2026 (3) TMI 751 - AT - Service Tax

Despatch money treated as contractual adjustment, not a port service, so not taxable as service tax.

Whether despatch money under a charter party qualifies as consideration for a taxable port service was addressed by treating the payment as an ... Port service - condition of contract not consideration - Whether the ‘despatch money’ received for expeditious unloading of cargo and quick turnaround of the vessel, from the vessel owner to the appellant can be classified as ‘Port Service’ under section 65(105)(zn) read with section 65(82) of the Finance Act, 1994, and service tax can be charged on said despatch money received by the appellant from the vessel owner. Port service - condition of contract not consideration - HELD THAT:- In the case of Vedanta Ltd.[2025 (11) TMI 682 - CESTAT CHENNAI], the Coordinate Bench at Chennai examined the issue as to whether the despatch money can be subjected to service tax under the category of ‘port service’ during the period April, 2008 to June, 2012, and, inter alia, held that no party to the agreement i.e., neither importer nor transporter performed any activity, which would fall within the meaning of the word ‘service’ as occurring in the definition of the term ‘port service’ as it stood on or after 01.07.2010. Therefore, it was held that the appellant had not rendered any taxable service in respect of both demurrage and despatch money. It is not a case where the appellant had to perforce clear the consignment before the agreed upon time in order to earn despatch money or for that matter, delay the consignment and incur demurrage charges. These are various incentives or dis-incentives/penalties, which are conditions of the agreement regulating faster turnaround time. Therefore, there is force in the submissions made by the appellant that the said amount cannot be considered as consideration paid to the appellant for especially providing port services for quicker turnaround. It is not the case of the department that they have always been getting despatch money, rather, they have been getting both despatch money as well as paying out demurrage charges depending on early despatch of cargo or later despatch of cargo than the agreed upon time limit provided in the agreement itself. Therefore, from the nature of these provisions, it cannot be said that there was an agreed upon service for which, a contract has been executed between the appellant and the vessel owner as distinct from the charter party agreement. It is not possible to vivisect this activity out of charter party agreement in order to cover it under the category of port service and assume that the despatch money paid is the consideration for this agreed upon activity. It is more in the nature of demurrage, liquidity damages, etc., which cannot be subjected to service tax as they are conditions of the contract and not a consideration for executing the contract. Despatch money is a contractual incentive/penalty under the charter party and not consideration for a separate port service; the adjudicating authority's demand is set aside. Final Conclusion: The appeal is allowed: the impugned order confirming service tax on despatch money is set aside on merits because despatch money constitutes contractual incentives/penalties within the charter party and not consideration for a separate port service. Issues: Whether despatch money received by the appellant from vessel owners constitutes consideration for a taxable 'port service' under Section 65(105)(zn) read with Section 65(82) of the Finance Act, 1994 for the period April 2007 to March 2012.Analysis: The arrangement between the parties arose under a charter party agreement which fixed freight and also provided mutually contingent provisions for despatch money and demurrage depending on early or late unloading. The payment labeled as despatch money functions as an incentivising/penal clause within the charter party and is subject to netting with demurrage rather than reflecting a separately agreed service provided by the appellant to the vessel owner. Prior decisions addressing similar facts have treated such payments as conditions of contract or liquidated damages/incentives and not as independent taxable port services. The nature of the transactions here shows no distinct contract or separate obligation by the appellant to perform a service for consideration over and above the charter party; the amounts operate as contractual adjustments for performance timing rather than payment for a discrete service falling within the statutory definition of 'port service.'Conclusion: In favour of the assessee. Despatch money does not constitute consideration for a taxable port service and is not liable to service tax under the cited provisions; the adjudicating authority's order is set aside and the appeal is allowed.