Case Law Details
International Seaport Dredging Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chandigarh)
Bareboat Charter of Dredgers Constitutes Transfer of Right to Use Goods – Not Taxable as “Supply of Tangible Goods” Service: CESTAT Chandigarh
The appellant is a world leader in dredging activity. It took; on hire; dredgers and other equipment from a supplier located outside India. A demand of service tax of over Rs.20 crores along with interest and penalty was confirmed for the period from 2011-12 to 2014-15 on the ground that it was liable to service tax under “supply of tangible goods for use” service; on reverse charge basis. Hence; appeal.
Hon’ble CESTAT, Chennai set aside the order and allowed the appeal. It held: (i) the Tribunal in the appellants own case; on examination of the agreement; held that there was “transfer of right to use goods” and hence; cannot be subjected to service tax; (ii) it was a standard bareboat charter and not a service; relies on judgment of Supreme Court in Shelf Drilling and Great Eastern Shipping; (iii) rejects the argument that post 2012 (negative list); it is a taxable service as there is no supply; (iv) the lis between the parties is settled as revenue has accepted the earlier order; relies on judgment of Supreme Court in Jayswal Neco; (v) accordingly; sets aside demand on merits.
FULL TEXT OF THE CESTAT CHENNAI ORDER
International Seaport Dredging Ltd., the Appellant herein, has preferred this appeal against the Order in Original No. CHN-SVTAX-002-COM-1 to 3 -2016-17, dated 25.01.2017 (impugned Order).
2. The brief facts are that the Appellant is engaged in providing dredging and reclamation of sea ports and allied works. They are registered with the Service Tax Department. In the course of business, the Appellant hires dredgers, vessels and allied equipment from non-resident owners having no permanent establishment in India, predominantly under Standard Bareboat Charter Agreements. The present proceedings that have culminated in the impugned order adjudicates three SOD / SCNs No.271/2013 dated 03.10.2013, 231/2014 dated 15.09.2014 and 60/2015 dated 31.08.2015, covering the period October 2011 to September 2014, each of which indicate that they are in continuation of the earlier proceedings. Further, the earliest of the SODs in the present proceedings, i.e. SOD No.271/2013, dated 03.10.2013 indicates the previous period proceedings initiated vide three separate SCNs covering the period from September 2007 to August 2010 had been adjudicated by the Commissioner of Service Tax, Chennai, vide OIO no.729, 2013, dated 31.01.2013. The SOD No.271/2013 also indicates that the facts and allegations made in the previous notice are part of the Statement of Demand. The Department had issued these notices being of the view that the activity of lease / hire of the vessels / equipment from various companies abroad is classifiable under supply of tangible goods service and that the Appellant was liable to pay service tax on reverse charge basis in terms of Section 66A of the Finance Act 1994. The impugned order passed by the Adjudicating Authority after due process of law has been appealed before this Forum in the present appeal.
3. Shri Bharat Raichandani, Ld. Advocate appearing for the Appellant contended that in the impugned order, the Adjudicating Authority has reproduced the very same line of reasoning as adopted in the earlier Order in Original. The said Order in Original had been challenged by the Appellant and this Tribunal has allowed the appeals in favour of the Appellant vide the decision in International Seaport Dredging Ltd. V. Commissioner of Service Tax, Chennai, 2018 (12) GSTL 185 (Tribunal – Mad.). The Tribunal has categorically held that there was a “transfer of right of possession and effective control of the vessels / dredgers to the Appellant and that such arrangements were outside the purview of service tax under “supply of tangible goods service”. The said order of the Tribunal in the Appellant’s own case has not been challenged by the Revenue and consequently it has attained finality and the issue therefore, stands concluded between the parties. It is argued that the Department is bound by the said decision.
