Sal Steel Ltd. Vs Union of India (Gujarat High Court)
A perusal of Section 94 shows that there is no power conferred upon the Central Government to make any Rules or Notifications for extraterritorial events; or in other words, for services rendered and consumed beyond the “taxable territory” i.e. beyond India. Obviously, the Act itself is not applicable to the territories other than India and therefore the Executives cannot have any power to make Rules for territories beyond India.
In Indian Association of Tour Operators 2017 (5) G.S.T.L. 4 (Del.), the Delhi High Court has considered validity of Rule 6A of the Service Tax Rules and held at paras 44, 47, 48 and 53 that a Rule made by the Central Government has to necessarily be only in relation to taxable services, namely, services provided in the taxable territory of India, and an essential legislative function of taxing an activity in non-taxable territory could not have been delegated to the Central Government. Rule 6A has been struck down as ultra-vires the Rule making power of Section 94 by the Delhi High Court.
The impugned provisions are also ultra vires the Rule making power of Section 94 of the Finance Act.
The charging section 66B provides for levy of service tax on the value of “services”, other than those specified in the Negative List. The term “service” is defined under Section 65B(44) to mean any activity carried out by a person for another for consideration. Thus, service is an activity carried out by a person (i.e. the service provider) for another person (i.e. the receiver of service). Only two parties are recognized by the Parliament in regard to “service” viz. the service provider and the recipient of service.
Section 68(a) of the Finance Act lays down that every person providing taxable service to another person shall pay service tax; and thus the primary obligation to pay service tax is on the person providing such service.
By virtue of Sub Section (2) of Section 68, the Central Government has power to shift the liability to pay service tax; the method which is popularly known as reverse charge mechanism, under which service tax is collected from the recipient of service. Notification No.30/2012-ST issued under Section 65(2) of the Finance Act is for reverse charge system; and the table under para (II) of the Notification shows that the Central Government has shifted the burden to pay service tax to the person receiving the service by virtue of Col.No.4 of the table. Thus, the reverse charge system under Section 68(2) of the Finance Act permits the Central Government to collect or recover service tax from the receiver of service, though the primary charge is on the person providing taxable service by virtue of Sub Section (1) of Section 68.
But the importers in CIF contracts i.e. the writ applicants herein are neither service providers nor service receivers in respect of transportation of goods by a vessel from a place outside India upto the Customs station of clearance in India. Section 68(1) and also the reverse charge Notification under Section 68(2) permit the Central Government to collect and recover service tax only from the person providing the service or from the person receiving the service, and not from a third party. The rule making power of section 94 also does not permit the Central Government to make rules for recovering service tax from a third party who is neither the service provider nor the service receiver.
Therefore, the impugned provisions i.e. Rule 2(1)(d)(EEC) and Explanation-V to Notification No.30/2012-ST are ultra vires Section 65B(44) defining “service” and Section 68, and also Section 94 of the Finance Act.
When the Respondents have admitted that the importers in India are not persons receiving service of sea transportation, and that it is the Respondent’s case that the Indian importers were “indirectly” receiving such service and hence were persons liable to pay service tax on such service; it is clearly a case where the Respondents propose to charge service tax from the third parties i.e. the Indian importers by implication, and not by clear words of the charging section. The impugned provisions creating a charge of service tax on third parties though the Act of the Parliament provides for levy and collection of tax either from the person providing service or from the person receiving service are beyond the charging provision, and also beyond the Rule making power of Section 94 of the Finance Act.
In the present cases, since the value of ocean freight is not available, Sub Rule (7CA) is inserted in Rule 6 of the Service Tax Rules thereby giving an option to the importer to pay service tax on 1.4% of CIF value of imported goods. But this insertion of Sub Rule (7CA) in Rule 6 is also ultra vires the machinery provision of Section 67, and also rule making power of Section 94.
There is no power conferred upon the Central Government under Section 94 to fix value of any service, the way such power is conferred upon the Board under Section 14(2) of the Customs Act, 1962. In absence of any power vested in the Central Government to fix value of any service by way of making a rule or a notification, Rule 6(7CA) of the Service Tax Rules is ultra vires the Rule making power. Secondly, it is an option under Rule 6(7CA) to pay service tax on the amount calculated @1.5% of CIF value of the imported goods; but if the importer does not exercise this option, then there is void because actual value of this service i.e. ocean freight is not known even to the Revenue officers. Therefore, the scheme of taxation would fail and fall in absence of a machinery provision for valuation of the service when tax is proposed to be recovered from a third party not having any information about the value of such service.
Therefore, Rule 6(7CA) amended by the Central Government is also ultra vires Section 67 and Section 94 of the Finance Act.
