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 to service tax prior to the exemption effective 01.07.2010. The extended period of limitation for assessing the unpaid service tax was upheld based on audit findings and the service tax demand with interest is sustained. Criminal or wilful evasion mens rea was not established, so penalty for wilful evasion was set aside while the general penalty was affirmed, yielding a partly allowed appeal.

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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.

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