OVERLAP OF CUSTOMS DUTY AND SERVICE TAX

Relevant Statutory Provisions

Service Tax – Reverse Charge Mechanism: effective from July 01, 2012

• Section 68 of the Finance Act, as amended (Act)

“Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

• Notification No. 30/2012-ST dated 20/6/12.

In case of the following services notified as specified services, the service recipient is held as the person liable for payment of service tax to the Government.

“Taxable services provided or agreed to be provided by:

(i) to (x) ……………

(xi) Taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory.”

• Relevant extracts from Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (‘CVR’) issued in terms of Customs Act, 1962 – Rule 10 – Cost and Services

“(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, —

(a) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i) commissions and brokerage except buying commissions;

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(b) The value apportioned as appropriate of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

(i) materials, components, parts and similar items incorporated in the imported goods;

(ii) tools, dies, moulds and similar items used in the production of the imported goods;

(iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

(c) royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable;

(d) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation.- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

(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, for delivery at the time and place of importation and shall include –

a) The cost of transport of the imported goods to the place of importation;

b) Loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and

c) The cost of insurance;

Provided that –

(i) Where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

(ii) The charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

(iii) Where the cost referred to in clause (c) is not ascertainable, such cost shall be 1.125% of free on board value of the goods;

…………….”

Double taxation of services and intangible rights related payments by importers of goods to foreign entities

As per CVR, the value of services and intangible rights is required to be added to the transaction value of imported goods, for the purpose of levy of customs duty. At the same time such payments (consideration) for services and intangible rights are also liable to service tax under reverse charge. Thus, there is an issue of double taxation.

In particular, as per Rule 10(1)(c) & (e) of CVR, the following is required to be added to the price actually paid or payable for the imported goods while determining the transaction value.

“Royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

All other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation:- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (a) and (b), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.
Issues pertaining to indian companies entering into business arrangements with foreign entities arise for consideration. Such arrangements are mainly done to use brand/reputation, intellectual property rights, product and business expertise etc. of foreign entities and sell products supplied/approved by them in indian market. Such arrangements are made in different legal forms like joint venture, franchise, license, distributor etc. under the said arrangements, indian companies are obliged to maintain prescribed standards of business, pay for value of goods being imported and are also required to make payments to foreign partner for services and intangible rights which are identified by various names like franchise/license fee, marketing/advertising fee, agents fee/commission, renewal fee, reimbursements of travel etc.

While Custom authorities relates all the above direct or indirect payments related to services and intangible rights like royalty, license fee etc. to supply of goods and hold them liable to Customs duty, service tax authorities treat such payments as consideration for services and hold indian companies liable to pay service tax under reverse Charge mechanism.

Thus,  indian  companies  are  exposed  to  the  burden of double taxation of Customs duty as well as service tax.   this   increases   the   transaction   costs   of   indian businesses substantially.

Government has in its wisdom, sought to address this issue in some specific cases. E.g.:

•    When transfer of right to use imported/locally pro- cured packaged software or canned software is passed on to the buyer, Government has exempted CVD/Central excise duty on consideration for such transfer of right to use, provided service tax is paid on the same (Ref: Notification No. 25/2011- Cus. dated 01.03.2011 and 14/2011-Ce dated 24.03.2011). Conversely, service tax was exempt- ed when CVD/Excise duty was paid (Ref: Notifica- tion no. 34/2012 – St, dated 20.06.2012).

•    IPR service providers were exempted from service tax equivalent to amount of cess payable on the transfer of technology under the provisions of the r & d Cess act, 1986 so as to avoid double taxa- tion of both service tax and r & d Cess (ref not no. 17/ 2004-St., dated 10.09.2004).

Mumbai CESTAT Ruling in united shippers lTD vs. csT (2015) 37 STR 1043 (Tri – Mumbai)

Issue before CESTAT

“Whether barge (shipping) charges collected towards transportation of the imported goods from the mother vessel anchored at Bombay floating Lights to dharmatar jetty where the goods were unloaded, which forms part of the transaction value of the imported goods can be once again levied to service tax under the category of cargo handling services?”