The Notification Nos. 15/2017-ST and 16/2017-ST making Rule 2(1)(d)(EEC) and Rule 6(7CA) of the Service Tax Rules and inserting Explanation-V to reverse charge Notification No.30/2012-ST is struck down as ultra vires Sections 64, 66B, 67 and 94 of the Finance Act, 1994; and consequently the proceedings initiated against the writ applicants by way of show cause notice and enquiries for collecting service tax from them as importers on sea transportation service in CIF contracts are hereby quashed and set aside with all consequential reliefs and benefits.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. Since the issues raised in all the captioned writ applications are the same, those were heard analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the Special Civil Application No.20785 of 2018 is treated as the lead matter.
Special Civil Application No.20785 of 2018
3. By this writ application under Article 226 of the Constitution of India, the writ applicant, a Company, engaged in the business of manufacturing goods like Sponge Iron, Ferro Chrome, Silico Manganese and Ferro Silicon, has prayed for the following reliefs;
“(A) That Your Lordships may be pleased to issue a writ of Mandamus or any other appropriate writ, order or direction thereby striking down Rule 2(1)(d) (EEC) of the Service Tax Rules and Notification Nos. 15/2017-ST and 16/2017-ST as ultra vires Sections 66B, 67 and 94 of the Finance Act, 1994, and ultra vires Articles 14 and 265 of the Constitution of India;
(B) That Your Lordships may be pleased to issue a Writ of Mandamus or any other appropriate writ, order or direction striking down Rule (7CA) of the Rule 6 of the Service Tax Rules, 1994 and Explanation-V of Notification No.30/2012-ST dated 20.6.2012 as ultra vires Sections 66B, 67 and 94 of the Finance Act, 1994 and ultra vires Articles 14 and 265 of the Constitution of India;
(C ) That Your Lordships may be pleased to issue a writ of Mandamus or any other appropriate writ, order or direction thereby quashing and setting aside Circular No.206/4/2017-ST dated 13.4.2017 and Show Cause Notice No.VI(a)/8-38/CEA/CIR-VI/Gr.29/2017-18 dated 28.6.20189;
(D) Pending hearing and final disposal of the present petition, Your Lordships may be pleased to stay the adjudication proceedings of Show Cause Notice No.VI(a)/8-38/CEA/CIR-V/Gr.29/2017-18 dated 28.6.2018 (Annexure-‘H’)
(E) An ex-parte ad-interim relief in terms of Para 18(D) above may kindly be granted.
(F) Any other further relief that may be deemed fit in the facts and circumstances of the case may also please be granted.”
4. The case of the writ applicant, as pleaded in the writ application, is as under;
1. M/s. SAL Steel Ltd. (hereinafter referred to as the “Petitioner”) is a Company inter alia engaged in the business of manufacturing goods like Sponge Iron, Ferro Chrome, Silico Manganese and Ferro Silicon, which were excisable goods classified under Chapter 72 of the Central Excise Tariff Act, 1985. The Petitioner has a factory for this purpose at the address shown in the cause title of the Petition. The 2nd Petitioner is one of the Directors and shareholder of the Petitioner, and he is a citizen of India entitled to the constitutional guarantees enshrined under Part–III of the Constitution of India. The 2nd Petitioner is joined as a party to the present proceedings because he is materially and substantially interested in the conduct and business affairs of the Petitioner.
2. The first Respondent is the Union of India, whereas Respondent Nos.2, 3 and 4 are employees, agents and servants of the Union of India. The 2nd Respondent is the chief officer of Gandhidham Commissionerate, whereas Respondent Nos. 3 and 4 have been proper officers of Central Excise and Service Tax Department having jurisdiction over the area where the Petitioner’s manufacturing activities are located. Respondent Nos. 2, 3 and 4 have jurisdiction over Gandhidham Kutch area for enforcement of the provisions of the Finance Act, 1994 in respect of levy of service tax; and the Petitioner’s business activities having been located in Gandhidham-Kutch area, Respondent Nos. 2, 3 and 4 have jurisdiction over the Petitioner also for levy and recovery of service tax. The Respondents herein are “State” and “State Authorities” as contemplated under Article-12 of the Constitution of India, and are amenable to the writ jurisdiction of this Hon’ble Court.
2.1 The main challenge in the present petition is about constitutional validity of two Notifications issued by the Central Government thereby laying down that the importer was the person liable to pay service tax on services by way of transportation of goods by a vessel from a place outside India upto the Custom station of clearance in India even in case of cost, insurance and freight (CIF) contracts, even though the local importer in such CIF transactions is neither the service provider nor the service recipient for imported goods. The service provider is the vessel owner/operator whereas the service receiver is the overseas seller/supplier of the goods, and the entire service of transporting goods from a foreign location to an Indian Port is provided and consumed outside India. Under the provisions of the Finance Act, 1994, service tax can be charged and collected either from the service provider or from the service receiver, but not from a third party; and therefore the Notifications and the Rules made thereunder laying down that the importer was the person liable to pay service tax for ocean freight are ultra vires the charging section as well as the machinery section of the said Finance Act, and also beyond the rule making power of the Central Government. A fictional value at the rate of 1.4% of sum of cost, insurance and freight (CIF) of imported goods is laid down as the value of such service for assessing service tax thereon, because the importer in India would not have any information about actual ocean freight charged by the vessel owner/operator from the overseas supplier/seller of the goods; but this fiction about value is also beyond the machinery provision of the Finance Act, 1994. Proceedings are initiated against the Petitioner Company for recovery of service tax as an importer of goods under CIF transactions in view of such invalid and unauthorized provisions, though such proceedings as well as the provisions invoked by the Service Tax authorities are ultra vires Articles 14 and 265 of the Constitution also.
