Case Law Details
Rashtriya Ispat Nigam Pvt. Ltd. Vs Commissioner of Central Excise & Service Tax (CESTAT Hyderabad)
The appeal concerns whether “despatch money” received by the appellant can be classified as a taxable service under “port service” as defined in the Finance Act, 1994. The adjudicating authority had confirmed a demand of ₹2.58 crore along with an equal penalty on the ground that such despatch money constituted consideration for services rendered to vessel owners.
The appellant, a Government of India undertaking engaged in importing raw materials, enters into charter party agreements with vessel owners for transportation and separate arrangements with stevedores for unloading cargo. Under these agreements, despatch money is paid by vessel owners when cargo is unloaded before the stipulated time, while demurrage is payable by the appellant in case of delay. The department treated the receipt of despatch money as consideration for facilitating quicker turnaround of vessels, thereby classifying it as “port service.”
The adjudicating authority held that the appellant acted as a main contractor engaging stevedores and provided services benefiting the vessel owner by ensuring faster unloading. Accordingly, the despatch money was treated as a separate consideration for such services.
The appellant argued that the issue is no longer res integra, relying on a prior decision which held that despatch money is not taxable under “port service.” It was further contended that despatch money is not an independent service but a contractual condition linked to transportation. The appellant emphasized that the contract cannot be split to artificially treat despatch money as a separate taxable service when it is intrinsically linked with freight and demurrage. It was also submitted that despatch money is in the nature of an incentive or bonus and not consideration for any service.
The Tribunal examined the nature of the transaction and observed that the core issue was whether despatch money received during the relevant period could be subjected to service tax under “port service.” It noted that under the charter party agreement, despatch money and demurrage are part of a mechanism regulating turnaround time. The net payable amount is determined at the end of the contract after adjusting both components.
The Tribunal referred to earlier decisions which held that such amounts do not arise from any activity qualifying as a “service.” It was observed that neither the importer nor the transporter performs any activity that fits within the definition of “port service.” The Tribunal also noted that payments such as penalties, compensation, or liquidated damages arising from contractual terms are not consideration for a service.
Further, reliance was placed on decisions distinguishing between consideration for a service and conditions of a contract. It was emphasized that amounts recovered due to breach or non-compliance of contractual terms cannot be treated as consideration for tolerating an act or for providing a service.
Applying these principles, the Tribunal held that despatch money and demurrage are contractual incentives and disincentives regulating performance under the charter party agreement. They are not payments for any independent or agreed service. The Tribunal also observed that the appellant did not always receive despatch money and, at times, paid demurrage, indicating that these amounts are contingent adjustments rather than fixed consideration for services.
It was concluded that the activity cannot be artificially separated from the charter party agreement to classify it as “port service.” The despatch money is more akin to demurrage or liquidated damages and cannot be subjected to service tax.
Accordingly, the Tribunal found no merit in the order of the adjudicating authority and set aside the demand and penalty. Since the case was decided on merits, the issue of limitation was not examined. The appeal was allowed.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s Rashtriya Ispat Nigam Ltd (hereinafter referred to as the appellant) are in appeal against OM dt.24.06.2013, whereby, demand of Rs.2,58,30,254/- was confirmed along with equal penalty. The issue involved is whether the ‘despatch money’ received for expeditious unloading of cargo and quick turnaround of the vessel, from the vessel owner to the appellant can be classified as ‘Port Service’ under section 65(105)(zn) read with section 65(82) of the Finance Act, 1994, and service tax can be charged on said despatch money received by the appellant from the vessel owner.
2. The brief facts of the case are that the appellants are a Government of India Undertaking and are, inter alia, engaged in import of raw materials, etc. Further, in order to import, the appellants are entering into charter party agreement with vessel operators/owners and are also entering into separate agreements for unloading of goods at the port of import with stevedores on vessel to vessel basis. The department felt that the appellants are receiving certain money in the form of despatch money from vessel operators and the said despatch money is consideration towards provision of ‘port services’ to the vessel owner by the appellant. On adjudication, the adjudicating authority held that despatch money is received by the appellant on account of services provided to vessel owner for quicker or more efficient turnaround of vessel and the activity of arranging quick turnaround is for the benefit of vessel owner. This transaction of providing quick turnaround and receiving despatch money was treated as a separate activity as distinct from service provided by the vessel owner to the appellant. It was also held that the appellants were the main contractor, who engaged sub-contractors i.e., stevedores for carrying out stevedoring operations and in respect of which they had received certain amount of money from the vessel owner.
3. Learned Advocate for the appellant has, inter alia, submitted that the matter is no longer res integra in view of the judgment of Coordinate Bench at Chennai in the case of Vedanta Ltd Vs CGST & CE [2015 (11) TMI 682], wherein similar issue of whether service tax is chargeable against despatch money received by the appellant from the vessel owner was decided. Additionally, he has also submitted that otherwise also, the despatch money cannot be an independent service provided by the appellant to the vessel owner and the said provision is only a condition of the contract for transportation. He has relied on the judgment of Hon’ble Supreme Court in the case of Super Poly Fabricks Ltd Vs CCE [2008 (10) STR 545] in support that the contract cannot be split and that the attempt to sever the agreement, especially when the consideration of contract and demurrage/ despatch money are inseparably connected in the agreement, such conclusions derived are impermissible under law. He has also highlighted the fact that as per charter party agreement, it is the vessel owners, who are providing transportation of goods to the appellant. However, such services are not subjected to service tax as they do not fall within the ambit of transportation of cargo by waterways as defined under section 65(105)(zzzzl). He has also relied on the judgment of Larger Bench of the Tribunal in the case of Kafila Hospitality & Travels P Ltd Vs CST [2021 (47) GSTL 140 (Tri-LB)] in support that despatch money is nothing but incentive/ bonus and the same cannot be subjected to service tax.