4. Ld. Counsel submitted that the decision of the Karnataka High Court which was relied upon by the Appellant before this Tribunal in the earlier proceedings, as that holding the field, reported in Great Eastern Shipping Co. Ltd. V. State of Karnataka and Others, (2004) 136 STC 519 (Karnataka), has since been affirmed by the Hon’ble Supreme Court in Great Eastern Shipping Company Ltd., 2020 (32) GSTL 3 (SC). It is further submitted that the Hon’ble Supreme Court in the case of Commissioner of Central Tax V. Shelf Drilling F. G. Mcclintock Ltd. (2023) 12 Centax 2 (SC) has held that service tax under ‘ supply of tangible goods services is not leviable in respect of hiring of ‘offshore drilling unit’ where bareboat charter stipulates that owners do not retain any control whatsoever on Chartered Equipment, either by reserving for only use of deployment on another Charter, and nor do they intervene in any deployment by Charters. It is contented that the said decision affirmed by the Hon’ble Apex Court pertains to period of dispute from December to April 2014 wherein the service tax has been proposed to be imposed by invoking the provisions of Section 66 E (a) of the Finance Act, 1994, i.e., ’declared service’. Ld. Counsel contended that the said judicial affirmation is applicable in the present case. It is further submitted that the Tribunal has been consistently adopting the said view as can be seen from the decision in Tel Exports V. LTU Chennai, Service Tax Appeal No.41380 of 2015, dated 16.04.2025, Taneja Aerospace and Aviation Ltd. V. Commissioner of GST & Central Excise, Chennai (2024) 17 Centax 335 (Tri.-Mad.), Caravel Logistics Pvt. Ltd. V. Commissioner of GST & Central Excise (2024) 21 Centax 144 (Tri.-Mad.) and Universal Dredging & Reclamation Corporation Ltd. V. Commr. of CGST and C.Ex. Madurai, 2021 (44) GSTL 401 (Tri.-Mad). Reliance was also place on the decisions in Blue Dart Aviation Ltd. V. CST & Final Order No.42278-42285/2018 dated 10.07.2018. He prays that the appeal may be allowed.
5. Shri Sanjay Kakkar, Ld. Authorised Representative reiterated the findings of the Adjudicating Authority as stated in the impugned order.
6. We have heard both sides and perused the materials on record.
7. We find that the present proceedings are with respect to subsequent SODs issued and place reliance on the facts and allegations made in the previous notices. We find that this Tribunal in the appellant’s own case, in International Seaport Dredging Ltd. V. Commissioner of Service Tax, Chennai, 2018 (12) GSTL 185 (Tribunal – ) has held as under:
“7. We have heard both sides and perused the appeal records.
8. The first major point for consideration is the service tax liability of the appellant on reverse charge basis in respect of vessels and dredgers chartered by them from foreign owners. The tax liability was sought to be upheld on reverse charge basis under the category of ‘Supply of Tangible Goods Service’. The tax entry relevant is as below :-
“Section 65(105)(zzzzj) of the Finance Act, 1994 defines “supply of tangible goods services” as follows :-
“any services provided or to be provided to any person by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances”.
9. The whole dispute can be narrowed down to the interpretation of exclusion clause in the above entry. In other words, services in relation of supply of tangible goods for use, without transferring right of possession and effective control shall be liable to service tax. The appellant’s case is that they have right of possession and effective control of the vessels/dredgers. In this connection, we have perused the Bareboat Charter, a copy of which was submitted by the Ld. Counsel. The charter talks about delivery of vessel to be taken over by the appellant at the designated place. After due survey and inventory, the vessel is to be delivered to the appellant. At the time of delivery the appellant shall pay for all the bunkers, lubricating oils and water. Clause 9 of the Charter states that the vessel shall during the charter period be in full possession and at the absolute control for all purposes of the charterers and under their complete control in every respect. The charterers shall maintain the vessel, her machinery, boilers, appurtenances and spare parts in a good state of repair in efficient operating conditions and in accordance with good commercial maintenance practice.
10. The appellants (charterers) are required to establish and maintain financial security or responsibilities in respect of oil or other policy damages as required by any Government, municipality etc. Clause 9(b) states that the dredgers shall at their own expenses and by their programme man, virtual, navigate, operate, supply fuel and repair the vessels whenever required during the Charter Period and they shall pay all charges and expenses of every account and nature whatsoever incidental to their usage and operation of the vessel under this charter, including foreign general municipality and/or taxes. It is the responsibility of the charterer to comply with all the regulations regarding officers and crew of the vessel as per the applicable law.
11. Clause 10(a) stipulates payment terms for charter. The appellants are to pay an agreed lump sum amount per calendar month till the vessel is redelivered by them to the owners. Clause 12(a) stipulates that the vessel shall be kept by the charterers at their expense against marine, war and protection and indemnity risks in such form as the owner shall in writing approve. Clause 14 talks about redelivery of the chartered vessel. On expiry of charter period, charterer shall redeliver the vessel at safe and ice-free port or place as per the approval.
12. On careful consideration of the terms of the above Bareboat Charter, we are of the considered view that in the present case, vessels/dredgers were transferred to the appellant with right of possession and effective control of such vessels/dredgers. The exclusion for tax liability as provided in the tax entry for supply of tangible goods is applicable to the present case.
13. We have also examined various decisions of the Tribunal and Apex Court relied upon by the appellant as well as Revenue. We note that the facts of the case as appreciated in the present dispute are to be applied to the legal principle laid down in these decisions.
14. Black’s Dictionary (Tenth Edition) defines Bareboat Charter as below :-
“Bareboat Charter – A charter under which the ship owner surrenders possession and control of the vessel to the charterer, who then succeeds to many of the shipowner’s rights and obligations. The charterer, who provides the personnel, insurance and other materials necessary to operate the vessel, is known either as a demise charterer or as an owner pro hac vice. Also termed demise charter; demise charterparty; bareboat charterparty.
