Introduction: The Finance Act, 2016 introduced service tax on services of transportation of goods by a vessel from a place outside India upto the customs station of clearance with effect from 01/06/2016. Section 66D introduced from 01/07/2012 in the Finance Act, 1994 (the Act) comprising of negative list of services i.e. the services which are outside the ambit of service tax also contained entry (p) (ii) which read as follows:
“(p) Services by way of transportation of goods –
(i) ……………
(ii) by an aircraft or a vessel from a place outside India upto the customs station of clearance in India”.
The above entry now stands omitted with effect from June 01, 2016. However, such services by an aircraft continue to be exempt vide insertion of entry 53 In Mega Exemption Notification No.25/2012-ST.
TRU letter DO.F.No.334/8/2016 – TRU dated 29/02/2016 in this regard clarified as follows:
“(C) The entry in the Negative List that covers services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance [section 66D (p)(ii)] is proposed to be omitted with effect from 1.06.2016. Clause 146 of Finance Bill 2016 may please be seen in this regard. However such services by an aircraft will continue to be exempted by way of exemption notification [Not. No. 25/2012-ST, as amended by notification No. 09/2016-ST dated 1st March, 2016 refers]. The domestic shipping lines registered in India will 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 hands of the business entity. The service tax so paid will be available as credit with the Indian manufacturer or service provider availing such services (subject to fulfillment of the other existing conditions). It is clarified that service tax levied on such services shall not be part of value for custom duty purposes. In addition, Cenvat credit of eligible inputs, capital goods and input services is being allowed for providing the service by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. Consequential amendments are being made in Cenvat Credit Rules, 2004 [Not. No. 23/2004-CE (N.T.), as amended by Sl. Nos. 2(b) and 5(h) of notification No. 13/2016-C.E. (N.T.) dated refers. ]
(Clause 146 of the Bill refers) “
In terms of the above clarification, consequential amendments are made in CENVAT Credit Rules, 2004 to allow CENVAT credit of service tax paid on various input services used by domestic shipping companies or other service providers such as freight forwarders against their earnings from export freight, which hitherto was not available to them as ocean freight was not taxable.
Earlier till 30/06/2012 also, the service of transportation of goods by ocean/waterways did not find place in notified services listed in section 65(105) of the Act. The levy thus relates to service of transportation of goods by ocean in the course of import. Transportation of goods by ocean (or even air) in the course of ‘export’ did not attract service tax in the past i.e. pre and post negative list based tax regime and continue to be outside the scope of service tax by means of operation of Place of Provision of Services Rules,2012 (PoP Rules). The relevant Rule 10 of the said PoP Rules reads as follows:
“10. Place of provision of goods transportation services”.- The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of goods.
The above rule thus determines that when the goods are transported by vessel/ocean internationally, the destination of goods being beyond territorial jurisdiction to which the Act extends, the place of provision of the said service is outside India and therefore, no service tax is attracted.
Conventionally, when the goods are imported by vessel/ ocean, customs duty in terms of section 14 of the Customs Act, 1962 is charged on the cost of transportation from the place of shipment to the port of importation in India. Thus all applicable levies of customs including Counterveiling Duty (CVD), Cess and Special Additional Duty (SAD) are attracted on the ocean freight. Thus, there has been a view among professionals and freight forwarding fraternity that the freight is being taxed twice; viz. under the Customs Act and now also under Service Tax. In this context, it is relevant to note here, a few observations made in decided cases:
Ocean freight & service tax:
In United Shippers Ltd. vs. Commissioner of Central Excise 2015 (37) STR 1043-(Tri.-Mumbai) service tax was sought to be levied as cargo handling service wherein on transportation of goods by barges from mother vessel to the jetty onshore in the course of import of goods into India, it was held that the activity is not liable for service tax as the activity is part of import transaction liable for import duty. However, Tribunal – Delhi in Shri Atul Kaushik & others vs. Commissioner of Customs (Export) 2015 (330) ELT 417 (Tri.-Del), a case of import of packaged software held that there is no provision that warrants exclusion from assessable value for customs on the ground that service tax is charged on the license fee paid on such a software imported when such license fee is a part of condition of sale. In this case, relying on the case of Imagic Creative Pvt. Ltd. vs. Commissioner 2008 (9) STR 337 (SC) (wherein it was held that service tax and VAT are exclusive), the Appellants had urged that both service tax and customs duty cannot be demanded on the same transaction. The Tribunal in the reference held that decision is an authority for what it decides and mutuality of customs duty and service tax is not deduced from the said Supreme Court decision. Further, no constitution provisions restricting the same was brought to the notice of Tribunal. Since this decision examined includibility of license fee in assessable value for levying customs duty, the question is whether license fee paid should have suffered service tax when the same was includible for the purpose of customs duty by applying the ratio of decision in United Shippers Ltd. (supra).It is another matter though that license fee payable for a copyrighted product like software (wherein copyright remains vested in seller) would be a transaction of “deemed sale” of goods not liable for service tax as what is transferred is a right to use the copyrighted product against payment of license fees as held by Karnataka High Court in Infosys Ltd. vs. Deputy Commissioner of Commercial Taxes and Others 2015-TIOL-HC-KAR-VAT.
