Introduction: In the case of Apeejay Shipping Limited vs. CST (CESTAT Kolkata), the appellant, Apeejay Shipping Limited, found themselves entangled in a legal dispute with the Central Service Tax department over the levy of service tax on certain discounts in their chartering business. This article delves into the details of the case, the arguments presented by both parties, and the final verdict.
Background of the Case: Apeejay Shipping Limited, engaged in chartering ships, provided ships to charterers on a hire basis. This practice involved granting discounts to charterers, specifically termed as ‘Address Commission.’ The dispute revolved around the service tax liability on these discounts.
Service Tax Demand: The Central Service Tax department issued a show cause notice in 2010, demanding service tax of Rs. 2,03,19,847, alleging that Apeejay Shipping Limited had not paid service tax on the ‘Address Commission’ paid to foreign companies as per Section 66A of the Finance Act. The Commissioner Service Tax, Kolkata, confirmed this demand, along with interest and a penalty equal to the tax amount.
Appellant’s Contention: Apeejay Shipping argued that the ‘Address Commission’ was essentially a discount, common in the shipping industry when chartering ships. Their contracts with charterers included this practice. Apeejay Shipping pointed out that neither the show cause notice nor the impugned order specified the sub-clause of the taxable service under which ‘Address Commission’ would fall, rendering the order legally unsound. They also emphasized that service tax liability should only arise when there’s a physical remittance of service value in foreign currency, which did not occur in their case.
Department’s Argument: The Revenue department contended that the discounts provided were essentially commissions meant to promote Apeejay Shipping’s business. Hence, these discounts should be considered under the category of ‘Business Auxiliary Service’ (BAS) and be subject to service tax. They argued that, since the Appellant allowed these discounts to promote their business, it should be treated as a commission.
CESTAT Kolkata’s Observations: The CESTAT Kolkata noted that there were two types of commission in the agreement: ‘Third Party Commission’ paid to foreign agents for promoting their business (which was not in dispute), and the ‘Address Commission’ offered to charterers. CESTAT Kolkata found ‘Address Commission’ to be a discount and not a payment for any specific service. They ruled that as there was no remittance to foreign charterers, the service tax under Section 66A did not apply.
Chartering Business Practice: The customary practice in the chartering business involves allowing charterers to receive discounts from hire charges, and the net hire charges are received by the ship owner. Essentially, this practice provides charterers a discount without any remittance made to them by the ship owner. As ‘Address Commission’ did not pertain to the rendering of a taxable service, the CESTAT Kolkata ruled that no service tax was payable on it. This decision aligned with the principle that service tax is levied only on consideration received for service provision.
Verdict: The CESTAT Kolkata concluded that the demand for service tax was not sustainable and set it aside. Given the unsustainability of the demand, the question of charging interest or imposing a penalty did not arise.
Conclusion: The Apeejay Shipping Limited vs. CST (CESTAT Kolkata) case illustrates the importance of precise legal definitions and the interpretation of service tax regulations. In this case, the CESTAT Kolkata ruled in favor of Apeejay Shipping Limited, categorizing the ‘Address Commission’ as a discount rather than a taxable service. This decision serves as a precedent for similar cases in the chartering business and underscores the need for clarity in tax regulations and legal proceedings.
FULL TEXT OF THE CESTAT KOLKATA ORDER
The Appellant are owners of ships and engaged in providing ships on hire basis, which in the common trade parlance, is known as ‘Chartering of Ships’. The ships are given on hire either for a specific period of time or for a single voyage. The ships are given on hire by entering into contracts with the respective charterers/parties. In terms of the contractual arrangement, the charterers hire the ships and the Appellant allows a specified percentage of discounts from the freight/hire charge, which is commonly known as ‘Address Commission’. The Appellant, for promoting their chartering business, also entered into contractual arrangements with various indigenous as well as foreign agents/companies for soliciting/promoting their chartering business. The agents are entitled to commission which is calculated on the basis of freight business generated by such agents, and in the common trade parlance, is known as ‘Third Party Commission’.