The ‘demise’ or ‘bareboat’ charter is conceptually the easiest to understand. The charterer takes possession and operates the ship during the period of the charter as though the vessel belonged to the charterer. The bareboat charter is thus analogous to the driver who leases a car for a specified period or a tenant who rents a house for a term of years. The charterer provides the vessel’s master and crew (much as the lessee-driver personally drives the car) and pays, the operating expenses (much as the lessee-driver buys the gasoline. “David W. Robertson, Steven F. Friedell & Michael F. Sturley, Admiralty and Maritime Law in the United States 371 – 72 (2002).”
As against above, time charter is defined as a charter for a specified period under which the ship owner continues to manage and control the vessel but the charterer designates the port of call and the cargo to be carried.
15. We note that an identical dispute with reference to the very same tax entry came up before the Tribunal in Petronet LNG Ltd. v. Commissioner of Service Tax, New Delhi – 2013- TIOL-1700-CESTAT = 2016 (46) S.T.R. 513 Tribunal. The Tribunal elaborately examined the terms of charter agreement and various decisions of High Courts and Apex Court before arriving at the conclusion that the charter agreement, both long term and short term, conform to all substantive ingredients as would constitute the transactions as transfer of right to use goods. Therefore, the transactions fall within the exclusionary clause of Section 65(105)(zzzzj) of the Act, consequently outside the purview of taxable service. The Tribunal extensively referred to the following decisions :-
a. Avatar Singh and Others – (2002) 7 SCC 419,
b. H. .S. Asia Ltd. – (2003) 132 STC 217 (Guwahati),
c. Bharat Sanchar Nigam Ltd. – 2006-TIOL-15-SC-CT-LB = 2006 (2) S.T.R. 161 (S.C.),
d. Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer – (1990) 77 STC 182 AP,
e. G. S. Lamba & Co. v. State of Andhra Pradesh – 2012-TIOL-49-HC-AP = 2015 (324) E.L.T. 316 (A.P.).
f. Great Eastern Shipping Company Ltd. v. State of Karnataka – (2004) 136 STC 519 (Kar.).
16. We note that the analysis of the Tribunal in the above said decisions in Petronet LNG (supra) is focussed on the terms “transferring right of possession and effective control”. In the said case, the Revenue submitted that the Manager, Master and crew of the bunkers are employees of the owner and were paid overtime etc. by the owner. The owner is required to maintain the tanker for wear and tear and also expenses of stores, spares, water, survey, overhauling etc. Examining the said contention of the Revenue, the Tribunal held that the said activities on the part of the owner does not take away the right of possession and effective control of the hirer. Agreement should be considered as a whole and mere employment of the personnel does not derogative from the reality of transfer of possession to and effective control by the assessee over the tanker for their use.
17. We note that the analysis and reasoning adopted by the Tribunal in Petronet LNG are squarely applicable to the present dispute. In fact, in the present case, Manager, Master and crew of the vessel and are actually under control and employment of the appellants. The maintenance of the vessel for wear and tear and also expenses for lubricating, spare parts, water etc. are in fact met by the appellant only. This is not the case in the case of Petronet LNG (supra). Even then the Tribunal in the said case held that reading the charter agreement as a whole, it is clear that there is a transfer of right of possession and effective control of the vessel with the assessee.
18. We note that the adjudicating authority observed that there is no legal transfer of right of possession or effective control of the vessels by the appellant. We note that such observation is contrary to the facts as revealed from the terms of charter agreement. It is relevant to note here that the transaction is not a sale simplicitor. But a transaction where there is transfer of right of possession and effective control of the goods transferred are considered as deemed sale. The clarification issued by the Board on 29-10-2008 explaining the scope of the present tax entry is relevant in this regard. It is clarified that transaction of allowing another person to use the goods without giving the legal right of possession and effective control, not being treated as sale of goods, is treated as service. As elaborately analysed above, in the present case, there is a transfer of possession and effective control of the vessels to the appellant under the various clauses of the charter agreement which clearly brings out that the appellant is having legal right of possession and effective control of the vessel.
19. We note that the restriction of use of vessel only for dredging operation and bar of sub-leasing without consent of the owner, area of operation of the vessel as stipulated by the owner is considered as restrictions which will make the arrangement as not amounting to transferring right of possession and effective control to the appellant. We are not in agreement with such inference. As noted already, there is no sale of vessel in the present transaction. The owner of the vessel continues to be the owner. It is necessary and legally permissible for the owner to put certain restrictions and obligations on the part of the appellant who uses the supplied vessel for the intended purposes. This by itself will not make the exclusion clause for tax inapplicable.
