Case Law Details
Rashtriya Ispat Nigam Ltd Vs Commissioner of Central Excise & Service Tax (CESTAT Hyderabad)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, examined multiple appeals involving service tax demands on demurrage charges, dispatch money, and Consulting Engineering Services (CES) received from foreign entities. The dispute covered the period from 2007-08 to 2011-12, with certain issues extending beyond 1 July 2012.
The appellant, a manufacturer of iron and steel products, imported raw materials and exported finished goods through charter party agreements with vessel owners and separate arrangements with stevedores for loading and unloading operations. The department alleged that the appellant was liable to pay service tax under the Reverse Charge Mechanism (RCM) on CES received from foreign entities and on demurrage charges under the category of Port Services. It also sought to tax dispatch money received for quicker unloading and vessel turnaround.
With respect to demurrage charges and dispatch money, the Tribunal observed that loading and unloading activities within a port may fall within the scope of port services. However, the crucial requirement for service tax levy is the existence of a service provider, a service recipient, and consideration for the service. The Tribunal found that the actual loading and unloading work was performed by stevedores engaged by the appellant, and the stevedores had discharged service tax on such activities. Vessel owners neither performed loading or unloading operations nor engaged stevedores for those activities. Therefore, vessel owners could not be treated as providers of port services to the appellant. As a result, the department’s invocation of Section 66A for taxing demurrage paid to foreign vessel owners was held to be unsustainable.
The Tribunal further held that demurrage charges and dispatch money were contractual conditions linked to transportation arrangements. Demurrage operated as a charge for delay in unloading or loading beyond agreed laytime, while dispatch money served as an incentive for quicker turnaround. These amounts were adjusted against freight and formed part of the transportation arrangement rather than consideration for any independent service. Consequently, they could not be treated as taxable consideration under service tax law.
The Tribunal also noted that, in import transactions, demurrage formed part of transportation-related costs associated with the purchase of goods, while in export transactions it was connected with costs incurred up to delivery of goods on board the vessel under FOB contracts. The ownership of goods remained with the appellant until loading or unloading, and therefore such activities could not be regarded as services rendered to another person.
For the period after 1 July 2012, the Tribunal rejected the view that demurrage or dispatch money could be taxed as a declared service under Section 66E. It held that such amounts represented contractual consequences, incentives, or penal charges arising from transportation arrangements and not consideration for any service. The Commissioner (Appeals)’ attempt to analyze the issue under declared service provisions was also found to be beyond the scope of the show cause notices.
On the issue of dispatch money, the Tribunal held that the same reasoning applicable to demurrage equally applied to dispatch money because both arose from the same contractual arrangement and merely reflected whether vessel turnaround occurred earlier or later than agreed. Accordingly, dispatch money was also held not liable to service tax.
Regarding Consulting Engineering Services, the Tribunal found that although the agreement was entered into with a foreign entity located in Moscow, that entity also had an establishment in India holding service tax registration. The contract specifically provided that where the foreign contractor had an office in India, service tax would be paid by the Indian establishment and reimbursed by the appellant. It was undisputed that the Indian establishment had discharged the service tax and the appellant had reimbursed the same in accordance with the contract.
The Tribunal held that the Indian establishment handled statutory compliance and tax payments in relation to the services provided. Therefore, the case involved service tax liability on a forward-charge basis through the Indian establishment rather than under RCM. Since service tax had already been paid by the Indian establishment, a separate demand under RCM against the appellant could not survive. Accordingly, service tax on CES under reverse charge was also set aside.
Holding that the department had failed to establish taxability of demurrage charges, dispatch money, or CES under RCM, the Tribunal set aside the demands and penalties. Since the appeals were allowed on merits, it did not examine issues relating to limitation, penalty, or relief under Section 80 of the Finance Act. All appeals were allowed.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s Rashtriya Ispat Nigam Ltd (hereinafter referred to as appellant) are in appeal against OIO dt.28.02.2014, vide Appeal No. ST/22362/2014, whereby, the adjudicating authority has confirmed the demand in respect of ‘demurrage charges’ paid towards delayed discharge of import cargo as well as non-payment of service tax under Reverse Charge Mechanism (RCM) under the category of ‘Consulting Engineering Service’ (CES) in respect of services received from their foreign contractors. The period involved is from 2007-08 to 2011-12. The appellants are also in appeal against OIA dt.22.03.2018, vide Appeal Nos. ST/30797 & 30798/2018, and against OIA dt.27.03.2018, vide Appeal No. ST/30799/2018, wherein, the OIOs passed by the adjudicating authorities have been upheld by the Commissioner (Appeals). The issue involved in all these three appeals is leviability of service tax on ‘demurrage charges’. The appellants are also in appeal against OIA dt.28.03.2018, vide Appeal No. ST/30800/2018, whereby the OIO passed by the adjudicating authority has been upheld and the issue involved is whether ‘dispatch money’ received for expeditious unloading of cargo and quick turnaround of the vessel are classifiable under the category of ‘Port Services’ and subjected to service tax or otherwise.
