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Mormugao Port Trust Versus Commissioner of Customs, Central Excise & Service Tax, Goa- (Vice-Versa)

Demand - Section 73(1) of the FA, 1994 - Port Services - Renting of Immoveable Property services - whether the amount received by the Assessee from SWPL, under the nomenclature of royalty, was a consideration for the renting/leasing of the land and the waterfront and accordingly liable to tax under the head of Renting of Immoveable Property services? - Held that: - there is no service that has been rendered by the Appellant, much less the taxable service of renting of immoveable property. The mo .....

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O. ST/86337, 86592/15 - Order No.A/93085-93086/16/STB. - Dated:- 7-10-2016 - Mr. Ramesh Nair, Member(Judicial) And Mr. C.J. Mathew, Member(Technical) Shri. V.K. Jain, Advocate with Ms. Isha Shah, Advocate for the Appellants Shri. R. Kapoor, Commissioner (A.R.) with Shri. A.K. Goswamim Addl. Commissioner(A.R.) for the Respondent Per : Ramesh Nair These two appeals are directed against Order-in-Original No. GOA-EXCUS-000-COM-028-2014-15 dated 28.3.2015 passed by Commissioner of Central Excise, Goa .....

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f the Finance Act, 1994. iii) I am not imposing any penalty under Section 76, 77 and 78, of the Finance Act, 1994 in terms of Section 80 of the Finance Act, 1984. 2. The facts of the case as recorded in the Show Cause Notice are that the Appellant, M/s. Mormugao Port Trust is rendering Port Services and is duly registered for this purpose with the service tax authorities. The Notice contends that, the Assessee had entered into an agreement with M/s South West Port Ltd, Mormugao, (SWPL) under whi .....

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x was leviable under the head of Renting of Immoveable Property services. 3. The Assessee replied to the Notice submitting that there was no liability to service tax inasmuch as there was no renting of immoveable property service rendered by it and that the royalty earned by it was infact its share of revenue from services which were jointly rendered by the Assessee and SWPL. It was submitted that the principal-client relationship which is the basic tenet for applicability of service tax was not .....

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the notice, except proposal for imposition of penalties, have been confirmed by Order dated 28.3.2015, therefore the Assesseeis before us. 5. Shri Vipin Jain, Ld. Counsel appearing for the Assessee made the following submissions: a) The impugned order has been passed without appreciating the true nature of agreement existing between the Assessee and SWPL. b) The assumption that the Assessee had leased the land and the water front was erroneous and contrary to facts. Infact the arrangement betwe .....

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e is a combination of two or more persons in a specific venture, where profit is jointly sought without any actual partnership or corporate designation. It clearly comes out from the judgment that to constitute a joint venture, a common enterprise for profits should be undertaken where joint control is exercised over strategic financial and operative decisions. This test is met with in the facts of the present case. d) The relation between the co-venturer and joint venture is akin to that of a p .....

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running the joint enterprise and that if the venture is successful the returns that he gets from the same is his profits and not a consideration for any specific service rendered. Likewise a co-venturer does not render any service to the joint venture for a consideration, so as to attract any service tax liability. It was submitted for the same reason Explanation 3 to the definition of service in Section 65(B)(44) also could not be invoked. e) That the CBEC in its Circular No.179/5/2014 dated 2 .....

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nds of Appellant. g) The entire demand was barred by limitation. 6. Shri Rupam Kapoor, Ld. Commissioner AR and Shri A.K. Goswami, Ld. Additional Commissioner (AR) appearing for the Revenue reiterates the findings in the impugned order. In addition, he submits that: i) the agreement between the Assessee and SWPL itself, in clause 15.3 records that the duties, obligations and liabilities of the parties under the agreement are several and not joint or collective and that nothing contained in the ag .....

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p between the two was that of a joint venture inasmuch as the Hon ble Delhi High Court has in the case of Airport Retail Pvt Ltd vs UOI reported in 2014 (35) STR 659 held that variable component of a licence fee could also be a part of the consideration received for renting of the premises. A decision of the Tribunal in the case of Airport Authority of India vs Commissioner of Service Tax reported in 2015 (39) STR 35 was cited to argue that royalties earned by a statutory authority from private .....

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mits that the decision of the Delhi bench of Tribunal in Airport Authority of India vs Commissioner of Service Tax reported in 2015 (39) STR 35 does not assist the Revenue s case as in that case existence of any joint control by the Airport Authority of India over the businesses run by retail business establishments from the airport premises was not even a contention urged or pleaded by the Assesse. The facts as set out in that decision seem to suggest that the Airport Authority of India had onl .....

