Contract classification for dredging vessels turns on operational control, with hire arrangements treated as supply of tangible goods.

Charter hire of dredging vessels was treated as supply of tangible goods where the recipient retained operational control, while the vessel owner provided crew and equipment under a hire arrangement; on that footing, dredging service classification was not sustained for the DCI, DDCL and Gangavaram Port contracts. For Hazira Port, the work was examined as manpower and equipment deployment for geo-bag bund and foreshore protection, and the dredging component predated taxability. Dhamra Port required fresh factual examination because the record did not clearly show whether the arrangement was separate or composite. Reverse charge demands on manpower supply and legal service issues were largely rejected, penalties were quashed, and several ancillary matters were remanded for verification.

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Issues: (i) Whether charter hire of dredging vessels to Dredging Corporation of India, Dharti Dredging & Construction Ltd. and Gangavaram Port constituted dredging service or supply of tangible goods service; (ii) Whether the activities relating to Hazira Port and Dhamra Port fell within site formation, dredging or exempt port-related services; (iii) Whether reverse charge demands for maintenance and repair, manpower supply and management consultancy/legal services were sustainable; (iv) Whether penalties were warranted.

Issue (i): Whether charter hire of dredging vessels to Dredging Corporation of India, Dharti Dredging & Construction Ltd. and Gangavaram Port constituted dredging service or supply of tangible goods service.

Analysis: The contracts were examined as charter hire agreements specifying hire period, delivery and redelivery terms, while operational control, deployment, hours of work and dredging decisions remained with the recipients. The billing pattern, including hourly hire and wear-and-tear charges linked to dredged volume, showed that the appellants supplied vessels with crew and equipment rather than themselves rendering dredging activity. The factual arrangement was therefore closer to supply of tangible goods than to performance of dredging service.

Conclusion: The demands under the category of dredging service for DCI, DDCL and Gangavaram Port were set aside and the assessee succeeded on this issue.

Issue (ii): Whether the activities relating to Hazira Port and Dhamra Port fell within site formation, dredging or exempt port-related services.

Analysis: For Hazira Port, the work was found to be supply of manpower and equipment for geo-bag bund and foreshore protection, and the dredging component was completed before dredging service became taxable. The site formation classification was not sustained on the actual contract terms. For Dhamra Port, the record did not clearly establish whether there were separate contracts or a composite arrangement, and the documents and findings were inconsistent. The exemption claims and classification issues therefore required fresh examination on a clearer factual basis.

Conclusion: The demand relating to Hazira Port was set aside, while the dispute relating to Dhamra Port was remanded for fresh adjudication.

Issue (iii): Whether reverse charge demands for maintenance and repair, manpower supply and management consultancy/legal services were sustainable.

Analysis: In respect of maintenance and repair, part of the dispute depended on where the services were actually performed and the evidentiary record was insufficient, warranting de novo consideration. For expatriate manpower, the salary arrangements showed direct employment by the appellant and routing of payments through foreign entities as mere facilitators, so reverse charge liability was not made out. For Pinsent Masons, the invoices showed a law firm rather than a management consultant, and legal services were not taxable for the period in question. Limited verification was also directed for insurance auxiliary services, consulting engineer services and advances where the record was unclear.

Conclusion: The manpower supply and management consultancy/legal service demands were set aside, the maintenance and repair demand was remanded, and the ancillary verification issues were also remanded.

Issue (iv): Whether penalties were warranted.

Analysis: Once the principal classifications were found to be contentious and several demands were either set aside or remanded, the matter remained essentially interpretational rather than one involving deliberate suppression sufficient to sustain penal consequences.

Conclusion: The penalties were set aside.

Final Conclusion: The order was substantially modified in favour of the assessee, with major service tax demands deleted, certain issues remanded for reconsideration, and all penalties quashed.

Ratio Decidendi: Where a service recipient retains operational control and the payer merely charters vessels with crew under a hire arrangement, the activity is not dredging service; classification must follow the real nature of the contract and the actual control over performance.

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