The Chennai And Ennore Ports vs Union Of India on 28 March, 2023

Outcome**

• The challenges to the vires of Section 66C(2) of the Finance Act, 1994, and Circular No. 206/4/2017-ST dated 13.04.2017, and the impugned notifications related to their implementation (Tables 1, 2, 3, 4 of the judgment) failed.
• However, the Court held that the petitioners (Steamer Agents and Importers) are not the "recipient of service" for the purpose of Notification No. 3/2017-ST (amending Notification No. 30/2012-ST) and Notification No. 15/2017-ST (further amending Notification No. 30/2012-ST).
• Consequently, no service tax can be demanded from these petitioners due to "defects" in the said notifications concerning the shift of tax burden.
• All impugned Show Cause Notices issued to the petitioners were quashed.
• The respondents (Revenue) were directed not to issue any fresh show cause notices to importers and steamer agents for the period between January 22, 2017, and June 30, 2017, for similar activities.
• For refunds, petitioners were directed to file appropriate refund applications within 30 days, which are to be disposed of within 60 or 90 days, as per the law laid down in Mafatlal Industries Private Limited.

2. Core Issue

The core issue was the constitutional validity and enforceability of Service Tax levied on ocean freight for imported goods under a reverse charge mechanism, by shifting the liability onto Steamer Agents and subsequently Importers, for the period from January 22, 2017, to June 30, 2017 (pre-GST era). This included challenges to:
* The vires of Section 66C(2) of the Finance Act, 1994.
* The withdrawal of exemption via Notification No. 1/2017-ST.
* Notifications (No. 2/2017-ST, 3/2017-ST, 15/2017-ST, 16/2017-ST) and a Circular (No. 206/4/2017-ST) that designated Steamer Agents and Importers as "persons liable to pay tax" for ocean freight.

3. Key Facts

• Petitioners: Comprised of Steamer Agents (Category 1) and Importers (Category 2) of goods into India.
• Service: Transportation of goods by vessel from a place outside India up to the customs station of clearance in India (ocean freight).
• Period of Dispute: January 22, 2017, to June 30, 2017 (prior to the implementation of GST).
• Pre-2017 Position: Services by way of transportation of goods by vessel from outside India to India were exempt from service tax under Sl. No. 34(c) of Mega Exemption Notification No. 25/2012-ST.
• Change in Law (2017):
  • Withdrawal of Exemption: Notification No. 1/2017-ST (dated 12.01.2017, w.e.f. 22.01.2017) withdrew the exemption for this service.
  • Shifting Liability (Steamer Agents): Notification No. 2/2017-ST (dated 12.01.2017, w.e.f. 22.01.2017) amended Rule 2(1)(d)(i)(EEC) of the Service Tax Rules, 1994, to make "the person in India who complies with Sections 29, 30 or 38 read with Section 148 of the Customs Act, 1962" (i.e., Steamer Agents) liable for service tax. Notification No. 3/2017-ST (dated 12.01.2017, w.e.f. 22.01.2017) further amended Notification No. 30/2012-ST (reverse charge) by inserting Sl. No. 12 and Explanation IV, making Steamer Agents 100% liable.
  • Shifting Liability (Importers): Notification No. 15/2017-ST (dated 13.04.2017, w.e.f. 23.04.2017) further amended Notification No. 30/2012-ST, replacing Steamer Agent liability with "the importer as defined under clause (26) of Section 2 of the Customs Act, 1962" (new Explanation V). Notification No. 16/2017-ST (dated 13.04.2017, w.e.f. 23.04.2017) amended Rule 2(1)(d)(i)(EEC) to make importers liable and also inserted Rule 6(7CA) to offer an option to pay 1.4% of the CIF value of imported goods as service tax.
  • Clarification: Circular No. 206/4/2017-ST (dated 13.04.2017) clarified that foreign shipping lines could not avail abatement under Notification No. 26/2012-ST due to CENVAT credit conditions.
• Some petitioners received show cause notices and/or sought refunds of service tax paid.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Steamer Agents and Importers):

