2025 (4) TMI 1332 - AT - Service Tax

Levy of service tax - inclusion of value of banker/fuel and water delivered while supplying the vessel by the appellants to their charterers in determining the assessable value for discharging service tax under Supply of Tangible Goods for Use (STGU) service - period covered in the SCN is from October 2009 to September 2014 - HELD THAT - The service tax is liable to be paid in respect of taxable services provided by one person i.e. service provider to the other person i.e. service receiver. It is not in dispute that the appellants-vessel owner is the service provider and their customer-charterers are the service receiver in respect of the taxable service. Further it also transpires that for the period relating to the pre-negative list regime i.e. prior to 1-7-2012 the taxability of service tax was determined in terms of coverage of an activity under the service tax net by defining taxable services under section 65(105) ibid which enumerated each of the specified services. For the period post-negative list regime the category of services hitherto defined under the erstwhile regime were merged under a common phrase i.e. service as defined under section 65B(44) ibid which was brought into effect from 1-7-2012. The relevant entry of the specific taxable service in the present case is 65(105)(zzzzj) ibid. Subsequent to introduction of Negative list regime from 01.07.2022 the services that are subject to levy of service tax have been explained in Section 66B ibid. In the agreement entered into by the appellants it clearly states that the services provided are for hiring of the vessel for carrying petroleum products by the vessel and such services shall start from the time of delivery of the vessel. It is also brought out clearly in the above agreement that the charterer pays for the fuel water during the period of hiring of the vessel and the charges paid for the services of hiring of vessel include these. Since the vessel has to be moved to the place of delivery as agreed between the parties after its last charter period is completed the cost of fuel/bunker contained therein and water during the period of making the vessel ready for delivery for starting of service is required to be incurred by the appellants which is separately reimbursed by charterers at actuals. It is clearly brought out that such activity of delivering the vessel is not part of the services and therefore the fuel/bunker and water charges incurred by the appellants prior to the delivery of the vessel in no case would become part of the services agreed upon between the parties. Therefore the value of the bunker/fuel and water which do not form part of the taxable services cannot be added to the taxable value of the services. The issue involved in this appeal was decided in an identical facts of the case by the Co-ordinate Bench of the Tribunal in the case of Express Engineers Spares Private Limited 2022 (1) TMI 564 - CESTAT ALLAHABAD by holding that supply of goods to customers would not amount to STGU for the period prior to 30.06.2012 or a declared service from 01.07.2012 to attract levy of service tax. It is not in dispute that the appellants have paid VAT on the bunker/fuel and there is no VAT on water. As these goods are supplied during the process of delivery of the vessel to the charterers distinct from the fuel and water supplied during the charter period such supply of the goods for enabling the delivery of the vessel cannot be brought under the purview of the service contract entered into between the appellants and their customers-charterers. Therefore on the facts and circumstances of the present case these cannot be brought under the scope of the supply of STGU services by the appellants. Conclusion - The reimbursement of bunker/fuel and water charges which constitute supply of goods with payment of VAT cannot be included in the taxable value of service under STGU service. Appeal allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the bunker/fuel charges and water charges recovered by the appellants from their charterers form part of the taxable value of services under the category of Supply of Tangible Goods for Use (STGU) service for the purpose of service tax levy under the Finance Act, 1994.

2. Whether the supply of bunker/fuel and water during the delivery and redelivery of vessels constitutes a taxable service or is merely a supply of goods outside the scope of service tax.

3. The applicability of statutory provisions, circulars, and judicial precedents in determining the taxability of such charges.

4. The correctness and sustainability of the impugned order demanding service tax, interest, and penalties on the disputed amounts.

Issue-wise Detailed Analysis:

Issue 1: Taxability of bunker/fuel and water charges under STGU service

Relevant legal framework and precedents: The Finance Act, 1994, particularly Sections 65(105)(zzzzj), 65B(44), 66, 66B, and 67, govern the levy and valuation of service tax. Section 65(105)(zzzzj) defines taxable service relating to supply of tangible goods for use without transferring possession and effective control. Section 65B(44) defines "service" and excludes certain activities such as transfer of title or deemed sale of goods. Section 67 prescribes valuation rules, including the gross amount charged for taxable services. Rule 5 of the Service Tax (Determination of Value) Rules, 2006, mandates inclusion of all expenditure or costs incurred in providing taxable services into the taxable value.

Precedents relied upon by the appellants include decisions of the Tribunal in Express Engineers & Spares Pvt. Ltd., International Seaport Dredging Ltd., and Kiran Gems Pvt. Ltd., which held that supply of goods involving transfer of possession and control, with payment of VAT, does not amount to STGU service and is not taxable under service tax.

The department relied on decisions such as Commissioner of Service Tax Vs. Singapore Airlines Ltd., United Shippers Ltd., and Intercontinental Consultants & Technocrats Pvt. Ltd., which supported inclusion of such charges in the taxable value.

Court's interpretation and reasoning: The Court examined the contractual terms between the appellants and their charterers, particularly clauses relating to hire period, responsibilities of owners and charterers, and provisions for bunker and water supply and reimbursement. It was found that during the charter period, the charterers pay for fuel and water consumed, and the hire charges exclude these costs. The fuel and water supplied at delivery and redelivery are reimbursed separately based on actual costs or prevailing coastal prices.

