Service Tax Not Liable To Be Paid On Ocean Freight/Sea Transportation Services: Bombay High Court

The Bombay High Court has held that service tax is not liable to be paid on ocean freight or sea transportation services.

The bench of Justice G. S. Kulkarni and Justice Firdosh P. Pooniwalla has relied on the decision of the Gujarat High Court in the case of SAL Steel Ltd. vs. . Union of India, in which it was held that no tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located in a 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, and the levy and collection of tax on such ocean freight under the impugned notifications is not permissible in law.

The petitioner/assessee is a company incorporated under the Companies Act, 1956, and is a manufacturer of fully drawn yarn, air-texturized yarn, and cotton yarn at its unit at Silvassa. The petitioner is one of the top yarn manufacturing units in India. In the course of its activity, the petitioner imports various raw materials, namely, purified terephthalic acid (PTA) and monoethylene glycol (MEG), used in the manufacture of the final product. The petitioner is also importing certain spare parts and accessories required for its plant and machinery. Materials, spare parts, and accessories for machinery are being imported by the petitioner from foreign suppliers under the CIF (cost, insurance, and freight) contract, wherein the entire cost of transportation of goods up to the customs station in India is incurred by the foreign supplier.

The petitioner imported the required raw materials and spare parts for machinery under different bills of entry. The bills of entry are 10 in number and were issued between May 15th and June 24th, 2017. The department conducted an audit and issued final report No. 52/2018/-19 dated May 16, 2018, demanding payment of service tax for the period April 2017 to June 2017 on the value of the imports as set out in the chart contained in Paragraph 3.3 of the petition. The petitioner has paid service tax along with interest.

Chapter V of the Finance Act, 1994, was recast by the Finance Act, 2012, introducing a new regime of tax referred to as the “Negative List of Taxation Scheme” w.e.f. July 1, 2012. Under the amendment, Section 66 D(p) was incorporated to deal with “services by way of transportation of goods." It is contended that sub-clause (ii) thereof was omitted by the Finance Act, 2016 w.e.f. June 1, 2016. It is the case of the petitioner that the transportation of goods in a vessel provided by a person located in non-taxable territory to the person located in non-taxable territory was exempted from the service tax available under Sl. No. 34 of Notification No. 25/2012-ST, and the same was made inapplicable w.e.f. January 22, 2017, vide Notification No. 1/2017-ST dated January 12, 2017.

The Service Tax Rules, 1994, were amended by the Service Tax (Amendment) Rules, 2017, in which Rule 2 sub-rule (1), clause (d), and sub-clause (i) were amended to insert a new item (EEC) for taxing “ocean freight” w.e.f. January 22, 2017. Notification No.30/2012-ST dated June 20, 2012, providing for 'Reverse Charge System' was amended via Notification No.3/2012-ST dated January 12, 2017 to insert an entry to prescribe 'Reverse Charge Mechanism' for the transportation of goods in a vessel.

The petitioner contended that under the GST regime, IGST at 5% is imposed on the importer on the transportation of goods in a vessel provided by a person located in a non-taxable territory to a person located in non-taxable territory from a place outside India up to the customs station for clearance in India. The importer, as per Section 2(26) of the Customs Act, 1962, is deemed to be the recipient of service and liable to pay IGST on the services supplied by persons located in non-taxable territory by way of transportation of goods by vessel from a place outside India up to the customs station for clearance in India.

The petitioner contended that IGST on the transportation of goods in a vessel from a place outside India up to the customs station of clearance in India on the importer, on a reverse charge basis, is arbitrary and illegal. It is contended that a levy of service tax on the importer, who is neither the service provider nor the service receiver, is sought to be made in terms of the power conferred under sub-section (3) of Section 5 of the IGST Act. The levy and collection of service tax (IGST) from an Indian importer in respect of goods (in respect of CIF contracts) on services rendered outside India in a non-taxable territory is unconstitutional. The service tax on ocean freight payable by the importer under the reverse charge mechanism would not be legal and valid.

The court held that the petitioner would be entitled to the refund of duty, however, subject to the petitioner filing the refund application, which would be required to be decided in accordance with the law, including the principles of unjust enrichment.

Counsel For Petitioner: Raghavendra

Counsel For Respondent: Jitendra B. Sharma

Case Title: M/s. Sanathan Textile Pvt Ltd. Versus Union of India

Case No.: Writ Petition No. 184 Of 2019

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