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2016 (8) TMI 852 - CESTAT MUMBAI

2016 (8) TMI 852 - CESTAT MUMBAI - 2016 (46) S.T.R. 835 (Tri. - Mumbai) - Refund of service tax paid inadvertently on non-taxable services - Operation and Maintenance Management of Well Stimulation Vessel - period from 16.6.2005 to 31.3.2006 - Classification of service - Ship Management service or Maintenance or Repair services - Whether the composite contract cannot be vivisected for taxing the taxable components repair and maintenance - Valuation - inclusion or reimbursement of expenses - diff .....

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r of a ship or vessel under an O&M contract is also bound to maintain the vessel in a sea-worthy manner in the course of its operation by husbanding her with due diligence and care; such an obligation may not even require maintenance as contemplated in section 65(64) of Finance Act, 1994. - Not to be overlooked also is the performance of service on goods or equipment with ‘goods’ having the specific import supra. It may not be entirely correct in describing a ship or vessel as equipment thou .....

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goods except for the time that they are the subject of a sale agreement. That ships, vessels and motor vehicles need not exclusively be goods is also apparent in section 2 of Customs Act, 1962; they could also be conveyances. As conveyances, ships/vessels and motor vehicles move easily on water or land but, not being goods that are amenable to severance from land/water, are not distinguishable from immoveable property. - Consequently, the legislative intent to tax 'repairs or maintenance' o .....

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rt of any existing entry within the newer entry. The two entries continue to have an independent existence after 1st May 2006. Judicial pronouncements have made clear that the extent of legislative intent to tax in such situations is easily ascertainable. - Classification of service in question under ‘Ship Management Service' under Section 65(95a) upheld. - The service provided during the disputed period from 16.06.2005 to 31.03.2006, is not taxable, being composite service, and cannot b .....

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rder 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 or Repairs' and 'Business Auxiliary Service'. They filed the refund claim on the ground that they .....

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d 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 Coordination for landing & take off for helicopter, 3.2.4 Repair & Maintenance of the Vessel including .....

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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 & electronic components of stimulation equipment on the vessel) and any reasonable addition of equipment/systems .....

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s 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 & machineries shall be allowed for use, which are required to be procured form the OEM/OES or his authorized dealers. Any .....

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p; 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 Waters and overseas for dry-dock repairs etc. 3.10 To arrange for the annual statutory and classification surveys .....

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eed 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 is also relevant and is extracted below: 10.0 MAINTENANCE "The Contractor shall be responsible for the day .....

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uneration 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 .............................. Indicating approval (which shall not be unreasonably withheld) or shall state the r .....

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ng 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 categories of personnel to be hired/employed by the Contractor for manning of the Owner's vessels) which the Cont .....

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entioned 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 and not on the amount which is only a reimbursement of the actual expenses incurred. Respondent also informed to .....

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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 taxable w.e.f 1.5.2006. According to him, the service provided by the respondent is well covered under the definit .....

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dered 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 Finance Act which, inter alia, include operation and management of the vessels. The Contract Price defined in Annexu .....

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d 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 Respondents for Operation, Management and maintenance of the said vessel. (c) The Respondents undertake to operate a .....

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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 activity he stated: The impugned services provided during the period (from 16.06.2005 to 31.03.2006) can be covered .....

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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 activity is covered under 'Ship Management' service he relied on CBEC Circular D.O.F. no.334/4/2006-TRU date .....

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assified 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 of law which renders a specific provision redundant or otiose or inconsistent needs to be avoided. He relied o .....

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nd 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 procure materials spares etc. on behalf of the customer. He relied on CBEC Circular No 5/97-ST dt. 12.06.1997 an .....

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nd 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 they recovered the expenses from ONGC on a cost to cost basis. He added that Rule 5(1) has already been stuck dow .....

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efinitions 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) Maintenance or repair including reconditioning on restoration, or servicing of any goods, excluding a motor vehicle; .....

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ement 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.e.f. 1.5.2006, the activity as a whole is most aptly covered under this service. However, the period in dispute .....

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vered 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 goods, excluding motor vehicle; or (b) maintenance or management of immovable property; From the above, it is se .....

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, 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 operations) and activities in Clauses 3.2.3, 3.7.3, 3.8, 3.9, 3.11 and 3.12 do not appear to be covered by the ter .....

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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 introduced in the category of 'Maintenance or Repair' service from 1.5.2006. Therefore, we cannot agree with the .....