Contentions of the Appellants

•    The activity of transshipment of import and export cargo, from the mother vessels to the jetty and vice versa, is carried out by the barges (termed as daughter vessels) on account of the draft not permitting the mother vessels to travel until the jetty at  minor  ports. the  appellant  submitted  that  it  is a settled position in law that such transshipment of cargo from the mother vessel to the jetty is to be treated as a continuation of the journey of the goods in the import stream into india, as upheld in South India Corporation (Agencies) Ltd. vs. Collector of Customs and Ors. (1987) 30 E.L.T. 100 (Cal); Turner Morrison and Co. Ltd. vs. Asstt. Col- lector of Cus. for Exports (II) (1999) 110 E.L.T. 484 Cal.) and Collector of Customs, Ahmedabad vs. Shipping Corporation of India Ltd. (1987) 29 E.L.T. 182 (tribunal).

•    The freight amount charged to the customer for the barge transportation of goods from the mother vessel to the jetty forms a part of the assessable value of the imported goods, for the purpose of computation of Customs duty. the inclusion of the freight amount has been explicitly mandated by the amendments effected to section 14 of the Customs act, 1962 read with CVr these amendments were made in order to overcome the decision in Ispat In- dustries Ltd. vs. Commissioner of Customs, Mum- bai (2006) [202 E.L.T. 561 (S.C.)] and ensure the position in law which had always been intended by the Legislature, and accordingly the said po- sition would equally apply for the period prior to 2007. therefore, the value of the transportation by transshipment is treated as an intrinsic part of the value of a goods transaction and the said amount therefore, cannot attract the levy of service tax si- multaneously as being in the nature of consideration for provision of services. reference is made to the decision in Escotel Mobile Communications Ltd. vs. Union of India (2004) [177 E.L.T. 99 (Ker.)] wherein it was held that, based on the “aspect theory”, the same transaction could be exigible to different taxes in its different aspects – in that case, the issuance of a Sim card to a subscriber could be equally liable to sales tax and service tax at the same time. this view was challenged before the Hon’ble Supreme Court in BSNL vs. UOI (2006) [2S.T.R. 161 (SC)] in which the aforesaid finding of the high Court was overruled, and it was categorically held that the aspect theory would not apply to enable the value of the goods to be included in the rendition of services or vice versa. In the present case, the freight charged for the barge transpor- tation of the goods from the mother vessel to the jetty is includible in the assessable value on which customs duties are levied. Applying the rationale laid down in the aforesaid ruling of the Hon’ble Su- preme Court, once the freight has already rightly suffered customs duties as a part of the value of the goods being imported, a dual levy of service tax cannot also be imposed on the same freight amount, and the demand on this basis cannot sustain. Further, it was submitted that this activity of transportation of goods from the mother vessel to the jetty is earned out before the goods crosses the customs frontier of india and consequently, will be construed to be undertaken while the goods are still in the import stream and prior to the successful completion of the process of importation of the goods into india. [Garden Silk Mills vs. Union of India, (1999) 113 E.L.T. 358 (S.C.)] reliance was also placed on the decision of the Hon’ble Supreme Court in the case of Hotel Ashoka vs. Asst. Commr. of Commercial Taxes (2012) [276 E.L.T. 433 (S.C.)], wherein it held that an activity of sale of items in the duty free zone of an airport will not attract the levy of Vat, even though such sale is actually taking place within the physical territory of india, as such goods had not crossed the customs frontier of india to form a part of the mass of goods meant for consumption in india and had therefore not been imported into india. it was therefore, submitted that taxing the transshipment of the goods in the present case will tantamount to levying service tax on an activity of import of goods, which is impermissible in law.

Contentions of the Revenue

It appears that transport of cargo by barges from the mother vessels had taken place when the mother vessels  were  at  mumbai  floating  Light/inner anchorage  of mumbai Port trust, i.e. when the vessels were already in india. Therefore, there does not appear any legal bar to levy service tax on the services provided in relation to the cargo transported by the barges from the mother vessels to  the jetty.  It  would  also  not  be  correct  to  say  that it would amount to double taxation. The levy of cus- toms duty and service tax are under separate enact- ments. In the case of CST, Bangalore vs. Lincoln He- lios (India) Ltd. (2011) 23 STR 112 (Kar.), the hon’ble high Court has held that excise duty is levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore, it will not amount to payment of tax twice.