  • The impugned notifications, rules, and Section 66C(2) of the Finance Act, 1994, are ultra vires the Constitution (Articles 14, 19, 245, 246, 265, etc.) and Parliament's legislative competence.
  • Tax cannot be imposed on persons who are neither the service provider nor the actual service recipient.
  • There is no rational nexus to tax Steamer Agents for ocean freight when the service provider and recipient are outside India. Steamer Agents merely comply with Customs Act provisions.
  • Levy on ocean freight results in double taxation as freight is already included in the CIF value for customs duty assessment.
  • In CIF contracts, the importer does not pay freight separately, making valuation for service tax impossible, and they lack privity of contract with the shipping line.
  • The option to pay 1.4% of CIF value (Rule 6(7CA)) is ultra vires Section 67 (valuation) and Section 94 (rule-making power) as the government has no power to fix tariff value.
  • Relied on Sal Steel Ltd. v. Union of India (Gujarat HC) which struck down similar levies.

• Revenue:

  • The contention that liability cannot be fastened on petitioners as they are not "service recipients" is incorrect, citing UoI v. Mohit Minerals (Supreme Court).
  • Service tax is a destination-based tax; ocean freight service is completed in India when goods are offloaded, establishing a "territorial nexus" with India.
  • Sections 66B, 66C, and 68 (read with 64) of the Finance Act, 1994, permit the levy. Section 68(2) specifically allows the government to notify "any person" liable to pay tax.
  • The freight charges are ultimately borne by the importer indirectly within the CIF value. This constitutes an import of service.
  • Parliament has the power to legislate on extra-territorial events that have a real nexus with India (citing Electronics Corporation of India, GVK Industries).
  • The power to grant exemption includes the power to withdraw it (Kasinka Trading).

5. Court’s Reasoning

• Vires of Section 66C(2) and Territorial Nexus: The Court upheld the vires of Section 66C(2) of the Finance Act, 1994, and implicitly, Rule 10 of the Place of Provision of Service Rules, 2012. It reaffirmed that Parliament has the power to legislate on activities with extra-territorial elements, provided there is a "real and sufficient territorial nexus" with India (e.g., consumption of service in India).
• Withdrawal of Exemption: The Court found the withdrawal of the exemption (Notification No. 1/2017-ST) to be valid, reiterating the principle that the power to grant an exemption includes the power to withdraw it, and such withdrawal does not give rise to promissory estoppel.
• "Recipient of Service" & Reverse Charge Mechanism: This was the crucial point.
  • The Court held that in a CIF (Cost, Insurance, Freight) contract, the foreign supplier/exporter engages the overseas shipping line and pays for the ocean freight. Therefore, the foreign supplier is the actual recipient of the ocean freight service.
  • The Indian importer is the recipient of "goods," not the service of ocean transportation from the shipping line, and typically lacks privity of contract with the shipping line.
  • Steamer Agents are also not the recipients of the ocean freight service; they act as agents for the vessel owner and perform limited functions under the Customs Act.
  • The Court found a fundamental "flaw" or "defect" in Notification No. 3/2017-ST and No. 15/2017-ST. While Sl. No. 12 in the amended Notification No. 30/2012-ST stated that the "recipient of service" is liable for 100% tax, the Explanations V and IV (respectively) incorrectly declared Steamer Agents or Importers as the "person liable to pay tax." This contradicted the core principle that only the actual recipient of the service could be made liable under the reverse charge mechanism.
  • The Court explicitly agreed with the reasoning of the Gujarat High Court in Sal Steel Ltd. v. Union of India, which held that importers in CIF contracts are neither service providers nor service recipients of ocean freight, and therefore, provisions making them liable are ultra vires Section 68 and Section 94 of the Finance Act, 1994.
  • The Court also noted that the Supreme Court's decision in Union of India v. Mohit Minerals Private Limited (under the GST regime) further supported the view that the importer is not the recipient of ocean freight service in CIF contracts.
• Double Taxation & Valuation: The Court acknowledged that taxing ocean freight on importers in CIF contracts would lead to double taxation, as the freight component is already included in the assessable value for customs duty. It also noted the practical difficulty for importers in determining the freight value in CIF contracts, making valuation provisions unenforceable without a proper machinery.

