Custom, Excise & Service Tax Tribunal
International Seaport Dredging Ltd vs Service Tax - Chennai on 18 June, 2018
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNALSOUTH ZONAL BENCH
CHENNAI
Appeal Nos.ST/502-504/2010
[Arising out of Order-in-Original No.26 to 28 of 2010 dt. 05.04.2010
passed by Commissioner of Service Tax, Chennai]
International Seaport Dredging Ltd. Appellant
Versus
Commissioner of Service Tax,
Chennai Respondent
Appearance :
Shri A.R.Madhav Rao, Advocate Shri Pragya Awasthi, Advocate For the Appellant Shri K. Veerabhadra Reddy, JC (AR) For the Respondent CORAM :
Hon'ble Ms. Sulekha Beevi C.S. Member (Judicial) Hon'ble Shri Madhu Mohan Damodhar, Member (Technical) Date of hearing: 12.03.2018 Date of Pronouncement : 18.06.2018 FINAL ORDER No. 41828-41830 / 2018 Per Bench The appellants are engaged in providing Dredging and Land Reclamation Services. During scrutiny of records of the appellants by the department, it emerged that appellants had entered into agreements /contracts with various customers and parties as under :2
Appeal Nos.ST/502-504/2010
1. Dharti Dredging & Construction Ltd, Hyderabad - 500 016 for providing the Vessel i.e.. TSHD VlaanderenXX to operate at the Port of Visakhapatnam (Visakhapatnam Port Dredging) dated 19.07.06.
2. Gangavaram Port Limited, Hyderabad, Package 2A: Advanced extraction of material for filling in port backup area. Dated 17.02.06
3. Gujarat Adani Port Ltd for maintenance dredging works at Mundra Port dated 05.09.2005.
4. Dredging Corporation of India Ltd., Vishakhapatnam for providing vessel pacifique dated 17.01.2007
5. Gujarat Adani Port Ltd., Mudra Port for Maintenance dredging at Mudra Port access channel, Turning basin and berth area for 3 years period dated 06.06.2006.
6. Gangavaram Port Limited, Hyderabad, Package 2C : Dredging and navigational aids dated 17.03.2006 (Development of port facility at Gangavaram)
7. Haziraport Pvt. Ltd., l-lazira for supply of manpower & equipment for maintenance of Geo-bag Bud and Foreshore Protection Work dated 15.10.2006
8. M/s.Bellsea Investments Limited, Cyrpusc, 'Belsea") for deputing the employees of Bellsea specified in the schedule hereto to be deputed by Bellsea to ISD and any other employee(s), who may be deputed by Bellsea to ISD, at the request of the latter during the term fo this Agreement (As Secondees agreement) dated 01.11.04.
9. M/s.Bellsea Rock supply Limited, Nicosia, Cyprus for supplying of manpower to ISD
10. Tideway BV for technical services, Dated 01.04.04 From perusal of the agreements / contracts, it appeared to the Department that the main activity of the appellants is to provide Dredging Services. It further appeared that appellants had vivisected total value received into various heads of equipment leasing, man power supply etc., and had not discharged the service tax liability along with interest on the following services :
(a) Dredging Services for 2005-06 to 2006-07
(b) Site Formation Services, in respect of contract covering Geo Bund
bags for fore shore areas during the period 2006-07
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(c) Scientific and Technical Consultancy Services for the period 2004-05
to 2006-07 under reverse charge mechanism
(d) Management, Maintenance and Repair Services for the period
2006-07 under reverse charge basis.
(e) Consultancy Insurance Services for the period 2004-05 and 2006-07
under reverse charge basis.
(f) Management Consultancy Services for period 2004-05 to 2006-07
under reverse charge basis.
(g) Man Power supply service for the period 2004-05 to 2006-07.
