JULY 08, 2016

By K Srinivasan

IN Budget 2016, vide clause 146 of the Finance Bill, 2016, entry in the negative list pertaining to Transportation of goods by an 'aircraft' or a ‘vessel' from a place outside India up to the customs station of clearance in India, has been omitted (Section66D(p(ii)) of the Finance Act refers). While the Transportation of Goods by an aircraft was again sought to be kept out of tax net by an exemption (Notification No.25/2012-ST as amended by Notfn.No.99/2015 dated 1.3.2016 refers), transportation of goods by a vessel was not.

There has been a long raging issue of Ocean freight being subjected to service tax in the hands of Freight Forwarders and Custom House Agents in some part of the country while the same treatment is not meted out to others in other parts of the country. The reason given for the above action of the Department to tax ocean freight selectively in some places is that the transaction is not on a principal to principal basis. Therefore, the agency relationship comes in and in the absence of satisfying the pure agency concept envisaged under Rule 5(2) of the DOV Rules 2006, the ocean freight which were marked up by the FFs/CHAs were sought to be taxed fully. However, there was an exception made by the Board that in the case of production of proof by the FFs/CHAs that they are multi modal agencies registered with the Ministry of Surface Transport, ocean freight can be exempted since it satisfies the parameter of Principal to Principal transaction. In the meanwhile, in one of the Chief Commissioners' Conferences with the Chairman, CBEC, the above issue was raised and a clarification was issued by the Board that in the event of satisfying Pure Agency concept envisaged under Rule 5(2) ibid, only mark up should be taxed and not the entire ocean freight. Earlier, if an invoice contained a mark- up, then it was considered prima facie a disqualification for claiming Pure- agency exclusion of ocean freight from taxable value. However, when the conditions of Pure Agency could not be satisfied, the old harrowing experience of getting taxed for ocean freight continues.

It is felt in some sections of the Department that the omission of entry relating to transportation of goods by a 'vessel' from the negative list in Budget 2016, is meant to bring transportation of goods by any ‘vessel' from anywhere into India, into tax net and thereby extend the existing benefit of abatement available under Notification 26/2012-ST at the rate of 70% with additional facility of CENVAT of input services. However, CENVAT facility of inputs and capital goods shall remain barred as before if abatement is wished to be availed. In the above scenario, ocean freight is likely to be charged to service tax at 30% of the value of transportation charges of goods by a vessel in both legs namely from outside India to the customs station in India and as well as within India by a vessel in a manner similar to coastal transportation which was defined as service in the Positive List regime and now taxable under the negative list regime with of course the abatement of 70% applicable under Notification No.26/2012 ST.

It is hoped that with the above change, the long raging ocean freight issue will set at rest, notwithstanding the fulfillment of pure agency conditions laid by the Valuation Rules. Hopefully, this should put the last nail in the coffin of dispute including the appeals before the Delhi High Court in the case of Intercontinental Consultants and Technocrats Private Ltd. - 2012-TIOL-966-HC-DEL-ST relating to the period prior to amendment through clause 109 of Finance Bill 2015/ Explanation (a) to Section 67 of the Finance Act, 1994 in 2015, to include all expenses and costs under the purview of taxable value. In fact, the above position of law with reference to valuation to include costs and expenses in taxable value is continued even under the Model GST Law.

As regards the person responsible for payment of service tax with reference to the ocean freight discussed above, it will be the Indian Shipping Lines registered in India who undertakes the transport of goods from a place outside India up to the Customs station of clearance in India for a manufacturer in India on forward charge basis. If it is an intermediary who arranges the said transportation of goods for a manufacturer or a dealer, it will be taxable on reverse charge basis in the hands of the business entity facilitating with the possibility of passing on the credit of service tax paid on ocean freight at 30% of its value to the Indian manufacturer / dealer who in turn can utilize the credit and keep the CENVAT chain going. But the only unanswered part here is what does a dealer who acts as business entity who does high seas transfer of goods, do with the CENVAT credit of service tax paid by him on ocean freight which he cannot pass to anybody. In this case, the tax portion fails to form part of the credit chain and may have to be refunded.

Otherwise, I must think the Board has come clean on this issue of any infirmities / divergence of practice earlier present in this grey area of taxation of services. This also brings the transportation of goods by a vessel to a level playing field with transportation of goods by road to the extent of taxation insofar as the abatement and rate of service tax payable is concerned, though not the cost. The cost of these services of coastal / inland transportation by a vessel vis-à-vis road may be vastly different. The above move on the part of the Government will not only encourage exports and discourage imports due to the costs involved of transportation of goods by sea into India but also due to the parallel measure undertaken in the Budget 2016 to incentivize exports further by throwing open CENVAT credit facility of inputs, capital goods and input services for Export of service by way of transportation of goods by a vessel from the customers' station of clearance in India to a place outside India. (Notification No.23/2004 CE NT) as amended by Sl.Nos.2(b) and 5(h) of Notification No.13/2016 CE NT dated 1.3.2016 refers) This has the long ranging vision of curbing of pollution and transport bottle necks and cost-effective and expeditious transport to spur growth of trade and Industry.

A few pending requests of CHA Trade are that the abatement on intermediary business entities like them, if kept at 90% would promote ease of doing business. Further, they also want ancillary services connected with ocean freight like loading and unloading, etc. to be classified under ocean freight and extended the abatement facility either at the available rate of 70% under Notification No.26/2012 or at the requested enhanced rate of 90% as the case may be. This would be after all only in line with the Board's earlier decision to treat the ancillary services of GTA as part of GTA service and extend the abatement applicable to GTA at70% to the ancillary services as well in terms of Section 66 F(3)(ii) of FA 1994 as a naturally bundled service having the essential character of main service for the purpose of the subject taxation.

Last but not the least, is to provide a level playing field between the foreign shipping lines and the Indian shipping lines with reference to taxation of service of ocean freight. In the present scenario, it is apprehensive that only the Indian shipping lines are being taxed for ocean freight service since the service is received in India and paid by the Indian shipping lines. Whereas, in the case of imports by a foreign shipping lines on CIF basis, the freight element is built into the cost of goods and borne by the foreign shipping line in a foreign land and hence the possibility of taxing the same does not arise in terms of Place of Provision of Service Rules, as it exists now. In such a case, the Indian shipping lines are placed at a disadvantageous position with reference to the foreign liners. No doubt, the taxes can be paid on ocean freight by forward charge and taken credit by them. Whereas the cost of purchase by an Indian manufacturer who procures inputs/ goods through a foreign liner, will be less to the extent of service tax on Ocean freight paid by the Indian liner and passed on to the Indian manufacturer. This aspect needs to be addressed by the Government through careful drafting of the relevant provisions of the Act under the present as also the GST regime.

In passing: It is also pertinent to note that the Central government has issued an exemption notification 38/2016-ST dated 23.06.2016 granting exemption to taxable services by way of transportation of goods by a vessel from outside India upto Customs station in India for invoices raised before May 31, 2016.

(The author is Assistant Commissioner of Service Tax, Chennai and the views expressed are strictly personal.)