2. In all these appeals, the issues are more or less common, except for certain provisions being applied post 01.07.2012. The brief facts of the case relevant to all the appeals are that the appellants are engaged in manufacture of iron and steel products and for the same, they are importing raw material as well as exporting their finished goods. In this regard, they entered into charter party agreement with vessel operators/ owners of the vessel and they also entered into a separate agreement for unloading of goods with the stevedores on vessel to vessel basis. The department noticed that they were receiving certain dutiable services from service providers situated outside India and therefore, felt that in respect of said services, the appellants are required to discharge service tax under RCM in terms of section 66A of the Finance Act, 1994 (Act).
3. Essentially, there are two services, which are in dispute. Firstly, it is alleged that they have not discharged service tax on the services of CES procured from companies located outside India and secondly, they have not discharged service tax on ‘demurrage charges’ paid by the appellant to the foreign vessel owners. This activity was covered under ‘Port Services’ defined under section 65(82) of the Act. Therefore, essentially, the department alleged that they are receiving certain taxable services from persons located outside India and therefore, in terms of section 66A, they are required to discharge service tax thereon.
4. On adjudication, the adjudicating authority examined their submissions and the factual matrix of the case. Insofar as the issue of leviability of service tax on CES under RCM, he noted that the appellants had received certain services for technological assistance for battery complex repairs from one M/s CJSC ‘OGNEUPORTKOKSSERVICES’ (OKOS), Moscow. After examining the contract, it was held that the said activity falls within the category of CES. Thereafter, he examined the provisions of section 66A of the Act to decide whether they were required to pay service tax under RCM. He interpreted section 66A keeping in view the submission of OKOS that they were having permanent establishment at Noida and the same was registered with service tax department, in a manner in which he held that since in the present case, the appellant had entered into contract with service provider located in Moscow and therefore, legally, the Moscow unit of service provider is required to provide service and fulfil all the obligations laid down under the contract and therefore, it is immaterial whether the services were provided by the service provider through their Indian establishment or by them directly and therefore, relying on the provisions under second proviso to section 66A read with section 66A(2), he held that the establishment of service provider located in Moscow and India are to be considered as two independent establishments and therefore, Moscow unit of service provider is concerned with provision of taxable service to the appellant and hence Moscow unit and not Indian establishment is liable to discharge service tax liability. The relevant paras of OIO are reproduced below.
“39.Therefore I would like to examine the relevant statutory provisions relating to Service Tax payment under Reverse Charge mechanism covered under Section 66A of Finance Act.
Section 66A: Charge of Service Tax on services received from outside India:
(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:
Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:
Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.
Explanation 1. – A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.
Explanation 2. – Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.
40. From the above legal position, it is obvious that as per the provisions of Section 66(A)(1) of Finance Act, if any service specified under Section 65(105) of Finance Act is provided by a service provider, who has his place of business / fixed establishment / permanent address/ usual place of residence in a country other than India, and received by a service recipient, who has his place of business / fixed establishment/ permanent address / usual place of residence in India, then it shall be considered that such service is provided by the service recipient himself and therefore service recipient is required to discharge the Service Tax liability. However this Section 66(A)(1) is followed by two provisos. The exemption provided under first proviso is applicable to a service recipient, who is an individual. In the present case, the Service Recipient is M/s. RINL and not an individual. Therefore the exemption given under first proviso is not applicable to the present situation. As per the 2nd proviso to Section 66(A)(1) of Finance Act, if the service provider has his business establishment in two or more different countries, then the country, from which the service is provided, is taken into consideration for deciding the issue of provision of service. As per the explanation 1 given at the bottom of Section 66A, if a person is carrying on a business through a branch or agency in any country, then the branch or agency is treated as having a business establishment in that country. Further as per explanation 2 given at the bottom of Section 66A, in relation to a body corporate, the usual place of residence is the place where it is incorporated.
