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Commissioner of Central Excise And Service Tax (Ltu) , Mumbai Versus The Shipping Corporation of India Ltd.

2015 (7) TMI 553 - CESTAT MUMBAI

Vivisection of service - Composite contract - ship management service - ship management service - Difference of opion - Registry is directed to put up the file before the Hon'ble President to resolve the issue, by reference to a third Member.

Whether, in the facts and circumstances, the composite contract of ship management service can be vivisected for the period in question, when 'ship management service' was not taxable, and the taxable component like 'repair and maintenance' be ch .....

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dent : Shri Bharat Raichandani, Adv. ORDER Per: P S Pruthi: This appeal filed by Revenue is directed against order of Commissioner (Appeals) who set aside the order of the adjudicating authority rejecting the refund claim of ₹ 16,40,79,318/- filed by the respondent M/s. Shipping Corporation of India Ltd. (SCI). Cross-objections were also filed by the Respondent. 2. The background of the case is that M/s. SCI are engaged in providing taxable services under the categories of 'Maintenance .....

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which the respondent provided "Operation and Maintenance Management of Well Stimulation Vessel" owned by ONGC. The scope of the work under the contract is given in Clause (3) of Annexure-III to the contract for the Well Stimulation Vessel Smaranidhi. Similar contracts were entered into for other vessels. The scope of work is extracted below: 3.2 The Marine operations broadly include: 3.2.1. Manoeuvering & dynamic positioning of the vessel, 3.2.2 Crane & deck operations, 3.2.3 .....

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l, all supplies and deployment of complete crew in all the shifts. The Base Manager shall have suitable office accommodation and all secretarial assistance required to enable him to carry out his responsibilities. 3.4 To keep the vessel in Dynamic Positioning mode during job execution. 3.5 To maintain/up-keep of the referred equipment and attend to the day-to-day repairs & maintenance of the Vessel (marine equipment, all auxiliary equipment as referred at Para 3.1 including electrical & .....

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lso include to proper forecast required to keep all the equipment operational at all the times. 3.7 The supplies of material/spares/consumables including lubricants shall be against the indents/requisitions approved by Owner on the recommendation of Contractor's representative duly certified by Owner's representative on board, keeping in view the consumption pattern, inventory levels, PMS schedule & lead time of procurement etc. 3.7.1. Only genuine spares for equipment & machiner .....

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s shall be the property of the Owner. 3.7.3 The responsibility of the Contractor includes Customs clearance & payment of Customs duty & supply to ONGC base. 3.8 To coordinate & arrange dry-dock & lay up repairs. The vessel is required to undergo dry dock twice in five years to meet the statutory requirement of hull & thrusters surveys. 3.9 To coordinate with Director General of Shipping/any other agencies for statutory marine requirements & movement of vessel in Indian Wa .....

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maintenance of Marine Equipment & Systems. 3.12.1 The payment to Service Engineer shall be made as per agreed rates decided mutually before mobilisation, Traveling expenses shall be reimbursed as per actual. The transportation to & from Offshore, boarding & lodging at the vessel shall be provided by ONGC. 3.13 To provide assistance to deal with any emergency situations e.g. blow out, fire fighting, pollution control etc. as per the demand of the occasion. Clause 10 of the Contract i .....

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ner, Breakdown/Downtime/Penalty shall be governed by Clause 25." Clause - 8 of the contract relates to remuneration and terms of payment 8.0 REMUNERATION AND TEMS OF PAYMENT 8.1 Contractor shall prepare daily reports in triplicate of the number of categories of contractor personnel as per the approved regular crew, equipment on hire and for the quantities of consumables and spares delivered against authorization of Owner's representative/Vessel in-charge and submit them for approval ... .....

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ar and callout) as applicable/allowances/repatriation/porterage/conveyance temporary hotel accommodation/boarding allowance medical expenses, etc. for the various categories of personnel required for the manning of these vessels and also expenses for the running operations of the vessels and its routine maintenance and supply of stores including payment of statutory taxes, service tax as applicable and custom duties or any other statutory levies (excluding the Income Tax liability for all catego .....

