TaxTMI 
TaxTMI 
2024 (5) TMI 414
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....elves registered with jurisdictional Service Tax Commissionerate under the Finance Act, 1994. The appellants had entered into contracts with Oil and Natural Gas Commission (ONGC) for providing offshore drilling service; further in context with providing such services, the appellants have obtained the rigs on 'Bare boat charter' basis from its subsidiary company M/s Greatship Global Energy Services Pte. Limited, Singapore (GGES). The rigs were delivered to the appellants at a place outside India and the period of hire of such rigs start from the moment these were delivered to the appellants, and they have also paid hire charges for the period when the rigs were not in India. Some of these rigs during its operation under the ONGC contract were positioned in the continental shelf/Exclusive Economic Zone on the basis of their co-ordinates. The details of the rigs which were hired by the appellants were as follows: S. No. Name of Rig Date of contract Contract period Place of delivery Date of delivery Date of entry into India 1 Great drill - Chetna 25.02.2009 11.03.2009 to 08.04.2012 Singapore 11.03.2009 19.03.2009 2 Great drill - Chitra 09.10.2009....
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....eering services under clause 105(g) of Section 65 of Finance Act, 1994 for the period 2008-09 to 2011-12. The demands were raised by invoking extended period under proviso to Section 73(1) ibid, besides proposing for recovery of interest and penalties by issue of Show Cause Notice (SCN) dated 15.10.2013. Further, periodical show cause cum demand notices dated 09.04.2015 and 07.12.2015 were also issued for recovery of service tax covering the period 2013-14 and 2014-15. These SCNs was adjudicated by the learned Commissioner and were culminated into the issue of impugned order dated 11.12.2017. In the impugned order, the original authority has confirmed the adjudged demands as proposed in the show cause notices demanding service tax. Besides confirmation of the said service tax demands, the original authority had also ordered for recovery of interest and imposed penalties under Section 76 and 78 of the Finance Act, 1994. Further, the original authority has also issued a corrigendum dated 27.03.2018, for modifying the amount demanded for recovery in the SCN dated 15.10.2013 for the period 2009-10 to 2011-12 and for dropping part of the demand and modifying the mandatory penalty....
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....air the rig during the charter period. [Clause 10(b) of agreement] Maintenance and Repairs: It is the appellants' responsibility to maintain the rig, its machinery, boilers, appurtenance and spare parts in efficient operating condition.[Clause 10(a)(i) of agreement] Insurance: During the charter period, the rig shall be kept insured by the appellants at their expense against hull and machinery, war and protection and any other risk. [Clause 13(a) of agreement] Flag and name of Rig: During the Charter period, the appellants have the liberty to paint the rig in its own colour and fly its own house flag. The appellants also have the liberty to change the name and flag of the rig during the charter period (with the approval of the owners which shall not be unreasonably withheld). [Clause 10(d) of agreement] 3.3 The appellants have not paid service tax on the hire charges paid to GGES on the ground that there is a transfer of right to use the rig to the appellants. The department has alleged that GGES has provided supply of tangible goods service without transfer of right to use goods. Total demand raised on this account is Rs. 2,47....
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.... use the rigs to only provide services to ONGC with express permission from owners; (vii) there existed clauses in the agreements pertaining to repossession in case of termination of agreement. However, the appellants have provided various grounds which have not been considered by original authority and, therefore, pleaded that the above service tax demands are not sustainable and their appeals be allowed. 3.5 In support of their stand, learned Advocate had relied upon the following decisions of the Tribunal and the judgement of Hon'ble Supreme Court, in the respective cases mentioned below: (i) International Seaport Dredging Ltd. Vs. Commissioner of S.T., - 2018 (12) G.S.T.L. 185 (Tri. - Chennai) (ii) Universal Dredging and Reclamation Corporation Ltd., Vs. Commissioner of CGST & C.E., - 2020 (6) TMI 619 - CESTAT CHENNAI (iii) Petronet LNG Ltd. Vs. Commissioner of Service Tax - 2016 (46) S.T.R. 513 - (Tri. Del.) (iv) British India Steam Navigation Co. Ltd. Vs. Shanmugha vilas Cashew Industries - 1990 (48) E.L.T. 481 (S.C.) 4.1. Learned Authorised Representative for Revenue submits that the activity of the appellants is covered under the taxable categor....