41. After examining the statutory position, I apply the same to the present situation. In the present case, it is noticed from the Agreement No. VSP/WC/AGT-4969/2010-11 dated 30/11/2010 that the agreement was entered into between the assessees and the service provider viz., M/s. CJSC “OGNEUPORTKOKSSER VIS” (OKOS) located in Moscow. The assessees submitted that the service provider is having a permanent establishment in India at Noida and that the same was registered with Service Tax Department and complying with various Indian Acts, such as Provident Fund Act, Income Tax Act etc. Therefore the service provider is carrying on business through a permanent establishment in India as well as in a country other than India, i.e., Moscow. In such a situation, as per the provisions of Section 66A(2) of Finance Act 1994, both these establishments are to be considered as two separate persons for the purpose of levy of Service Tax. Further as per the provisions of 2nd proviso to Section 66A(1) ibid, if the service provider has his business establishment in two or more different countries, then the country, from which the service is provided, is taken into consideration for deciding the issue of provision of service. In the present case, the assessees entered into a contract with the Service Provider located at Moscow and therefore legally Moscow unit of the service provider is required to provide the service and fulfill all the obligations laid down under the contract. Therefore it is immaterial whether the service was provided by the service provider through their Indian establishment or by them directly. In view of the provisions laid down under 2nd proviso to Section 66(A) read with Section 66A(2) of Finance Act 1994, I hold that in the present case, the Establishments of the service provider located in Moscow and in India are to be considered as two different independent establishments and therefore unit of the service provider located at Moscow is concerned with the provision of taxable service to the assessees and hence Moscow unit of the service provider, but not their Indian establishment, is liable to discharge the tax liability is shifter to the assessees. Therefore I hold that the assessee’s contention that the Indian establishment of the service provider located at Noida paid Service Tax of Rs. 49,41,779/- in respect of the contract entered into with them is also not a valid argument, because the assessees are liable for payment of Service Tax under reverse charge mechanism.”
5. Insofar as the issue of service tax under the category of ‘Port Services’, he held that the appellants had paid demurrage charges to the foreign vessel owners at the discharge port and thereafter, examined the scope of port services both pre-amendment as well as post-amendment. He accordingly held that loading/ unloading of material is to be considered as ‘port services’ and demurrage charges being activity done for a consideration is taxable. The appellants are the main contractor for the work of the above operations and hence they are liable to pay service tax. The relevant paras of the OIO are reproduced below.
“43. I observe that M.s RINL , Visakhapatnam are engaged in imports of the raw material and exports of their final products. The assessees paid demurrage charges to the foreign vessel owners at the discharge port i.e., Visakhapatnam or Gangavaram Port in respect of their imports and also exports. The assessees contend that demurrage charges paid on exports for delay in loading the vessel beyond the allowed time schedule as per terms & conditions of the agreement, is a part of the consideration by way of diminution and not “Port Services”. Similarly, demurrage charges paid on imports is a part of transportation cost and not a consideration paid towards any provision of service and therefore demurrage charges paid by them are not liable to Service Tax under “Port Services”.
44. Therefore I would like to examine the relevant statutory provisions relating to ‘Port Service’. Section 65(82) and Section 65(105)(zn) of Finance Act define Port Service and Taxable Service respectively. The relevant sections of the statute are reproduced hereunder for ready reference:
Section 65(82) of Finance Act: ‘Port Service’ means any service rendered within a port or other port, in any manner;
Section 65(105)(zn) of Finance Act: ‘Taxable Service’ means any service provided or to be provided to any person, by any other person, in relation to port services in a port, in any manner.
From the above legal position, it is obvious that if any service is rendered within a port or other port in any manner is considered as ‘Port Service’. After examining the legal position of Port Service, I take up the issue regarding whether demurrage charges are to be considered as the amount charged in connection with the providing ‘Port Service’ or not. It is noticed that at the time of import, demurrage is an additional amount paid for delay / additional time taken in discharging the vessel by unloading the vessel beyond the stipulated time limit. Similarly at the time of export also, demurrage charges were paid, whenever there is delay in loading the vessel beyond the stipulated time limit. In this context, it is noticed that Board vide circular F.No.B.11/1/2001-TRU dt. 09.07.2001 clarified that demurrage charges are recovered as a rental for storage of goods. The fact that these charges apply only if the goods overstay a prescribed free period, does not detract from their being in the nature of a charge for providing a service in relation to goods. Accordingly demurrage charges would form part of the taxable value. Further, it noticed that at Para 2.3.2 of Educational Guide to Service Tax, it was mentioned that the payment relating to demurrages payable for use of services beyond the period initially agreed upon, e.g. retention of containers beyond the normal period, constitute a consideration for provision of service.
