Recently Honorable Mumbai High Court has delivered a landmark judgment on the issue of taxability of a service which is likely to fall within to categories one was introduced in 2007 and second was introduced in 2008.

 65(105)(zzzy) - Mining Service

1.  65(105)(zzzzj) - supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliance

Nature of Service

Members of the INDIAN NATIONAL SHIPOWNERS ASSOCIATION (1^st petitioner) provide services to major exploration and production operators (in India as well as in the international waters) with their various vessels that include offshore drilling rigs, offshore support vessels, harbour tugs and construction barges. The vessels provided by the members of the INDIAN NATIONAL SHIPOWNERS ASSOCIATION (1^st petitioner) carry out various jobs, inter alia, as enumerated hereunder:

(a). The Offshore Support Vessels carry out various types of jobs like, anchor handling, towing of vessel, supply to rig or platform, diving support, fire fighting and safety support in designated and non-designated areas.

(b). The marine construction barge supports offshore construction, provides accommodation, crane support and stoppage area on main deck for equipment.

(c). The harbour tugs are deployed for piloting big vessels in and out of the harbour and for husbanding main fleet.

Related Provisions of Service Tax:

65(105)(zzzy): Any services provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas; [w.e.f 1-6-2007]

65(105)(zzzzj): Any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances; [w.e.f. 16-5-2008]

In view of the doubts on the taxability of the offshore oil-field services rendered by its various members, the 1^st petitioner addressed a letter to the 3^rd respondent and sought clarification regarding applicability of Service Tax on the Marine Logistic Services rendered by Offshore Support Vessels under entry (zzzy) i.e. treating them as services "in relation to mining or mineral' oil or gas". vide its letter dated 17/8/07. Correspondence ensued between SCI and the 5^th respondent. Letters of the 5^th respondent indicate its stand. According to the 5^th respondent Marine Logistic Support has no direct nexus with the mining operations and hence Service Tax should not be deposited in reference to charter hire of vessels. The 5^th respondent indicated its decision not to reimburse Service Tax unless it is found leviable by a higher legal forum. Similar letters were sent by the 5^th respondent to other members of the 1^st petitioner.

The 1^st petitioner received a clarification letter from the 3^rd respondent on 17/12/07 wherein it was mentioned that the Marine Logistic Services rendered by the members of the 1^st petitioner are in relation to "Mining of Mineral Oil or Gas Service as defined under subclause (zzzy) of Section 65(105) of the Finance Act, 1994." A further letter dated 19/2/08 was addressed to the 1^st petitioner by the 4^th respondent as a reply to its representation dated 28/11/07 reiterating the view of the 3^rd respondent that Marine Logistic Service is liable to Service Tax. Members of the 1^st petitioner were advised that they should obtain registration with Service Tax authorities and pay Service Tax. It was further stated in the letter that the 2^nd respondent had directed that action may be taken in accordance with law. It is not necessary to refer to various letters sent by the 5^th respondent to the 1^st petitioner, to SCI and to other members because the 5^th respondent maintained its stand that Marine Logistic Services are not covered by entry (zzzy).

Decision of the Honorable High Court:

we hold that the services rendered by the members of the 1st petitioner are either premining or post mining activities. They have no direct relation to mining. They were, therefore, rightly not brought to tax till entry (zzzzj) was introduced to cover transport of tangible goods by sea without transferring right of possession and effective control thereof. The services rendered by the members of the 1st petitioner are covered by entry (zzzzj) because they inter alia supply vessels offshore support vessels, barges, tugs etc. without transferring right of possession and effective control over them. In contrast entry (zzzy) was introduced to comprehensively bring under the service tax net activities having a direct nexus to mining activities. Entry (zzzzj) is not a carve out of entry (zzzy). Both entries are independent. Entry (zzzzj) was not inserted into the Finance Act by amending entry (zzzy). It is not possible to invent a remote connection of the services rendered by the members of the 1st petitioner to mining activities and hold that they fall in entry (zzzy). Entry (zzzzj) is not a specie of what is covered by entry (zzzy). Nature of the services rendered by the members of the 1st petitioner, legislative history of the two entries, various circulars to which, we have made reference and the relevant judgments which we have noted hereinabove lead us to hold that the entry contained in Section 65(105)(zzzy) of the Finance Act, 1994 does not apply to services provided by the members of the 1st petitioner. Needless to say that respondents 1 to 4 and respondent 6 cannot demand service tax from the members of the 1st petitioner on the services rendered by them to the 5th respondent. As a consequence of this view of ours proceedings leading to issuance of letters dated 17/12/07, 19/2/08 and 5/3/08 annexed as Exhibits H, N & R respectively to the petition stand quashed and set aside.

Reference:

Chapter V of the Finance Act, 1994 - Service Tax

Clause 105 of Section 65 - List of taxable services

Section 66 - Charging Section

Finance Act, 2007

Finance Act 2008

Section 2(31) of the Income Tax Act, 1961

Section 129 (3) of the Customs Act, 1962

Article 246 of the Constitution of India

Article 276 of the Constitution of India

Entry 60, List II of the Seventh Schedule to the Constitution of India

Entry 92C of List 1 of the Seventh Schedule to the Constitution of India

Circular No. 334/1/2007-TRU (Letter D.O.F. No.) dated 28/2/2007

Circular bearing No. 232/2/2006-CX dated 12/11/07

Circular bearing No. M.F. (DR) Letter D.O.T. No. 334/1/2008 TRU dated 29/2/08

C.K.P. Mandal v. Commissioner of Central Excise, Mumbai, [2006 -TMI - 671 - HIGH COURT OF JUDICATURE (BOMBAY)]

Glaxo Smithkline Pharmaceuticals Ltd. [2008 -TMI - 2459 - CESTAT, Mumbai], and Board of Control for Cricket in India, [2007 -TMI - 1530 - CESTAT, MUMBAI],

Gujarat Chemical Port Terminal Co. Ltd., [2008 -TMI - 3425 - CESTAT, AHMEDABAD] and Diebold Systems (P) Ltd. [2008 -TMI - 3505 - CESTAT, CHENNAI]

Diebold Systems (P) Ltd. [2008 -TMI - 3505 - CESTAT, CHENNAI]

Magus Construction Pvt. Ltd. v. Union of India [2008 -TMI - 4479 - HIGH COURT OF GAUHATI]

Tamil Nadu Kalyan Mandapam Association v. Union of India, [2005 -TMI - 135 - SUPREME COURT OF INDIA]

All India Federation of Tax Practitioner, [2007 -TMI - 1556 - Supreme Court]

Gem Granites v. Commissioner of Income-Tax T.N. [2008 -TMI - 6150 - SUPREME Court]

 

Supply of tangible goods without transfer: offshore vessel services classify under equipment supply entry, not mining related services. The services of offshore support vessels-including supply, towing, anchor handling, diving support, firefighting, accommodation and crane support-are pre or post mining activities lacking direct nexus to extraction and therefore do not fall under 65(105)(zzzy). They constitute supply of tangible goods and equipment for use offshore without transfer of possession or effective control and are governed by 65(105)(zzzzj); administrative directions treating them as mining related under zzzy are inapplicable.