By TIOL News Service

NEW DELHI, NOV 14, 2013: THE assessee is engaged inter alia in marketing Liquefied Natural Gas (LNG); receiving; storage ; and re-gasification. For the purpose of re-gasification, the assessee imports LNG from its vendor - RasGas, Qatar through cryogenic ships, since LNG could be transported from Qatar to India only at the extremely low temperature of minus 164 degrees-Celsius . The assessee's re-gasification facility is situated at Dahej, Gurajat.

For transporting LNG, the assessee signed two "Time Charter Agreements" (TCA) with a consortium of ship owners namely (i) M/s Mitsui O.S.K. Lines Ltd.; (ii) M/s Shipping Corporation of India Ltd.; (iii) M/s Nippon Yusen Kabushiki Kaisha; and (iv) M/s Kawasaki Kisen Kaisha Ltd. These ship owners are collectively referred to as "Owners". The assessee also entered into a short term TCA. One such agreement was entered into with Trinity LNG Transport, vide agreement dated 30.4.2009 for hiring the LNG tanker "Trinity Glory". The short term TCA and the TCA's are collectively referred to as "Agreement".

The show cause notice dated 22.4.10 proposed to levy service tax under Section 66A of the Finance Act, 1994 (under the reverse charge mechanism) as the recipient of "supply of tangible goods", (STGU), a taxable service defined and enumerated under Section 65(105)(zzzzj) of the Finance Act, 1994 (the Act). The period covered under this show cause notice is May 2008 and March 2010. A second show cause notice dated 22.9.11 proposed levy of service tax on commercial borrowings during the period 2006 to March 2011. The third show cause notice dated 13.10.11, covering the period April 2010 to March 2011 was for levy of service tax, also on the taxable "STGU" service.

The impugned adjudication order, in respect of the SCN dated 22.4.2010 confirmed the service tax demand of Rs.50 ,07,43,385 /-; penalty of Rs.50,01,43,385/- under Section 78; penalty of Rs.5000/-under Section 77; besides interest under Section 75. There was no mention of penalty under Section 76. In respect of the SCN dated 12.9.2011, Rs.3 ,77,00,597 /- was assessed towards service tax, besides penalties under Sections 76 and 77; penalty under Section 78 and interest levy was not indicated. In respect of the SCN dated 13.10.2011, Rs.38 ,58,43,597 /- was assessed towards service tax besides penalties under Sections 76 and 77. No interest levy under Section 75 was specified but penalty under Section 78 was eschewed.

By the corrigendum dated 24.4.12 the quantum of penalty assessed under Section 76, (in respect of SCNs dated 12.9.11 and 13.10.11), was modified. The corrigendum dated 29.5.12, (in respect of SCN dated 22.4.10), amended the adjudication order to enhance the penalty assessed under Section 78 to Rs.50 ,07,43,385 /. The third corrigendum dated 8.6.12 reiterated the enhancement of interest + levy under Section 75, (amended by the corrigendum dated 29.5.2012), in respect of the SCN dated 12.9.11; and clarified that the quantum of service tax assessed in the adjudication order, pertaining to the SCN dated 13.10.11 included cesses; deleted the education cess and secondary and higher education cess separately specified in the adjudication order; and as a consequence the amended demand of tax became Rs.38 ,47,45,522 /-. This corrigendum also proposed levy of interest under Section 75 in respect of the third SCN dated 13.10.11.

The core issue before the adjudicating authority and in this appeal as well is:

"Whether the charter of the tankers (cryogenic vessels) from the foreign entities (owners) is subject to levy of service tax under the taxable category "Supply of Tangible Goods for Use, enumerated and defined under Section 65(105)(zzzzj) of the Act, on the reverse charge basis?

Section 65(105)(zzzzj) reads as,

( zzzzj ) " 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".

Tribunal noted,

Board Circular No. 334/1/2008-TRU dated 29.02.2008 , inter alia issued clarifications in respect of the proposed taxable service - STGU. Paragraph 4.4 of the circular clarified that the transfer of the right to use any goods is leviabe to sales tax/ VAT as deemed sale of goods; the transfer of the right to use involves transfer of both possession and control of the goods to the user of the goods; and that the proposal is to levy service tax on such services provided in relation to STGU, with no legal right of possession or effective control. The circular specifically clarified that STGU which is leviable to sales tax as deemed sale of goods is outside the purview of the proposed service.