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....e list regime i.e. after 01.07.2015 upto 31.03.2015. 7. In order to address the above issues comprehensively, we would like to refer the relevant legal provisions contained in the Finance Act, 1994, during both pre and post negative list period, as follows: "Definitions. Section 65. In this Chapter, unless the context otherwise requires,- (19) "business auxiliary service" means any service in relation to (i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or (ii) promotion or marketing of service provided by the client; or (iii) any customer care service provided on behalf of the client; or (iv) procurement of goods or services, which are inputs for the client; or Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "inputs" means all goods or services intended for use by the client; (v) production or processing of goods for, or on behalf of, the client; (vi) provision of service on behalf of the client; or (vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or....
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....equipment and appliances; (zzzzq) to any person, by any other person, through a business entity or otherwise, under a contract for promotion or marketing of a brand of goods, service, event or endorsement of name, including a trade name, logo or house mark of a business entity by appearing in advertisement and promotional event or carrying out any promotional activity for such goods, service or event; Charge of service tax on services received from outside India. 66A. (1) Where any service specified in clause (105) of section 65 is,- (a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be the taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provision....
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....of other local authorities who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Declared services. 66E. The following shall constitute declared services, namely:- (a) renting of immovable property; xx xx xx xx (f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods;...." 8.1 The above legal provisions as it existed for the period prior to 01.07.2012, the taxable entry for levy of service tax on Supply of Tangible Goods for Use (STGU) services was specific in terms of Section 65(105)(zzzzj) ibid, which provided for levy of service tax on supply of tangible goods for use without transf....
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....uality as STGU services are that it should firstly involve supply of tangible goods and secondly, there shall be no transfer of right of possession and effective control of the tangible goods from one person to other person. 8.3. Further, the Education guide on Taxation of Services dated 20.06.2012 issued by the department in clarifying to the filed formations and the trade, the meaning of transfer of right to use goods were explained as follows. The relevant paragraph is extracted hereunder: "6.6 Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods 6.6.1 What is the meaning and scope of the phrase 'transfer of right to use such goods' Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. Transfer of right of goods' involves transfer of possession and effective control over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh v. Rashtriya lspat Nigam Ltd [Judgment dated 6/2/2002 in Civil Appeal no. ....
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....ere are four basic acts/conventions regulating shipping trade. United Nations Convention on the Law of the Sea (UNCLOS), signed on 10th December 1982, effective as of 16th November 1994, to which India is a signatory, provides the core element of international legislation for maritime industry. The other important international conventions that are required to be complied with by the shipping industry are International Convention for the Prevention of Pollution (MARPOL) covering prevention of pollution of the marine environment by ships due to either operational or accidental causes; International Convention and Code on Standards of Training, Certification and Watch keeping for Seafarers (STCW), International Management Code for the Safe Operation of Ships and for Pollution prevention (ISM Code). In order to ensure compliance with various legal requirements of international maritime law, the ship owners first and foremost, generally enter into a contractual relationship with terms agreed between them and with ship hirers, by adopting the standard agreements. BIMCO in their efforts to complement the global regulatory regime developed by the International Maritime Organization (IMO) ....
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....of hiring of the ship, for the upkeep of the ship including maintenance, repairs and employing the crew, commercial, operational and technical management, repossession of the ship etc., the Ship owner have entered into contractual arrangement with a Ship hirer, who conducts the same functions as the former used to perform, on the basis of the standard BIMCO contract provisions and upon payment of hiring charges. Thus, prima facie, the above contract entered by the appellants with ship owners GGES clearly show that during the period of hire, the appellants are in possession and control of the rigs. 8.6 We also find that certain specific clauses of the agreement provide the contractual relationship between the ship owner and the ship hirer in clear terms. "2. Chater period In consideration of the hire detailed in Box 22, the Owners have agreed to let and the charterers have agreed to hire the Vessel for the period stated in Box 21. 3. Delivery (a). The vessel shall be delivered by the Owners and taken over by the Charterers at the port or place indicated in Box 13 in such ready sea berth as the Charterers may direct... or 2. Time and Place of delivery (Part....