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P route. The judgment of the Delhi High Court in the case of Airport Retail Pvt Ltd vs UOI is also not relevant as that was the case of a challenge by way of a Writ Petition against proposed levy of service tax on rentals earned by Delhi International Authority Ltd (DIAL) from duty free shops. The Writ Petition in that case did not contend that there was a joint venture between DIAL and the duty free shops and the court therefore did not permit this argument to be taken up during oral pleadings .....

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hat the issue to be decided by us is whether the amount received by the Assessee from SWPL, under the nomenclature of royalty, was a consideration for the renting/leasing of the land and the waterfront and accordingly liable to tax under the head of Renting of Immoveable Property services. The Appellant s contention that the Royalty in question was not a consideration received for any particular service rendered by the Assessee to SWPL but was its share in the revenue earned from a joint busines .....

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pparent that the said bids were invited in line with the Government s policy of encouraging Private participation in the port sector through the Public Private Partnership route (PPP for short). The private sector participation was invited. The Tariff authority for Major Ports, which fixed the tariff for the port services rendered at the two new multipurpose bulk cargo handing berths 5A and 6A describes this project as one setup on a PPP model. This is so stated in relevant Notification No.G 27 .....

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ed by it from SWPL whether described as licence fees or as royalty were in fact a consideration for the activity of leasing the land and water area to SWPL. 10. After going through the licence agreement dated 11.4.1999 between the two parties, we find that the Commissioner was wrong in holding that the Assessee had merely leased out the land and water area to SWPL, and had done nothing else besides that. The agreement shows that besides leasing out the land and water area to SWPL for which a spe .....

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WPL is the right to conduct port operations at Mormugao water-front. As per the licence agreement, licence fees is the consideration agreed for the specific activity of leasing/renting of land and water area. Royalty on the other hand is the reward that the Assessee earns as his share of revenue from a joint port business enterprise run by the two parties in lieu of the various facilities, rights and resources contributed by the Assessee for the joint business. The main contribution of the Appel .....

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oviding information about licence premises to SWPL (clause 3.2), approval of the provision and maintenance of all general port infrastructure, pilotage and towage on a non-discriminatory basis, overseeing dock-side safety, monitoring air pollution and water pollution at its own cost, compliance of environmental measures, supplying of power and water during construction, assistance for fire fighting, obtaining/assisting in obtaining other sanctions and donations (clause 5.10, 5.11), scheduling en .....

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ng of land and water area was split-up by the parties into two of which royalty was the variable component. On the contrary, the various obligations of the Assesseeas set out above, show that Royalties earned by it was the reward for the several contributions made by the Assessee to the joint venture between them and SWPL. The contributions of the Assesseecomprised of the grant of a permission to conduct port business using the water front at Mormugao, a right which otherwise vested exclusively .....

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artnership. In our view this arrangement in the nature of the joint venture where two parties have got together to carry out a specific economic venture on a revenue sharing model. Such PPP arrangement are common nowadays not only in the port sector but also in various other sectors such as road construction, airport construction, oil and gas exploration where the Government has exclusive privilege of conducting businesses. In all such models, the public entity brings in the resource over which .....

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in the nature of partnership with each co-venturer contributing in some resource for the furtherance of the joint business activity. 13. Sometimes, the contracting parties, may conduct such joint venture in the name of a separate legal entity, while at times, such a joint venture is carried out under the individual names of the parties. Such informal arrangements are called by different names either as a consortium, collaboration, joint undertaking, etc. Regardless of the legal form or name that .....

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ny body corporate or any other person to perform any of the services and functions assigned to the Board under this Act on such terms and conditions as may be agreed upon. 14. The meaning of the term joint venture was interpreted by the Supreme Court in the case of Faqir Chand Gulati vs Uppal Agencies Pvt Ltd 2008 (12) STR 401 SC wherein the Apex Court quoted with approval the following extract from the American jurisprudence Second Edition Volume 46 defines Joint Venture to mean: 17…&hel .....

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pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of the other coventurers within the general scope of the enterprise. Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership .....

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law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships. A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint ven .....

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. The other obvious feature of a joint venture would be that the parties participate in such a venture not as independent contractors but as entrepreneurs desirous to earn profits, the extent whereof may be contingent upon the success of the venture, rather than any fixed fees or consideration for any specific services. 16. In the instant case the agreement entered into between the Assessee and SWPL envisages that the Assessee would make available the land and the water front, while the obligati .....

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cargo handling jetties, as set out in clauses 5.10, 5.11 and 6.2.1 which we have referred to earlier. It thus clearly comes out from the agreement between the Assessee and SWPL, that the two had come together with the common objective of earning revenue by jointly rendering port services at jetty No.5A and 6A. There is joint control over the operations as it is clear from the agreement that the strategic financial and operating decisions such as those relating to the basic design, capability fun .....