A Petition being Special CA No.17804/2017 challenging all the above referred provisions of the Service Tax law filed by Kandla Port Steam Ship Agents Association has been admitted by this Hon’ble Court on 29.6.2018. The present petition involves challenge to the same provisions of Notification Nos. 15/2017-ST and 16/2017-ST and also a Circular dated 13.4.2017 issued by the CBEC for implementing such provisions.
3. Brief facts relevant for the present petition are as under:-
The Petitioner has set up a factory at the address in the cause title of this Petition for manufacturing goods like Sponge Iron, Ferro Chrome, Silico Manganese and Ferro Silicon, which were excisable goods classified under various headings and sub headings of Chapter 72 of the Central Excise Tariff at the relevant time. The Petitioner had been conducting manufacturing activities in accordance with the provisions of the Central Excise Act, 1944 and the Rules framed thereunder, and the Petitioner had also been complying with the provisions of the Finance Act, 1994 as amended from time to time in respect of levy of service tax, and also the Service Tax Rules, 1994 framed under the said Finance Act.
4. For manufacture of the above referred goods, the Petitioner requires various raw materials and inputs, including Steam Coal, Chrome Ore, Iron Ore and Chrome Ore Concentrate; which are regularly imported also by the Petitioner. The orders for purchase of such materials are placed by the Petitioner to foreign suppliers on CIF basis. The responsibility and obligation of the sellers/suppliers under CIF contracts has been to deliver the concerned materials to the Petitioner by bearing cost, insurance and freight by such sellers/suppliers.
5. In international trade, goods are bought and sold by way of two different modes/methods, namely, CIF contract and FOB contract.
FOB (i.e. Free on Board) is a contract of sale between the foreign supplier and the local importer, where the importer would engage the vessel/ship owner or operator for importing goods into India. In FOB contract, the service of transportation of goods by ship or vessel is received by the importer in India, whereas such service is rendered by the owner/operator of the foreign going vessel.
In case of CIF contract, the overseas supplier would engage the vessel owner/operator for transportation of goods to India. The appointment of the vessel/ship and also payment of transportation charges i.e. ocean freight of such vessel owner/operator are made by the overseas supplier in CIF contract. The service of transportation of goods by vessel is thus received by the overseas supplier from the foreign going vessel owner/operator in CIF contract.
5.1 Thus, the basic difference between FOB and CIF contract is that the service of transportation of goods by vessel/ship is received by the importer in FOB contract, whereas such service is received by the overseas supplier in case of CIF contract. The transportation charges for transporting goods by vessel or ship are colloquially known or called “ocean freight”, and such ocean freight is paid by the local importer in case of FOB contract whereas ocean freight is paid by the overseas supplier in case of CIF contract.
6. The Parliament had put service of transportation of goods by an aircraft or a vessel in Negative List under Section 66D of the Finance Act, 1994 as amended on 1.7.2012. Extracts of Section 66D of the said Finance Act as the Section stood in July, 2012 is enclosed and marked as Annexure-“A”.
By virtue of Clause (p)(ii) of Section 66D, services by way of transportation of goods by a vessel from a place outside India upto the Custom Station of clearance in India were not chargeable to any service tax.
7. The Parliament omitted the above referred Clause (ii) of Clause (p) of Section 66D with effect from 1.6.2016. Accordingly, services by way of transportation of goods by an aircraft or a vessel from a place outside India upto the Custom station of clearance in India came to be excluded from the Negative List; and consequently such services were chargeable to service tax with effect from 1.6.2016.
However, the Central Government has issued a Notification No.25/2012-ST dated 20.6.2012, popularly known as the Mega Exemption Notification; and at Sl.No.34 of this mega exemption Notification, services received from a provider of service located in a nontaxable territory by a person located in a non-taxable territory was fully exempt. Since the overseas seller/supplier of the goods when the goods were exported to India was located in a non-taxable territory and the vessel owner/operator who actually transported the goods to India was also located in a non-taxable territory, ocean freight in case of CIF contracts still continued to be exempt from collection of service tax even after 1.6.2016 by virtue of Sl.No.34 of the above referred Notification. Extracts of Notification No.25/2012-ST along with relevant definitions of the Finance Act (for taxable territory and non-taxable territory) are enclosed and marked as Annexure-“B”.
8. The Central Government has framed Service Tax Rules vide Notification No.2/94-Service Tax dated 28.6.1994. These Rules have been amended from time to time.