The Court observed that the supply of bunker/fuel and water at delivery/redelivery is distinct from the service of hiring the vessel and is essentially a supply of goods. The appellants purchase the fuel/bunker paying VAT, and water is not subject to VAT, indicating a transaction in goods rather than services. The Court emphasized that service tax is leviable only on taxable services and the value must relate to such services. Since the bunker/fuel and water charges do not form part of the agreed service but are reimbursed costs, they cannot be included in the taxable value of STGU service.

The Court further noted that the negative list regime introduced from 01.07.2012 excludes supply or sale of goods from service tax. Therefore, post that date, such supply of bunker/fuel and water cannot attract service tax.

Key evidence and findings: The representative charter party agreement clearly delineates the obligations of owners and charterers regarding fuel and water supply and payment. Documentary evidence of purchase invoices and VAT payment by appellants supports the contention that these are supplies of goods. The contractual terms show separate reimbursement mechanisms for bunker/fuel and water, distinct from the hire charges.

Application of law to facts: Applying the statutory definitions and valuation rules, the Court held that since bunker/fuel and water supplied at delivery/redelivery are goods supplied separately and not part of the taxable service, their value cannot be included in the taxable value for service tax purposes.

Treatment of competing arguments: The department's reliance on precedents supporting inclusion of such charges was distinguished on facts and applicability. The Court noted that the case laws cited by the department were not relevant or had been overruled or distinguished by higher courts and coordinate benches of the Tribunal. The appellants' reliance on circulars and Tribunal decisions supporting exclusion of such charges was accepted as binding and consistent with the statutory framework.

Conclusion: The Court concluded that bunker/fuel and water charges recovered by the appellants do not form part of the taxable value of STGU service and are not liable to service tax for the disputed period.

Issue 2: Valuation principles and applicability of VAT payment as a factor

Relevant legal framework and precedents: Section 67 of the Finance Act, 1994, and Rule 5 of the Service Tax (Determination of Value) Rules, 2006, govern valuation. The Circular No. 65/14/2003-S.T. clarifies the distinction between supply of goods and taxable service. Tribunal decisions in Express Engineers and Kiran Gems emphasize that payment of VAT on goods supplied is a significant factor indicating a sale transaction and not a taxable service.

Court's interpretation and reasoning: The Court relied on the principle that if VAT is paid on the goods supplied, the transaction is deemed a sale and outside the scope of service tax. The Court found that the appellants paid VAT on bunker/fuel supplied to charterers, indicating a sale transaction. Water supply, not subject to VAT, was also treated as supply of goods. The Court held that the presence of VAT liability negates the applicability of service tax on the same transaction.

Key evidence and findings: Documentary proof of VAT payment by the appellants on bunker/fuel was accepted. The absence of VAT on water was noted but treated consistently as supply of goods.

Application of law to facts: The Court applied the valuation principles and clarifications to hold that the value of bunker/fuel and water cannot be included in the taxable service value. The payment of VAT confirmed the nature of the transaction as supply of goods.

Treatment of competing arguments: The department's argument that the bunker/fuel and water charges are integral to the service was rejected on the basis of contractual terms and statutory provisions. The Court distinguished the department's cited precedents on facts and legal grounds.

Conclusion: The valuation of bunker/fuel and water charges is not includable in the taxable value of services for service tax purposes, especially when VAT is paid on such supplies.

Issue 3: Applicability of negative list regime effective from 01.07.2012

Relevant legal framework: Section 66B of the Finance Act, 1994, introduced the negative list regime, excluding supply or sale of goods from service tax levy. The Education Guide by CBIC clarifies that from 01.07.2012, supply of goods is outside service tax ambit.

Court's interpretation and reasoning: The Court observed that for the period post 01.07.2012, supply of bunker/fuel and water is clearly excluded from service tax under the negative list. Hence, no service tax can be levied on such supplies after that date.

Application of law to facts: The disputed period includes pre and post negative list regime. The Court held that even if any ambiguity existed pre-01.07.2012, post that date the supply is not taxable.

Conclusion: The negative list regime excludes supply of bunker/fuel and water from service tax from 01.07.2012 onwards.

Issue 4: Sustainability of the impugned order demanding service tax, interest, and penalties

Court's reasoning: The Court found that the impugned order failed to appreciate the contractual terms and the legal distinction between supply of goods and taxable services. The order erred in including bunker/fuel and water charges in the taxable value. The Court relied on binding precedents and statutory provisions to hold that the demand of service tax and penalties is not sustainable.

Conclusion: The impugned order is set aside, and the appeal is allowed in favor of the appellants.

Significant Holdings:

"...the value of the bunker/fuel and water, which do not form part of the taxable services cannot be added to the taxable value of the services."

"...payment of VAT on supply of goods is also a factor to determine whether the transaction is that of sale...the supply of tangible goods for use is leviable to VAT/Sales tax as deemed sale of goods, is not covered under the scope of the proposed service."

"...such supply of the goods for enabling the delivery of the vessel cannot be brought under the purview of the service contract entered into between the appellants and their customers-charterers."

"...the impugned order dated 25.08.2016 does not stand the scrutiny of law and therefore the same is not legally sustainable."

The Court established the principle that reimbursement of bunker/fuel and water charges, which constitute supply of goods with payment of VAT, cannot be included in the taxable value of service under STGU service. The supply of such goods at delivery and redelivery of vessels is distinct from the taxable service of vessel hire and thus exempt from service tax. The negative list regime further excludes such supply from service tax post 01.07.2012. Consequently, demands of service tax, interest, and penalties on such charges are unsustainable.