotage, towage, maintenance of entrance channel draft, dredging, and safety of navigation, were essential for the movement of vessels and goods. Thus, the royalty charges received by the appellant were considered taxable under "Port Services."

2. Applicability of Service Tax on Leasing/Renting of Immovable Property:
The appellant contended that the royalty charges were for leasing/renting a portion of the port area and not for any services rendered. However, the tribunal noted that the BOT agreement did not use the terms "leasing" or "renting" but rather "licensing." The agreement outlined specific obligations and services provided by the appellant, which were integral to the development and operation of the container terminal. Therefore, the tribunal concluded that the royalty charges were not merely for leasing/renting but were for a bundle of services covered under "Port Services." Moreover, service tax on renting of immovable property was introduced only from 1.6.2007, and the period in question was prior to this date.

3. Invocation of the Extended Period for Demand:
The appellant argued that the extended period for demand could not be invoked due to a lack of suppression of facts. However, the tribunal found that the appellant had not informed the department about the royalty charges, and the issue was only detected during an audit. Therefore, the tribunal upheld the invocation of the extended period for demand, citing that the department had sufficient justification.

4. Imposition of Penalties under Sections 76 and 78 of the Finance Act, 1994:
The tribunal noted that the appellant, a Public Sector Undertaking (PSU), was regularly paying service tax on port services and was under a bona fide belief that the royalty charges were not taxable during the relevant period. The appellant had also started paying service tax on royalty charges from 1.6.2007. Considering these factors, the tribunal invoked Section 80 of the Finance Act, 1994, and set aside the penalties imposed under Sections 76 and 78, acknowledging the reasonable and bona fide cause for the appellant's failure to pay service tax earlier.

Conclusion:
The tribunal held that the monthly royalty charges received by the appellant for the development and operation of Berth No. VII as a container terminal were chargeable to service tax under "Port Services." The demand was upheld after allowing the cum tax benefit, but the penalties under Sections 76 and 78 were waived. The appeals were partly allowed in these terms.