45. Further it is noticed that in the present case, the assessees subcontracted the stevedoring work to the stevedores on vessel to vessel basis for unloading in respect of imports and loading in respect of exports. The said stevedoring agent authorized by the port to undertake stevedoring operations in the port, in relation to the vessels or goods, in any manner, was rendering ‘Port Service’. Therefore, I am of the view that the loading/unloading the material is to be considered as Port Service and demurrage charges being activity done for a consideration is taxable. The assessees are the main contractors for the work of the above operations and hence they are liable to pay Service Tax under the ‘’Port Services’.”
6. Learned Advocate for the appellant has submitted that as per their procurement model, they are entering into charter party agreement with vessel operators/ owners and also with stevedores for actually doing the said work of loading/ unloading. Similarly, for exports also, they entered into contract with foreign buyers on FOB basis and the goods are delivered into vessels nominated by the buyer. In the context of their import and export, in terms of charter party agreement, certain average rate of discharge of cargo is agreed and in case of delay, the appellant is liable to pay demurrage charges. However, in the case of expeditious unloading and turnaround, the appellant would be liable to receive ‘dispatch money’ from the vessel operators. The final freight charges are paid to the vessel operator/ owner with adjustment towards demurrage or dispatch money.
7. Insofar as the issue of CES is concerned, learned Advocate has submitted that OKOS has permanent establishment in India and the agreement between OKOS, Russia and the appellant clearly provides for reimbursement of service tax by the appellant subject to OKOS providing an invoice, which contains all the requisite details.
8. Learned Advocate’s main submissions are as under.
A) Demurrage charges are only a condition of the contract and not consideration for service. In this regard, he has relied on the following judgments.
i. Bhayana Builders (P) Ltd Vs CST [2013 (32) STR 49(Tri-LB)]
ii. South Eastern Coalfields Ltd Vs CCE [2021 (55) GSTL 549 (Tri-Del)]
iii. CCE & ST LTU Mumbai Vs Shipping Corporation of India Ltd [2025 (8) TMI 800 – CESTAT Mumbai]
iv. Sembcorp Energy India Ltd Vs CCE, Hyderabad [2023 (4) TMI 919 – CESTAT Hyderabad]
v. Krishnapatnam Port Vs CCE & ST [2023 (72) GSTL 259 (Tri-Hyd)]
B) Demurrage incurred for import of goods is related to the transportation cost which in turn forms part of purchase transaction. Hence, it is not a service. Similarly, insofar as demurrage incurred for export of goods is concerned, it is part of sale consideration and not a service. He has relied on the following case laws in support.
i. Indian Oil Corporation Ltd Vs CCE, Goa [2015 (1) TMI 456 – CESTAT Mumbai]
ii. Surjeet Auto Pvt Ltd Vs CCE [2024 (8) TMI 204 – CESTAT New Delhi]
C) No service has been provided to the appellant as the goods are owned by the appellant themselves. In this regard, he has relied on the judgment of Hon’ble High Court of Punjab & Haryana in the case of CCE Vs Nahar Industrial Enterprises Ltd [2010 (19) STR 166 (P&H HC)].
D) Appellants/ stevedores have not provided any ‘port services’.
E) Demurrage charges recovered by the vessel owner cannot be considered as a rental for storage of goods beyond laytime. Hence, they cannot form part of the gross value of taxable service.
F) Appellant is not liable to pay service tax under the category of CES.
G) Extended period is not invokable as the appellant is a PSU. In this regard, he has relied on the decision of this Tribunal in the case of Visakhapatnam Port Trust Vs CCE & ST, Visakhapatnam-I [2019 (3) TMI 820 (Tri-Hyd)] and in the appellant’s own case in Rashtriya Ispat Nigam Ltd Vs CC, Visakhapatnam [Final Order No. 30076/2022 dt.28.07.2022] and this being an issue involving interpretation of law.
