Service Tax on demurrage in relaiton to transport of service Tax exempted goods by Rail

[dipsang vadhel]

As all may be aware that as per Finance Bill 2010 & subsequent notification No. 43 of 2012, services provided in relations to transport of goods by Rail will be liable to service Tax w.e.f.01.10.2012. All also may be aware that transportation of certain goods like Chemical Fertilizers etc. has been exempted from service Tax considering the fact the importance of equitable & efficient distribution of such goods across the country in the public interest.

Accordingly, Railway does not charge service tax on fright for transportation of such goods. However, railway has continued to charge service Tax on Demurrage payable in relation to transportation of such goods.

As the trade normally understands and also as envisaged under Section 2 (11) of the Railways Act, 1989, Demurrage is considered to be a charge for detention of carriage (transport related) after expiry of free time, if any, allowed for such detention. Even as per section 30 of The Railways Act, 1989 whereby the demurrage charge itself is fixed, also states that it is incidental to or connection with the carriage of goods (i.e. transportation) only.

This being the position under the Railways Act, 1989, I am of the view that  demurrage charges in the present case is nothing but detention charge in relation to transportation of fertilizers by rail, the same should therefore exempted from service Tax. In this connection, reference is invited to Section 66 F (2) and (3) of  Finance Act, 1994 & in terms of the said rules, the “demurrage charges” for storage activity by railways can be said to be naturally bundled with the activity of transportation and hence, it should be considered as one single service and exemption would be available even to demurrage charges.

In the above background, I wish to know whether the demurrage incurred in relation to transportation of exempted goods (like fertilizer) is liable to Service Tax or not? The underlying logic of the matter will be appreciated.

AI Summary

Demurrage Charges on Tax-Exempt Goods Not Exempt from Service Tax Under Rule 6(1) of Service Tax Rules. A query was raised about whether demurrage charges related to the transportation of service tax-exempt goods, such as fertilizers by rail, should also be exempt from service tax. The query referenced the Railways Act, 1989, suggesting that demurrage charges, being related to transportation, should be exempt. However, a response clarified that demurrage charges are not considered part of transportation services under the Mega Exemption Notification. According to Rule 6(1) of the Service Tax (Determination of Value) Rules, demurrage charges are considered separate from transportation services, and thus, service tax is applicable to them.