FEBRUARY 21, 2020

By B Venkat Ramanan, Senior Associate and Rohan Muralidharan, Principal Associate, Lakshmikumaran & Sridharan, Chennai

THE levy of service tax on ocean freight in respect of CIF import contracts has been a subject matter of dispute between the importers and Indirect Tax Department primarily due to a double tax incidence on the said freight component viz., one under the service tax and the other under the customs. However, the recent ruling pronounced by the Hon'ble Gujarat High Court in the case of Sal Steel Ltd. ¹ has provided a sigh of relief to the importers. Through this article, we would be critically analyzing the correctness of the said judgement and how far it will stand the test of time. As someone famously said, "Time is the ultimate critic. What future generations think of us and our work ultimately determines our standing or lack of it."

Analysis of the statutory provisions under service tax

Section 68(1) of the Finance Act 1994 [hereinafter referred to as the Act] imposed the liability on the service provider to discharge the service tax on provision of services. However, Section 68(2) of the Act carved out an exception to the above provision and empowered the Central Government to recover service tax in respect of notified services from a person other than the provider of service. This mechanism of recovery under Section 68(2) has been colloquially referred to as Reverse Charge Mechanism [RCM].

In exercise of the powers conferred under Section 68(2), Notification No. 30/2012-ST dated 20.06.2012 [hereinafter referred to as the subject Notification] enumerated various services on which service tax [either fully or partially] was payable under RCM by a person other than the service provider. In the subject Notification, an amendment was carried out in 2017 ² wherein with effect from 23.04.2017, the entire service tax in respect of services provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by vessel from a place outside India up to the customs station of clearance in India (ocean freight), was liable to be paid by the person as defined in Rule 2(1)(d)(i)(EEC) of Service Tax Rules [hereinafter referred to as the subject Rule ] who was actually the importer of the said goods located in India. Consequently, the fallout from the said amendment was that w.e.f. 23.04.2017 in case of CIF ³ import contracts, the service tax on ocean freight was liable to be paid by the 'importer' who filed the bill of entry. Further, vide Rule 6(7CA) of the Service Tax Rules, for the purpose of remitting such tax, the importers were given an option to value the said service at the rate of 1.4% of the CIF value of the imported goods. [Kindly refer 16/2017-ST dated 13.04.2017 w.e.f 23.04.2017.]

At this point it may be noted that in terms of Rule 10(2)(a) ⁴ of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, the value of the freight component was in any case includible in the transaction value of imported goods for the purpose of payment of customs duty.

Challenge to the said levy

M/s Sal Steel Limited challenged the said levy of service tax before the Hon'ble Gujarat High Court inter alia on the following grounds:

- Under the Act, service tax could be levied only on services rendered in India and not for services rendered/consumed outside India. Since levy of service tax on import ocean freight is an extraterritorial event, the above provisions providing for collection of service tax is ultra vires;

-  Going by the scheme of the Act, service tax can be collected only from service provider or service receiver [under RCM]. Since in case of CIF import contracts, importer being a third party who is neither a service provider nor a service recipient, recovery of service tax from such third party is ultra vires;

-  There is no power conferred upon the Central Government for fixing the value of taxable service and therefore Rule 6(7CA) of the Service Tax Rules is ultra vires the rule making powers.

The judgement

The Hon'ble Gujarat High Court upheld the aforesaid challenge and held that no service tax is leviable on ocean freight in respect of CIF import contracts inter alia on the following grounds:

- The service tax which was being levied under the subject Notification relates to a service which is in the nature of ocean transportation from a place outside India upto customs station of clearance in India and is provided by for foreign transporter to a foreign exporter. Thus, the service in dispute is a transaction occurring beyond the landmass of India and is in the nature of extraterritorial event. The provisions of the Act do not empower the Central Government to collect service tax on such extraterritorial events since the same applies only to the services which are provided in India. Hence, the subject Notification and the subject Rule which allowed the Government to recover service tax on such service is beyond the scope of the Act and thus, not legally valid to the said extent.

