Voyage Charter Agreements Not Taxable As Supply Of Tangible Goods Service: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 25 June set aside a service tax demand of Rs.2.42 crore against Vedanta Ltd., holding that voyage charter agreements entered into for transportation of goods cannot be classified as "Supply of Tangible Goods for Use Service" under the Finance Act, 1994, as they are contracts for carriage of goods and do not involve transfer of possession or effective control of vessels.

Technical Member Vasa Seshagiri Rao and Judicial Member Ajayan T.V. allowed Vedanta's appeal against the Order-in-Original confirming a service tax demand of Rs.2,42,70,786, along with interest and penalties, including penalty under Section 78 of the Finance Act. The Bench held:

"In this appeal, we are of the considered view that the vessels were not kept for appellant's use but to transport the goods from one port to other and the consideration payable is to be calculated on the basis of the quantity and weight of the goods transported."

Vedanta, formerly known as Sesa Sterlite Ltd., manufactures copper cathodes and related products. Between 16 May 2008 and 31 August 2009, it entered into voyage charter agreements with foreign vessel owners for transportation of coastal goods.

The Department alleged that payments made to the foreign vessel owners were consideration for "Supply of Tangible Goods for Use Service" under Section 65(105)(zzzzj) of the Finance Act, 1994, and sought to levy service tax under the reverse charge mechanism. An Order-in-Original confirmed the demand of Rs.2.42 crore along with applicable interest and penalties, prompting Vedanta to approach the Tribunal.

Before the Tribunal, Vedanta contended that the agreements were voyage charters for transportation of goods and not contracts for supply or hire of vessels. It argued that the vessels were never placed at its disposal, and neither possession nor effective control was transferred. The company further submitted that it paid freight linked to the quantity of cargo transported and that the Department itself had treated similar transactions during subsequent periods as transportation of coastal goods.

The Revenue argued that provisions relating to demurrage, dead freight and other contractual obligations demonstrated that the vessels had effectively been made available to Vedanta. It contended that, even without transfer of legal possession, the arrangements fell within the taxable category of supply of tangible goods service.

Examining the agreements, the Tribunal found that they were voyage charter contracts under which vessel owners undertook to transport specified cargo between ports for agreed freight. It observed that the vessel owners retained possession, command and operational control of the vessels, remained responsible for navigation, seaworthiness and management, and that Vedanta acquired no independent right to use, deploy, sub-let or commercially exploit the vessels.

The Bench further noted that the Bills of Lading issued by the vessel owners were characteristic of contracts for carriage of goods rather than hiring arrangements. It also observed that payments were made as freight based on the quantity of goods transported, with no separate consideration for use or hire of the vessels.

Rejecting the Department's reliance on clauses relating to demurrage and port expenses, the Tribunal held that such provisions are standard features of maritime contracts and do not alter the essential character of voyage charter arrangements.

Relying on Union of India v. Gosalia Shipping Pvt. Ltd. 1978 (5) TMI 1 (SC), the Tribunal reiterated that voyage charter agreements are contracts for carriage of goods and not contracts for hiring vessels. It also held that the principles laid down in BSNL v. Union of India 2006 (3) TMI 1 (SC) on transfer of the right to use goods were inapplicable because possession and effective control of the vessels remained with the foreign vessel owners. The Bench also followed its earlier decision in Core Minerals v. Commissioner of Service Tax, Chennai 2023 (11) TMI 218 - CESTAT Chennai.

The Tribunal also rejected the invocation of the extended limitation period. It noted that the transactions were duly recorded in Vedanta's books of account and had been subjected to repeated departmental and Accountant General audits, demonstrating that the Department was aware of the company's activities. It held that mere non-payment of tax or adoption of a particular classification does not amount to suppression of facts unless accompanied by a deliberate intention to evade tax. It held:

"The activity of chartering vessels under voyage charter agreements undertaken by the appellant do not fall within the ambit of 'Supply of Tangible Goods for Use Service' and is correctly classifiable as transportation of goods and not liable to service tax under the category of 'Supply of Tangible Goods for Use Service'."

Accordingly, the CESTAT set aside the impugned order and allowed Vedanta's appeal with consequential relief in accordance with law.

For Appellant: Mr. Ramnath Prabhu, Advocate

For Revenue: Ms. O.M. Reena, Authorised Representative