Under Rule 2(1)(d) of the Service Tax Rules, the expression “person liable for paying service tax” has been defined. By virtue of Notification No.2/2017-ST dated 12.1.2017, the Central Government has inserted Clause (EEC) under Rule 2(1)(d) thereby laying down that the person in India who complied with Section 29, 30 or 38 read with Section 148 of the Customs Act, 1962 with respect to goods transported by a vessel from a place outside India upto the Custom Station of clearance in India was the person liable to pay service tax on such services. For ready reference, extracts of Service Tax Rule (including Rule 2 and 6) with the relevant amendments including Clause (EEC) are enclosed and marked as Annexure-“C”.
8.1 Section 29 of the Customs Act refers to the obligations of the person-in charge of a vessel or an aircraft entering India from any place outside India. Section 30 of the Customs Act also refers to the obligations of such person for submitting Import General Manifest and the like documents. Section 38 refers to the powers of the proper Customs officer for requiring person-incharge of any conveyance carrying imported goods for production of any document or answer any questions.
By virtue of Clause (EEC) under Rule 2(1)(d) of the Service Tax Rules, the persons in charge of the vessel was deemed to be the person liable to pay service tax in situation covered under the said clause. Ordinarily, the shipping agent of the vessel owner is the person responsible for filing IGM and therefore, by virtue of the above referred provision of Rule 2(1)(d) (EEC), shipping agent of the vessel owner was the person liable to pay service tax on ocean freight.
8.2 However, by virtue of Notification No.26/2012-ST dated 20.6.2012, the Central Government has allowed abatement in value of the above referred taxable service to the extent of 70%, by providing at Sl.No.10 of the said Notification that service tax shall be paid on 30% of the value of transport of goods in a vehicle if Cenvat credit was not taken. The shipping agent or the vessel owner/operator was thus liable to pay service tax on 30% of ocean freight by virtue of the above referred provisions.
9. All the above referred provisions show that the importers like the Petitioner in India were not liable to pay any service tax on ocean freight in case of CIF contracts, because transportation service by using a vessel or ship was not rendered to the importers in CIF transactions.
10. The Petitioner has made CIF contracts for purchasing materials like Steam Coal, Chrome Ore, Iron Ore and Chrome Ore Concentrate, from the overseas sellers/suppliers. Specimen purchase contracts/orders on CIF basis are enclosed and marked as Annexure-“D”.
Accordingly, the Petitioner has never been the person liable to pay service tax on ocean freight, and accordingly the Petitioner has never paid service tax on ocean freight for purchasing goods in the international market on CIF basis. The Respondents have also never demanded any service tax from the Petitioner on the transportation charges for transporting goods in a vessel or ship from any foreign port to India in cases where the Petitioner imported goods on CIF basis.
11. However, on 13.4.2017, the Central Government has issued two Notifications being Notification Nos. 15/2017-ST and 16/2017-ST. Both the Notifications dated 13.4.2017, however, have been brought into force from 23.4.2017.
By virtue of Notification No.15/2017-ST, the Central Government has substituted certain Explanations in the original Notification No.30/2012-ST dated 20.6.2012. Explanation-V so substituted/inserted vide this Notification No.15/2017-ST provides that the importer as defined under Section 2(26) of the Customs Act shall be the person liable to pay 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 a vessel from a place outside India upto the Custom station of clearance in India. By virtue of Explanation-V so inserted, it would mean that the importer of goods would be liable for paying service tax on ocean freight in case where the service of transportation of goods in a vessel was provided by the vessel owner/operator to the overseas supplier-seller in CIF transactions.
By Notification No.16/2017-ST, Clause (EEC) of Rule 2(1) (d) of the Service Tax Rules has been substituted, and there also the importer as defined under Section 2(26) of the Customs Act is made liable to pay service tax on ocean freight in cases like CIF transactions. A new Sub Rule i.e. Sub Rule (7CA) has also been inserted in Rule 6 of the Service Tax Rules by this Notification, thereby providing that the value of the ocean freight may be calculated at the rate of 1.4% of the sum total of CIF for paying service tax thereon. Thus, the effect of the amendments vide the other Notification No.16/2017-St is also the same i.e. an importer like the Petitioner is made the person liable to pay service tax on ocean freight in case of CIF transactions, though the service of transportation of goods in CIF transactions is rendered by the ship owner/operator to the overseas seller/supplier, and not to the local importer. Copies of these two Notification Nos.15/2017-ST and 16/2017-ST, both dated 13.4.2017 are enclosed and marked as Annexure-“E”.
Since amendments by the above two Notifications are made in Rule 2 of Service Tax Rules and original Notification No.30/2012-ST dated 20.6.2012, the Service Tax Rules and Notification No.30/2012-ST with these amendments are enclosed and marked as Annexure-“F” Colly.
