2018 (3) TMI 633 - AT - Service Tax

Appellant not liable for service tax on hiring dredgers/vessels. Customs duty not part of taxable value.

The Tribunal held that the appellant was not liable to pay service tax on hiring dredgers/vessels as the arrangement constituted a transfer of right of ... Supply of Tangible Goods Service - transfer of right of possession and effective control - Bareboat Charter / demise charter - reverse charge liability - taxable value - inclusion of reimbursed statutory leviesSupply of Tangible Goods Service - transfer of right of possession and effective control - Bareboat Charter / demise charter - reverse charge liability - Whether chartering of vessels/dredgers under the Bareboat Charter constituted transfer of right of possession and effective control, thereby excluding the transaction from service tax under the 'Supply of Tangible Goods Service' entry and negating reverse charge liability. - HELD THAT: - The Tribunal examined the Bareboat Charter terms (delivery after survey and inventory, charterer to pay for bunkers and oils, clause 9 placing vessel in full possession and absolute control of the charterer, obligations of the charterer for maintenance, crew and operational expenses, lump sum payment under clause 10, insurance and redelivery obligations) and authoritative definitions and precedents on demise/bareboat charters. Applying the legal test in the tax entry - that services in relation to supply of tangible goods for use without transfer of right of possession and effective control are taxable - the Tribunal found that the charter terms conveyed possession and effective control to the appellant. Restrictions such as limited area of operation and bar on sub-charter without consent, and retention of ownership by the supplier, do not negate the transfer of possession and control in a bareboat charter context. The Tribunal relied on analogous decisions (including Petronet LNG Ltd. and relevant High Court/Supreme Court authority) and Black's Dictionary definition to conclude the arrangement is a transfer of right to use and falls within the exclusion under section 65(105)(zzzzj). [Paras 17, 18, 19, 20, 23]The Bareboat Charter resulted in transfer of right of possession and effective control to the appellant; the arrangement is outside the scope of service tax under the 'Supply of Tangible Goods Service' entry, and reverse charge liability does not arise.Taxable value - inclusion of reimbursed statutory levies - Service Tax (Valuation) Rules - reimbursed expenses not consideration - Whether customs duty, entry tax and similar statutory levies reimbursed by the clients to the appellant form part of the taxable value of dredging services. - HELD THAT: - The Tribunal noted the appellants did not dispute service tax on the dredging consideration itself but challenged inclusion of reimbursed statutory levies in the taxable value. Rule 5(1) of the Service Tax (Valuation) Rules, 2006 was cited by Revenue, but the Tribunal observed that the provision has been struck down by the Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. Further, the reimbursed duties and taxes were actual expenditures incurred and subsequently reimbursed by clients under the contract and do not constitute consideration for the taxable service. The Board's clarification that excise, customs, octroi and similar duties are not consideration for services was noted. On these bases the Tribunal held there is no justification to include such reimbursed statutory levies in the taxable value. [Paras 24]Customs duty, entry tax and similar statutory levies reimbursed by the clients on actual basis do not form part of the taxable value of the dredging services and cannot be included in valuation for service tax.Final Conclusion: The impugned order confirming reverse charge service tax on chartered vessels and adding reimbursed statutory levies to taxable value is set aside; the appeals are allowed. Issues Involved:1. Liability of the appellant to pay service tax on hiring of dredgers/vessels from foreign companies under 'Supply of Tangible Goods Service' on reverse charge basis.2. Inclusion of customs duty, entry tax, etc., paid by clients on the import of materials used for dredging services in the taxable value for dredging services.Issue-wise Detailed Analysis:1. Service Tax Liability on Hiring of Dredgers/Vessels:The appellants argued that the demand for service tax under 'Supply of Tangible Goods' is not sustainable because the Charter Party Agreement transferred the right to use the vessels to the appellant, thus the transaction cannot be taxed as a service. They emphasized that the agreement provided for a standard Bareboat Charter, where the appellant had full possession and effective control of the vessels. Clauses 9, 12, 14, 20, and 21 of the Charter Agreement were specifically cited to support this claim. The original authority's finding that the appellants did not have legal right and effective control was contested, stating that the restrictions on sub-chartering and usage area did not affect the right to possession and control.The Revenue opposed, arguing that the exclusion for tax under 'Supply of Tangible Goods Service' applies only when there is a transfer of right of possession and effective control, which they claimed was not present in this case. They highlighted that the appellants had no unrestricted right to use the vessels and that mere custody did not exclude tax liability.Upon review, the Tribunal noted that the key issue was whether there was a transfer of right of possession and effective control. The Bareboat Charter indicated that the vessels were under the appellant's full possession and control, with responsibilities for maintenance, operation, and legal compliance. The Tribunal referred to Black's Dictionary and previous decisions, including Petronet LNG Ltd. vs. Commissioner of Service Tax, New Delhi, which supported the appellant's position. They concluded that the arrangement constituted a transfer of right of possession and effective control, thus falling within the exclusion clause of section 65(105)(zzzzj) of the Finance Act, 1994.2. Inclusion of Customs Duty and Entry Tax in Taxable Value:The appellants contended that customs duty and entry tax on imported equipment, reimbursed by clients, should not be included in the taxable value for dredging services. They argued that these were statutory levies not considered as part of the consideration for the service. The Revenue, however, argued that these expenditures should form part of the gross value under Rule 5(1) of Service Tax (Valuation) Rules, 2006.The Tribunal noted that Rule 5(1) had been struck down by the Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India. Even otherwise, the Tribunal found that these were actual expenses reimbursed by clients and not considerations for rendering taxable services. The Board's Circular dated 13.4.2016 clarified that taxes and duties are not consideration for services and cannot be subjected to service tax. Consequently, the customs duty reimbursed by clients could not be included in the taxable value.Conclusion:The Tribunal set aside the impugned order, concluding that the appellant had the right of possession and effective control of the vessels, thus not liable for service tax under 'Supply of Tangible Goods Service.' Additionally, customs duty and entry tax reimbursed by clients were not to be included in the taxable value for dredging services. The appeals were allowed.