Time charter of vessel: possession and control passed to charterer; offshore EEZ use held outside service tax, demand set aside

Time charter hire received by the vessel owner from charterers was assessed as taxable "supply of tangible goods for use" (STGU) under s.65(105)(zzzzj) of the Finance Act, 1994. Interpreting the charterparty clauses in light of maritime conventions and the Merchant Shipping Act, the Tribunal held that physical possession and effective control of the vessel were delivered to the charterer for the charter period; hence the arrangement amounted to transfer of the right to use and did not constitute STGU, which applies where possession/effective control is retained by the supplier. The Tribunal further held that services consumed at offshore locations in the Continental Shelf/EEZ were outside the taxable territory under s.64 and applicable notifications, rendering the levy unsustainable to that extent. The demand and impugned order were set aside and the appeal allowed with consequential relief.

---

---

1. ISSUES PRESENTED AND CONSIDERED

(i) Whether providing offshore support vessels on time charter/hire to a charterer, under the contractual terms examined, constituted taxable "Supply of Tangible Goods for Use" under Section 65(105)(zzzzj) of the Finance Act, 1994, i.e., whether the arrangement was "without transferring right of possession and effective control".

(ii) Whether service tax under the "Supply of Tangible Goods for Use" entry could be demanded when the charter contracts and delivery of the vessels to the charterer occurred prior to 16.05.2008, the date from which the levy was brought into force.

(iii) Whether the levy was unsustainable on territorial applicability, where the services were consumed in offshore locations such as the Continental Shelf and Exclusive Economic Zone, asserted to be outside the taxable territory for the relevant period.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Classification as "Supply of Tangible Goods for Use" (STGU) - transfer of possession and effective control

Legal framework (as discussed by the Court): The Tribunal examined the definition of STGU inserted in Section 65(105)(zzzzj), covering supply of tangible goods for use without transferring right of possession and effective control.

Interpretation and reasoning: The Tribunal treated the charter agreements (SUPPLYTIME 89) and their operative clauses on delivery/redelivery, hire, master and crew, owners' obligations, and operational instructions as determinative of whether possession and effective control stood transferred. On a plain reading, the vessel was delivered for use during the charter period for consideration, and physical possession and operational control for the chartered activity rested with the charterer. The Tribunal reasoned that where the charterer has possession and effective control to operate and undertake the intended activities, the essential condition for STGU (absence of transfer of possession/effective control) is not satisfied.

Conclusions: The Tribunal held that the time-charter arrangement examined involved transfer of the right to use the vessel with possession and effective control with the charterer, and therefore it could not be taxed as STGU. The demand under STGU was held not legally sustainable on this ground.

Issue (ii): Taxability where contract and delivery occurred prior to 16.05.2008 (date of introduction of STGU)

Legal framework (as discussed by the Court): The Tribunal noted STGU was brought into force w.e.f. 16.05.2008 through the notified effective date, and examined whether the taxable event in the present transactions occurred before that date.

Interpretation and reasoning: The Tribunal relied on undisputed contract particulars showing the charter contracts were executed well before 16.05.2008 and the vessels were delivered to the charterer before that date. It reasoned that these facts demonstrated that the charterer services, as supplied/delivered for use, did not occur after the levy came into force, and thus could not be subjected to service tax under a later-introduced entry. The Tribunal also endorsed the approach that periodic/per-day computation of hire does not convert a pre-levy supply/delivery into a post-levy taxable event, treating such billing as a commercial method of quantifying consideration rather than determining taxability.

Conclusions: The Tribunal concluded that, since the agreements and delivery of vessels occurred prior to 16.05.2008, the transactions could not be taxed under STGU introduced from that date, even if payments were received during the disputed period. This independently rendered the impugned demand unsustainable.

Issue (iii): Territorial applicability-consumption of services in offshore locations (Continental Shelf/EEZ)

Legal framework (as discussed by the Court): The Tribunal considered the contention on Section 64 (extent/applicability) read with the notifications relied upon by the assessee, addressing whether service tax applied only within the territory of India for the relevant period.

Interpretation and reasoning: The Tribunal held that the department failed to rebut the assessee's claim that the services were consumed in offshore locations in the Continental Shelf and Exclusive Economic Zone and, to that extent, were outside the applicable taxable territory. It treated this territorial limitation as an additional and independent reason undermining the demand, noting the supporting reliance placed by the assessee on a High Court decision and a departmental instruction referred to in the order.

Conclusions: The Tribunal held that the levy was unsustainable also on the ground that the services were consumed outside India in offshore locations, and therefore the adjudged demands could not stand legal scrutiny on territorial applicability as well.

---