Supply Of Water To Vessels Within Port Liable To Service Tax Before 2010 Exemption: CESTAT Ahmedabad

The Ahmedabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the supply of water to vessels within a port area forms part of “port services” and is liable to service tax under the Finance Act, 1994 for the period prior to the exemption introduced with effect from July 1, 2010.

The bench comprising Judicial Member Dr Ajaya Krishna Vishvesha and Technical Member Satendra Vikram Singh observed that,

“We therefore, agree with the arguments of learned AR duly supported by the clarification issued by CBEC vide their letter dated 09.07.2001 read with Notification No.31/2010-ST dated 22.06.2010 that supply of water within the port area is covered under the category of port services and is leviable to service tax prior to 01.07.2010.”

The dispute arose after the department conducted an audit of the records of Sea Shipping Services, the appellant, and found that the company had issued debit notes to customers for reimbursement towards the supply of fresh water to vessels and recovered Rs. 66.25 lakh without paying service tax.

The department alleged that the activity fell within the scope of “port services” under Section 65(82) of the Finance Act, 1994, and issued a show cause notice seeking recovery of Rs. 6.82 lakh in service tax under the proviso to Section 73(1), along with interest under Section 75 and penalties under Sections 77 and 78.

The Additional Commissioner confirmed the demand and imposed penalties, which were later upheld by the Commissioner (Appeals).

Aggrieved by this, the company approached the tribunal, contending that the transaction amounted to the sale of water and not the provision of a service. It argued that water was purchased and supplied to ship owners on a back-to-back basis and the charges recovered were merely reimbursement of expenses.

The company also submitted that water is treated as goods and is exempt from VAT under the Gujarat Value Added Tax Act, 2005, and therefore could not be subjected to service tax.

The Revenue, on the other hand, argued that the activity involved the procurement, transportation, and pumping of water to vessels and therefore constituted a service in relation to vessels within a port. It relied on clarifications issued by the Central Board of Excise and Customs stating that water supply charges form part of the taxable value of port services.

After examining the records, the tribunal held that prior to July 1, 2010, the activity of supplying water to vessels within the port area formed part of taxable port services. It noted that the invoices showed supply of water by barge along with associated costs such as transportation and other operational expenses, indicating that the transaction was not a simple sale of goods but involved elements of service.

The bench stated that,

“In view of the documentary evidences available in this case read with clarification issued by CBIC vide their letter dated 09.07.2001, we hold that the appellant are liable to service tax on supply of water which is a part of port service rendered by them. Therefore, the activity of supplying water forms part of port service. Hence, we uphold the service tax demand confirmed vide the impugned order by invoking extended period.”

However, the bench observed that there was no mens rea on the part of the company to evade payment of service tax. Accordingly, while upholding the service tax demand and interest, the tribunal set aside the penalty imposed under Section 78 of the Finance Act, 1994, but affirmed the penalty under Section 77.

In view of these findings, the tribunal disposed of the appeal by confirming the service tax liability while granting partial relief to the appellant on the penalty aspect.

For Appellant: Advocate Sharan Rayaprol

For Respondent: Assistant Commissioner, Rajesh Nathan