In the said case, the facts were not in dispute. the as- sessee undertook not only manufacture and sale of its products, it also erected and commissioned the finished products.  The  customer  was  charged  for  the  services rendered as well as the value for manufactured products. admittedly, up to 20/06/2003 no service tax was leviable on erection and commission work. It was only subjected to tax from 01/07/2003.

The assessee paid the excise duty on the value of the product notwithstanding the services rendered. it is in that context, they were contending that there cannot be levy of tax under two parliamentary legislations. however, the excise duty was levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore it will not amount to payment of tax twice. After contesting the matter before the tribunal, the assessee paid the service tax and interest thereon. Moreover, the commissioning installation and erection work was brought to service tax only from 01/07/2003. It was during the transitional period and the benefit of doubt existing in the mind of the assessee was given to him. Since it constitutes a reasonable cause for not paying the service tax in view of Section 80, the Court held that the tribunal was justified in interfering with the levy of penalty and in setting aside the same and there was no infirmity in the order passed by the tribunal.

“Truly speaking, the imposition of import duty, by an large, results in a condition which must be ful- filled before the goods can be brought inside the customs barriers, i.e. before they form part of the mass of the goods within the country.

It would appear to us that the import of the goods into india would commence when the same cross into the territorial waters but continues when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed.”

Thus  when  the  goods  are  being  transported  by the barges from the mother vessel to the jetty on- shore, that activity is part of the import transaction of bringing the goods into india from a place outside india. the question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after the customs transaction is completed. therefore, the question of levying to service tax on the transportation by barges from the question of levying to service tax the transportation by barges from the mother vessel to the jetty onshore, would not arise at all since the said activity is part of the import transaction leviable to import duty and we hold accordingly. [para 5.2]

•    This is also evident from the fact that Section 14 of the CVR were amended to specifically include barge charges and handling charges in the trans- action value  of the imported goods vide  finance act, 2007 to overcome the adverse decision in the case of ispat industries (supra). Section 14 was substituted “to specifically provide that transaction value of imported goods shall include, in addition to the price, any amount paid or payable for costs and services, including commissions, … cost of transportation to the place of importation, insurance, unloading and handling charges to the extent and in the manner specified in the rules made in this regard”.

These  amended  provisions  came  into  force  with effect from 10/10/07. CBEC has also clarified vide Circular 34/2009, dated 30-11-2009 that “the issue of ineligibility of barge charges in the value (of imported goods) will be governed by the provisions of Section 14 of the Customs act, 1962 read with CVR for the assessment arising in the period from 10/10/07 onwards.”

Thus  the  question  of  demand  of  service  tax  on barge charges and the handling charges connected therewith would not arise at all with effect from 10-10-2007 as they form an integral part of the transaction value for levy of customs duty. Even fo the period prior 10-10-2007, the same position would apply for the reason that the import trans- action is complete only when the goods reach the customs barriers and the bill of entry for home consumption is field. [Para 5.3]

•    As regards the observations of Karnataka High Court relied by the revenue, it was observed that in the Lincoln helio case, the only question of law considered by the hon’ble high Court was whether setting aside the penalty by the tribunal was correct when the demand of service tax and interest was upheld and the assessee did not contest the levy.  These  are  not  the  issues  before  us  nor  is there any remote connection with the facts of the case before us. It is a settled position in law as held by the hon’ble apex Court in al noori tobacco Products india Ltd. case [2004 (170) eLt 175 (SC)] that the ratio of a decision can be applied only if the facts are identical. A slight or a material change in the facts could lead to an entirely different conclusion. [Para 5.7]

Conclusion
In light of the foregoing, it is very clear that, there is      an exposure to overlap of customs duty & service tax, more particularly, in cases of payments made to foreign entities by indian importers. the mumbai CESTAT ruling discussed earlier does lay down a sound principle in the context of the facts of that case. However, exposure to litigation even in such cases continues. Further, mandatory pre-deposit provisions causes hardship to the assesses in such cases as well. the impact of overlap of customs duty and service tax assumes significance, again in the backdrop of the increased rate of service  tax to 14% (which could go up with 2% Swatch Bharat Cess) and imminent introduction of GST. hence, it is felt that this issue needs to be speedily addressed by the Government so as to ensure that transaction cost of indian importers is not unduly burdened rendering them globally uncompetitive.