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.

[Guest]

Dear Dipsang Vadhel

The exemptions contained in the Mega Exemption Notification is allowed in respect of transportation services but demurrage charges are not a consideration for transportation service.

Further it is specifically mentioned under Rule 6(1) of Service Tax (Determination of Value) Rules, that “the amount realized as demurrage for a service beyond the period originally contracted” should be included in the value of service. Therefore service tax will be levied on demurrage charges.

 

AI Summary

Demurrage charges on rail transport are treated as service value and subject to service tax despite transport exemption. The issue is whether railway demurrage tied to carriage of exempt goods shares the transport exemption. One view treats demurrage as detention incidental to carriage and thus bundled with transportation and exempt; the responding view relies on the Mega Exemption Notification and Rule 6(1) of the Service Tax (Determination of Value) Rules to treat demurrage as separate consideration to be included in service value and therefore taxable.