In a recent ruling provided by Authority for Advance Rulings in the case of Berco Undercarriages (India) Pvt. Ltd. AAR/ST/10/2016, the Applicant intended to import raw material and appoint a foreign C&F agent for all composite services of handling, arranging shipping liners, clearances at point of origin and destination at a composite fee in his respective currency and customs duty would be paid on the said composite fee invoice. The question was raised as to which portion of the same would attract service tax. Discussing both the above decisions of United Shippers Ltd. (supra) and Shri Atul Kaushik (supra), AAR observed that Tribunal was not consistent on chargeability of service tax when customs duty was levied. It was also noted that transportation service by vessel from outside India upto the customs station in India is in the negative list of services and therefore not chargeable to service tax. However, at the instance of revenue’s contention, Rule 5(1) of the Service Tax (Determination of Value) 2006 (Valuation Rules) was invoked and it was held that excluding the costs incurred by C&F agent as pure agent if conditions listed in the said Rule 5 of Valuation Rules are satisfied, service tax would be payable by the Applicant on the said invoice as recipient of service. It appears prima facie that AAR’s attention was neither drawn to the Delhi High Court having declared the said Rule 5(1) ultra vires service tax in Intercontinental Consultants & Technocrats P. Ltd. vs. UOI 2012-TIOL-966-HC-DEL-ST and moreover, importantly relevant here is that neither the principles governing bundled service are examined nor relevant PoP Rules apparently seem to have been brought to the notice of AAR to determine place of provision of service of the service provider referred to as C&F agent. For instance, as per Rule 4 of Place of Provision of Services Rules, 2012 (PoP Rules) when a service provider is in nontaxable territory provides performance based services in relation to goods outside India, no service tax is attracted or as per parameters laid in Rule 9 of the said PoP Rules, the services provided by an intermediary outside India, no reverse charge is attracted. Indeed, AAR ruling is binding only on the Applicant. However, it may cause widespread litigation on the issue involved.
Thus, in addition to the levy of duty of customs already levied while the goods are imported, service tax is levied when an Indian shipping line or a freight forwarder handles a cargo and when the freight is payable at the end of consignee. The issue here is assuming there are two separate taxable events, one under the service tax law and also under the Customs Act, whether or not there is a need for cost addition to the goods by way of service tax as in many cases such as traders, passing on of CENVAT credit is not enabled in terms of CENVAT Credit Rules, 2004 and conventionally when freight is being considered part of the cost of imported goods for the levy of customs duty, why should service tax be levied.
Further service tax levied on transportation in the course of import has different implications on different classes of persons. Factually, a large majority of shipments are handled by Foreign Service providers/freight forwarders and the current levy is not affecting them as they are located in non-taxable territory. As against this, an Indian multimodal transport operator or a freight forwarder handling import shipment would be liable for service tax and therefore they would have less competitive service rate with the incidence of service tax @ 4.5 per cent on import freight and such service providers often do not have potential to pass on the credit. The issue therefore arises is whether any level playing field is really provided to Indian shipping lines or other service providers when majority of the cargo in the course of imports to India is handled by foreign flagship vessels or freight forwarders. Lastly, a mention is necessary here as to nationwide litigation initiated by the service tax department wherein service tax is demanded from service providers earning margin on ocean freight as MTO /freight forwarder/Non- Vessel Owning Common Carrier (NVOCC) i.e. carrying out business on their “own account” akin to traders, margin earned on non-taxable ocean or airfreight is alleged as value of service chargeable to service tax. The department is on its way to file an appeal against Mumbai Tribunal’s decision in Greenwich Meridian Logistics (India) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai 2016-TIOL-869-CESTAT -MUM wherein it has been held that the margin on non-taxable ocean freight is not liable for service tax as business auxiliary service. Now the Government’s own action of levying service tax on import freight is inconsistent with their own claim in litigation of treating margin on freight as value of taxable service does not require to be elaborated further.
Conclusion:
As per internationally known practices, the activity of transportation of goods by vessel or air is not chargeable to VAT or GST implemented by several countries across the globe and is considered part of the cost of imported goods for customs duty. When the Government is so keen on implementing GST as soon as practically possible, whether the levy of service tax was necessary is a poser made by many. However, it is hoped that on implementation of GST, the dual levy will be taken care of in line with international practice.
