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TMI Blog2023 (8) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellants were rendering the services of ship management, commercial management, technical management and crew management services to vessel owners and are receiving fixed cost equivalent to monthly management fees and are getting reimbursed the cost incurred by them for ship/vessel crew, cost of purchase of vessel consumables, repairs and maintenance of ships/vessels, and administrative costs etc. The appellants assessee is paying service tax on management fees for service rendered to Indian shipowners for which payment is received in Indian currency and in respect of foreign owners where payment is received in foreign currency, the appellants are not paying service tax claiming it as export of service. The investigation concluded that various reimbursable expenses received during October 2006 to March 2011, on which service tax is liable to be paid has not been paid by the appellants. Accordingly show cause proceedings were initiated by issue of three show cause notices dated 20.04.2012, 16.10.2012 and 16.09.2014 as per the Finance Act, 1994, as detailed below: SCN reference Period Service Tax demand in Rs. F. No. V/ST/HQ/AE/H/308/2011 dated 20.04.2012 October, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellants as income or expenditure in their books of accounts. In further explaining the nature of reimbursement expenses, the learned counsel had stated that the appellants receive monthly advance from the Vessel/ship Owners for procuring various goods and services for and on behalf of Vessel/ship Owners such as crew salary, vessel consumables, repair and maintenance, etc. The following process was adopted for incurring expenditure for and on behalf of vessel owner: (i) The budget of expenses was prepared by the Appellants, which was approved by the Vessel/ship Owners. The Vessel/ship Owners monitored actual expenses for procurement of goods and services and for payment to the crew of the ship, against the budgeted cost. (ii) All purchase orders issued to vendors and the bills issued by the vendors were issued in the name of Master/Owner of the Vessel/ship and c/o the Appellants. Further, the crew was recruited by the Appellants for and on behalf of the Vessel/Ship Owners. (iii) For the purpose of facilitating payment of expenses, on behalf of the owners, the Appellants had opened separate bank accounts for each of the owners under their management. (iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (i) PI Shipping and Logistics Ltd. Vs. Commissioner of Central Excise and Service Tax, Chennai - 2018 - TIOL - 3112 - CESTAT-MAD. (ii) Prime Consultancy Services Vs. Commissioner of Service Tax, Chennai - 2018 - TIOL - 2291 - CESTAT-MAD. (iii) Commissioner of Service Tax, New Delhi Vs. Karam Freight Movers - 2017 (2) G.S.T.L. 215 (Tri. - Del.) (iv) Intercontinental Consultants & Technocrats Pvt. Ltd. Vs. Union of India - 2013 (29) STR 9 (Del.) (v) Union of India Vs. Intercontinental Consultants & Technocrats Pvt. Ltd. - 2018 (10) GSTL 401 (SC) 4.1. Learned Authorised Representative for Revenue submits that the activity of the appellants is covered under the 'ship management service' and are rightly chargeable to service tax on the reimbursement charges. He further submitted that the amount recovered by the appellants cannot be considered as reimbursable expenses or amount received as pure agent as this amount has been received for providing the ship management services per se. By referring to the definition of ship management to highlight the clause (ii) of sub section 96A of section 65 of the Finance Act, 1994, he stated that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng "Ship Management Services" as defined under Section 65(96a) and as referred to in Section 65(105)(zzzt) as a taxable service liable to Service Tax under Section 66 of the Finance Act, 1994. The taxability of the service provided by the noticee is not in doubt. * The noticee had in their ST-3 returns declared and paid Service Tax on the amount billed to their clients under their invoices. * The noticee had, in addition to invoices, raised debit notes on their clients. Service Tax was not paid by the noticee on the consideration recovered by the noticee from their clients through such debit notes. xx xx xx xx xx 35. Therefore, the only point of dispute is whether the amounts recovered by the noticee through debit notes are to be treated as part of "Gross Amount" (taxable value) as defied under Section 67 of the Finance Act, 1994 or as Pure agent expenses in terms of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006." 7. We find that the dispute in this case lies in the narrow compass of deciding whether service tax is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice tax is effectuated in Section 66 of the Act. It says that "there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub- clauses (a) (d) (e) ...(zzzt) ... (zzzzv) and (zzzzw) of Section 65 and collected in such manner as may be prescribed". Further, the provisions of Section 67 of the Act, as it stood before being substituted by the Finance Act, 2006, w. e. f. 01.05.2006 was as under: "67. Valuation of taxable services for charging service tax:- For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him. Explanation 1.- For the removal of doubts, it is hereby declared that the value of a taxable service, as the case may be, includes,- (a) the aggregate of commission or brokerage charges by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker. (b) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as follows: - 'Section 67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Determination of Value) Rules, 2006, was brought into effect from 01.06.2007. Rule 5 provided for "inclusion in or exclusion from value of certain expenditure or costs". The relevant portion of the rule, is extracted as follows: - "5. Inclusion in or exclusion from value of certain expenditure or costs: (1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. (2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely: - * the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; * the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 3 : A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B. Illustration 4 : Company X provides a taxable service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract entered specifically defines the scope of the authority as agent acting on behalf of ship owner. All purchase orders issued to vendors and the bills issued by the vendors are issued in the name of master / owner of the ship and C/o the appellants. Further, appellants are making payment to seafarer/workers on behalf of the owner of the ship. The agreement with the seafarer is made by the appellants on behalf of 0wner of the ship. This fact is illustrated from the agreement with the seafarer. It is specifically mentioned in the agreement that the said seafarers are hired for and on behalf of the ship owner. The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service; Goods and services procured are effectively used by the ship owners only, the appellants have not utilized any services and goods procured under pure agent for their own personal use or work. The recipient of service is liable to make payment to the third party; The purchase orders are issued to vendors and the bills issued by the vendors are in the name of master / owner of the ship and C/o the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of ship management service, the appellants had paid the service tax and have also indicated the said value of services separately in the documents to be provided to the ship owner. The above factual position indicates that the appellants are fulfilling the conditions prescribed under Rule 5 (2) ibid, and hence the reimbursement expenditure collected by appellants have to be treated as expenditure or costs incurred by the service provider as a 'pure agent' of the recipient of service on behalf of ship owner. 