Demurrage Paid To Foreign Vessel Owners Not Taxable As Port Service: CESTAT Hyderabad

On 3 June, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that demurrage charges paid by Rashtriya Ispat Nigam Ltd. (RINL) to foreign vessel owners for delays in loading or unloading cargo cannot attract service tax because such charges are contractual payments connected with transportation of goods and not consideration for any taxable service.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad allowed RINL's appeals and set aside the service tax demands on demurrage charges, dispatch money and consulting engineering services. The Bench held:

"..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"

The Service Tax Department raised the demands for the period 2007-08 to 2011-12. RINL, which imports raw materials and exports steel products, had entered into charter party agreements with foreign vessel owners. Under those agreements, RINL paid demurrage when loading or unloading exceeded the stipulated laytime and received dispatch money when vessel operations concluded within the prescribed time.

The Department sought to levy service tax on demurrage charges under the category of "Port Services". It also alleged that RINL was liable to pay service tax under the reverse charge mechanism on consulting engineering services received from Russian company OKOS.

RINL argued that demurrage and dispatch money merely adjusted freight charges and did not constitute consideration for any service. It submitted that independent stevedores performed the loading and unloading operations and discharged service tax wherever applicable. RINL further contended that demurrage formed part of transportation costs in imports and part of sale-related expenses in exports.

The Tribunal accepted these submissions. It observed that demurrage arises from contractual terms governing the transportation of goods and acts as a disincentive against delays in vessel turnaround. It noted that vessel owners neither provided loading or unloading services to RINL nor received demurrage as consideration for any taxable activity.

The Bench held that the Department failed to establish the existence of any taxable service rendered by the foreign vessel owners to RINL and, therefore, could not sustain its case under Section 66A of the Finance Act, 1994. Agreeing with RINL, the Tribunal observed:

"..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..."

The Tribunal further held that demurrage and dispatch money merely constitute conditions of a transportation contract and cannot be treated as consideration for any service. It held:

"...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"

On the issue of consulting engineering services, the Tribunal found that OKOS maintained an established office in India and that the Indian establishment had already discharged service tax on the services provided. Since RINL reimbursed that tax in accordance with the contract, the Bench held that the Department could not sustain a fresh demand under the reverse charge mechanism.

Accordingly, the CESTAT set aside the impugned orders and allowed RINL's appeals.

For Appellant: Ch. Sumanth, Advocate

For Respondent: M. Anukathir Surya, AR