2019 (9) TMI 1315 - HC - Service Tax

Service tax on Ocean Freight - what is CIF , and how the CIF is different from the FOB contracts. - Striking down Rule 2(1)(d) (EEC) of the Service Tax Rules and Notification Nos.15/2017-ST and 16/2017-ST as ultra vires Sections 66B, 67 and 94 of the Finance Act, 1994, and ultra vires Articles 14 and 265 of the Constitution of India - striking down Rule (7CA) of the Rule 6 of the Service Tax Rules, 1994 and Explanation-V of Notification No.30/2012-ST dated 20.6.2012 as ultra vires Sections 66B, 67 and 94 of the Finance Act, 1994 and ultra vires Articles 14 and 265 of the Constitution of India - validity of Circular No.206/4/2017-ST dated 13.4.2017 HELD THAT - The service proposed to be taxed under the impugned provisions is admittedly that of transportation of goods upto the Indian Port i.e. land mass of the country; and this service covering sea transportation of hundreds or thousands of KMs is an event occurring beyond the land mass of the country, and hence in the nature of an extraterritorial event. The provisions of the Finance Act, 1994, which is an Act of the Parliament for levy of service tax, do not permit nor empower the Central Government to collect service tax on such extraterritorial events, and the services which are rendered and consumed beyond the land mass of the country. The charging provision i.e. Section 66B provides for levy of service tax on the value of services provided or agreed to be provided in the taxable territory by one person to another. Section 65B(52) defines taxable territory to mean the territory to which the provisions of this Chapter apply. As seen above, the provisions of this Chapter i.e. Chapter V, apply to the whole of India by virtue of Section 64(1) of the Finance Act; and thus it is the mandate of the Parliament for applying the provisions of Chapter V of the Finance Act for service tax to whole of India, and not to extraterritorial events occurring outside the land mass of India - In the present case, the Parliament has restricted the provisions of Chapter-V of the Finance Act in respect of service tax to events occurring in the taxable territory i.e. India by virtue of Section 66B (the charging section), Section 66B(52) and Section 64(1) and therefore the impugned Notifications issued by the Executive i.e. the Central Government by way of Rules, are beyond Sections 64, Section 66B and Section 65B(52) of the Finance Act. The impugned Rules and Notifications seek to levy and collect service tax on services rendered and consumed outside India, and therefore these provisions are ultra-vires the above referred three provisions of the Act made by the Parliament. The impugned provisions i.e. Rule 2(1)(d)(EEC) and Explanation-V to Notification No.30/2012-ST are ultra vires Section 65B(44) defining service and Section 68, and also Section 94 of the Finance Act - Rule 6(7CA) amended by the Central Government is also ultra vires Section 67 and Section 94 of the Finance Act. The Notification Nos.15/2017- ST and 16/2017-ST making Rule 2(1)(d)(EEC) and Rule 6(7CA) of the Service Tax Rules and inserting Explanation-V to reverse charge Notification No.30/2012-ST is struck down as ultra vires Sections 64, 66B, 67 and 94 of the Finance Act, 1994; and consequently the proceedings initiated against the writ applicants by way of show cause notice and enquiries for collecting service tax from them as importers on sea transportation service in CIF contracts are hereby quashed and set aside with all consequential reliefs and benefits - Application allowed.

Issues Involved:
1. Validity of Rule 2(1)(d)(EEC) of the Service Tax Rules.
2. Validity of Notification No.15/2017-ST.
3. Validity of Notification No.16/2017-ST.
4. Validity of Circular No.206/4/2017-ST.
5. Validity of Show Cause Notice No.VI(a)/8-38/CEA/CIR-VI/Gr.29/2017-18 dated 28.6.2018.
6. Constitutional validity of levying service tax on ocean freight in CIF contracts.

Detailed Analysis:

1. Validity of Rule 2(1)(d)(EEC) of the Service Tax Rules:
The court examined Rule 2(1)(d)(EEC) which defines the person liable for paying service tax on services by way of transportation of goods by a vessel from a place outside India up to the Customs station of clearance in India as the importer. The court found that the rule was ultra vires Sections 64, 66B, 67, and 94 of the Finance Act, 1994, as it attempted to levy service tax on an extraterritorial event, i.e., services rendered and consumed outside India, which is beyond the statutory provisions of the Finance Act.

2. Validity of Notification No.15/2017-ST:
Notification No.15/2017-ST amended the reverse charge Notification No.30/2012-ST, making the importer liable for paying service tax on ocean freight in CIF contracts. The court held that this notification was ultra vires the Finance Act, 1994, as it imposed a tax on a third party (the importer) who is neither the service provider nor the service recipient, contrary to the provisions of Sections 66B and 68 of the Finance Act.

3. Validity of Notification No.16/2017-ST:
Notification No.16/2017-ST inserted Sub Rule (7CA) in Rule 6 of the Service Tax Rules, providing an option to pay service tax on 1.4% of the CIF value of the imported goods. The court found this rule to be ultra vires Section 67 and Section 94 of the Finance Act, as it attempted to fix the value of a taxable service without any statutory authority to do so, thus lacking a proper machinery provision for valuation.

4. Validity of Circular No.206/4/2017-ST:
The circular clarified that no abatement in value of service would be allowed for ocean freight, making the entire value of transportation charges subject to service tax. The court found this clarification to be incorrect and beyond the provisions of the Finance Act, 1994, as it sought to impose service tax on the entire value of ocean freight without any statutory basis.

5. Validity of Show Cause Notice No.VI(a)/8-38/CEA/CIR-VI/Gr.29/2017-18 dated 28.6.2018:
The show cause notice was issued to recover service tax from the petitioner on ocean freight for imports made on CIF basis. The court quashed this notice, stating that the proceedings initiated under the impugned notifications and rules were invalid as they were based on provisions that were ultra vires the Finance Act, 1994.

6. Constitutional Validity of Levying Service Tax on Ocean Freight in CIF Contracts:
The court examined the constitutional validity of levying service tax on ocean freight in CIF contracts. It held that such a levy was beyond the legislative competence of the Parliament as it sought to tax services rendered and consumed outside India. The court emphasized that the Finance Act, 1994, does not permit the collection of service tax on extraterritorial events, and the impugned provisions were therefore unconstitutional and ultra vires Articles 14 and 265 of the Constitution of India.

Conclusion:
The court struck down Rule 2(1)(d)(EEC) and Rule 6(7CA) of the Service Tax Rules, and Explanation-V to Notification No.30/2012-ST as ultra vires the Finance Act, 1994. Consequently, the proceedings initiated against the petitioners for collecting service tax on ocean freight in CIF contracts were quashed and set aside with all consequential reliefs and benefits.

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