2. A show cause notice dated 20.10.2010 was issued to the Appellant demanding service tax of Rs.2,03,19.847/- including Education Cess, alleging that the Appellant has not paid service tax on the Address Commission paid to foreign companies as per Section 66A of the Finance Act. The Notice was adjudicated and the Commissioner Service Tax, Kolkata has confirmed the demand of service tax of 1,56,27,124/- along with interest and imposed equal amount of tax as penalty. Aggrieved against the impugned order, the Appellant has filed the present appeal.
3. The contention of the Appellant is that the ‘Address Commission’ paid to foreign companies is nothing but a ‘discount’, and it is a customary practice followed in the shipping industry for grant of discounts to charterers for taking the ships on hire basis, as is evident from the Charter party Agreement entered into by the Appellant, which contains the clause for payment of ‘Address Commission’ and netted off from the Vessel Hire Charges and does not contain any element of rendering Further, assailing the impugned Order, the Appellant submits that either in the Show Cause Notice or in the impugned order, there is no mention of the sub-clause of the taxable service under BAS, under which ‘Address Commission’ would fall. Hence, the order is bad in law and is unsustainable. They also submitted that the liability of payment of service tax in the hands of recipients of services in terms of Section 66A of the Act read with Rule 6 of the Service Tax rules would arise only when there is any physical remittance of value of services outside India in foreign currency, for the services rendered. In the present case, the amount received by the Appellant from the Chartering of Ships, is netted off on the ‘Address Commission’ and no remittance towards the ‘Address Commission’ was received by the Appellant outside India. Hence, they contended that the question of payment of service tax does not arise in this case.
4. The Ld. A.R. for the Revenue reiterated the findings of the Ld. Commissioner.
5. Heard both sides and perused the appeal records.
6. We observe that there are two types of commission mentioned in the agreement. There is a commission paid to Foreign Agents for promoting their business. We find that there is no dispute about discharge of service tax on “Third Party Commission” paid to foreign agents in relation to the promotion of their business of Chartering of Ships. The dispute in this appeal centers around the discount passed on to the charterer of ships, which is described in the respective agreements a ‘Address Commission’. It is the contention of the Appellant that ‘Address Commission’ is nothing but a ‘discount’ and on this count, no remittance is made by them to the foreign charterer of ships, and the total amount received by them is after deducting the said ‘Address Commission’ from the Hire Charges, and this is a common practice in the shipping trade. The Ld. Adjudicating Authority on the other hand, observed that allowing such discounts from the Chartering of Ship Charges, is nothing but an incentive to the charterers, in order to promote the business of the Applicant and hence taxable under the category of ‘Business Auxiliary Service’ (BAS). We observe that Address Commission is a payment made by vessel owners to charterers. It is stated in the charter party as a percentage of the amount paid in freight. Address commission does not require any particular services on the part of the charterers. Therefore, payment of Address Commission would only mean a slight reduction in the freight rate. Thus, we observe that Address Commission is not paid towards rendering of any service.
7. The argument of the Department is that the discounts from the Hire Charges were allowed by the Appellant only to promote their business and therefore, it should be treated as a ‘commission’ and leviable to service tax under the category of ‘Business Auxiliary Service’ (BAS). WE observe that there was remittance of money to the foreign charterer of ships. In the absence of any remittance to the foreign charterer of ships, payment of service tax under Section 66A would not arise.
8. We observe that in chartering business as a normal trade practice, the charterer is allowed a discount from the hire charges payable by them and the net hire charges is received by the ship owner. Thus, for all practical purposes, the charter is given a discount by the owner on the hire charges and no remittance is being made by owner of the ship e. ASL to charters. As the Address Commission was not paid towards rendering of any taxable service, we hold that no service tax is payable on “Address Commission” as the same is in the nature of discount and not a payment for provision of any taxable service. It is a settled principle of law that service tax is leviable only on consideration received for provision of service. We do not find any merit in the contention of the department that the discount deducted should have formed part of the value of consideration paid to the foreign companies and discharged service tax under the reverse charge mechanism. When there is no evidence to substantiate the allegation that the discount was offered towards rendering of any service, no service tax is payable on those discounts. Accordingly, we hold that the demand is not sustainable and set aside the same. As the demand itself is not sustainable, the question of charging interest or imposing penalty does not arise.
9. In view of the above discussion, we set aside the impugned order and allow the appeal filed by the Appellant.
(Pronounced in the open court on…19.10.2023…)