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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, activity-wise. Therefore as the value of each activity undertaken is based on the actual value for which invoices .....

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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 Repair' service. Therefore, we find it appropriate to remand the matter to the Commissioner to identify the act .....

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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 apply, by analogy, to the present case. We have also seen material invoices raised by agencies from whom the ma .....

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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 the respondent on cost to cost basis. There being no factual dispute on this reimbursement, a view can be taken .....

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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 regards the supply of materials and spares, here again we find from Clauses 3.7 and 3.7.1 that the materials are a .....

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yment 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 Jubiliant Enpro Pvt. Ltd. (supra) while relying on the judgment of the Hon'ble High Court of GDA Security Pvt. Lt .....

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he 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 the exclusion provision, that the cost of parts or other material, if any, sold to the customer during the cours .....

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e 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. In view of the above, we remand the case to the Commissioner for fresh adjudication with the following direct .....

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rculars 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 the whole contract is found on the cost plus basis for management and maintenance of the ships, by the responde .....

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tise 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 various contract entered into by the respondent-SCI and their principal-ONGC, it is apparent that the scope of servi .....

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-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 finding of the Commissioner (Appeals), so far as classification of these services involved in the present appeal .....

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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 principal service and accordingly classified. The decision is to be made on question of facts and law. It will not .....

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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 to Service Tax under Storage and Warehousing Services'. Similarly, this Tribunal in the case of Rolls Royce .....

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ntract 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 cost and/or remuneration received, the respondent assessee had discharged the Service Tax, which they are not dis .....

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dered. 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, Thus, the appeal is dismissed. 18. To sum up, I hold that the services provided by the respondent have been ri .....

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ll be entitled to consequential relief, if any, in accordance with law. The adjudicating authority is directed to grant refund expeditiously preferably within a period of two months from the date of production of copy of this order, with interest as per Rules. DIFFERENCE OF OPINION (i) 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 comp .....

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ri R. K. Das, Dy. Commissioner (AR) for the appellant Shri Bharat Raichandani, Advocate for the respondent Per: C J Mathew, Member (Technical) 20. Difference of opinion between the Learned Member (Technical) and Learned Member (Judicial) in order no. M/2680-81/15/STB dated 5th June 2015(as amended by Order No. M/4790/15/STB dated 21st October 2005 in Application No. ST/ROM/94387/15) appeal no. ST/89501/13 has been recorded thus: (i) When the entire scope of work deserves to be split up into two .....

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eld by Member (Judicial). (ii) Whether the issue on valuation of taxable services needs to be remanded for comprehensive examination keeping in view Board circulars and judicial pronouncements on the issue as held by the learned Member (Technical). Or The issue on valuation does not need to be remanded because reimbursement expenditure incurred does not fall under the taxable service rendered, as held by Member (Judicial). 21. In the first round of litigation, both the lower authorities had reje .....

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ral Gas Corporation (ONGC) was liable to tax as consideration for rendering of maintenance or repair service defined in section 65 (64) and taxable under section 65(105)(zzg) of Finance Act, 1994 whereas the first appellate authority concluded that the activities in the performance of the contract fell within the definition of ship management services as defined in section 65 (96a), taxable under section 65(105)(zzzt) of Finance Act, 1994 and hence outside the ambit of Finance Act, 1994 before 1 .....

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e facts and circumstances in full; it shall suffice to merely recapitulate the salient features of the dispute between M/s Shipping Corporation of India and Commissioner of Central Excise & Service Tax (LTU), Mumbai in disposing off the application for refund of tax claimed to have been paid in excess for the period from 16th June 2005 to 31st March 2006. M/s Shipping Corporation of India had entered into contracts with M/s Oil & Natural Gas Corporation (ONGC) on 9th June 2005 titled Ope .....

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vessels in the same manner as it does its own save that the entire cost is borne by M/s ONGC through a system of monthly payments and, in the manner of all O&M contracts, is paid a fixed percentage of the total expenditure. The appellant had been discharging tax on the entire receipts from M/s ONGC and has now sought refund the tax so paid on the receipts as was in excess of the fixed percentage earned as O&M fee. 24. The ambit of the contract was comprehensive enough to cover manning, o .....

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n for the rendering of taxable service. 25. While Learned Member (Judicial) is of the opinion that the relationship between M/s ONGC and the appellant is not covered by the taxable service in section 65 (105)(zzg), viz., repair or maintenance as it stood during the period for which refund is claimed but became taxable under section 65(105) (zzzt) with effect from 1st May 2006, the Learned Member (Technical), though not in agreement with the contention of Revenue that the entire proceeds were for .....

