2023 (5) TMI 899 - HC - Service Tax

Place of provision of services - Levy of Service tax on international ocean freight when both the service provider and service recipient are located outside India - Constitutional validity of Notification No.28/12-ST dated 20.6.2012, Notification Nos.1/2017-ST, 02/2017-ST 03/2017-ST, all dated 12.01.2017 and Section 66C(2) of Chapter V of the Finance Act, 1994 (as amended) - clarification of the Board in Para 4 4.1 of the Circular No.206/4/2017 Service Tax, dated 13.04.2017 - ultra vires provision of the Constitution or not - POPOS rules - evy of tax on goods are imported on CIF basis - levy of service tax in case of FOB - Reverse charge mechanism. HELD THAT - Service tax initially became payable by steamer agents on ocean freight with effect from 22.01.2017 in view of the amendment by Notification No.1/2017-ST dated 12.01.2017. Later, by the impugned Notification No.15/2017-ST dated 13.04.2017, the burden was shifted on the importer - Thus, the intention of the Government was to shift burden of tax on the steamer agents and later on the importers vide impugned Notification No.15/2017-ST dated 13.04.2017 with effect from 23.04.2017, wherein, an Explanation V to Notification No.30/2012-ST dated 20.06.2012 was inserted. It impacted the second Category II of Writ Petitioners namely the importers . There were further amendments to the Explanations to vide Notification No.03/2017-ST, dated 12.01.2017 and Notification No.15/2017-ST, dated 13.04.2017. Rule 8B was inserted to the Point of Taxation Rules, 2011, after Rule 8A vide impugned Notification No.14/2017-ST dated 13.04.2017. It came into force on 23.04.2017 with retrospective effect from 22.01.2017 - the purpose of the insertion of Rule 8B of the Point of Taxation Rules, 2011 with retrospective effect from 22.1.2017 was to fix the rate of tax, value of taxable service and rate of exchange as the date of bill of lading of goods in the vessel at the port of export. The impugned Notification No.14/2017-ST dated 13.04.2017 was intended to enable the Department to levy and collect service tax on the steamer agents and also the importers at the prevailing rate for the respective period. The amendment was in compliance with the requirement of Section 67(A) of the Act. Thus, not only the importer but also the steamer agents were liable to pay tax at the rate and value from 22.01.2017. There are no merits in the challenge to it. The value of incidence of such intermediate services availed by the Shipping Liners will be passed on by the Shipping Liners to the Foreign Shippers and eventually to the importers. This value gets taxed in the case of CIF Contract. In the case of FOB contracts, the importers have to in any event include the value under Section 14 of the Customs Act, 1962. Thus, to tax, the overseas freight twice is also uncalled. In case of CIF transaction, the value of ocean freight is not available with the importer as the ocean freight is paid by the overseas supplier. The value of a CIF contract is indivisible. The impugned notifications also have the propensity of spiraling the import value of the goods - In CIF contracts, the value of sea transportation service is not made available either to the importers or the steamer agents. There is also no privity of contract between the importers and the Overseas Shipping Liner in CIF contracts nor does an Indian importer make any payment for such ocean freight to the Overseas Shipping Liners and its ancillary service provider who services are engaged enroute. The service tax cannot be demanded from these petitioners as neither the steamer agents nor the importers in India are the recipient of service. They are not liable to pay tax. The other impugned notifications which were issued as a consequence of withdrawal of the exemption under Mega Exemption Notification No.25/2012-ST dated 20.6.2012 vide Notification No.1/2017-ST dated 12.1.2017 with effect from 22.1.2017, vide Notification No.1/2017-ST dated 12.1.2017 with effect from 22.1.2017 also cannot be challenged as challenge to the latter notification has to fail - The, Central Government had devised a mechanism, whereby, apart from those activities which were specifically excluded from the definition of service in Section 65B(44) of the Finance Act, 1994, few services were placed in the negative list in Section 66D of the Finance Act, 1994 while few services were specifically exempted with effect from 01.07.2012 under Mega Exemption Notification No.25/2012-ST dated 20.06.2012 with effect from 01.07.2012. The other collateral notifications which have been challenged in these writ petitions are merely incidental and only consequential to withdrawal of exemption in Mega Exemption Notification No.25/2012- ST dated 20.06.2012 vide impugned No.1/2017-ST dated 12.01.2017 with effect from 22.01.2017. They have been issued with a view to implement the changes on account of withdrawal of exemption under impugned No.1/2017-ST dated 12.01.2017 with effect from 22.01.2017. There is a flaw in the above Notification No.03/2017-ST dated 12.01.2017 and Notification No.15/2017-ST dated 13.04.2017. It is the foreign liner who engages the service of various other persons in the course of transport of service. It is the foreign shipping liner who receives service who can be taxed and not the importers or the steamer agents although by virtue of the above two notifications, the person liable to pay tax has been also declared as the person who complies with Sections 29, 30 or 38 read with Section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods between 22.01.2017 and 22.04.2017 and thereafter the importer as defined under Clause (26) of Section 2 of the Customs Act, 1962 of such goods between 23.04.2017 and 30.06.2017 - the demand are incapable of being enforced in view of the above defects pointed out in the amendment to Notification No.30/2012- ST dated 20.06.2012 issued under Section 68(2) of the Finance Act, 1994 vide the impugned Notification No.3/2017, dated 12.01.2017 under the scheme of the Act, the Rules made thereunder and the Notifications issued - there is no scope for shifting the burden on these two categories of writ petitioners to pay service tax as things stand. Therefore, these collateral notifications which have been challenged need not be declared ultra vires as such. Thus, neither of the Category of writ petitioners are liable to pay tax in view of defect in Notification No.3/2017-ST dated 12.01.2017 w.e.f. 22.01.2017 and Notification No.15/2017, dated 13.04.2017. While amending Notification No.30/2012-ST dated 20.06.2012 vide Notification No.3/2017-ST dated 12.01.2017 w.e.f. 22.01.2017 and Notification No.15/2017, dated 13.04.2017 and the burden was shifted on these writ petitioners by virtue of the amendment to the provisions of Service Tax Rules, 1994 vide Notification No.02/2017-ST dated 12.01.2017 w.e.f. 22.01.2017 and later by Notification No.16/2017 dated 13.04.2017 w.e.f. 23.04.2017, the demand of service tax on these petitioners cannot be countenanced for the foregoing reasons - The impugned notifications had a very short life with effect from 22.01.2017 upto 30.06.2017. With effect from 01.07.2017, the respective Goods and Service Tax Act, 2017 (GST Act, 2017) came into force and subsumed several indirect taxes including Chapter V of the Finance Act, 1994. In KUSUM INGOTS ALLOYS LTD. VERSUS UNION OF INDIA 2004 (4) TMI 342 - SUPREME COURT , it was held that an order passed on writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act. If that be so, the notices which have been challenged by the category II writ petitioner in Table 5 are also liable to be quashed. However, we would not go that far to hold all the notifications challenged as ultra-vires. Category I Writ Petitioners have also challenged the vires of para 4 and 4.1 of Circular No.206/4/2017-ST dated 12.4.2017 in W.P.No.14643 of 2017 as null and void and ultravires the various provisions of the Constitution and ultra vires Section 83 of the Finance Act, 1994, Section 37B of the Central Excise Act, 1994 as made applicable to Finance Act, 1994 as well as Notification No.26/2012-ST dated 20.06.2012. There is no necessity to declare the impugned notifications as ultra vires as there is no proper machinery provided under the impugned notifications issued under Section 68(2) of the Finance Act, 1994 to shift the burden to pay service tax on the petitioners as the petitioners are not either the recipients of the taxable service by way of transportation goods by a vessel from a space outside India up to the customs stations of clearance in India. They are not liable to tax as things stand - Challenge to Notification No.01/2017-ST dated 12.01.2017 has to fail in the light of the decision of the Hon ble Supreme Court in Kasinka Trading vs. Union of India , 1994 (10) TMI 64 - SUPREME COURT . The challenges to other notifications are unnecessary. As far as refunds are concerned in Table No.6, the petitioners shall file refund applications within a period of 30 days from the date of receipt of a copy of this order, if such refund applications have not been already filed. Such refund applications shall be disposed of in accordance with the decision of the Hon ble Supreme Court in Mafatlal Industries Private Limited vs. Union of India , 1996 (12) TMI 50 - SUPREME COURT within a period of 60 days thereafter. Petition disposed off.