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tion @ 5% of the total expenses incurred or to be incurred by the Contractor under various illustrative heads mentioned in CL 8.3 above. The remuneration charge of 5% will not be applicable on customs duties, Contractor's service tax and Contractor's management expenses. 3. As the respondent had paid service tax on the entire amount of charges reimbursed to them by ONGC, they filed a refund claim on the ground that service tax was payable only on the amount of 5% fees received by them an .....

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rvices forms an integral part of the taxable value. He also rejected the contention of the respondent that the costs incurred on reimbursable basis have to be excluded, that even as per present provisions, the respondent had not fulfilled the conditions of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 to be qualified as a pure agent of the service recipient. He also rejected the contention that the activity is covered under "Ship Management service" which became tax .....

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Act, 1994, he held that the 'Ship Management' service gives the essential character to the service rendered by the respondent. Therefore the tax paid inadvertently by the respondent under the 'Maintenance or Repair' service for the period prior to 1.5.2006 is refundable. 4. Heard both sides. 5. The Ld. AR contended that the activities carried out by the respondent are well covered under the definition of "Maintenance or Repair" service under Section 65(64) of the Finan .....

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ure incurred cannot be treated as reimbursable expenditure. The Ld. A.R. relied on the judgment of M/s. Safe and Sure Marine Services Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai - ST/116/2010 and the case of M/s. Jubilant Enpro Pvt. Ltd. vide order no. A/419-420/13/CSTB/C-I. 6. The Ld. Counsel appearing for SCI stated that the activity undertaken by the respondent can be described briefly as follows: (a) ONGC is the owner of the vessel. (b) ONGC has entered into an agreement with the Respo .....

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ent and maintenance of the vessel. (g) The personnel employed by the Respondents for Operation, Management and Maintenance of the said vessel are qualified and experienced Marine, Geotechical and Diving personnel satisfying the requirements of Indian Merchants Shipping Rules. Annexure-III (Schedule-D) of the above agreement stipulates the professional qualifications and requisite experience required by the Marine, Geotechnical, Diving Call out etc. personnel. 6.1 On taxability of the above activ .....

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orm part of the taxable value. Value of goods/materials used in the course of such maintenance services do not form part of taxable value. Service tax paid by the respondent was not passed on to the customer i.e M/s. ONGC and the said amount is reflected in the balance sheet as service tax receivable. Any expenditures/costs incurred by the Respondents are in the nature of expenses incurred in the capacity of a pure agent of the customers i.e. M/s. ONGC. 6.2 In support of his stand that the activ .....

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ter 1.5.2006, the activity would be classifiable under 'Ship Management' service, the same cannot be classified under 'Management Maintenance or Repair' service for the earlier period. He relied on Glaxo Smithkline Pharmaceuticals Ltd. vs. CCE 2005 (188) ELT 171 (T). He added that the same activity cannot be classified under two different heads for two different periods. He relied on Gujarat Chem Port Terminal Co. Ltd. vs. CCE - ST/ 74/2004. He also stated that any interpretation .....

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paid on spares, Steamer Charges, Stores & Spares, Wages and Allowance etc., have been reimbursed by ONGC and the respondents have been paying service tax on the commission at 5% received from ONGC over and above the cost reimbursed on actual basis. The respondents are only making payment to service providers on behalf of ONGC who is reimbursing the expenses on a cost to cost basis. In this connection he referred to Clause 3.7 of the Contract which recognizes the fact that respondent shall p .....

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Repair' activity which is covered under the Maintenance service has been provided by the said contractors and not the respondent. He relied on Glaxo Smithkline Pharmaceuticals Ltd. vs. CCE 1996 (3) STR 711 and Scott Wilson Kirkpatrick (I) Pvt. Ltd. vs. CST 2007 (5) STR 118. Lastly, he urged that although valuation Rules were introduced w.e.f 18.4.2006, even by application of Rule 5(1) they would be entitled to benefit of 'pure agent' under Rule 5(2) of the Valuation Rules, because th .....