11. On perusal of the records of the case, it transpires the appellants had entered into an agreement for ship management with ship/vessel owners as per standard contract of Baltic and International Maritime Council (BIMCO). The BIMCO agreement provides for various management services such as technical management, commercial management, crew management and crew insurance etc., for which the parties to contract have to enter into agreement. For the ship management services provided by the appellants, they had received management fees and discharged service tax liability thereon, as applicable, and filed a periodical ST-3 returns. In case of foreign vessels (owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as insurance arrangements. The latest edition of such contract/ agreement is SHIPMAN 2009. The advantage are of such contract is that all potential specifics of ship management are included in this form thus, allowing the contracting parties to shape a unique business relationship between the Owner and the Ship Manager. The main structure of the SHIPMAN 2009 Contract is as follows: Structure of the BIMCO standard ship management agreement SHIPMAN 2009 Part -I Standard information concerning parties to the agreement Part -II Section 1 Basis of the agreement Section 2 Services Section 3 Obligations Section 4 Insurance, budgets, income, expenses and fees Section 5 Legal, general and duration of agreement Annex A Details of vessel or vessels Annex B Details of crew Annex C Budget Annex D Associated vessels Annex E Fee schedule Considering the complexity of crew management and the need for proper management by ship owners, BIMCO has also brought out separate agreement CREWMAN 2009 designated for larger crew administration services. From the above contractual arrangements, it can be inferred that in order to comply with various legal compliance re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this section or section 95." From the above international conventions, BIMCO standard contracts and the provisions of Merchant Shipping Act, it is clear that the arrangement of contract between the ship owner and ship management agent, is a wellaccepted commercial arrangement in the maritime trade. Supply of sea crew by the ship manager on behalf of the ship owner is also recognized by the Merchant Shipping Act, 1958. 14. We also find that certain specific clauses of the agreement provide the contractual relationship between the ship owner and the ship manager in clear terms. "3. Authority of the Managers Subject to the terms and conditions herein provided, during the period of this Agreement the Managers shall carry out the Management Services in respect of the Vessel as agents for and on behalf of the Owners. The Managers shall have authority to take such actions as they may from time to time in their absolute discretion consider necessary to enable them to perform the Management Services in accordance with sound ship management practice, including but not limited to compliance with all relevant rules and regulations. ... 11. Income Collected and E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Crew - Notwithstanding anything that may appear to the contrary in this Agreement, the Managers shall not be liable for any acts or omissions of the crew, even if such acts or omissions are negligent, grossly negligent or willful, except only to the extent that they are shown to have resulted from a failure by the Managers to discharge their obligations under Clause 5(a) (Crew Management), in which case their liability shall be limited in accordance with the terms of this Clause 17 (Responsibilities)." 15. From the records placed before us, it is also seen that in rendering ship management services, the appellants have incurred various expenditures for and on behalf of the ship owners and claimed reimbursement for the same. In terms of the above specific clauses of the agreement, the appellants have carried out their responsibilities as agents, for and on behalf of the owners. Accordingly, all monies received by the appellants was credited in a separate bank account and the interest accrued on the same was also credited to the owners. Commission and discount obtained by the appellants was also credited to the owner's bank account. We also find that in one of the De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue that on ship management fees, for the services rendered by the appellants, they have failed to pay the service tax. Thus the quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the ship management service provided by them. 17. We also find that validity of Rule 5(1) ibid, in as much as it provides that all expenditure or costs incurred by the service provider in the course of providing the taxable service shall be treated as consideration for the taxable service and shall be included in the value for the purpose of charging service tax was examined by the Hon'ble High Court of Delhi in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India in W.P. (C) 6370/2008 reported in 2013(29) S.T.R. 9 (Del.) by holding that Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. As the Hon'ble High Court viewed that it purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s hue, the expression 'such' occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing 'such' taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such 'taxable service'. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendment, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider 'for such service' and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service. 25. This position did not change e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature. On this aspect of the matter, we may usefully refer to the Constitution Bench judgment in the case of Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited [(2015) 1 SCC 1] wherein it was observed as under : "27. A legislation, be it a statutory Act or a statutory rule or a statutory notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work of fiction/non-fiction or even in a judgment of a court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the various principles of "interpretation of statutes". Vis-a-vis ordinary prose, a legislation differs in its provenance, layout and fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the similar issue in the case of M/s Seher Vs. Commissioner of Service Tax, Delhi - II by holding that the service tax demands confirmed under Rule 5 do not survive, in asmuchas Rule 5 itself has been held to be ultra vires of Section 67 by the Hon'ble Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). The relevant paragraphs of the Final Order No.50509/2022 dated 13.06.2022 in the above case is extracted below: "15. In this arrangement, the only reason the Revenue sought service tax on the amounts reimbursed to the appellant by the client is that the appellant did not fulfill the conditions laid down in Rule 5 to qualify as a pure agent. However, we find that Rule 5 itself has been held to be ultra vires of Section 67 by the Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. The Commissioner sought to distinguish the appellant's case on the ground that the nature of services for which reimbursements were made in Intercontinental case were different from the case of the appellant. In our considered view, the nature of service should make no difference to the taxability of reimbursements when Rule 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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