9. Learned AR, on the other hand, has reiterated the findings of the adjudicating authority and also relied on certain case laws in support that the activities would be covered within the ambit of CES. Insofar as demurrage charges under ‘port services’ is concerned, he has referred to Circular No. 121/3/2010-ST – F.No.332/29/2009-TRU dt.26.04.2010, wherein, the Board had clarified certain leviability of service tax on container detention charges. He has also relied on the judgment in the case of Western Agencies Pvt Ltd Vs CCE [2011 (3) TMI 528 – CESTAT Chennai (LB)].
10. Heard both sides and perused the records.
a) There are three broad issues, which need to be decided viz.,
b) Whether in respect of CES, the appellants are required to pay service tax on RCM or otherwise.
c) Whether the appellants are required to pay service tax on demurrage charges paid by them to the vessel owners under the category of ‘port services’ or otherwise.
d) Whether the appellants are required to pay service tax on dispatch money received by them from the vessel owners or otherwise.
12. The appellants are engaged in both export and import. In the case of import, they are arranging for the transportation of the goods from the load port situated outside India by arranging vessels in terms of charter party agreement. The charter party agreement with vessel owners provided that the appellants unload the material quickly and in case they are able to unload within the stipulated time, then they will be entitled for certain incentives or bonus in terms of dispatch money, however, in case there is a delay in unloading, they will be required to pay demurrage charges to the vessel owners. It is also an admitted fact that in the case of import, it is on CIF basis, where freight, insurance and other charges like demurrage are included in the customs value for the purpose of discharge of customs duty. In the case of export, it is on FOB basis, which requires them to deliver the goods on the ship i.e., Free on Board.
13. Since there are two distinct issues, we are taking up these issues separately. Therefore, the first issue is whether the demurrage charges or for that matter dispatch money can be considered to be covered under the category of ‘port services’ or otherwise. Further, if it is covered under ‘port services’, then who is the service provider and who is the service recipient in the present factual matrix. Thirdly, what is the consideration for the service provided by the service provider to the service recipient and what is the location of these two entities in the context of loading and unloading of goods from the vessel both in the case of export and import. It is also an admitted fact that the department has raise the SCN invoking the provisions to section 66A both for CES as well as for Port services, as is apparent from the SCN. Therefore, in both the situations, what is required to be demonstrated is that port service has been provided by the vessel owner to the appellant and since vessel owner is located outside India, therefore, the appellant is required to discharge service tax under RCM basis.
14. Insofar as the issue whether loading and unloading will get covered within the ambit of port service, we find that the activity of loading and unloading of goods in the port area would get covered within the definition of port service. However, for the period prior to amendment w.e.f. 01.07.2010, the port service covered any service rendered by a port or other port or any other person authorized by such port or other port in any manner in relation to vessel or goods. In this case, there is no dispute that the appellants are neither a port/other port nor they are a person authorized by such port. Therefore, the appellants cannot be said to have provided port service for the period prior to 01.07.2010. For the period beyond 01.07.2010, this restriction is gone and therefore, the only issue, which needs to be examined, is who is providing port service and to whom. It is a trite law that for levy of service tax, there has to be a service provider providing taxable service and a service recipient receiving such service and there is a consideration for providing that service paid by the recipient to the provider. Therefore, these three elements are essentially required before establishing that service tax is payable in respect of certain activity. Insofar as service provider is concerned, it is clearly alleged by the department that appellants are undertaking unloading and loading of goods for which they are getting dispatch money or paying demurrage charges. Therefore, in this context, the appellants may be treated as service provider, however, this was subject to the fact that the appellants themselves have not provided such service and in fact, has engaged another person i.e., stevedores, for carrying out the said service. In fact, the appellants have submitted that stevedores have discharged service tax on said activity under the category of port service while raising the bills on the appellant. Therefore, in the facts of the case, we find that appellants cannot be considered as service provider under the category of port service to the vessel operators. Conversely, it is also an admitted position that vessel owners have not carried out any activity relating to unloading or loading of goods nor they have hired any stevedores for carrying out the same. Therefore, they cannot be treated as service provider to the appellant for providing port service. If the vessel owners are not the service providers then the premise on which the department has built the case itself crumbles as they have invoked provisions of section 66A, where the entity is located outside India is required to provide service, though the payment of service tax is to be made by the person, who is the recipient of the service and located in taxable territory i.e., India. Therefore, in the given factual matrix, invocation of section 66A itself is not proper. If at all there was any case of levy of service tax in relation to that activity, it was between the stevedores and the appellant where the stevedores have carried out certain activity, which can be covered under the category of port service in favour of the appellant and the appellants have made certain payments towards that service. This would be a case of service tax payment on forwards charge basis by the stevedores. We also note that it is nowhere alleged that sub-contractor is performing activity on behalf of the appellant and this observation in the OIO is outside the scope of SCN. Therefore, on this ground itself, the impugned order will not sustain, insofar as levy of service tax on demurrage charges paid by the appellant to the vessel owner is concerned in terms of section 66A.