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#39; service or under Section 65(96a) as 'Ship Management' Service. It would be useful to extract the definitions of the two competing services as under: (64) "management, maintenance or repair" means any service provided by- (i) any person under a contract or an agreement; or (ii) a manufacturer or any person authorized by him, in relation to, - (a) management of properties, whether immovable or not; (b) maintenance or repair of properties, whether immovable or not; (c) Mainte .....

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; (vii) payment, on behalf of the owner, of expenses incurred in providing services or in relation to the management of ship; (viii) the entry of ship in a protection or indemnity association; (ix) dealing with insurance, salvage and other claims; and (x) arranging of insurance in relation to ship; 8. The exact nature and scope of service provided by SCI has already been detailed in para 2 above. There appears to be no doubt that after the introduction of the 'Ship Management' Service w. .....

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gorized as 'Maintenance or Repair' service. Thus, we have to examine whether the activities would be covered by the definition of 'Maintenance or Repair' service prior to 1.5.2006 when it was defined as: (64) "maintenance or repair" means any service provided by- (i) any person under a contract or an agreement; or (ii) a manufacturer or any person authorised by him, in relation to,- (a) maintenance or repair including reconditioning or restoration, or servicing of any g .....

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f work which are reproduced in para-2 above. We find that in many clauses such as clause 3.2.4, 3.2.5, 3.3, 3.5, 3.6, 3.7.2, 3.12, either the words 'Maintenance or the word 'Repair' is used in these clauses. Therefore, it cannot be said that service under the category of 'Maintenance or Repair' was not provided. The problem which arises is that certain activities such as those in clauses 3.2.1 (Manoeuvering & dynamic positioning of the vessel), 3.2.2 (Crane & deck ope .....

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;Cost plus' basis". Thus from the terms of the Contract as specified in Clause 1.3 and the details of the scope of work as specified in Clause 3 to Annexure-III of the Contract, it is clear that some activities related to 'Operations' which were not taxable, during the impugned period and some activities related to Maintenance Management which were taxable under the category of 'Maintenance or Repair service. We also note that the word 'Management' was also introduce .....

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k deserves to be split up into two categories namely 'Maintenance or Repair' service which was taxable during the impugned period and 'Operations' which was not taxable during the impugned period. We note that, prima facie, there appears to be a composite contract between ONGC and the respondent. However, on venturing into details of the contract we find that it is composed of a range of distinct and separately identifiable activities which are paid for and reimbursed by ONGC, ac .....

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case of Jubilant Enpro Pvt. Ltd. (supra) and M/s. Safe & Sure Marine Services Pvt. Ltd. (supra). The facts in those cases are somewhat different. In those cases the issue was whether the appellant have provided 'Manpower Supply Service' or 'Ship Management Service'. In the present case at hand we have already examined the issue of classification and have come to the conclusion that only some activities provided under the contract fall in the ambit of 'Maintenance or Repa .....

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various agencies. We have seen the bills relating to such work such as electric work, servicing and repairs to navigational and communication equipments, repairing of rafts, specialized workshop etc. The appellant apparently are merely a conduit for getting the work done and passing on the reimbursement of expenses incurred by ONGC to the agencies to whom the work is outsourced. The Board circular relating to reimbursement of expenses incurred by CHA's and Manpower Recruitment agencies will .....

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ontractor (SCI) under cost plus basis. There is no doubt that all the expenses incurred are reimbursed by ONGC for provision of service on account of expenses payable to all the Sub-contractors through whom the respondent gets the various activities performed. The respondent raises the Debit Notes on ONGC for the reimbursement of various expenses such as - Launch Hire, Customs duty on spares, Steamer charges, Stores and spares, Wages and allowances etc. ONGC reimburses the entire expenditure to .....

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or payment to the Service Engineer arranged by the respondent but authorized by the owner, to be made at agreed rates and for whom travelling expenses are reimbursed as per actual. This clause indicates that all expenditure incurred by the respondent for undertaking various activities are strictly on a reimbursement basis. Neither the adjudicating authority nor the Commissioner (Appeals) have gone into the details of various clauses of the Contract before arriving at a judicious decision. As reg .....

