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TMI Blog2023 (8) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... tuted with a new section 67 to provide for determination of value of taxable service. Prior to this, service tax was charged on the gross amount received. The proposed section provides for determination of taxable value in cases where the consideration received for taxable services provided is not wholly in money terms and the consideration received is in money terms but not known explicitly. Separate valuation rules were also brought out for this purpose. Hence, it is desirable to examine the above legal provisions along with the rules. In rendering ship management services, the appellants have incurred various expenditures for and on behalf of the ship owners and claimed reimbursement for the same. In terms of the above specific clauses of the agreement, the appellants have carried out their responsibilities as agents, for and on behalf of the owners. Accordingly, all monies received by the appellants was credited in a separate bank account and the interest accrued on the same was also credited to the owners. Commission and discount obtained by the appellants was also credited to the owner s bank account - The expenses were shown for the month as per budget allotted/agreed to, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal No. 17-19/ST-V/SKD/2015 dated 14.10.2015 (referred to as impugned order ) passed by Commissioner, Service Tax-V, Mumbai. 2.1. Briefly stated, the facts of the case are that the appellants herein are inter alia, engaged in rendering ship management services and are registered under service tax registration No. AABCV3134CST001. On the basis of investigation conducted by anti-evasion wing of Service Tax-I Commissionerate, Mumbai, it was found that the appellants were rendering the services of ship management, commercial management, technical management and crew management services to vessel owners and are receiving fixed cost equivalent to monthly management fees and are getting reimbursed the cost incurred by them for ship/vessel crew, cost of purchase of vessel consumables, repairs and maintenance of ships/vessels, and administrative costs etc. The appellants assessee is paying service tax on management fees for service rendered to Indian shipowners for which payment is received in Indian currency and in respect of foreign owners where payment is received in foreign currency, the appellants are not paying service tax claiming it as export of service. The investigation co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their employees and not for the acts of the crew, as they are not in employment of the appellants. The appellants had also employed their own employees for undertaking management activity and the appellants had incurred their own establishment expenses. Such expenditure was not claimed as reimbursement of employee cost of the establishment expenditure by the appellants. The appellants had made disclosure of the amount of expenditure incurred on behalf of the vessel owners and the amount reimbursed, and such disclosures were made in the financial statements to comply with the requirements of BIMCO agreement and statutory disclosure requirements. The said amount was not claimed by the appellants as income or expenditure in their books of accounts. In further explaining the nature of reimbursement expenses, the learned counsel had stated that the appellants receive monthly advance from the Vessel/ship Owners for procuring various goods and services for and on behalf of Vessel/ship Owners such as crew salary, vessel consumables, repair and maintenance, etc. The following process was adopted for incurring expenditure for and on behalf of vessel owner: (i) The budget of expenses wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -performance. Further, it provides that the master of the vessel would be responsible to undertake the reasonable maintenance of seafarers as per the rules issued under the Merchant Shipping Act, 1958. Thus, the seafarers/crew are the employee of the master/owner of the vessel. 3.4. In view of the above the learned Counsel stated that the appellants were not required to pay service tax on the reimbursement of the expenses received from the Ship Owners. They also relied on the following decisions in support of their stand and prayed for setting aside the order dated 14.10.2015 passed by the Commissioner of Service Tax, Mumbai-V. (i) PI Shipping and Logistics Ltd. Vs. Commissioner of Central Excise and Service Tax, Chennai 2018 TIOL 3112 CESTAT-MAD. (ii) Prime Consultancy Services Vs. Commissioner of Service Tax, Chennai 2018 TIOL 2291 CESTAT-MAD. (iii) Commissioner of Service Tax, New Delhi Vs. Karam Freight Movers 2017 (2) G.S.T.L. 215 (Tri. Del.) (iv) Intercontinental Consultants Technocrats Pvt. Ltd. Vs. Union of India 2013 (29) STR 9 (Del.) (v) Union of India Vs. Intercontinental Consultants Technocrats Pvt. Ltd. 2018 (10) GST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the records of the case. 6. On perusal of the impugned order dated 14.10.2015, it is seen that the learned Commissioner had recorded that the following facts are not under dispute and the only point of dispute is whether the amounts recovered by the appellants through debit notes are to be treated as part of taxable value for the purpose of levy of service tax or not, and on which he had passed an order confirming the adjudged demands. The relevant paragraphs of the impugned order are extracted below: 32. The following aspects are not under dispute: The noticee is rendering Ship Management Services as defined under Section 65(96a) and as referred to in Section 65(105)(zzzt) as a taxable service liable to Service Tax under Section 66 of the Finance Act, 1994. The taxability of the service provided by the noticee is not in doubt. The noticee had in their ST-3 returns declared and paid Service Tax on the amount billed to their clients under their invoices. The noticee had, in addition to invoices, raised debit notes on their clients. Service Tax was not paid by the noticee on the consideration recovered by the noticee from their clients through such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of ship; (vi) negotiating contracts for bunker fuel and lubricating oil; (vii) payment, on behalf of the owner, of expenses incurred in providing services or in relation to the management of ship; (viii) the entry of ship in a protection or indemnity association; (ix) dealing with insurance, salvage and other claims; and (x) arranging of insurance in relation to ship; 8.2. The charge of service tax is effectuated in Section 66 of the Act. It says that there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub- clauses (a) (d) (e) ...(zzzt) ... (zzzzv) and (zzzzw) of Section 65 and collected in such manner as may be prescribed . Further, the provisions of Section 67 of the Act, as it stood before being substituted by the Finance Act, 2006, w. e. f. 01.05.2006 was as under: 67. Valuation of taxable services for charging service tax:- For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him. Explanation 1.- For the removal of doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch amount as with the addition of tax payable, is equal to the gross amount charged. Explanation 3.- For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. 8.3. The new Section 67 which came into effect from 01.05.2006 is shorter and later amended in 2008 and 2012, is as follows: - Section 67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall, (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for determination of taxable value in cases where the consideration received for taxable services provided is not wholly in money terms and the consideration received is in money terms but not known explicitly. Separate valuation rules were also brought out for this purpose. Hence, it is desirable to examine the above legal provisions along with the rules. 9.2. The Service Tax (Determination of Value) Rules, 2006, was brought into effect from 01.06.2007. Rule 5 provided for inclusion in or exclusion from value of certain expenditure or costs . The relevant portion of the rule, is extracted as follows: - 5. Inclusion in or exclusion from value of certain expenditure or costs: (1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. (2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent. Illustration 2 : In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 3 : A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have fulfilled the same, in order to treat him as pure agent are tabulated below: Description of the condition Whether the conditions were fulfilled in the present case The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; The appellants are acting as pure agent of the recipient of the service. The BIMCO contract entered specifically defines the scope of the authority as agent acting on behalf of ship owner. All purchase orders issued to vendors and the bills issued by the vendors are issued in the name of master / owner of the ship and C/o the appellants. Further, appellants are making payment to seafarer/workers on behalf of the owner of the ship. The agreement with the seafarer is made by the appellants on behalf of 0wner of the ship. This fact is illustrated from the agreement with the seafarer. It is specifically mentioned in the agreement that the said seafarers are hired for and on behalf of the ship owner. The recipient of service receives and uses the goods or services so pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and The appellants makes the payment from separate bank account maintained by them. The appellants gets reimbursement of the amount paid on actual basis and no mark-up/ profit is added on such amount. The goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account. The goods or services procured by the appellants from the third party are in addition to the services of ship management. In respect of ship management service, the appellants had paid the service tax and have also indicated the said value of services separately in the documents to be provided to the ship owner. The above factual position indicates that the appellants are fulfilling the conditions prescribed under Rule 5 (2) ibid, and hence the reimbursement expenditure collected by appellants have to be treated as expenditure or costs incurred by the service provider as a pure agent of the recipient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time law, the ship owners first and foremost, generally enter into a contractual relationship with terms agreed between them and with a ship manager or ship management agents, by adopting the standard agreements. BIMCO in their efforts to complement the global regulatory regime developed by the International Maritime Organization (IMO) have created standard contracts and clauses that address the commercial and practical implications of global regulations on charter parties and other shipping contracts that allocate obligations, responsibilities and liabilities fairly. SHIPMAN is one such model agreement covering various aspects such as crew, technical, commercial management as well as insurance arrangements. The latest edition of such contract/ agreement is SHIPMAN 2009. The advantage are of such contract is that all potential specifics of ship management are included in this form thus, allowing the contracting parties to shape a unique business relationship between the Owner and the Ship Manager. The main structure of the SHIPMAN 2009 Contract is as follows: Structure of the BIMCO standard ship management agreement SHIPMAN 2009 Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms) Act, 2017. Section 96 of the Merchant Shipping Act, 1958 provide for engagement of seamen only by a ship owner or his agent. The relevant section is extracted below: 96. Supply or engagement of seamen in contravention of Act prohibited.― (1) A person shall not engage or supply a seaman to be entered on board any ship in India unless that person is the owner, master or mate of the ship, or is the agent of the owner or is bona fide the servant and in the constant employ of the owner, or is a director of a seaman s employment office, or a shipping master. (2) A person shall not employ for the purpose of engaging or supplying a seaman to be entered on board any ship in India, any persons unless that person is the owner, master or mate of the ship, or is the agent of the owner or is bona fide the servant and in the constant employ of the owner, or is a director of a seamen s employment office, or a shipping master. (3) A person shall not receive or accept to be entered on board any ship any seaman, if that person knows that the seaman has been engaged or supplied in contravention of this section or section 95. From the above international conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Owners for any loss, damage, delay or expense of whatsoever nature whether direct or indirect, (including but not limited to loss of profit arising out of or in connection with detention of or delay of the Vessel) and howsoever arising in the course of performance of the Management Services UNLESS same is proved to have resulted solely from the negligence, gross negligence or willful default of the Managers or their employees or agents, or subcontractors employed by them in connection with the Vessel, in which case (save where loss, damage, delay or expense has resulted from the Managers personal act or omission committed with the intent to cause same or recklessly and with knowledge that such loss, damage, delay or expense has resulted from the Managers personal act or omission committed with the intent to cause same or recklessly and with the knowledge that such loss, damage, delay or expense would probably result) the Managers liability for each Incident or series of Incidents giving rise to a claim or claims shall never exceed a total of ten (10) times the annual management fee payable hereunder. (II) Acts or omission of the Crew Notwithstanding anything that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, we are of the considered view, that both on the facts of the case and on the interpretation of legal provisions of the Finance Act, 1994, the demand of service tax on reimbursement expenses goes beyond the mandate of Section 67, which is a charging section for levy of service tax. Section 67, both before and after 01.05.2006 amendment authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money. The underlined words i.e. for such service are important in the setting of Section 66 and 67. The charge of service tax under Section 66 is on the value of taxable services. The taxable services are listed in Section 65(105). The service provided by the petitioner falls under clause (zzzt). It is only the value of such service that is to say, the value of the service rendered by the appellants to ship owner, which is that of a ship management service, that can be brought to charge and nothing more. It is not the case of the Revenue that on ship management fees, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act. 22 . Section 66 of the Act is the charging Section which reads as under: there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses of Section 65 and collected in such manner as may be prescribed. 23 . Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the value of taxable services . Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. 24 . In this hue, the expression such occurring in Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel : the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect. 29 . In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with consideration is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax. Though, it was not argued by the Learned Counsel for the Department that Section 67 is a declaratory provision, nor co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the faith of the then existing law. 29. The obvious basis of the principle against retrospectivity is the principle of fairness , which must be the basis of every legal rule as was observed in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later. 30 . As a result, we do not find any merit in any of those appeals which are accordingly dismissed. 19. We further find that the Principal Bench of this Tribunal had dealt with the similar issue in the case of M/s Seher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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