12. The Central Board of Excise & Customs, New Delhi has issued a Circular No.206/4/2017-ST dated 13.4.2017, in view of the above referred changes and amendments in respect of service tax on ocean freight. As regards abatement in value of such service to the extent of 70% otherwise allowed vide Sl.No.10 of Notification No.26/2012-ST, it is clarified at paras 4 and 4.1 of this circular that such abatement shall not be admissible in case of value of services of transportation of goods in a vessel because the condition of Notification No.26/2012-ST that no credit on inputs and capital goods should be taken under the Cenvat Rules was not fulfilled in the present scenario inasmuch as the service providers (i.e. the foreign shipping lines) were liable to zero rated tax in their home country and had thus suffered no taxes. A copy of this Circular No.206/4/2017-St dated 13.4.2017 is enclosed and marked as Annexure-“G”.
The effect of the above referred clarification, which is on face of it wrong and incorrect, is that a person liable to pay service tax on ocean freight is now liable to pay service tax on the entire value of transportation charges i.e. the whole of ocean freight without any abatement in value that the Central Government has otherwise allowed vide Sl.No.10 of Notification No.26/2012-ST.
13. For value of this service, the Central Government has also amended Rule 6 of Service Tax Rules by inserting Sub Rule (7CA), thereby laying down that the person liable for service tax for ocean freight shall have option to pay service tax on 1.4% of sum of cost, insurance and freight (CIF) value of the imported goods. Thus, the Central Government has extended an option to pay service tax @1.4% of CIF value of the goods in case the person liable to pay service tax did not propose to discharge service tax on the actual value of ocean freight.
14. As aforesaid, the Petitioner’s contracts are on CIF basis, and therefore the Petitioner had not been liable to pay service tax on ocean freight, because the importer who had not received the service of transportation of goods in a vessel from the owner/operator of such ocean going vessel was not the person liable to pay service tax in this case till 23.4.2017. But since the importer of the goods is made liable to pay service tax by virtue of Notification Nos.15/2017 and 16/2017,both dated 13.4.2017, from 23.4.2017, the Central Excise and Service Tax authorities initiated enquiry against the Petitioner as a result of audit verification of the Petitioner’s records. The Audit officers noticed the imports made by the Petitioner and also the Bills of Entry filed for the goods imported on CIF basis. Upon noticing that service tax on ocean freight was not paid by the Petitioner as an importer even for the imports made on and after 23.4.2017, the Assistant Commissioner, GST Audit has issued a Show Cause Notice No. VI(a)/8-38/CEA/CIR-VI/Gr.29/2017-18 dated 28.6.2018, thereby proposing to recover Rs.33,09,220/- as service tax from the Petitioner on the ocean freight portion of imports made from 23.4.2017. This show cause notice is based on Notification Nos.15/2017-ST and 16/2017-ST, and proposals for charging interest and imposing penalties under various provisions of the Finance Act, 1944 have also been leveled in this show cause notice. A copy of this show cause notice No. VI(a)/8-38/CEA/CIR-VI/Gr.29/2017-18 dated 28.6.2018 is enclosed and marked as Annexure-“H”.
The Petitioners submit that there has been no malafide or dishonest intention on their part in not paying service tax on ocean freight for the period from 23.4.2017 to 30.6.2017. The Petitioners have been under a genuine and bonafide impression that no service tax was chargeable on CIF transactions, and therefore service tax has not been paid by them. Several changes and amendments have been made by the Central Government with effect from 23.4.2017, but the Petitioners were not aware about such changes and amendments; and since the changes and amendments are even otherwise so complicated that a person of ordinary prudence would not be in a position to understand such actions of the Central Government. Since there was no liability to pay service tax on the importer on ocean freight component for CIF contracts for several years and the Petitioners genuinely believe that the importer cannot be made liable to pay service tax in a situation like the present one, the service tax has not been paid, and the same impression was apparently carried by the Divisional and Range officers also, until the Audit officers raised the objection.
The show cause notice above referred is pending before the adjudicating authority. The Petitioners have not filed any formal reply to the show cause notice, and no order has been made by the adjudicating authority on this show cause notice dated 28.6.2018.
15. The Petitioners submit that the provisions made by the Central Government for charging service tax on ocean freight and also for recovering service tax on ocean freight from the importer in respect of CIF transactions are ultra-vires the provisions of the Finance Act, 1994 as amended from time to time, and also ultra vires the Constitution of India, inasmuch as no tax in the nature of “service tax” can be levied and collected by the Union of India on the activities which occur outside the territory of India, and no recovery of a tax in the nature of “service tax” can be made from a person who is neither service provider nor service recipient. There is no machinery provision also for determining value of the service in the nature of transportation of goods by vessel from a place outside India to a Custom Station in India, and therefore also the provisions made by the Central Government for seeking to charge service tax from an importer like the Petitioner on a fixed rate of 1.4% of the CIF value of the imported goods are ultra vires Articles 14 and 265 of the Constitution of India. The Petitioners are therefore constrained to approach this Hon’ble Court challenging such provisions for being declared unconstitutional and ultra vires on following main amongst other grounds that may be urged at the time of hearing of the present petition; grounds being set out hereunder without prejudice to one another:”
5. Thus, the subject matter of challenge is the validity of the following;
“(i) Rule 2(1)(d)(EEC) of the Service Tax Rules, which provides that the person liable to pay service tax in relation to service by way of transportation of goods by a vessel from a place outside India upto the Customs Station of clearance in India, shall be the importer as defined under Section 2(26) of the Customs Act.
