2025 (7) TMI 480 - AT - Service Tax

Demand of differential service tax by disallowing abatement of 70% availed - levy of service tax on ocean freight has been set aside by Hon ble Gujarat High Court in M/s. SAL Steel Ltd Vs. Union of India 2019 (9) TMI 1315 - GUJARAT HIGH COURT - HELD THAT - The issue regarding validity of Rule 2(1)(d)(EEC) and 6(7CA) inserted by Notification No. 15/2017-ST and 16/2017-ST were challenged before Hon ble Gujarat High Court in the case of M/s. SAL Steel ltd. Hon ble Gujarat High Court held that the impugned provisions were ultra vires of Section 64 65B (44) 66B 67, 68 and 94 of the Finance Act 1994. By clause (EEC) of Rule2(1)(d) of the Service Tax Rules importer as defined under Section 2(26) of the Customs Act is made liable to pay service tax in case of services of transportation of goods by sea provided by a foreign shipping line to a foreign charterer with respect to goods destined to India. A new sub-rule (7CA) has also been inserted in Rule 6 of the Service Tax Rules by Notification No. 16/2017-ST thereby providing an alternate mechanism to calculate and pay service tax on a value of ocean freight calculated @ 1.4% of the sum total of CIF value. However Hon ble Gujarat High Court vide its order has held that N/N. 15/2017-ST and 16/2017-ST making rule 2(1)(d) (EEC) and Rule 6(7CA) of the Service Tax Rules and inserting explanation-V to reverse charge Notification No. 30/2012-ST is struck down as ultra vires Section 64, 66B, 67 and 94 of the Finance Act 1994. It is therefore found that when the levy of service tax on ocean freight on the importer on reverse charge basis has been struck down by Hon ble High Court the department s contention to deny abatement of 70% and demand the differential service tax amount is devoid of merit. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether the levy of service tax on ocean freight under the reverse charge mechanism, as prescribed by Notification Nos. 14/2017-ST, 15/2017-ST, and 16/2017-ST, is valid and enforceable.
• Whether the appellant was entitled to claim a 70% abatement on the ocean freight value while discharging service tax liability under the reverse charge mechanism.
• Whether the department was justified in demanding differential service tax along with interest and penalty by disallowing the 70% abatement claimed by the appellant.
• The applicability and binding effect of the Gujarat High Court's ruling in M/s. SAL Steel Ltd Vs. Union of India, which struck down the levy of service tax on ocean freight on the importer under reverse charge basis.
• The relevance and applicability of precedents such as CCE Vs. Adani Wilmar Ltd and the Kerala High Court's decision in M/s. GAC Shipping (India) Pvt Ltd regarding the abatement on ocean freight.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Levy of Service Tax on Ocean Freight under Reverse Charge Mechanism

Relevant legal framework and precedents: The levy was imposed through Notification Nos. 14/2017-ST, 15/2017-ST, and 16/2017-ST dated 13.04.2017, which amended the Service Tax Rules by inserting Rule 2(1)(d)(EEC) and sub-rule 6(7CA). These provisions made the importer liable to pay service tax on ocean freight under reverse charge, calculated either on actual freight or on a deemed value basis (1.4% of CIF value). The levy was challenged before the Gujarat High Court in M/s. SAL Steel Ltd Vs. Union of India.

Court's interpretation and reasoning: The Gujarat High Court held that the impugned provisions were ultra vires Sections 64, 65B(44), 66B, 67, 68, and 94 of the Finance Act, 1994. The Court found that the Notifications and the corresponding amendments to the Service Tax Rules exceeded the legislative competence and were not in conformity with the statutory provisions governing service tax levy and valuation.

Key evidence and findings: The Tribunal relied on the Gujarat High Court's judgment which invalidated the levy. The Court emphasized that the reverse charge mechanism and valuation method prescribed were not legally sustainable.

Application of law to facts: Since the levy itself was struck down, the foundation for demanding any differential service tax on ocean freight under reverse charge did not exist.

Treatment of competing arguments: The department initially issued a show cause notice demanding differential tax and penalties, contending that the appellant had wrongly availed 70% abatement. However, the department's representative conceded that the issue was covered by the Gujarat High Court's ruling and the Tribunal's precedent in CCE Vs. Adani Wilmar Ltd.

Conclusions: The Tribunal concluded that the levy of service tax on ocean freight under reverse charge was invalid, and hence, the demand for differential tax was without merit.

Entitlement to 70% Abatement on Ocean Freight

Relevant legal framework and precedents: The appellant claimed a 70% abatement on ocean freight value while discharging service tax liability. The Tribunal referred to the decision in CCE Vs. Adani Wilmar Ltd, where the Tribunal allowed such abatement. Additionally, the Kerala High Court in M/s. GAC Shipping (India) Pvt Ltd quashed the CBIC Circular dated 13.04.2017, which denied such abatement, thereby upholding the 70% abatement.

Court's interpretation and reasoning: The Tribunal recognized the binding nature of these precedents and held that the appellant was entitled to the 70% abatement on ocean freight.

Key evidence and findings: The appellant's payment of service tax with 70% abatement was consistent with the legal position established by the precedents.

Application of law to facts: Given the validity of the abatement was settled, the department could not disallow the abatement and demand the differential amount.

Treatment of competing arguments: The department did not dispute the precedents and fairly conceded the point.

Conclusions: The appellant's claim to 70% abatement was upheld.

Demand for Differential Service Tax, Interest, and Penalty

Relevant legal framework and precedents: Section 73(1) of the Finance Act, 1994 empowers the department to recover service tax not paid or short paid along with interest and penalty. However, such recovery must be based on a valid demand.

Court's interpretation and reasoning: Since the levy itself was struck down, there was no valid basis for the department to issue a show cause notice or demand differential tax.

Key evidence and findings: The department's demand was premised on disallowing the 70% abatement and treating the entire ocean freight as taxable value. The Tribunal found this approach legally untenable.

Application of law to facts: The Tribunal applied the principle that an invalid levy cannot support a valid demand for tax recovery.

Treatment of competing arguments: The department conceded the legal position and did not contest the appellant's entitlement.

Conclusions: The demand for differential service tax along with interest and penalty was quashed.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"When the levy of service tax on ocean freight on the importer on reverse charge basis has been struck down by Hon'ble High Court, the department's contention to deny abatement of 70% and demand the differential service tax amount is devoid of merit."

The core principles established include:

• The levy of service tax on ocean freight under reverse charge mechanism, as introduced by Notifications Nos. 15/2017-ST and 16/2017-ST, is ultra vires the Finance Act, 1994.
• The importer cannot be held liable to pay service tax on ocean freight under the impugned provisions.
• The 70% abatement on ocean freight value is a valid and legally recognized concession, supported by Tribunal and High Court precedents.
• Any demand for differential service tax, interest, and penalty based on the invalid levy and disallowance of abatement is unsustainable and must be set aside.

Accordingly, the Tribunal allowed the appeal, setting aside the demand for differential service tax, interest, and penalty.