From the statutory provision (Section 65(105(zzzzj), in particular the exclusionary clause therein and the constitutional position flowing from Article 366 (29A)(d), it is clear that a transaction which involves transfer of control and possession of tangible goods amounts to 'sale' liable to the levy of sale tax. As a corollary of this legal position, such a transaction is outside the purview of a taxable service.

The Tribunal held : the charter agreements, both the long-term and short-term, conform to all substantive ingredients as would constitute the transactions as transfer of the right to use goods. Therefore the transactions fall within the exclusionary clause of Section 65(105)(zzzzj) of the Act and consequently outside the purview of the taxable STGU service. The transactions are therefore immune to the levy and collection of service tax.

WHETHER TRANSACTIONS UNDER LONG TERM CHARTER AGREEMENT ARE IMMUNE TO LEVY OF SERVICE TAX SINCE THE TAXABLE EVENT OCCURRED PRIOR TO 16.05.2008 : Apart from the conclusion that the transactions in relation to all the three tankers (covered by long-term and short-term charters) fall within the exclusionary clause of Section 65(105 (zzzzj)], the periodical payments remitted by the assessee in relation to the long term charters of "Disha" and "Raahi" are in relation to the supply of these tangible goods, as a one time event which occurred prior to introduction of this taxable service w.e.f. 16.05.2008 and are therefore not leviable to service tax. Held accordingly.

WHETHER THERE IS NO LIABILITY TO PAY SERVICE TAX UNDER THE PROVISO TO RULE 3(3) OF THE IMPORT OF SERVICE RULES : The proviso to Rule 3(iii) of the Rules, is a specific provision applicable to the taxable service specified and defined in Section 65(105)(zzzzj); and reads:

"Provided that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is received by a recipient located in India, then such taxable service shall be treated as taxable service provided from outside India and received in India subject to the condition that the tangible goods supplied for use are located in India during the period of use of such tangible goods by such recipient".

Held : The phrase in Rule 3(iii); the tangible goods supplied for use are located in India during the period of use of such tangible goods by the recipient, can only mean that the tangible goods must be located during the entirety of the period of use of such tangible goods by the recipient, in India. The separate and distinct treatment specified for the taxable STGU service, in the proviso to Rule 3(iii) of the 2006 Rules, in our considered view clearly signals the statutory intent that tangible goods, for falling within the fold of the reverse charge mechanism, must when supplied for use be located in India during the entirety of the period of their use, by the recipient.

Legality of imposition of penalties under Sections 76 to 78 : Since the adjudication order with regard to the service tax liability is quashed, the liability, assessed in the said order is equally unsustainable to interest and penalties. Even otherwise, in the totality of the facts and circumstances and in view of the legal advice obtained by the petitioner, we consider that the discretion under Section 80 ought to have been invoked for deleting penalties under Sections 76 to 78 of the Act.

Whether corrigenda dated 14.4.12, 29.5.12, 31.5.12 and 22.6.12 are valid : It is contended by the assessee that the corrigenda were issued altering the quantum of penalty or levying interest, thus substantively amending of the adjudication order; and that the corrigenda were issued without notice or opportunity to the assessee. Since the corrigenda were issued without notice or opportunity to the petitioner held that these are unsustainable. In any event since it is already held that the transactions in issue do not fall within the taxable service, the corrigenda issued amending the adjudication order, with regard to interest or penalties components would also be invalid.

In sum it is held:

(i) That the transactions in issue amount to transfer of the right/ to use tangible goods, with possession and effective control of such goods, in favour of the assesee by owners of the tankers. These transactions fall within the ambit of the exclusionary clause of Section 65(105) (zzzzj) of the Act and are therefore immune to the liability to service tax;

(ii) Since the tankers were not located during the entire duration of their use by the assessee, within the territory of India, the assessee is not liable to remit tax, under the reverse charge mechanism under Section 66A of the Act, in view of the provisions of the proviso to Rule 3(iii) of the Taxation of Service (provided outside India and received in India) Rules, 2006;

(iii) The transactions are outside the purview of the taxable STGU, under Section 65 (105)(zzzzj); since the agreements and the delivery of these tankers pursuant to the agreements (the taxable event), occurred prior to 16.5.08, the date of introduction of this taxable service; and

(iv) The facts and circumstances justify invocation of the provisions of Section 80, to delete imposition of penalties under Sections 76 to 78 of the Act. Consequently, the imposition of penalties is invalid.

(See 2013-TIOL-1700-CESTAT-DEL)