20. Examining the scope of transfer of right to use, the Hon’ble Karnataka High Court in Great Eastern Shipping Company Ltd. (supra) held that when the vessel during the charter period was for all purposes at the disposal of the charterer and under their control in every respect including maintenance, spare parts, efficient operation, fulfilment of legal clarification etc., the same should be considered as transfer of right to use.
21. The Tribunal in Reliance Industries Ltd. – 2016 (45) STR 341 (Tri.-Mum.) examined this issue as one of the disputes. Relying on the Circular dated 29-2-2008, of the Board and the decision of the Tribunal in Petronet LNG (supra.)., the Tribunal held that there is no supply of tangible goods in the said arrangement, which is under Bareboat Charter. Reference was made to Section 115(v)(a) and Section 197(1) of Income-tax Act, 1961.
22. The Hon’ble Supreme Court in British India Steam Navigation Co. Ltd. v. Shanmughavilas Cashew Industries and Others reported in (1990) 3 SCC 481 held that a charter party has to be construed so as to give effect, as far as possible to the intention of the parties as expressed in the contract. The Supreme Court was examining the implication of Bill of Lading in the said case.
23. On a careful consideration of Bareboat Charter, involved in the present case, findings of the impugned order and the submissions of the appellant, we have arrived at the conclusion that in the present case there is a transfer of right of possession and effective control of the vessel/dredger to the appellant. This arrangement is outside the purview of service tax liability under a ‘supply of tangible goods services’. (emphasis supplied)
8. For the period after 01-07-2012, the Adjudicating Authority has stated that since he has already discussed and held that the activity of transfer of goods by way of hiring provided by the foreign service providers to the appellant is without any transfer of right to use goods and therefore is not a deemed sale, but a taxable service, hence in terms of the new provisions effective from01-07-2012 also, the activity is a declared service under Section 66E(f) of the Finance Act, 1994. Thus, when the very premise on which the Adjudicating Authority has proceeded to confirm the demand is premised on his finding that the activity of transfer of goods to the appellant is without any transfer of right to use goods and is in the teeth of the decision rendered by this Tribunal in the Appellant’s own case as noted supra, we are of the considered view that the findings of the Adjudicating Authority in the impugned order are unsustainable and liable to be set aside.
9. Further, Revenue has not shown to us that the aforesaid Final Order in the appellant’s own case, reported as International Seaport Dredging Ltd. V. Commissioner of Service Tax, Chennai, 2018 (12) GSTL 185 (Tribunal – ), has not attained finality. Therefore, when the lis, regarding the nature of the particular transaction and its exigibility to service tax inter se the parties, has attained finality and all the more when there is no allegation or evidence that the present transactions are of a different nature, that forms yet another compelling reason to decide the present dispute in the Appellant’s favour. The decisions in CCE, Mumbai v Bigen Industries Ltd, 2006 (197) ELT 305 (SC) and Jayswals Neco Ltd v. CCE, Nagpur, 2006 (195) ELT 142 (SC) refer in this regard.
10. The decisions relied upon by the Appellant in Universal Dredging & Reclamation Corporation Ltd. V. Commr. of CGST and C.Ex. Madurai, 2021 (44) GSTL 401 (Tri.-Mad), Commissioner of Central Tax V. Shelf Drilling F. G. Mcclintock Ltd. (2023) 12 Centax 2 (SC) that has affirmed the Tribunal decision in Shelf Drilling Ron Tappmeyer Ltd v. Commissioner of CGST & Central Excise, (2023) 12 Centax 1 (Tri-Bom), Great Eastern Shipping Co. Ltd. V. State of Karnataka and Others, (2004) 136 STC 519 (Karnataka), which has since been affirmed by the Hon’ble Supreme Court in Great Eastern Shipping Company Ltd., 2020 (32) GSTL 3 (SC), Tel Exports V. LTU Chennai, Service Tax Appeal No.41380 of 2015, dated 16.04.2025, Taneja Aerospace and Aviation Ltd. V. Commissioner of GST & Central Excise, Chennai (2024) 17 Centax 335 (Tri.-Mad.), Caravel Logistics Pvt. Ltd. V.
Commissioner of GST & Central Excise (2024) 21 Centax 144 (Tri.-Mad.) and Blue Dart Aviation Ltd. V. CST & Final Order No.42278-42285/2018 dated 10.07.2018 are also found to be apposite.
11. In asmuch as we have held in favour of the Appellant on merits, the demand of service tax along with applicable interest and the penalties imposed are unsustainable and liable to be set aside.
12. In light of our aforesaid discussions and for the reasons stated above, we set aside the impugned order.
Appeal is allowed with consequential relief(s) in law, if any.
(Order pronounced in open court on 28.04.2026)
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