- Vide Section 68(2) of the Act, the Government had the power to shift the liability to pay service tax from the service provider to service receiver. Further, perusal of para (II) ⁵ of the subject Notification would reveal that the Government had shifted the burden to pay service tax only to the person receiving the service and not to any third party. The rule making power of Section 94 also did not permit the Government to make rules for recovering service tax from a third party who was neither a provider or receiver of service. In case of ocean freight on CIF import contracts, since the importers are neither the provider nor the receiver of service, the subject Notification read with subject Rule providing for recovery of service tax on such services from the importer is beyond the scope of the Act.

- Even if its assumed that service tax can be recovered from the importers, there is no machinery provision for valuation of such service. This is for the reason that there is no power conferred upon the Government under Section 94 to fix value for any service and thus Rule 6(7CA) is ultra vires the rule making power. Secondly, Rule 6(7CA) only provides an option and if the importer does not exercise this option, then there is a void as the actual value of the service is not determinable. Consequently, without there being a value determinable for the said service, the levy of service tax on such service fails.

Analysis of the said judgement

On a detailed analysis of the reasoning adopted by the Hon'ble Gujarat High Court, in our humble view, the Court has not properly appreciated the scheme of the Act while arriving at the conclusion.

The Hon'ble Supreme Court in the case of Govind Saran Ganga Saran ⁶ held that if the four components that go into the concept of taxation namely 1) taxable event, 2) person liable to pay the tax, 3) rate of tax and 4) value on which the tax is to be levied, are not clearly identifiable in a particular transaction, then the levy of tax on such transaction fails. Now we shall proceed to analyses the judgement of the through the prism of the four cannons espoused by the Hon'ble Supreme Court supra.

Taxable event

- Section 66B of the Act provided for levy of service tax on all services which are provided or agreed to be provided in the taxable territory. Taxable territory was defined to mean the whole of India excluding the state of J&K. Vide Section 66C(1), the Government has been conferred with the power to determine the place where services are provided or deemed to have been provided. In exercise of the said power, the Government had prescribed the Place of Provisions of Services Rules, 2012 [POPS Rules].

- At this point, it may be seen that in terms of Rule 10 of POPS Rules, in case of import ocean freight since the goods are destined to India, the place of provision of such service would be India, the said service is said to have been provided only in India.

However, the High Court without giving due consideration to the POPS Rules, which has been prescribed under the provisions of Section 66C of the Act, had proceeded to determine the place of provision of the service of import ocean freight based on the actual performance of the said service and states that the same is an extraterritorial event. In our view, the same is ex facie contrary to the scheme of the Act;

Further, in this regard it is also relevant to note that since Rule 10 of POPS Rules was not a subject matter of challenge under the present writ petition, the same continues to be the part of the statute book and the judgement can be said to be per incuriam insofar as it overlooks the above provision. At this point, it is relevant to refer to the decision of the Hon'ble Supreme Court in the case of V. Kishan Rao v. Nikhil Super Speciality Hospital ⁷ wherein it was held that when a judgment is rendered ignoring the provisions of a statute, the same is said to be per incuriam.

Person liable to pay tax

-  As stated above, in terms of the subject Notification read with the Rule 2(1)(d)(i)(EEC), it was provided that service tax on ocean freight in respect of CIF import contracts was liable to be paid by the importer. However, the subject Notification and the subject Rule has been struck down primarily on the ground that the Act nowhere provides for recovery of service tax from a person other than service provider or service receiver.

-  In this regard it is relevant to note that a bare perusal of Section 68(2) of the Act would reveal that the said provision conferred upon the Government dual powers:- 1) power to issue by way of a Notification, the list of services on which tax shall be paid under RCM and 2) power to specify by way of a Rule, the person who has to discharge such tax. It is in exercise of the said power, the Government had issued the subject Notification and the subject Rule. Since, Section 68(2) does not restrict [either expressly/impliedly] the power of the Government to recover service tax from a person other than service receiver/provider, in our view, the High Court erred in holding that Section 68(2) of the Act did not provide for recovery of service tax from an importer who is neither a service provider/recipient. Hence, to the said extend, the decision of this Court is incorrect.