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....bligations under this Charter.... 13. Insurance (a) During the Charter Period the Vessel shall be kept insured by the Charterers at their expense against hull and machinery, war and Protection and Indemnity risks and such other risks which may be required by the Client to whom the Vessel is given on charter." By careful reading of the above clauses of the agreement entered into by the appellants with GGES in the present case, we find that the appellants have taken the rig on bareboat hire basis from GGES. The essence of contract is as under: (i) The effective control and possession of the rig is transferred to the appellants. The owner shall not do anything to interfere with the quite enjoyment of the appellants. (ii) The master and crew for operating the rig/Vessel are appointed by the appellants themselves. (iii) The appellants are free to operate and navigate the rig as per its desire. (iv) The appellants have the liberty to paint the rig in its own colour and fly its own house flag. (v) The appellants are responsible for the repairs, maintenance and insurance of the rigs. (vi) The appellants are also required to comply with all the applicable saf....
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....t reinforces the fact that the possession and control of the rig is with the appellants and therefore it is obligatory of the appellants to keep the rig in good repair and efficient condition and repair it as and when required. Prohibition to create lien - As regards the prohibition to create, incur or permit to impose any lien on the rigs, it is found that this clause is inserted to safeguard the interests of GGES in the rigs. However, we find that the prohibition to incur any lien over the rigs does not interfere with the quiet possession or control of the rigs while they are chartered by the appellants for their use. Notice depicting ownership - We find that as the ownership of the rigs remains with the GGES, there is a requirement to depict a notice of ownership of the ship/rig, but we find that it does not interfere with the possession and control of the ship/rig by the appellants. We find that this arrangement is not violative of transfer of right to use goods to the appellants. Master being the employee of the appellants - Clause 10(b) provides that the Master, officers and crew of the Rig shall be the servants of the Charterers i.e. the appellants, for all purposes wh....
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....ommissioner in the impugned order. 8.9 Further, we find that the taxable service under the category of Supply of Tangible Goods for Use (STGU) was introduced with effect from 16.05.2008. At the time of bringing this service under the service tax net, the Ministry of Finance in its instructions vide D.O.F. No. 334/1/2008-TRU dated 29.02.2008 had explained about the scope of the service tax levy on STGU as follows: "4.4 SUPPLY OF TANGIBLE GOODS FOR USE: 4.4.1 Transfer of the right to use any goods is leviable to sales tax / VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods. 4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is....
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....he rig during the period of charter hire. In other words, a charter by demise is one wherein, in return for payment of hire, the possession of the chartered ship is given to the charterer. The charterer provides the crew and pays all running costs and undertakes the responsibility of the ship owner to those, whose goods are carried or to all activities carried on with the rig. Hence, he vehemently argued against the confirmation of the service tax demands in the impugned order. 9.2 In this regard, we find that the issue has already been decided by the Hon'ble Supreme Court in the case of British India Steam Navigation Co. Ltd. Vs. Shanmugha Vilas Cashew Industries (supra) wherein the meaning of the phrase 'charter parties by way of demise' has been explained in the context of Indian Carriage of Goods by Sea Act, 1925, and the relevant paragraph in the said judgement is extracted and given "44. Charterparties by way of demise, says Halsbury, at para 403, are of two kinds : "(1) charter without master or crew, or "bareboat charter", where the hull is the subject matter of the charterparty, and (2) charter with master and crew, under which the ship passes to the charterer in ....
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....ployment office, or a shipping master. (2) A person shall not employ for the purpose of engaging or supplying a seaman to be entered on board any ship in India, any persons unless that person is the owner, master or mate of the ship, or is the agent of the owner or is bona fide the servant and in the constant employ of the owner, or is a director of a seamen's employment office, or a shipping master. (3) A person shall not receive or accept to be entered on board any ship any seaman, if that person knows that the seaman has been engaged or supplied in contravention of this section or section 95." From the above international conventions, BIMCO standard contracts and the provisions of Merchant Shipping Act, it is clear that the arrangement of contract between the ship owner and ship hirer, is a well-accepted commercial arrangement in the maritime trade. Supply of sea crew by the ship hirer on his own or as an agent on behalf of the ship owner is also recognized by the Merchant Shipping Act, 1958. This does not any way restrict the possession and actual control of the rigs by the appellants, as they had engaged the crew and other operational requirements for the a....