6. Statutory References

• Constitution of India: Articles 14, 19, 226, 245, 246, 248, 265, 268A, 302, 366(29A), Entry 41 and 83 of List I of VII Schedule.
• Finance Act, 1994 (Chapter V - Service Tax): Sections 64, 65(105), 65B(44), 66, 66A, 66B, 66C (specifically 66C(2)), 66D (specifically 66D(p)(ii)), 67, 67A, 68 (specifically 68(1) & 68(2)), 83, 93, 94 (specifically 94(2)(hhh)).
• Customs Act, 1962: Sections 2(26), 14, 25(1), 29, 30, 38, 148.
• Central Excise Act, 1944: Section 37B.
• Integrated Goods and Service Tax Act, 2017: Section 13(9).
• Rules & Notifications:
  • Service Tax Rules, 1994: Rule 2(1)(d), Rule 6 (including sub-rule (7CA)).
  • Place of Provision of Service Rules, 2012: Rule 10.
  • Point of Taxation Rules, 2011: Rule 8B.
  • Customs Valuation (Determination of Price of Imported Goods) Rules, 2007: Rule 10(2).
  • Notification No. 25/2012-ST (Mega Exemption) (Sl. No. 34(c)).
  • Notification No. 26/2012-ST (Abatement).
  • Notification No. 28/2012-ST (Place of Provision of Service Rules, 2012).
  • Notification No. 30/2012-ST (Reverse Charge Mechanism).
  • Notification No. 1/2017-ST, 2/2017-ST, 3/2017-ST (all dated 12.01.2017).
  • Notification No. 14/2017-ST, 15/2017-ST, 16/2017-ST (all dated 13.04.2017).
  • Circular No. 206/4/2017 – Service Tax, dated 13.04.2017.

7. Precedents Cited

• Reliance for Vires of Section 66C(2) & Extra-territorial Operation:
  • Electronics Corporation of India Vs. Commissioner of Income Tax and Another, AIR 1989 SC 1707.
  • GVK Industries Vs. Income Tax Officers, 2011 (4) SCC 36.
  • Union of India Vs. Mohit Minerals Private Limited, 2022 SCC OnLine SC 657 (also relevant for IGST on ocean freight).
• Reliance for Power to Withdraw Exemption:
  • Kasinka Trading Vs. Union of India, 1995 (1) SCC 274.
  • Darshan Oils Private Limited vs. Union of India, 1995 (75) E.L.T.32 (S.C.).
  • S.B.International Limited vs. Assistant Director General of F.T., 1996 (82) E.L.T. 164 (S.C.).
  • Numerous other Supreme Court judgments reaffirming Kasinka Trading.
• Reliance for Importers Not Being Service Recipients:
  • Sal Steel Ltd Vs. Union of India, (2020) 37 GSTL 3 (Gujarat High Court).
  • Union of India Vs. Mohit Minerals Private Limited, 2022 SCC OnLine SC 657 (Supreme Court decision on IGST on ocean freight under GST regime).
• Reliance for Refund Claims:
  • Mafatlal Industries Private Limited vs. Union of India, 1997 (89) E.L.T.(S.C.).
• Other Cited Cases:
  • Imagic Creative Pvt Ltd v. CCT, (2008) 2 SCC 614.
  • BSNL v. Union of India, 2006 (2) STR 161.
  • All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527.
  • Kusum Ingots and Alloys Ltd v. Union of India, 2004 (168) E.L.T. 3 (SC).