15. Notwithstanding the above conclusion, we have also examined other arguments advanced by the appellant as to why the demurrage charges cannot be construed as consideration and why the service tax cannot be charged on the amount of demurrage charges. Their first argument is that the demurrage charges or dispatch money are condition of the contract, which is relating to transportation of goods and it either penalizes them or incentivize them for quick turnaround of the vessel. It is also not disputed that the demurrage charges or dispatch money is adjusted in the freight amount agreed to be paid for arriving at the net freight. Therefore, it is obvious that the demurrage charges or dispatch money are not consideration, rather condition of the contract of transportation. In the case of Bhayana Builders P Ltd (supra), the Hon’ble Supreme Court observed that any amount charged, which has no nexus with the taxable service and is not a consideration for the service provided, does not become part of the value, which is taxable under section 67. It is also a trite law that the agreement has to be read as a whole, so as to gather the intention of the parties. In this case, the intention is apparent i.e., transportation of goods for the purpose of import from the port of loading up to the port of discharge, as also transportation of goods up to the ship and its loading in the case of export of goods. Therefore, we find much force in the submission that demurrage charges incurred for import of goods is essentially related to transportation cost, which is part of the purchase value relating to goods and hence, cannot be treated as service. Similarly, in the case of export of goods, since the sale is on FOB basis, the appellants were required to put the goods on board the vessels and therefore, up to that point, whatever cost has been incurred is very much part of the cost and therefore, relatable to sale consideration and not service. We also find that since goods are owned by the appellant till the time they are loaded on board, even the activity of loading/ unloading is service to the self as it is in relation to their own goods and the ownership is passing only once they are loaded on the vessel. We also find that in this case, reliance placed on the judgment of Nahar Industrial Enterprises Ltd (supra) is relevant. The relevant para is cited below.
“9. From the perusal of above quoted Sections, it is apparent that service tax can be levied only if service of ‘Storage and Warehousing’ is provided. Nobody can provide service to himself. In the present case, it is undisputed that the Respondent-Assessee stored the goods owned by himself. After the expiry of storage period, the Respondent-Assessee was free to sell to the buyers of its own choice. The Dealer-Assessee has stored goods in compliance to directions of government of India issued under Sugar Development Fund Act, 1982. The Respondent-Assessee has received subsidy not on account of services rendered to Government of India but has received compensation on account of loss of interest, cost of insurance etc. incurred on account of maintenance of stock. The act of Respondent-Assessee cannot be called as rendering of services. The Tribunal has rightly held that just because the storage period of free sale sugar had to be extended at the behest of Government of India, neither the Appellant-Revenue sugar mills becomes ‘Storage and Warehouse keeper’ nor the Government of India become their client in this regard. The storage of specific quantity of free sale sugar cannot be treated as providing ‘Storage and Warehousing’ services to the Government of India.”
16. We also note that even in the case of leviability of service tax in terms of declared service post 01.07.2012, it is no longer res integra that the demurrage charges would not get covered within the ambit of declared service. Therefore, even for the period post 01.07.2012, the view cannot be accepted that there was involvement of declared service falling under section 66E(e) and therefore, this will be subjected to service tax. In catena of judgments including South Eastern Coalfields Ltd (supra) and Sembcorp Energy India Ltd (supra), it has been clearly held that liquidated damages are not towards rendering of any service. Therefore, relying on the ratio in these judgments, the demurrage chares paid by them cannot, by any stretch of imagination, be considered as consideration paid towards any service. We also note that there is no specific agreement except for the charter party agreement exclusively entered between the vessel owners and the appellant for the purpose of loading/ unloading of goods or provision of demurrage charges/ dispatch money, relating thereto. The condition of the charter party agreement provides for certain penal charges in the nature of demurrage charges or certain incentives in the nature of dispatch money. However, as discussed, these are in the nature of penal charges, which become payable in terms of conditions agreed to in the agreement entered between the vessel owners and the appellant for transportation of goods in the case of import and even for placing goods on board the vessel in the case of export.