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....in accordance with good commercial maintenance practice. 10. The appellants (charterers) are required to establish and maintain financial security or responsibilities in respect of oil or other policy damages as required by any Government, municipality etc. Clause 9(b) states that the dredgers shall at their own expenses and by their programme man, virtual, navigate, operate, supply fuel and repair the vessels whenever required during the Charter Period and they shall pay all charges and expenses of every account and nature whatsoever incidental to their usage and operation of the vessel under this charter, including foreign general municipality and/or taxes. It is the responsibility of the charterer to comply with all the regulations regarding officers and crew of the vessel as per the applicable law. 11. Clause 10(a) stipulates payment terms for charter. The appellants are to pay an agreed lump sum amount per calendar month till the vessel is redelivered by them to the owners. Clause 12(a) stipulates that the vessel shall be kept by the charterers at their expense against marine, war and protection and indemnity risks in such form as the owner shall in writing approve. Clau....
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....ice Tax, New Delhi - 2013- TIOL-1700-CESTAT = 2016 (46) S.T.R. 513 Tribunal. The Tribunal elaborately examined the terms of charter agreement and various decisions of High Courts and Apex Court before arriving at the conclusion that the charter agreement, both long term and short term, conform to all substantive ingredients as would constitute the transactions as transfer of right to use goods. Therefore, the transactions fall within the exclusionary clause of Section 65(105)(zzzzj) of the Act, consequently outside the purview of taxable service. The Tribunal extensively referred to the following decisions :- a. Avatar Singh and Others - (2002) 7 SCC 419, b. H.L.S. Asia Ltd. - (2003) 132 STC 217 (Guwahati), c. Bharat Sanchar Nigam Ltd. - 2006-TIOL-15-SC-CT-LB = 2006 (2) S.T.R. 161 (S.C.), d. Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer - (1990) 77 STC 182 AP, e. G.S. Lamba & Co. v. State of Andhra Pradesh - 2012-TIOL-49-HC-AP = 2015 (324) E.L.T. 316 (A.P.). f. Great Eastern Shipping Company Ltd. v. State of Karnataka - (2004) 136 STC 519 (Kar.). 16. We note that the analysis of the Tribunal in the above said decisions in Petronet LNG (supra)....
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....s to the appellant under the various clauses of the charter agreement which clearly brings out that the appellant is having legal right of possession and effective control of the vessel. 19. We note that the restriction of use of vessel only for dredging operation and bar of sub-leasing without consent of the owner, area of operation of the vessel as stipulated by the owner is considered as restrictions which will make the arrangement as not amounting to transferring right of possession and effective control to the appellant. We are not in agreement with such inference. As noted already, there is no sale of vessel in the present transaction. The owner of the vessel continues to be the owner. It is necessary and legally permissible for the owner to put certain restrictions and obligations on the part of the appellant who uses the supplied vessel for the intended purposes. This by itself will not make the exclusion clause for tax inapplicable. 20. Examining the scope of transfer of right to use, the Hon'ble Karnataka High Court in Great Eastern Shipping Company Ltd. (supra) held that when the vessel during the charter period was for all purposes at the disposal of the charterer....
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....e in the decisions cited above would be applicable post 2012 after the introduction of the definition of 'service' and also [Section] 66E mentioning the 'declared services'. "Declared services 66E. The following shall constitute declared services, namely :- (a) renting of immovable property (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority. Explanation - For the purposes of this clause, - (I) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely :- (A) architect registered with the Council of Architecture constituted under Architects Act, 1972 (20 of 1972); or (B) chartered engineer registered with the Institution of Engineers (India); or (C) licensed....
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....ansfer of right to use the vessel. For a transaction to be transfer of right to use the goods, there should be transfer of possession as well as transfer of effective control. In the present case, the department has mainly relied upon clause (6) of the agreement, to contend that there is no transfer of possession as well as effective control. Clause (6) and its various subclauses is reproduced as under : "6. Maintenance and operations (A) The Lessee shall maintain the Vessel, her machinery, appurtenances and spare parts in a good state of repair, in efficient operating condition and in accordance with good maintenance practice and shall keep the Vessel with unexpired classification of its class and with other required certificates in force at all times. Owner shall be responsible for delivering the necessary spares till boarder of India. The Lessee shall take immediate steps to have the necessary repairs done with a reasonable time failing which the Lessor shall have the right of withdrawing the Vessel from the service of the Lessee without noting any protest and without prejudice to any claim the Lessor may otherwise have on the Lessee under this Charter. (B) During th....
