2025 (4) TMI 958 - AT - Service Tax

Levy of service tax - Dredging service - Extended period of limitation - penalty - HELD THAT - As per the contract entered by the appellant with the Azhikkal Port Kerala the appellants were liable to pay 30% of the net sale price as consideration for the sand removed from the river. Fact being so the actual contract is for sale of sand. Though it is admitted fact that by doing so the appellant is helping the port and it amounts to dredging . However considering the contract and its terms and conditions it cannot be held that the activity is amounting to service under dredging services. Regarding reliance of the Department in the matter of Reliance Michigan 2013 (7) TMI 236 - CESTAT MUMBAI it is an admitted fact that for carrying out the dredging activities the appellants were paid an amount of Rs. 8, 36, 58, 054/- for the work. However the issue raised by the appellant was that Mithi River is not a river but a nala and therefore services rendered by them does not amount to dredging of a river and accordingly they are not liable to pay service tax. As per the judgment of Hon ble Apex Court in the matter of Grand Royale Enterprises Ltd. 2022 (9) TMI 273 - SC ORDER when there is business transaction between two parties for sale of material service tax should not be levied. It is also an admitted fact that there is no payment whatsoever from the port to the appellant towards any service and respondent could not have vivisected the activities and charge a certain portion of the same towards service as held by this Tribunal in the matter of CMS (l) Operations Maintenance Co. P. Ltd. 2007 (5) TMI 74 - CESTAT CHENNAI . Fact being so the activity cannot be considered as falling under the category of dredging services but it is only sale of sand and the expenses incurred by the appellant including 30% as cost of sand to the Azhikal port can be considered only as expenses for procuring and sale of sand. Fact being so the demand made by the respondent is unsustainable. Conclusion - The actual contract is for sale of sand. Though it is admitted fact that by doing so the appellant is helping the port and it amounts to dredging . However considering the contract and its terms and conditions it cannot be held that the activity is amounting to service under dredging services. Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core issue considered by the Tribunal was whether the activities carried out by the Appellants could be classified under the service category of 'Dredging' for the purpose of confirming service tax liability. The Tribunal also considered whether the demand for service tax was barred by limitation and whether the imposition of penalties was justified.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The Tribunal examined the definition of 'Dredging' services under the Finance Act, 1994, and relevant case law, including decisions by the Supreme Court and the Tribunal itself. The Appellants argued that their activities constituted a business transaction involving the sale of sand, not a service liable for service tax. They relied on precedents such as M/s Doypack Systems and M/s All India Federation, which address the nature of transactions and service tax applicability.

Court's Interpretation and Reasoning

The Tribunal interpreted the contract between the Appellants and Azhikkal Port as primarily a sale of sand, not a provision of dredging services. The Tribunal noted that the Appellants were not paid by the port for any service; instead, they were allowed to remove and sell sand, retaining the sale proceeds. This arrangement did not constitute a taxable service under the 'Dredging' category.

Key Evidence and Findings

The Tribunal found that the Appellants were required to pay 30% of the net sale price of sand to the port, indicating a sale transaction. The Tribunal also noted that the Appellants incurred expenses related to the removal and sale of sand, further supporting the characterization of the transaction as a sale rather than a service.

Application of Law to Facts

The Tribunal applied the legal principles from relevant case law to the facts of the case, concluding that the activities of the Appellants did not fall within the taxable category of 'Dredging' services. The Tribunal emphasized that the absence of payment from the port to the Appellants for services rendered was a critical factor in this determination.

Treatment of Competing Arguments

The Tribunal addressed the Respondent's argument that the right to remove and sell sand constituted consideration for dredging services. The Tribunal rejected this argument, finding that the transaction was a sale of sand, not a service. The Tribunal also considered the Appellants' argument that the demand was barred by limitation, citing the Supreme Court's decision in M/s Uniworth Textiles Ltd., which held that when taxability is in dispute, the extended period of limitation cannot be invoked.

Conclusions

The Tribunal concluded that the demand for service tax was unsustainable as the activities did not constitute 'Dredging' services. The Tribunal also found that the demand was barred by limitation and that the imposition of penalties was unjustified.

SIGNIFICANT HOLDINGS

The Tribunal held that:

"The actual contract is for sale of sand. Though it is admitted fact that by doing so, the appellant is helping the port and it amounts to 'dredging'. However, considering the contract and its terms and conditions, it cannot be held that the activity is amounting to service under 'dredging' services."

The Tribunal established the principle that when a transaction is fundamentally a sale of material, service tax should not be levied, even if the transaction involves activities that could be construed as services. The Tribunal also reinforced the principle that demands for service tax must be within the statutory limitation period, particularly when taxability is disputed.

The Tribunal set aside the entire demand for service tax, interest, and penalties imposed by the adjudicating authority, allowing all appeals with consequential relief in accordance with the law.