17. We also note that in the case of Appeal Nos. ST/30797/2018, ST/30798/2018 & ST/30799/2018, the issues are similar and the SCNs have alleged that these are periodical in nature, meaning thereby that similar activities were covered under the port services and there is no factual difference between earlier SCN covered in Appeal No. ST/22362/2014 and the above three appeals. However, we find that Commissioner (Appeals) has also tried to analyze the same activity in terms of section 66E(e). Therefore, when these subsequent SCNs were treated as periodical in nature, the department has not claimed that now service tax is not being demanded under the category of port service but in terms of declared service. Therefore, the observations of the Commissioner (Appeals) with regard to applicability of declared service are clearly beyond the scope of SCNs. Notwithstanding this, even if it is presumed that the said dispatch money or demurrage charges can be brought under the category of declared service, we find that for the reasons discussed above, the said amount cannot be treated as leviable to service tax. In this regard, we find that in the case of CCE & ST LTU Mumbai Vs Shipping Corporation of India Ltd (supra), the Coordinate Bench at Mumbai examined similar issue, wherein, service tax was demanded in respect of demurrage charges in terms of declared service under section 66E. The issue examined by the Coordinate Bench is summarized at Paras 5 & 6, which are reproduced below.
“5. In the ‘vanilla’ variant of ‘transport of goods by sea’, failure to deliver cargo during stay of vessel at port has the outcome of losing space booked for it which devolves on the shipper and it is the responsibility of the vessel operator to discharge cargo with risk of overstay befalling them. In charters, voyage or time, it is normal for the charterer to be responsible for loading and, possibly, unloading of cargo. The essence of vessel operations is plying the waters with berthing being tantamount to idling and overstay being charged at higher rates on the vessel owner by port authorities; in ‘charter parties’, it is common practice to mitigate risk thereof by stipulating ‘laytime’ and ‘demurrage’ for non-adherence thereof. ‘Laytime’ is the agreed upon window of time during which a vessel is expected to complete loading or discharge, as the case may be, with ‘demurrage’ being that chargeable from the charterer for any stay beyond the stipulated ‘laytime’ not attributable to the vessel operator. The ‘demurrage’ is disincentive to delay retention of vessel in port which has cost implication to vessel operator. It is, thus, a contractual arrangement that has everything to do with transport.
6. Moreover, the ‘declared service’ deployed in the show cause notice and harped upon in the grounds of appeal is a conceptual expression not amenable to easy comprehension of intent of coverage. Contextually, ‘declared service’ is legal fiction and, particularly, when so described is hardly clarificatory. It is well-settled law that taxing statutes are to be literally construed and that legal fiction is not to be stretched beyond intent. This is evident from the exposition on that aspect by the Hon’ble High Court of Gujarat thus
‘11. But it is equally well-settled and that is a principle which should not be lost sight of that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion but that must be within the framework of the purpose for which it is created. “When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion : vide State of Bombay v. Pandurang Vinayak Chaphalkar. The principle that a legal fiction must be limited to the purpose for which it is created was also applied by N. H. Bhagwati J. in Bengal Immunity Company Limited v. State of Bihar where the learned judge observed :
“A legal fiction presupposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. But due regard must be had in this behalf to the purpose for which the legal fiction has been created. If the purpose of this legal fiction contained in the Explanation to article 286(1)(a) is solely for the purpose of sub-clause (a) as expressly stated it would not be legitimate to travel beyond the scope of that purpose and read into the provision any other purpose howsoever attractive it may be. The legal fiction which was created here was only for the purpose of determining whether a particular sale was an outside sale or one which could be deemed to have taken place inside the State and that was the only scope of the provision. It would be an illegitimate extension of the purpose of the legal fiction to say that it was also created for the purpose of converting the inter-State character of the transaction into an intra-State one. This type of conversion could have been in the contemplation of the Constitution makers and is contrary to the express purpose for which the legal fiction was created as set out in the Explanation to article 286(1)(a).”
12. The Supreme Court applied the same principle also in the case of Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co., and this is what they said in regard to the fiction created by the proviso to paragraph B of Part I of the First Schedule to the Finance Act, 195 :
“All that the fiction does is to bring profits of back years into the immediately preceding previous years, so that the requirements of the income-tax law may be complied with. As we have already stated, this fiction cannot be carried further than what it is intended for; it cannot be used to make these profits take the place of total income, which did not exist inthe previous year and to which the rate is to be applied under the terms of the proviso.”
13. It would, therefore, be seen that when the court is called upon to construe the effect of a legal fiction the court must first ascertain what is the purpose for which the legal fiction is enacted and then in the field of that purpose the court must give full effect to the legal fiction by carrying it to its logical conclusion.’
in Commissioner of Income-Tax, Gujarat v. Bai Vina [(1965) 0 GLR 583].”
18. The conclusion drawn by the Coordinate Bench was that the scope of taxability of particular declared service is restricted to standalone agreement and not to contingent liabilities crystalizing as part and parcel of another service – taxable or exempted, which, in effect, adduced by the adjudicating authority in dropping of the proceedings. The Coordinate Bench dismissed the appeal filed by the department. We find that the ratio of the said judgment is also squarely applicable for the period post 01.07.2012. We also consider that whatever rationale or logic is adduced for non-taxability in respect of demurrage charges, would also be equally applicable for dispatch money, as they are two sides of the same coin pertaining to same transaction depending on whether there has been early turnaround or late turnaround.
19. In view of the above, we do not find that the department has been able to sustain that service tax can be levied on the amount paid by the appellant as demurrage charges or received as dispatch money either under the category of port service or in terms of there being declared service under section 66E.
20. Insofar as CES is concerned, we find that the adjudicating authority has analyzed the provisions covered under section 66A. The same is cited below for ease of reference.
66A. Charge of service tax on services received from outside India
(1) Where any service specified in clause (105) of section 65 is,—
(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:
Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:
Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.
Explanation 1.— A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.
Explanation 2.—Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.
21. The fact relevant to the discussion is that in this case, though the agreement was signed by an entity located outside India, but it is also an admitted fact that they were having an establishment and office in India, which was also having service tax registration. It is also an admitted position that the said Indian branch office or establishment actually paid service tax involved on such transaction, which was made by the appellant to the OKOS, Russia. In this regard, we find that there is clear provision in terms of original agreement read with special conditions of the contract that in case of foreign contractors, who have an office establishment in India, the service tax shall be reimbursed by the appellant in Indian rupees to their Indian office. Therefore, the agreement clearly provided that if the foreign entity has Indian establishment, service tax will be payable by the Indian entity and the same would be reimbursed by the appellant. In this case, admittedly, the Indian office/ establishment of the foreign entity has discharged service tax and the same has been reimbursed by the appellant. We find that the adjudicating authority has taken a view relying on the explanation (1) that these two establishments, one located outside Indian and one in India, are to be treated as distinct persons. We find that a plain and simple reading of the said explanation would mean that in an event, a person is carrying on a business through a branch or agency in any country, they shall be treated as having business establishment in that country. This, in fact, supports the view that if Moscow unit is carrying out the business through their establishment located in India, the said establishment in India will be treated as a separate and distinct business establishment and subjected to service tax accordingly. Insofar as second proviso to section 66A(1) is concerned, it merely provides that if the service provider has his business establishment both in that country and elsewhere, the country where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided. Insofar as provision of section 66A(2) is concerned, it provides for situation where a person is carrying on business through permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section. Therefore, essentially this condition provides that in case there is a service provision by an entity located outside India to their permanent establishment located in India, then also said transaction will be subjected to service tax as both the establishments will be treated as separate persons. We feel that in this case, for the services provided to the appellant, which were in the nature of providing certain expert opinion, advice, etc., the Indian establishment handled the statutory compliance, tax payments etc., and not by Moscow unit. Therefore, in this case, there is scope for levy of service tax on CES on forward charge basis from the Indian establishment and not under RCM basis. In any case, the service tax has been discharged in full on forwards charge basis by the Indian establishment of foreign entity, which has also been reimbursed by the appellant in terms of the condition of the contract. We find that under these circumstances, a separate demand of service tax on the said service under RCM from appellant will not hold good. Therefore, in the facts of the case, we do not find that service tax can be levied on RCM basis for the services provided under the category of CES.
22. Therefore, the service tax demand involved in all these appeals under the category of demurrage charges and dispatch money for both the period prior to 01.07.2012 and post 01.07.2012 and also penalty would not sustain and to that extent, the impugned orders are liable to be set aside on merit itself and are accordingly, set aside. Further, since the appeals are decided in favour of the appellant on merit itself, we have not examined other arguments concerning invocation of extended period of limitation as well as imposition of penalty or extending benefit under section 80 of the Finance Act.
23. Appeals are allowed.
(Pronounced in the Open Court on 03.06.2026)
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