Summary

Issues Involved:
1. Challenge to the vires of certain notifications, provisions, and circulars related to service tax.
2. Challenge to the imposition of service tax on steamer agents and importers.
3. Challenge to show cause notices and claims for refunds of service tax paid.

Summary:

Issue 1: Challenge to the Vires of Notifications, Provisions, and Circulars
The petitioners challenged the vires of Notification No. 28/2012-ST, Notification Nos. 1/2017-ST, 02/2017-ST, 03/2017-ST, and Section 66C(2) of Chapter V of the Finance Act, 1994, as ultra vires the Constitution. They also challenged the clarification in Para 4 & 4.1 of Circular No. 206/4/2017 - Service Tax.

The court held that the challenge to Section 66C(2) of the Finance Act, 1994, and the related notifications failed. The court referenced the Hon'ble Supreme Court's decisions, which clarified that the power to grant exemption includes the power to withdraw it. The court also held that the Place of Provision of Services Rules, 2012, and Rule 10 therein, which determine the place of provision of services as the destination of the goods, were valid.

Issue 2: Imposition of Service Tax on Steamer Agents and Importers
The petitioners argued that the imposition of service tax on international ocean freight when both the service provider and recipient are located outside India was irrational and discriminatory. They contended that the steamer agents and importers should not be liable to pay service tax as they are not the recipients of the service.

The court found that the notifications shifting the burden of service tax to steamer agents and importers were flawed. The court held that the service tax could not be demanded from the petitioners as they were neither the recipients nor the providers of the service. The court referenced the Gujarat High Court's decision in Sal Steel Ltd. v. Union of India, which held that the impugned provisions were ultra vires the rule-making power of Section 94 of the Finance Act.

Issue 3: Challenge to Show Cause Notices and Claims for Refunds
The petitioners challenged the show cause notices issued to them and sought refunds of the service tax paid.

The court quashed the show cause notices, holding that the petitioners were not liable to pay service tax due to the defects in the notifications. The court directed the petitioners to file refund applications within 30 days if not already filed and ordered the respondents to dispose of the refund claims within 60 to 90 days in accordance with the law laid down by the Hon'ble Supreme Court in Mafatlal Industries Private Limited v. Union of India.

Conclusion:
The court dismissed the challenges to the vires of the notifications, provisions, and circulars but quashed the show cause notices and directed the respondents to process the refund claims. The court held that the petitioners were not liable to pay service tax due to the defects in the notifications shifting the burden of tax to them.