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do not have to bring them into record for rendering my findings. It may, however, be of import to consider two aspects that are germane to resolution of the dispute between Revenue and the assessee: gross amount charged and the scope of repair or maintenance service. 27. The taxable value, as defined in section 67 of Finance Act, 1994, is the gross amount charged by the service provider and the amount to be taxed is the totality of the consideration for rendering of a service. Undoubtedly, it wo .....

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nt of Finance Act, 1994. Nonetheless, unlike goods which are manufactured and belong to the manufacturer till disposal, transactions for rendering of service are not amenable to the same level of segmentation; valuation mechanism will have to specifically provide for exclusion of pass through money flows while acting as pure agent that is independent of being a provider of taxable service. Hence, the claim for exclusion from tax is linked to the contractual agreement that envisages such an age .....

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orced by Revenue, i.e. section 65(105)(zzg) incorporated in Finance Act, 1994 with effect from 1st July 2003, is: to a customer by any person in relation to maintenance or repair and section 65(64) defined maintenance or repair thus: means any service provided by (i) any person under a contract or agreement; or (ii) a manufacturer or any person authorized by him, in relation to maintenance or repair or servicing of any goods or equipment, excluding motor vehicle, with goods having the meaning as .....

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vice is the pre-requisite of a contract or agreement to maintain, repair or service. However, the tax levy is not crystallized by the mere execution of a contract promising to render service on the agreed terms; section 65(105(zzg) makes it necessary that some repair or maintenance must have been undertaken for a consideration for the tax liability to arise. In proceeding to deny the claim of the assessee for refund, the undertaking, if any, of repairs or maintenance has not been ascertained by .....

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a ship or vessel as equipment though equipment may be fitted on board rendering the ascertainment thereof by the original authority to be that much more complex. It is also moot whether a ship or vessel may, with some degree of accuracy, be described as goods. During the relevant period, taxability was limited to repair, maintenance or servicing of goods which were restricted to moveable property; this itself is defined in the General Clauses Act as all property excluding immoveable property wh .....

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ship from the waters should bring them within the ambit of immoveable. Ships before launch and for breaking up are goods but vessels or ships that are afloat are not goods except for the time that they are the subject of a sale agreement. That ships, vessels and motor vehicles need not exclusively be goods is also apparent in section 2 of Customs Act, 1962; they could also be conveyances. As conveyances, ships/vessels and motor vehicles move easily on water or land but, not being goods that are .....

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e. 30. Such an entry was incorporated in Finance Act, 1994 as section 65(105)(zzzt): to any person, under a contract or agreement, by any other person, in relation to ship management service with effect from 1st May 2006 and the definition of ship management service includes repair of ships. This incorporation would, therefore, reinforce the conclusion that the scope of section 65(105)(zzg) supra did not extend to conveyances including ships. 31. Learned Member (Technical), while not entirely in .....

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ip Management Service w.e.f 1.5.20006, the activity as a whole is most aptly covered under this service. He, however, goes on to state that: …..However, the period in dispute in the present case is 16.6.2005 to 31.3.2006. Therefore, the issue which requires a decision is whether the activity undertaken by ONGC (sic) would be covered under the Management, Maintenance or Repair Service. It is significant to note that the word Management in the above category of service was also introduced .....

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y relating to ships with the incorporation of section 65(105)(zzzt) from 1st May 2006. Accordingly, taxability even for the limited activity of repair or maintenance shifted to an entirely new entry thereafter. That is a conclusion I find difficult to agree with. 32. It is clear that the later entry was not carved out of an existing entry; neither was there any partial recasting of an existing entry to bring any part of any existing entry within the newer entry. The two entries continue to have .....

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t the activities of the members of the 1st petitioner are covered by entry (zzzy) and entry (zzzzj). Such a result is difficult to comprehend because entry (zzzzj) is not a specie of what is covered by entry (zzzy). Introduction of new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services. Therefore, prior to introduction of entry (zzzzj), the services rendered by the members of the 1st petitioner were not taxable. Creat .....

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try (zzzzj) was introduced to cover transport of tangible goods by sea without transferring right of possession and effective control thereof. The services rendered by the members of the 1st petitioner are covered by entry (zzzzj) because they inter alia supply vessels offshore support vessels, barges, tugs etc. without transferring right of possession and effective control over them. In contrast entry (zzzy) was introduced to comprehensively bring under the service tax net activities having a d .....

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