Service Tax Demand on Ocean Freight Quashed: Karnataka HC Follows Madras HC Judgment [Read Order]

The Karnataka High Court has set aside the Service Tax demand on ocean freight by applying the Madras High Court’s ruling, holding that the levy could not be imposed on entities that were not the actual recipients of the transportation service.

The petition was filed by Mangalore Steamer Agents Association, challenging Section 66C(2) of the Finance Act, 1994, various notifications issued in 2017, and Circular No. 206/4/2017-Service Tax. The controversy arose when the petitioner sought to be treated as the person liable to pay service tax on the transportation of goods by vessel from a place outside India to the customs station of clearance in India.

The burden was shifted despite the petitioner having no contractual nexus with the parties providing the service. The association approached the High Court seeking to quash the notifications, circulars, and show cause notices issued pursuant to these instruments.

The Bench of Justice S.R. Krishna Kumar held that the issues raised in the writ petition stood covered by the detailed judgment of the Madras High Court in The Chennai and Ennore Ports Steamer Agents Association v. Union of India delivered on 28.03.2023.

The Karnataka HC noted that the Madras HC had undertaken an exhaustive examination of the statutory framework under the Finance Act, 1994 and the scope of the amendments introduced through the 2017 notifications.

The Court observed that the Madras HC had categorically held that neither steamer agents nor importers could be considered recipients of the ocean freight service. The service was received by the foreign shipping line from service providers located outside India.

Under the scheme of the Finance Act, 1994, only a provider or a recipient of service could be made liable to pay tax, and the notifications could not extend liability to a third party with no contractual connection to the underlying service.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

The Bench noted that the amendments to Notification No. 30/2012-Service Tax through Notification No. 3/2017-Service Tax and Notification No. 15/2017-Service Tax to be defective. These defects arose because the notifications attempted to deem persons in India as liable to pay service tax even though such persons neither received the service nor had access to any information required to compute the taxable value under Section 67 of the Finance Act,1994.

The Karnataka HC held that the same defects and statutory inconsistencies existed in the present case. Therefore, it was ruled that the notifications could not be enforced against the petitioner and that the service tax demand based on these notifications was unsustainable.

Accordingly, the writ petition was allowed and disposed of in terms of the Madras HC’s ruling, resulting in the quashing of the service tax demand and rendering the related notifications and show cause notices inapplicable to the petitioner.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates