MARCH 15, 2016

By S B Parikh

IN the Budget 2016-17, the entry in the Negative List of services covering services by way of transportation of goods by an aircraft or a vessel from a place outside India upto the customs station of clearance in India is proposed to be omitted with effect from 1 st June, 2016 [Clause 146(b)(ii) of the Finance Bill, 2016, proposing to omit Section 66D(p)(ii) of the Finance Act, 1994]. However, such services by aircraft will remain exempted by entry No.53 of Notification No. 25/2012-ST, as amended by Notification No. 9/2016-ST dated 1 st March, 2016 w.e.f. 1 st June, 2016. The reason for continuing exemption to air freight while taxing ocean freight for import cargo is nowhere mentioned.

2. In the D.O. Letter F.No. 334/8/2016-TRU dated 29th February, 2016 issued by the Joint Secretary (TRU), it is mentioned at Para 4.1(C) that the domestic shipping lines registered in India would pay service tax under forward charge while the services availed from foreign shipping line by a business entity located in India will get taxed under reverse charge at the end of business entity. It is further mentioned that service tax so paid would be available as credit with Indian manufacturer or service provider availing such services (subject to fulfillment of other existing conditions). In my view, Cenvat credit would be available to manufacturers of dutiable goods and providers of taxable service only if they avail service of shipping line or freight forwarder directly. There is no provision to pass on Cenvat credit of service tax paid by registered dealer/importer (trader).Importers/Dealers registered with Central Excise department, who can pass on Cenvat credit of CVD and 4% SAD, will not be able to pass on service tax paidon ocean freight.

3. As per the first Proviso to Section 14 of the Customs Act, 1962, transaction value in case of imported goods shall include the costs of transportation to the place of importation. Thus, all kinds of duties of Customs like Basic Customs Duty, Countervailing Duty (equivalent of Central Excise duty), Education Cesses, 4% Additional Duty (known as SAD, which is being levied to counter-balance sales tax / VAT leviable on like article) are payable on ocean freight amount. If this proposal of the Finance Bill, 2016 is enacted, service tax will also be leviable on ocean freight in most of the situations (barring exception as discussed at Para 6).

4. The aforesaid D.O. letter further clarifies that service tax levied on such services shall not be part of value for Custom duty purpose. This clarification is in consonance with the Interpretative Note to Rule 3 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, which prescribes that duties and taxes in India are not includible in the value of imported goods provided that they are distinguished from the price actually paid or payable for the imported goods. Though Customs duties will not be leviable on the service tax payable on ocean freight, the amount of ocean freight will suffer Customs duties as well as service tax, which will cause double taxation on the same amount. When the ocean freight is includible in value of GOODS and it suffers all types Customs duties, the proposed levy of service tax on the same amount by treating it as SERVICE is likely to be challenged before judicial forums by contending that Customs duties and service tax are leviable on mutually exclusive values.

5. The service of transportation of goods by vessel can be provided by shipping lines. However, in many of the cases, shipping lines do not book cargo directly from importer or exporter. In such cases, international freight forwarders buy space from shipping lines or from their agent and sell the same, generally in piecemeal, on principal to principal basis. The difference between the sales value and purchase value of freight is profit or loss, as the case may be, of the freight forwarder. In this situation, it can be said that such international freight forwarders provide service of transportation of goods by vessel to the importer or exporter, as the case may be. If the freight forwarder works as intermediary and gets commission from shipping line, the place of provision of the service of intermediary is the location of intermediary, as per Rule 9 of the Place of Provision of Services Rules, 2012. However, for the purpose of this Article, it is assumed that freight forwarders provide service of transportation of goods by vessel on principal to principal basis on their own account (not as intermediary).

6. On the one hand Customs law treats ocean freight as a part of value of imported goods, on another hand service tax law framed by the same Department will treat ocean freight as a taxable service, if provided by a person to another person in taxable territory for a consideration. As per Rule 10 of the Place of Provision of Services Rules, 2012, the place of provision of services of transportation of goods, other than by way of mail or courier or goods transport agency, is the place of destination of the goods. Therefore, the service of transportation of goods by vessel to any taxable territory of India, is deemed to have been provided in India. However, in case where the service provider and service receiver both are not located in taxable territory, service tax cannot be levied on such service though the goods are destined to taxable territory. Entry at serial number 34(c) of the Notification No. 25/2012-ST exempts services received from a provider of service located in a non-taxable territory by a person located in a non-taxable territory. Even in the absence of this entry, under the present provisions it is not possible to levy service tax on the service provided in taxable territory, when service provider and service receiver both are located outside the taxable territory. Thus, if the Indian importer enters into contract with the foreign exporter to supply the cargo on CIF basis and the foreign suppliersends the cargo by engaging shipping line or freight forwarder located outside India, then the ocean freight would not attract service tax. For such CIF contracts, foreign supplier is the recipient of such service. In absence of privity of contract between Indian importer and shipping line / freight forwarder, Indian importer cannot be treated as recipient of such service. In order to obviate levy of service tax on ocean freight for import cargo, it is quite possible that some importers would start importing cargo through foreign vessels/forwarders on CIF basis instead of FOB basis.

7. Indian shipping lines / freight forwarders located in taxable territory will be required to pay service tax on ocean freight under forward charge in respect of import cargo irrespective of the fact whether they have been engaged by foreign supplier (CIF contract) or Indian importer (FOB contract). However, they can pay service tax by utilising Cenvat credit taken on inputs, input services and capital goods used for providing inbound and outbound transportation. Service tax is not leviable on ocean freight of export cargo, as the place of provision, i.e. destination, falls outside the taxable territory. Outbound transportation remained no longer ‘exempted service' after amendment to Cenvat Credit Rules, 2004, vide serial numbers 2(b) and 5(h) of the Notification No. 13/2016-CE (NT) dated 1 st March, 2016. So, Cenvat credit available for outbound transportation can be utilised for payment of service tax on inbound transportation by Indian shipping lines / freight forwarders. But, in case of services of foreign shipping line / freight forwarder availed by Indian importer, service tax will be payable under Reverse Charge Mechanism by cash only. Cenvat credit cannot be utilised for payment of service tax under Reverse Charge because this service is not ‘output service' of the service recipient.

8. It is felt that services by way of transportation of goods by an aircraft or a vessel from a place outside India upto the customs station of clearance in India, have been rightly kept in Negative List so as to avoid double taxation of Customs duties and service tax on freight charges. The proposal of charging service tax on ocean freight for import cargo may be re-examined by considering that when ocean freight is includible in the value of imported goods, whether service tax can be levied on the same amount?

(The views expressed by the author are his personal views)