The Mumbai bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) service tax demand confirmed under rule 5 of service tax (determination of value),Rules 2006 is not valid as it is ultra vires of Section 67 of Finance Act, 1994.
M/s ASP Ship Management (India) Private Limited, the appellant challenged the order passed by Commissioner, Service Tax-V, Mumbai. The appellants engaged in rendering “ship management services” and are registered under service tax registration No. AABCV3134CST001.
Based on investigation it was found that the appellants were rendering the services of ship management, commercial management, technical management and crew management services to vessel owners and are receiving fixed costs equivalent to monthly management fees and are getting reimbursed the cost incurred by them for ship/vessel crew, cost of purchase of vessel consumables, repairs and maintenance of ships/vessels, and administrative costs etc.
The investigation concluded that various reimbursable expenses received from October 2006 to March 2011, on which service tax is liable to be paid have not been paid by the appellants. Commissioner, Service had confirmed the adjudged demands besides the imposition of penalty under Sections 76, 77 and 78 of the Finance Act, 1994.
It was submitted by the appellant that they had entered into an agreement for ship management with Vessel Owners as per the standard contract of the Baltic and International Maritime Council (BIMCO). The agreement provides for various management services for which the parties can agree, such as Technical Management, Commercial Management, Crew Management and Crew Insurance. For the management services provided by the appellants, they received management fees and discharged service tax liability thereon, as applicable, and filed periodical ST-3 returns.
It was stated that appellants carried out management activities as agents for and on behalf of the Ship Owners. Money received by the Appellants was credited in a separate bank account and the interest accrued on the same was credited to the ship owners.
The question is whether the amounts recovered by the notice through debit notes are to be treated as part of “Gross Amount” (taxable value) as defined under Section 67 of the Finance Act, 1994 or as Pure agent expenses in terms of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.
The Revenue has claimed that the amounts collected by appellants are part of the taxable value for rendering ‘ship management services’, as the service tax is liable to be paid on the gross amount collected in terms of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. On the other hand, the appellants have claimed that they had paid service tax on the value of services billed to their clients i.e., on ‘ship management fees’ collected from the owner of the ships and had filed periodical returns; in respect of reimbursement expenses, the appellants had claimed that they had raised debit notes as ‘pure agent’ of the service recipient, thereby excluding these from the value of taxable services in terms of Rule 5(2) of the rules.
A two-member bench comprising Mr S K Mohanty, Member (Judicial)and Mr M M Parthiban, Member (Technical) observed that the demand for service tax on reimbursement expenses goes beyond the mandate of Section 67, which is a charging section for levy of service tax. Section 67, both before and after the 01.05.2006 amendment authorises the determination of the value of the taxable service to charge service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money.
The underlined words i.e. “for such service” are important in the setting of Sections 66 and 67. The charge of service tax under Section 66 is on the value of taxable services. The taxable services are listed in Section 65(105). The service provided by the petitioner falls under clause (zzzt).
While allowing the appeal, the Court set aside the impugned order.
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