2026 (3) TMI 595 - AT - Service Tax

Port services classification for vessel water supply sustained, tax demand and extended limitation upheld while wilful-evasion penalty remitted.

Supply of fresh water to vessels that includes procurement, transport to the vessel and related port operations is treated as port service and was liable ... Liabllity to service tax on the income from supply of fresh water - category of “Port Services” as defined under Section 65(82) of the Act - pure agent exclusion under valuation rules - extended period of limitation and penalties - Whether supply of water by the appellant to various vessels falls under sale of water or supply of water service. Supply of water as part of port services - Whether the appellant's supply of water to vessels is a sale of goods or a taxable port service - HELD THAT:- The Tribunal accepted the CBEC clarification that water-supply charges form part of the taxable value of port services and noted Notification No.31/2010-ST exempted supply of water only w.e.f. 01.07.2010. The appellant could not produce invoices or VAT returns conclusively showing pure sale transactions; invoices indicated supply by barge including procurement, transportation and other service elements. The appellant also admitted port authorisation for the activity. On these facts and the contemporaneous Board clarification, the Tribunal held the transactions constituted provision of port service and were leviable to service tax for the period prior to the exemption effective 01.07.2010. [Paras 5] Supply of water to vessels was held to be part of port services and taxable prior to 01.07.2010; the service-tax demand in respect of those supplies is upheld. Extended period of limitation where omission discovered on audit - HELD THAT:- The Tribunal accepted the department's account that non-payment of service tax in respect of water-supply to vessels came to light only during audit of records, and on that basis the extended period was rightly invoked by the authorities. The Tribunal therefore upheld the demand made invoking the extended period. [Paras 5] Extended period invocation for the service-tax demand was upheld. Pure agent exclusion under valuation rules - Whether the appellant acted as a pure agent and so excluded the reimbursed water cost from taxable value - HELD THAT: - The appellant failed to produce evidence demonstrating that it acted as a pure agent meeting the conditions of the valuation rule; the claim of pure-agent treatment was not supported by contemporaneous documentation. Consequently the Tribunal rejected the pure-agent contention and included the amounts within the taxable value of port services. [Paras 5] The pure agent claim was rejected and the amounts were included in the taxable value. Penalty under Section 78 requires mens rea - Whether penalties under Sections 77 and 78 of the Finance Act, 1994 were appropriately imposed - HELD THAT: - While the Tribunal affirmed imposition of the penalty under Section 77, it found no mens rea on the part of the appellant to evade payment of service tax and, taking a lenient view, set aside the equal penalty imposed under Section 78. The Tribunal therefore differentiated between the two statutory penalties based on the absence of willful evasion. [Paras 5] Penalty under Section 78 set aside for lack of mens rea; penalty under Section 77 affirmed. Final Conclusion: The Tribunal upheld the service-tax demand (including invocation of extended limitation) holding supply of water to vessels to be a port service taxable before 01.07.2010, rejected the pure-agent plea, set aside the penalty under Section 78 for lack of mens rea but affirmed the penalty under Section 77. Issues: (i) Whether supply of fresh water by the appellant to vessels is a sale of goods or constitutes part of 'port services' liable to service tax for the period prior to 01.07.2010; (ii) Whether extended period of limitation and penalties (Sections 77 and 78 of the Finance Act, 1994) were rightly invoked/levied.Issue (i): Classification of supply of fresh water to vessels as sale of goods or as port service liable to service tax prior to 01.07.2010.Analysis: CBEC clarification (F No. B.11/1/2001-TRU dated 09.07.2001) and the Annexure reproduced therein treat water supply charges as part of port services. The definition of port service in Section 65(82) of the Finance Act, 1994, and pre-01.07.2010 requirements regarding authorization support treating water supplied in relation to vessels within port operations as a service. Notification No.31/2010-ST dated 22.06.2010 exempts supply of water within a port w.e.f. 01.07.2010, confirming that prior to that date such supply was leviable to service tax. The Tribunal examined invoices and records and found they reflected charges beyond mere cost of water (procurement, transport to vessel, related service elements) and evidence did not establish pure agent treatment or bona fide sale of goods to displace classification as port service.Conclusion: The supply of fresh water by the appellant to vessels before 01.07.2010 forms part of 'port services' and is liable to service tax. This conclusion is against the assessee.Issue (ii): Validity of invocation of extended period of limitation and imposition of penalties under Sections 77 and 78 of the Finance Act, 1994.Analysis: The department discovered non-payment during audit and invoked the extended period based on available facts. On penalties, the Tribunal found absence of mens rea to evade tax and noted that the appellant failed to prove pure agent status; thus the substantive demand stands but culpability for willful evasion under Section 78 was not established. The Tribunal applied a lenient view on penalty under Section 78 while upholding the penalty under Section 77.Conclusion: Invocation of the extended period was upheld and the service tax demand sustained. Penalty under Section 78 is set aside; penalty under Section 77 is affirmed. The conclusions are partly against and partly in favour of the assessee as specified.Final Conclusion: The appeal is partly allowed inasmuch as penalty under Section 78 is remitted; otherwise the appeal is dismissed and the service tax demand along with interest and penalty under Section 77 is sustained.Ratio Decidendi: Supply of water to vessels, when it includes procurement, transportation to the vessel and related port operations, constitutes port service under Section 65(82) of the Finance Act, 1994 and was taxable prior to the exemption effective 01.07.2010.