No Service Tax on Repair & Maintenance of Navy Ships: CESTAT Sets Aside Demand and Penalty [Read Order]
CESTAT held that no service tax is payable on repair and maintenance of naval ships as the services are non-commercial, and set aside the demand and penalties
The Hyderabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that no service tax is leviable on repair and maintenance services provided to Naval ships as such activities are not commercial in nature and accordingly set aside the demand and penalties.
Steel City Enterprises was providing services to Naval Dockyard, Visakhapatnam like repair of ships, maintenance work, fabrication and supply of pontoons and also load testing work. The department alleged that these services are taxable under Management Maintenance or Repair Service, Works Contract Service and Technical Testing and Analysis Service. The adjudicating authority confirmed demand and imposed penalties.
The appellant’s counsel argued that all services were provided only to Naval Authorities and Navy is not doing any commercial activity. They also argued that repair of naval ships is exempt as per Notification No. 31/2010-ST. They further argued that some activities were supply of goods and they are not a testing agency. They also argued that they had bona fide belief that no tax is payable.
The revenue argued that appellant did not pay service tax and services are taxable under different categories. They also supported demand and penalty.
The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) observed that it was an admitted fact that all services were provided only to Naval Authorities and within the Naval Dockyard. It observed that the Navy is not engaged in any commercial activity and service tax is not leviable on services which are not related to commercial or industrial purposes.
The tribunal further observed that Notification No. 31/2010-ST and the Board’s clarification made it clear that repair of ships belonging to the Navy was not intended to be taxed, both prior to and after 01.07.2010.
The tribunal pointed out that classification of the services under different taxable heads such as MMRS, WCS or TTAS was not sustainable when the services were intrinsically linked to Naval operations. It explained that activities like placement of pontoons or assistance in load testing could not be independently classified as taxable services.
The tribunal also observed that the appellant had a bona fide belief regarding non-taxability, and no evidence was produced by the department to establish suppression or intent to evade tax. The tribunal explained that in the absence of any commercial element and considering the nature of services provided to the Navy, the demand of service tax could not be sustained.
The tribunal observed that the extended period of limitation was not applicable and penalties imposed under Sections 76, 77 and 78 were not justified in the facts of the case. The tribunal set aside the demand and penalties and allowed the appeal.
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