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ndertaken by a co-venture (partner) for the furtherance of the joint venture (partnership) can be said to be a service rendered by such co-venturer (partner) to the Joint Venture (Partnership). In our view, the answer to this question has to be in the negative inasmuch as whatever the partner does for the furtherance of the business of the partnership, he does so only for advancing his own interest as he has a stake in the success of the venture. There is neither an intention to render a service .....

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nt of any taxable service is absent in the relationship amongst the partners/co-venturers or between the co-venturers and joint venture. In such an arrangement of joint venture/partnership, the element of consideration i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is absent. 18. In our view, in order to render a transaction liable for service tax, the nexus between the consideration agreed and the service activity to be undertaken should be direct and .....

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s of the Tribunal in this regard are extracted below : 11. … Consideration is, undoubtedly, an essential ingredient of all economic transactions and it is certainly consideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. - The factual matrix of the existence of a monetary flow combined with convergence of two entities for such flow cannot be moulded by tax authorities into a taxable event without identi .....

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dividual or individuals who make the contribution in return for the benefit so derived. 13. … Neither can monetary contribution of the individuals that is not attributable to an identifiable activity be deemed to be a consideration that is liable to be taxed merely because a club or association is the recipient of that contribution. 14. … To the extent that any of these collections are directly attributable to an identified activity, such fees or charges will conform to the chargin .....

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mutual benefit of the partnership/joint venture cannot be regarded as a service rendered by one person to another for consideration and therefore cannot be taxed. 20. We may mention here that there are situations where a co-venturer or a partner may render a taxable service to the joint venture or the firm. This may happen if, for instance, the partner in individual capacity enters into a separate contract with the joint venture/partnership for providing a specific service in lieu of a separate .....

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with the firm for renting out his private property to the Partnership firm for a monthly rent. In this situation, the partner will be liable to pay service tax on the renting service rendered by him to the firm. On the other hand, if the partner chooses to grant the firm a right to use his office premises and regards this as his contribution to the hotch-potch of the partnership firm, the reward by way of profits which such partner may earn upon the success of the partnership venture will not b .....

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the other hand, if the firm s venture is successful, the partner may earn profit which may be much more than the normal rent that he would have earned by simply leasing out the office to the firm for a fixed rent. The profits which the partner will earn in such circumstances is a reward due to an entrepreneur for the risk that he takes and cannot be regarded as a consideration for the renting of the office to the firm. 21. The Commissioner has tried to support his conclusion to levy tax on Roya .....

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he said explanation (iii) reads as u: Explanation 3. - For the purposes of this Chapter,- (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. In our view all that the explanation stipulates is that an unincorporated association or a body of .....

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also benefit from the same is irrelevant as there is no contract of service agreed upon or performed by the partner (co-venturer) to the partnership (joint venture). Additionally, there is no consideration agreed upon or provided. In the absence of there being a quid pro quo the essential requirement of the definition of service is not met with. 22. The Ld. AR for the Revenue disputed the contention with regard to the enterprise being a joint venture and the assessee being a joint venture partne .....

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. In our view none of the two reasons urged by the Ld. Counsel for the Revenue would lead us to a conclusion that the arrangement between the two was not that of a Joint venture. The true nature of parties relationship has to be decided keeping in view the totality of the agreement by reading the agreement as a whole and not by reading one clause in isolation. The Commissioner himself holds so in para 27 of the order, though in a different context by observing that all clauses in the agreement h .....

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herein below. 10. In Amalgamated Electricity Co. v. Ajmer Municipality, though in a different context, it has been held that:- In construing the true nature of the contract entered into between the parties, the contract has to be read as a whole and if so read it is clear that what the plaintiff undertook was to pump water from the wells in question and not to supply any electrical energy. Hence we are in agreement with the learned Judges of the High Court that the plaintiff's case in this r .....

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d as a whole, it clearly comes out that the Assesseeand SWPL were jointly undertaking a common enterprise, the revenue of which was shared between the two. Insofar as the other argument of the revenue that non-sharing of losses militates against the principle of partnership being canvassed by the Assessee is concerned, firstly the broad principle of partnership of law applies to a transaction between co-venturer and joint venture and not the entire Partnership act perse. Secondly, even under the .....

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and the right to exploit such water front as his contribution while the other venturer brings in money to create infrastructure on the same as his capital, each of the partners is responsible/liable for loss of his capital incase the venture is not successful. Had the Assessee chosen to give right in the land and the water front by way of auctioning the same, they could have gained substantial fixed amount, irrespective of revenue loss to the person who takes the right under auction. If the ven .....

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