(ii) Notification No.15/2017-ST which provides for reverse charge system for collecting service tax from the importer as defined under Section 2(26) of the Customs Act in case of service of transportation of goods by a vessel from a place outside India upto the Customs Station of clearance in India.
(iii) Notification No.16/2017-ST which inserts Sub Rule (7CA) in Rule 6 of Service Tax Rules thereby providing an option to pay an amount calculated @ 1.4% of the sum of cost, insurance and freight (CIF) in case of payment of service tax for the above types of transportation.”
6. Submissions on behalf of the writ applicant;
6.1 Mr. Paresh M. Dave, the learned counsel appearing for the writ applicants has put forward four propositions for the purpose of challenging the above referred provisions as ultra vires the charging Section (Section 66B of the Finance Act) and the rule making power of the Central Government (Section 94 of the Finance Act). The four propositions canvassed are as under;
“(i) Under the Finance Act, 1994, levy of service tax is imposed on services rendered in India, and not for services rendered and/or consumed outside India, and therefore the above provisions providing for collection of service tax on extraterritorial events are ultra vires.
(ii) Service tax can be collected from the service provider or service receiver (under reverse charge system); but the importer is a third party in CIF transactions, who is neither serviced provider nor recipient of service. Therefore, the provisions for payment of service tax by a third party are ultra vires.
(iii) No power is conferred upon the Central Government under the Finance Act, 1994 for charging extraterritorial events, and therefore the provisions are ultra vires the rule making power of the Central Government.
(iv) No power for fixing value of a taxable service is conferred upon the Central Government under the Finance Act, 1994, and therefore Rule 6(7CA) of the Service Tax Rules inserted vide Notification No.16/2017-ST is ultra vires the rule making powers and also the machinery provision of Section 66.”
7. Submissions on behalf of the respondents Nos.1 to 4;
7.1 The power of the Parliament to levy service tax under Entry No.97 of List 1 is not in dispute.
7.2 Under Section 64 of the Finance Act, 1994 read with Section 66B of the Finance Act, 1994, Service Tax is applicable on taxable services provided in India, except the State of Jammu and Kashmir. Section 66C empowers the Central Government to make rules for determination of place of provision of service and Place of Provision of Services Rules, 2012 have been made accordingly.
7.3 Further, Section 66C(2) specifically provides that any rule made under sub-section (1) of Section 66C shall not be invalid merely on the ground that either the service provider or the service receiver or both are located at a place being outside the taxable territory.
7.4 Section 66C and the Place of Provision of Service Rules, 2012 are within the powers vested with the Parliament under the Constitution and also are in consonance with the law interpreted by the Supreme Court as well.
7.5 In terms of the applicable Rule 10 of the Place of Provision of Services Rules, 2012, the place of provision of services of transportation of goods by air/sea, other than by mail or courier, is the destination of the goods. Thus, with respect to goods destined for India, services by way of transportation of such goods by a vessel are taxable in India.
7.6 The Service Tax levy under question is on the services by way of transportation of goods by a vessel from a place outside India to the customs station of clearance in India. These services are provided by a person having a ship (either owned or arranged for his use) to another person (importer or exporter) receiving the services of transportation of goods whereas Custom duty is levied on the activity of bringing goods into India from a place outside India which is between the exporter and importer of goods Thus, it is evidently clear that the import of goods and the service of transportation of imported goods are distinct activities between separate set of persons.
7.7 The same transaction (for example, activity of bringing goods into India i.e. import of goods) may involve two or more taxable events (such as Customs duty on the import aspect and service tax for the ‘transportation services rendered’ aspect) and such an overlapping of two ‘aspects’ does not take away the power to levy tax on both aspects.
7.8 In the facts obtaining from the present case, in so far as the power of Parliament to levy Service Tax under Entry 97 of List I is concerned, it is relatable to the ‘service rendered’ aspect of the transaction and not the aspect of ‘import of goods’ per se Therefore, the Parliament by subjecting the service aspect to the Service Tax, is levying a tax distinct from the Customs duty levied by it under Entry 83 of List I.
7.9 In the present case, ‘import of goods’ which is carried out by a person other than the importer himself is an activity, which gives rise to the aspect of providing transportation services of the said imported goods and as such it is giving rise to more than one taxing incident. Therefore, the taxing incidents in relation to Customs duty on imports (Entry 83 of List 1) is completely distinguishable and is not in conflict with the taxing incidents of service tax on transportation services (Entry 97 of List I) .