4. Learned AR, on the other hand, has reiterated the findings of the adjudicating authority.
5. Heard both sides and perused the records.
6. We find that the core issue to be decided is whether the despatch money received by the appellant can be subjected to service tax under the category of ‘port service’ during the period April, 2007 to March, 2012 or otherwise. In this case, the appellants, who had hired vessels, had entered into charter party agreement, according to which, the vessel owners were to provide certain money known as despatch money in case the cargo in the vessels are offloaded at the port of import before agreed upon period. Essentially, the department’s allegation is that if the cargo is unloaded faster, then the vessel owner gives them despatch money for saving turnaround time and if there is a delay, then the appellant has to pay demurrage to the vessel owner. The accounting is such that at the end of contract, the net amount payable to either party is worked out. In other words, if the demurrage amount is more than the despatch money, then the appellant will have to pay and if the despatch money is more than the demurrage, then net despatch money is paid by the vessel owner. The department’s view is that the appellants are engaging stevedores to expedite the turnaround time and quicker unloading and in a way, therefore, are providing ‘port service’. For this particular activity, the vessel owners are paying them despatch money, which has been treated as consideration for such port service. On the other hand, the appellants have mostly contended that this is more by way of discount on freight or as an incentive for quicker turnaround time and all these things cannot be subjected to service tax under the category of ‘port service’.
7. In the case of Vedanta Ltd (supra), the Coordinate Bench at Chennai examined the issue as to whether the despatch money can be subjected to service tax under the category of ‘port service’ during the period April, 2008 to June, 2012, and, inter alia, held that no party to the agreement i.e., neither importer nor transporter performed any activity, which would fall within the meaning of the word ‘service’ as occurring in the definition of the term ‘port service’ as it stood on or after 01.07.2010. Therefore, it was held that the appellant had not rendered any taxable service in respect of both demurrage and despatch money. Relevant Paras of the order are reproduced below for ease of reference.
“13. The show cause notice and the impugned order indicate that the appellant was charging and collecting an amount under the following three heads:
(i) Compensation/Penalty from the buyers of coal on the short-lifted/unlifted quantity of coal and non-compliance of the terms and conditions of the Coal Supply Agreement, including forfeiture of earnest money deposit/security deposit;
(ii) Compensation/Penalty from the contractors engaged by the appellant for providing various types of services for breach of the terms and conditions of the contract; and
(iii) Liquidated damages from the suppliers of materials for breach of the terms and conditions of the contract.
14. Liability has been fastened upon the appellant under Section 65B read with Section 66E(e) of the Finance Act for the period from July, 2012 till March, 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party.
15. Section 65B(44) defines ‘service’ to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under Section 66E(e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66B provides that service tax shall be levied at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while Section 66E contains a list of declared services.”
8. We also note that this Bench in the case of Krishnapatnam Port Vs CCE & ST [2023 (72) GSTL 259 (Tri-Hyd)], inter alia, examined the payment of penalty/compensation/liquidity damages, etc., in the context of port service and, inter alia, held that recovery of liquidity damages/penalty from other party cannot be said to be towards any service, per se, as the appellant did not carry on any activity to receive the compensation charges and therefore, scope of levy of service tax cannot be extended. It has also relied on the judgment in the case of South Eastern Coalfields Ltd Vs CCE & ST, Raipur [2020 (12) TMI 912] to emphasize that there is marked distinction between conditions to contract and consideration for contract. The Bench also relied on various other judgments in support that the amounts recovered as charges for breach or non-compliance of terms and conditions cannot be considered as consideration for refraining or tolerating an act and were thus no leviable to service tax in terms of section 66E(e) of the Finance Act.
9. Therefore, we find that in this case, there is a charter party agreement, wherein an agreed sum is required to be paid as freight by the appellant to the vessel owner. However, in terms of certain conditions, certain provisions have been made for despatch money as well as for demurrage. It is not a case where the appellant had to perforce clear the consignment before the agreed upon time in order to earn despatch money or for that matter, delay the consignment and incur demurrage charges. These are various incentives or dis-incentives/penalties, which are conditions of the agreement regulating faster turnaround time. Therefore, there is force in the submissions made by the appellant that the said amount cannot be considered as consideration paid to the appellant for especially providing port services for quicker turnaround. It is not the case of the department that they have always been getting despatch money, rather, they have been getting both despatch money as well as paying out demurrage charges depending on early despatch of cargo or later despatch of cargo than the agreed upon time limit provided in the agreement itself. Therefore, from the nature of these provisions, it cannot be said that there was an agreed upon service for which, a contract has been executed between the appellant and the vessel owner as distinct from the charter party agreement. It is not possible to vivisect this activity out of charter party agreement in order to cover it under the category of port service and assume that the despatch money paid is the consideration for this agreed upon activity. It is more in the nature of demurrage, liquidity damages, etc., which cannot be subjected to service tax as they are conditions of the contract and not a consideration for executing the contract.
10. In view of the same, we do not find any merit in the order passed by the adjudicating authority and the same is set aside. Since the impugned order is set aside on merit itself, we have not examined the issue of limitation.
11. Appeal allowed.
(Pronounced in the Open Court on 13.03.2026)
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