-  Further, the High Court had also failed to take note of the fact that para (II) of the subject Notification which had contained the words "The extent of service tax payable thereon by the person who  provides the service and the person who receives the service for the taxable services specified in (I) shall be as specified in the following Table, namely:" was amended in March 2015 as "The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services specified in paragraph I …". This clearly evidences the fact that the para (II) of the subject Notification was modified to bring it in line in the provisions of Section 68(2) viz., recovery of service tax from a person other than a service provider who could either be a service recipient or any other person like the importer in the present case.

-  Further, it also becomes relevant to refer to the judgement of Hon'ble Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. ⁸ wherein the Court while striking down the Notification providing for levy of GST on import ocean freight in case of CIF contracts in the hands of the importer, at Para 241 had clearly observed as under:

241. The legislature , while enacting the IGST Act, was aware of the wide provisions under the Finance Act, 1994, which provide the Government the power to collect tax under the reverse charge basis only from the recipient of the service but from any other person as may be prescribed. …

From this it can be seen that the Finance Act 1994, gave wider power to the Government to impose tax on persons other than service provider/receiver. Thus, service tax on import ocean freight under CIF contracts can be imposed on the importer.

Value

-  Considering the difficulty in arriving at the value for the said service, the Government had prescribed Rule 6(7CA) of the Service Tax Rules which provided for a mechanism to arrive at the value for discharging service tax on such service. However, the said Rule has also been struck down by the High Court solely on the ground that rule making provision does not provide any power for the Government to fix the value for any service.

-  In this regard it is pertinent to note that once the power to prescribe a delegated legislation is traceable to a particular provision of the enabling Act, then such delegated legislation is said to be valid. Section 94(2)(aa) of the Act allowed the Government to frame rules for determining the value of any taxable service. Consequently, it can be seen that the power to prescribe Rule 6(7CA) is traceable to Section 94(2)(aa) of the Act and hence, the said Rule can be said to be legally valid.

Rate of tax

-  The rate of tax was not a subject matter of consideration in the said judgement and there was no dispute with respect to the existence of a rate of tax in respect of ocean transportation services.

-  Since, all four components that go into the concept of taxation have been fulfilled in the case of transaction relating to import ocean freight under CIF contracts, levy of service tax on such ocean freight can be said to be legally valid.

Conclusion:

In our opinion, from the foregoing discussions, considering the reasoning adopted by the Hon'ble High Court, the possibility of Department going in appeal before the Supreme Court is certain and only time will tell whether the judgement is upheld.

Hence, in our view, the importers who have not paid service tax on ocean freight should be circumspect about the judgement in its current form and it will be a question of wait and watch.

Further, if and when the matter comes before the Hon'ble Apex Court, the question of law that must be strenuously raised for challenging the legality of this levy is that when a particular service has actually been rendered/consumed outside India, can the Government by an artificial provision ⁹ deem it to be provided/consumed within India.

Another important aspect that may be considered before the Hon'ble Supreme Court is that of double taxation. In United Shippers v. CCE - 2014-TIOL-2500-CESTAT-MUM which was affirmed by the Hon'ble Supreme Court in Commissioner v. United Shippers Ltd. - 2015-TIOL-172-SC-ST-LB, the Hon'ble Tribunal held that there can be no levy of service tax on barge and handling charges which are part of the import transaction into India and form an integral concomitant of the transaction value on which the customs duty is leviable

[The view expressed in this article are strictly personal.]

¹ SCA No. 20785/2018 dated 06.09.2019 - 2020-TIOL-163-HC-AHM-ST

² Notification 3/2017-ST dated 12.01.2017 read with Notification 15/2017-ST dated 13.04.2017

³ CIF contracts refers to those contracts wherein the overseas supplier is responsible for supply and delivery of goods at the port of import of the customer. Consequently, the requisite transportation and insurance cost from the port of export till the port of import would be borne by the overseas supplier.

⁴ [(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, and shall include -

(a) the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation ⁵ It reads as under:- The extent of service tax payable thereon by the person who  provides the service and the person who receives the service for the taxable services specified in (I) shall be as specified in the following Table, namely:

⁶ [1985] 060 STC 0001 - 2002-TIOL-589-SC-CT

⁷ (2010) 5 SCC 513

⁸ 2020-TIOL-164-HC-AHM-GST

⁹ Rule 10 of POPS Rules read with Section 66C of the Act.