2025 (10) TMI 397 - AT - Service Tax

Extended limitation and penalty unsustainable; repairs of foreign ships before 01.03.2007 treated as delivery and use outside India

M/s. Amar Marine Enterprises Versus The Commissioner of Central Excise, Mangalore

CESTAT allowed the appeal, holding that invocation of the extended period of limitation and imposition of penalty were unsustainable. Repair and ... Invocation of extended period of limitation - penalty - repair service rendered to foreign ships amounted to “delivery outside India” and “used outside India” for the period prior to 01.03.2007 or not. Demand by invoking extended period of limitation and penalty - HELD THAT:- It is a pure interpretation of the provision of law and considering the ratio of decision relied by appellant in Commissioner of Service Tax, Bangalore vs. M/s. Motor World [2012 (6) TMI 69 - KARNATAKA HIGH COURT], the demand confirmed by invoking the extended period of limitation and penalty imposed by Lower Authority are unsustainable. Repair service rendered to foreign ships amounted to “delivery outside India” and “used outside India” for the period prior to 01.03.2007 - HELD THAT:- In the instant case, as noted by the Commissioner in the impugned order, the appellant had undertaken repair and maintenance service of the foreign ships which are docked at Indian Port and after repair they leave the Indian Territorial Waters and enter the International Maritime Zone. It is also a fact that for the above repairs payments were received in convertible foreign currency. Thus, the conditions laid down vide Rule 3(2) of the Export Service Rules read with the Board Circular No. 111/5/2009-ST dated 24.02.2009 and the clarification by TRU -141/10/2011 dated 13.05.2011 stands satisfied. The Circular states that “used outside India should be interpreted to mean that the benefit of the service should accrue outside India”. Thus, following the ratio of the decision of the Larger Bench in the matter, the impugned order confirming demand is unsustainable. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether repair and maintenance services rendered to foreign-flagged ships docked in India qualify as 'export of service' under the Export of Service Rules, 2005 and thus are exempt from service tax where consideration is received in convertible foreign exchange. 2. For the period prior to amendment of the Export Rules (specifically before 01.03.2007), whether such services can be regarded as 'delivered outside India' and 'used outside India' when all physical performance occurs within India but the benefit accrues to a recipient located outside India. 3. Whether the demand confirmed invoking the extended period of limitation (extended assessment period) and imposition of penalty is sustainable where the alleged non-payment of service tax arose from a bona fide interpretation of exemption provisions and where transactions were declared in returns and books of account. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Export of service entitlement for repair and maintenance of foreign ships Legal framework: Export of Service Rules, 2005 set out conditions for a service to qualify as export: (i) recipient located outside India; (ii) service provided from India and delivered/used outside India; and (iii) payment received in convertible foreign exchange. Earlier notifications provided exemptions where consideration was in convertible foreign currency. Precedent Treatment: The Tribunal's Larger Bench decisions and subsequent judicial pronouncements have interpreted the Export Rules and related Board Circulars to focus on recipient location and accrual of benefit; these decisions have been followed by the Court/Tribunal in the present matter. Interpretation and reasoning: The Tribunal applies Board Circular No.111/5/2009-ST and subsequent clarifications which explain that for Category III services (knowledge/technique-based or those not linked to immovable property), the relevant factor is the location of the service recipient and whether the benefit of the service accrues outside India. Repair and maintenance of foreign ships, although physically performed in India, result in the vessel leaving territorial waters and the operational benefit flowing to an entity outside India; payment was received in convertible foreign exchange. Hence the composite conditions of Rule 3 read with the Circular are satisfied. Ratio vs. Obiter: The conclusion that repair/maintenance of foreign ships constitutes export of service where benefit accrues outside India and payment is in convertible foreign exchange is treated as ratio by the Tribunal, following the reasoning in binding/precedential Tribunal decisions and clarificatory circulars; ancillary comments regarding characterisation of Category III services are explanatory but form part of the operative reasoning. Conclusions: The repair and maintenance of foreign ships docked in India, with payment in convertible foreign exchange and benefit accruing outside India, qualify as export of service under the Export of Service Rules, 2005; therefore, service tax demand on such services is unsustainable on merit. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Meaning of 'delivered outside India' and 'used outside India' for pre-01.03.2007 period Legal framework: Rule 3 of the Export Rules and its sub-rules define export of taxable services; wording changed effective 01.03.2007 to clarify 'provided from India and used outside India'. Prior formulations used 'delivered outside India' and 'used outside India'. Board Circulars and TRU clarifications interpret 'used outside India' to mean that the benefit of the service should accrue outside India, and that the location of the service recipient is determinative for Category III services. Precedent Treatment: Earlier Tribunal/Larger Bench decisions interpreted 'used outside India' in context of categories of services to prioritize the location of the recipient and the locus of benefit over the actual place of performance; these decisions were relied upon in the instant analysis. Interpretation and reasoning: For Category III services, which include services not tied to immovable property or with non-identifiable location of performance (e.g., business-auxiliary services), the phrase 'used outside India' should be read as accrual of benefit outside India. Thus, even where performance occurs entirely within India, if the recipient is located outside India and the benefit accrues outside India, the service qualifies as exported. This interpretation harmonizes the Rules and avoids internal contradiction within the legislative scheme. Ratio vs. Obiter: The interpretation that 'used outside India' equates to benefit accruing outside India for Category III services is treated as part of the ratio; statements on the need for harmonious reading of legislation reinforce the binding interpretative approach rather than being mere obiter. Conclusions: For the period prior to 01.03.2007, repair and maintenance of foreign ships-being Category III in character where benefit accrues to a recipient outside India-satisfy the 'used/delivered outside India' requirement; therefore such services qualify as exports under the Rules applicable to that period. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Extended limitation and penalty where non-payment arose from bona fide interpretation Legal framework: Extended period of limitation and penalty provisions permit demand and penalty where there is suppression or fraud. However, limitation bars demands based solely on audit objections where transactions are recorded and declared; penalty requires culpability beyond bona fide belief of non-levy. Precedent Treatment: Courts/Tribunals have held that demands based solely on interpretation disputes evident from records and returns, and where transactions were declared, cannot sustain invocation of extended limitation or penalty. Decisions recognizing bona fide interpretation as 'reasonable cause' for delay/non-payment have been relied upon. Interpretation and reasoning: The Tribunal notes that the alleged non-payment arose from an interpretation of exemption provisions; transactions were reflected in books and declared in returns under export of services. Audit objection based on interpretation does not constitute suppression of facts warranting extended limitation. Further, bona fide belief in non-liability arising from interpretation constitutes reasonable cause against imposition of penalty. Ratio vs. Obiter: The holdings that extended limitation and penalty are unsustainable in such circumstances constitute ratio as applied to the facts; general observations on principles of limitation and penalty serve as clarificatory guidance integral to the decision. Conclusions: Invocation of extended limitation period and imposition of penalty are unsustainable where non-payment was due to a bona fide interpretation of export/exemption provisions and where transactions were disclosed in returns and books; accordingly, demands confirmed on that basis are liable to be set aside. Cross-References and Application 1. The Tribunal's conclusions rest on a consistent reading of Rule 3 of the Export Rules, Board Circular No.111/5/2009-ST and TRU clarification, and on the principle that Category III services are to be assessed by the location of recipient/benefit rather than the place of physical performance. (See Issue 1 and Issue 2 analyses above for interrelated reasoning.) 2. The findings on limitation and penalty (Issue 3) are interconnected with the merits: since the Tribunal holds the services to be exported, demands based upon an alternative interpretation fail; independently, even if disagreement existed, the factual disclosure in returns and bona fide belief preclude extended limitation and penalty.