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....case of Petronet LNG Ltd. v. CST New Delhi - 2016 (46) S.T.R. 513 (Tri. - Del.) and also International Seaport Dredging Ltd. - 2018 (3) TMI 633-CESTAT CHENNAI = 2018 (12) G.S.T.L 185 (Tri. - Chennai). In International Seaport Dredging (supra), the Tribunal in the said case after analysing the clause stipulating for repair and maintenance of the vessel and other relevant clauses observed as under : "17. We note that the analysis and reasoning adopted by the Tribunal in Petronet LNG are squarely applicable to the present dispute. In fact, in the present case, Manager, Master and crew of the vessel and are actually under control and employment of the appellants. The maintenance of the vessel for wear and tear and also expenses for lubricating, spare parts, water etc. are in fact met by the appellant only. This is not the case in the case of Petronet LNG (supra). Even then the Tribunal in the said case held that reading the charter agreement as a whole, it is clear that there is a transfer of right of possession and effective control of the vessel with the assessee. 18. We note that the adjudicating authority observed that there is no legal transfer of right of possession or effe....
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....volves transfer of possession and effective control over such goods. A fleeting look on the definition of "Supply of Tangible Goods Service" under Section 65(105)(zzzzj) of the Finance Act, 1994 as it stood then clarifies why these decisions can also be made applicable for the period after 1-72012. The definition of "Supply of Tangible Goods Service" is as under : "any services 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 of possession and effective control of such machinery, equipment and appliances" 9. Prior to 1-7-2012 when the transaction did not involve transfer of possession and effective control, the activity would be taxable under 'Supply of Tangible Goods Services'. The test for determining whether a transaction is a transfer of right to use goods has always remained the same. 10. The department in their Education Guide has followed the decision of the Hon'ble Supreme Court in BSNL (supra) to lay down the test to determine as to whether the activity is transfer of right to use the goods. The Ld. Consultant has put forward submissions ....
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....at the transaction in the present case is identical to the transaction analysed by the Tribunal in the case of International Seaport Dredging (supra) as well as Petronet LNG Ltd. (supra). The transaction is nothing but transfer of right to use the goods and does not fall within the 'declared services' as alleged by department. The demand therefore cannot sustain. The issue on merits is found in favour of appellant." 10.1 In respect of payments made by the appellants to foreign vendors, namely M/s. Inchcape Shipping Services (UK) LTD., M/s. Maritima International S.A.De C.V, M/s. Asha Agencies Ltd., M/s. Furgo Survey (Middle East) Ltd, M/s. Fugro Seastar AS, Norway and M/s. Stratos, Canada, etc., according to the impugned order is in the nature of personnel support services, communication, weather forecasts etc., and is an operational or administrative support to the appellants. Hence, the impugned order had confirmed the service tax demands on the ground that the appellants are liable to service tax on reverse charge basis under 'Business Support Services'. It is an undisputed fact on record that the appellants have made such payments to the aforesaid foreign vendors in r....
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....merce. These services include transaction processing, routine administration or accountancy, customer relationship management and tele-marketing. There are also business entities which provide infrastructural support such as providing instant offices alongwith secretarial assistance known as "Business Centre Services". It is proposed to tax all such outsourced services. If these services are provided on behalf of a person, they are already taxed under Business Auxiliary Service. Definition of support services of business or commerce gives indicative list of outsourced services." The above definition enumerates those services which are in relation to marketing and sales of the goods. Admittedly, the foreign vendors of the appellants have not undertaken any activity of marketing of the goods belonging to the appellants nor have the foreign vendors undertaken any activity for promotion of sale of the goods belonging to the appellants. Therefore, the services rendered by the foreign vendors cannot be brought under the scope of "business support service" for charging service tax on RCM basis on the appellants. 10.2 The appellants had also submitted as an alternate argument that....
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....shall be treated as the taxable service performed in India;." In the present case, admittedly, the aforesaid services are provided and received by the appellants outside India and therefore, the Rule 3(ii) of the Import of Service Rules, 2006 are not attracted. Since the aforesaid services were entirely performed abroad, the same would not qualify as import of service in terms of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Thus, we find that the confirmation of the service tax demands on the above grounds is not legally sustainable. 11.1 On the issue of service tax demands confirmed in the impugned order in respect of payments made to Mr. Balbir Singh Negi, the appellants have submitted that Shri Balbir Singh Negi was their employee; and his functions included monitoring the progress report of the project, ensure that survey, inspection and test happens on time, ensure that construction is in compliance with the approved drawing. Further, it was claimed by the appellants that he was on their payroll and was paid monthly salary during the period of his employment; he was eligible for earned leave and sick leave; he was issued Form No. 16 ....