7.10 There is no constitutional bar in levying of taxes under different statutes on different aspects, if there are distinct taxable events, eligible to different taxes (e.g. Central Excise and VAT on manufacture and sale of goods respectively, entertainment tax and service tax on entry to entertainment and service aspect, service tax and Central Excise/VAT on contract manufacturing, service tax and luxury tax on hotel stay etc.). The only question is whether demand of tax is sustainable under the particular statute or not.
7.11 In the instant case, the value of transportation services is includible in the assessable value of the goods in terms of the Customs Act, 1962 and the Rules made there under [Customs Valuation of imported goods, Rules, 2007]. However, there is no provision under Service tax provisions (Finance Act, 1994) wanting non-levy of service tax on service of transportation of imported goods on the grounds that Custom duty has been levied on ouch value being included in the value of goods under a different statute viz. Customs Act, 1962. Vice. Versa, there is no provision warranting exclusion of value of transportation services from the assessable value for customs purposes, on the ground that service tax has become levied on such services under a different statute.
7.12 In the case of FOB (Free on Board) imports, the freight amount which is the consideration for transportation services is available with the Indian importer and the shipping line and thus;
a. If the Indian importer avails transportation services from a foreign shipping line, the Indian importer pays service tax under reverse charge basis on the freight amount which is known to Indian importer.
b. If the Indian importer avails transportation services from an Indian shipping line, the Indian shipping line pays service tax on the freight charges recovered in lieu of transportation services provided by it.
7.13 In the case of CIF (Cost, insurance and freight) imports, the freight amount is available with the shipping line and through the shipping line with the shipping agent/importer and thus,
a. If the Indian shipping line provides transportation services in case of CIF (Cost, insurance and freight) imports, the Indian shipping line pays service tax on the freight charges recovered in lieu of transportation services provided by it.
b. If the foreign shipping line provides transportation services in case of CIF (Cost, insurance and freight) imports, the Indian shipping agent/importer has to pay service tax in following ways,
(i) by procuring the quantum of freight charges and accordingly receive service tax ® 15% (14% Service Tax + 0.5% Swachh Bharat Cess + 0.5% Krishi Kalyan Cess) on the freight value from its principal i.e. the foreign shipping line and depositing service tax in India.
(ii) vide notification No. 16/2017-ST dated 13th April, 2017 an optional alternate mechanism has been provided with effect from 22nd January, 2017 for calculating and paying service tax @ 1.4% of CIF value of the imported goods.
7.14 Under the notification No. 26/ 2012-ST dated 20.06.2012 (Sr. No. 10), there is an exemption on 70% of the value of services of transportation of goods in a vessel subject to the fulfillment of the condition that the Cenvat credit on inputs and capital goods used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004 This conditional exemption has been extended for the reason that out of the full value of such services, the exempted value of service has already suffered taxes (Central Excise) which would have been available as Cenvat credit to set off service tax on full value of service In effect, the service tax is levied on the added value only. However, in case of foreign shipping lines, their services being exports from their home country, are zero-rated in their home country and thus have suffered no taxes. Further the foreign shipping lines do not get registered in India and do not follow the provisions of the Cenvat Credit Rules.
7.15 Vide Notification Nos. 15/2017-ST and 16/2017-ST respectively dated 13th April, 2017, the importer of goods as defined in the Customs Act, 1962 has been made liable for paying service tax in cases of services of transportation of goods by sea provided by a foreign shipping line to a foreign charterer with respect to the goods destined for India. This change has come into effect from 23rd April, 2017. The Shipping/steamer agents are no longer liable to pay the service tax for the services provided on or after 23rd April, 2017.
8. On 27th December, 2018, a Coordinate Bench of this Page 19 of 80 Court passed the following order;
“1. Mr. Paresh Dave, learned advocate for the petitioners submitted that by virtue of the impugned notification dated 13.4.2017 issued in exercise of power under subsection (2) of section 68 of the Finance Act, 1994, it has been provided that services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India, person liable for paying service tax other than the service provider shall be the importer as defined under section 26 (2) of the Customs Act, 1962 of such goods. It was pointed out that by virtue of Notification No.16/2017-S.T. Dated 13.4.2017 issued in exercise of powers under sub-section (2) of section 94 of the Finance Act, 1994 in the Service Tax Rules,1994, rule 2(1)(d) has been amended by inserting clause (EEC) and that in rule 6, with effect from 22.1.2017, that is, retrospectively, sub-rule 7(CA) has been inserted which provides that, the person liable for paying service tax for the taxable services provided or agreed to be provided by a person located in non-taxable territory to a person located in nontaxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India, shall have an option to pay an amount calculated at the rate of 1.4% of the sum of cost, insurance and frieght (CIF) value of such imported goods. It was submitted that in a CIF contract, the ocean freight of such vessel owner/operator is paid by the overseas supplier. It was submitted that in case of CIF contact insofar as the transportation of the goods till the customs station in India is concerned, the importer is neither the service provider nor the recipient.