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d for manning the vessels and also expenses for the running operations as well as supply of stores including payment of service tax as applicable and Customs duty which the Contractor may incur or become liable to pay. We find this is sufficient evidence to establish that the entire expenses are indeed paid by ONGC. From the entire arrangement it appears that no service is being provided by the respondent as such when the entire expenses are reimbursed by ONGC. We note that in the case of Jubili .....

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he expenses. Only adjustment in the actual amounts involved are claimed through debit notes. 10.1. This being the factual situation, we have to examine the issue keeping in view the statutory provisions. The valuation of taxable services for charging service tax is specified in Section 67 as "the value of any taxable services shall be the gross amount charged by the service provider for such services provided or to be provided by him". Further, the Explanation to Section 67 states in t .....

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has not appointed the respondents to deal with any third party but to provide services to them directly. We have noted above that the spares etc. are bought with the approval of ONGC and monthly advance is paid for reimbursement by ONGC. In the circumstances, the matter needs a comprehensive examination keeping in view Board Circulars (supra) on the issue of service tax payable on agency commission earned by Custom Houses Agents, and commission earned by Manpower Recruitment or Supply Agency. 11 .....

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activity. (ii) The value of taxable services may be determined keeping in view our observations above, Board Circulars and judicial pronouncements on this issue. 12. Appeal is disposed in above terms. Cross-objection is also disposed. (Pronounced in court on /03/2015) Per: Anil Choudhary: 13. I have gone through the order recorded by my learned brother Shri P.S. Pruthi, as I do not fully agree with his order, I am recording my separate order. 14. I agree with the learned Member (Technical) that .....

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a wide range of services in respect of running and operation of the ship. The respondent company has the expertise required to manage both the aspects of the ship, viz., - (a) Technical maintenance and Crew management. Further, the respondent have developed software support system to take care of various aspects of a ship like crew management, stores and spares, procurement, inventory control, plant maintenance system, dry-docking, assurance of the ship etc. From the detail perusal of the vario .....

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two or more sub-clauses of clause 105 of Section 65, classification should be effected as follows:- (a) the sub-clause which provides the most specific description shall be preferred to sub-clauses, which provide for a general description, (b) composite services consisting of a combination of different services, which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character. 15. I agree with the f .....

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of the TRU Circular dated 28.2.2006 which reads as under:- "Often services provided consist of more than one service. In such cases, it is important to decide, for the purpose of classification of services, whether each element of the transaction should be treated separately or as a single composite transaction, albeit, made up of two or more separate services. A composite service, even if it consists of more than one service, should be treated as a single service based on the main or prin .....

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itself determine whether the service provided is a single service or multiple services." This Tribunal has held in the case of Gujarat Chemical Port Trust Co. Ltd. - 2008 (9) STR 386 (LB), wherein a question arose as to whether rental charges collected by the assessee would be covered under 'Storage and Warehousing Services' or not. It was held that the activity undertaken was a composite supply of port services which became subject of Service Tax subsequently, would not be subject .....

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t taxed under 'Consulting Engineers Service'. Accordingly, I hold that in the present case also, the contract for 'ship management' cannot be vivisected to tax the other taxable components, including repair and maintenance. 16. Even otherwise, the whole agreement is based on 'cost plus' basis. Thus the respondent assessee herein have worked as a Pure Agent for its principal - ONGC and have only charged 5% remuneration on the management cost incurred. On such management co .....

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mbursable expenditure incurred on behalf of the client should not fall under the 'taxable services' rendered. 17. Further, the ground of the Revenue that the assessee had raised a new ground in appeal before the Commissioner (Appeals) that they are not chargeable to tax, for the period in dispute being prior to 1.5.2006, when 'ship management service' become a taxable service, is also not tenable and rejected as a ground of law, can be raised at any stage, by a part to a dispute, .....

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