2. Referring to section 66B of Finance Act, 1994, which is the charging section, it was pointed out that the same provides for levy of tax provided in the taxable territory by one person to another. It was submitted that the same does not contemplate levy of service tax of a person other than the service provider and/or the recipient of such service. It was submitted that, moreover, tax can be levied provided such service is provided in the taxable territory.
3. Reference was made to section 65B(52) which defines “taxable territory” to mean the territory to which the provisions of that Chapter apply. Referring to Chapter V of the Act, it was contended that by virtue of sub-section (2) of section 64 thereof, the same extends to the whole of India except to the State of Jammu and Kashmir. It was submitted that, therefore, no service tax can be levied to service provided outside India.
4. It was submitted that, therefore, the impugned notifications to the extent they seek to make the importer liable for payment of service tax in respect of ocean freight is ultra vires the provisions of section 66B and section 68(2) of the Finance Act, 1994.
5. The attention of the court was invited to section 94 of the Finance Act which provides for “Power to make rules”. It was submitted that in none of the items enumerated thereunder, is the Central Government empowered to fix the tariff value of any service. It was submitted that, therefore, the impugned notification dated 13.4.2017 which provides for an option to pay the amount calculated at the rate of 1.4% by way of sum of cost, insurance and freight value of the imported goods is de hors the powers conferred on the Central Government under sub-section (2) of section 94 of the Act.
6. Referring to section 67 of the Act which provides for “Valuation of taxable services for charging service tax”, it was submitted that there is no such power to fix tariff as has been done by virtue of the notification dated 13.4.2017 which is beyond the machinery provision also.
7. Various other submissions have been advanced; however, at this stage it is not necessary to refer to the same.
8. Having regard to the submissions advanced by the learned advocate for the petitioners, Issue Notice returnable on 6th February, 2019. By way of ad-interim relief, further proceedings pursuant to the impugned show cause notice dated 28.6.2018 (Annexure-H to the petition) are hereby stayed.
9. Direct service is permitted to the respondents other than the respondent Union of India.”
ANALYSIS
9. Mr. Dave, the learned counsel appearing for the writ applicants invited our attention to few relevant provisions of law. We must make a reference of those provisions in our judgment. We first look into the Service Tax Rules, 1994 (Notification No.2/94-S.T., dated 28th June, 1994, as amended). Rule 2(d) defines the phrase “person liable for paying service tax”. Rule 2(eec) reads thus;
“2(EEC) in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the importer as defined under clause (26) of section 2 of the Customs Act, 1962 (52 of 1962) of such goods.”
10. Rule 6 is with regard to the payment of service tax. Rule 6(7CA) reads thus;
“6[7CA]: The person liable for paying service tax for the taxable services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, shall have the option to pay an amount calculated at the rate of 1.4% of the sum of cost, insurance and freight (CIF) value of such imported goods.”
11. Mr. Dave, thereafter, invited our attention to the Notification No.30/2012-S.T. dated 20th June, 2012. The notification reads thus;
“Service for which tax is payable or partially payable by persons receiving the service- Service Tax payable by Reverse Charge system in relation to insurance business, GTA, sponsorship, Arbitral Tribunal, legal services by Advocates, support services provided by Govt. or local authorities (except specified services), renting of motor vehicles on abated value, renting of motor vehicles on unabated value (partially also payable by service provider), manpower supply (partially also payable by service provider), work contract (partially also payable by service provider), service provide from nontaxable territory but received in taxable territory (partially also payable by service provider)- Notification Nos.15/2012-S.T. & 36/2004-S.T. Superseded.
In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), and in supersession of (i) notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 15/2012-Service Tax, dated the 17th March, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number G.S.R 213(E), dated the 17th March, 2012, and (ii) notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 36/2004-Service Tax, dated the 31st December, 2004, published in the Gazette of India, Extraordinary, Part II, Section 3, Subsection (i), vide number G.S.R 849 (E), dated the 31st December, 2004, except as respects things done or omitted to be done before such supersession, the Central Government hereby notifies the following taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of the said sub-section, namely:–
1. The taxable services,—
(A) (i) provided or agreed to be provided by an insurance agent to any person carrying on the insurance business;
(ii) provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is,—
(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
(b)any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;
(c) any co-operative society established by or under any law;
(d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder;
(e) any body corporate established, by or under any law; or
(f) any partnership firm whether registered or not under any law including association of persons;
(iii) provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm located in the taxable territory;
(iv) provided or agreed to be provided by,—
(A) an arbitral tribunal, or
(B) an individual advocate or a firm of advocates by way of support services, or
(C) Government or local authority by way of support services excluding,—
(1) renting of immovable property, and
(2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory;
(v) provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers to any person who is not in the similar line of business or supply of manpower for any purpose or service portion in execution of works contract by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory;
(B) 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;
(II) 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 paragraph I shall be as specified in the following Table, namely:—