Accordingly, three show cause notices were issued to the appellants, inter alia, proposing demand of service tax liabilities along with interest thereon and for imposition of penalties under various provisions of law. In adjudication, the Commissioner vide impugned Order-in-Original No.26 to 28 dt. 5.4.2010 confirmed total service tax liability of Rs.4,84,36,863/- for the period 16.6.2005 to 31.03.2007 and service tax liability of Rs.18,15,76,316/- for the period April 2007 to December 2008 with interest thereon and also imposed penalties under Section 76 & 78 of the Act. Aggrieved, appellants have filed these appeals.
2.1 On 12-03-2018, when the matter came up for hearing, on behalf of the appellants, Ld. Advocate Shri A.R.Madhav Rao took us through the definitions of "dredging service" as elucidated in Section65 (36a) of the Finance Act, 1994 and "site formation"service as defined in Section 65 (97a) ibid which are extracted below :
Section 65 (36a) : "dredging" includes removal of material including, silt, sediments, rocks, sand, refuse, debris, plant or animal matter in any excavating, cleaning, deepening, widening or lengthening, either permanently or temporarily, of any river, port, harbour, backwater or estuary;4
Appeal Nos.ST/502-504/2010 Section 65 (97a) "site formation and clearance, excavation and earthmoving and demolition" includes,----
(i) Drilling, boring and core extraction services for construction, geophysical, geological or similar purposes; or
(ii) Soil stabilization; or
(iii) Horizontal drilling for the passage of cables or drain pipes; or
(iv) Land reclamation work; or
(v) Contaminated top soil stripping work; or
(vi) Demolition and wrecking of building, structure or road, but does not include such services provided in relation to agriculture, irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies;
2.2 Ld. Advocate advanced arguments, referring to each of the clients to whom the appellants rendered services as under :
2.3 Dredging Corporation of India (DCI):
(i) Appellant has onlyprovided necessary equipment and / or vessel for dredging to DCI which is under a Charter Hire Agreement.Appellant has not provided any dredging services.
(ii) Dredging operations were carried out by DCI.
(iii) Control and supervision of the vessels during dredging was also with DCI only.
(iv) Vessel leased to DCI was used to carry out dredging for Sethusamudram Ship Canal Project (SSCP) which is beyond 12 nautical miles from sea shore and hence outside the scope of service tax levy.
(v) The Charter Hire Agreement entered with DCI, copy of which has been filed with appeal, clearly indicates the "Name of Vessel : Pacifique Class:
IRS/BV Call Sign: ASUGO Flag: India." Period of hire is shown as 4 months with extension at owner‟s option, if requested for by Charterer. The 5 Appeal Nos.ST/502-504/2010 area of operation was Sethusamudram Shipping Channel. As per para-7 of the agreement , the appellant was responsible for maintaining the vessel, machinery appurtenances and spare parts in good state of repair. As per para 7(C) of agreement, the DCI would be paying Rs.3.60 per Cum of the material dredged and measured on hopper volume basis towards wear and tear and repairs of soil touching parts on monthly basis together with Charterer invoice.
This was in addition to mobilization charges of INR 18 million excluding VAT and demobilization charges of INR 3.6 million excluding VAT. This was the terms of the hire payment for charter hire for the vessel. The charter hire for actual month was to be paid on monthly basis. The terms and conditions of the agreement show that it is an agreement for charter of vessel and not agreement for providing dredging services. Merely because the maintenance charges/wear and tear/repair charges were stipulated to be on the measure of material dredged, the Department has held the contract to be a dredging contract. It can be seen that the payment for charter of vessel was on hourly basis.
vi) Although one of the representatives of the appellant was on board,the vessel was effectively only in the control of customer/DCI who alone would chalk out programme of dredging. Therefore, the activity of appellant of providing vessel on charter hire basis clearly falls within the scope of "Supply of Tangible Goods Service", which was taxable only w.e.f. 16.05.2008, and not dredging services.
vii) Appellants have paid service tax of Rs.57,03,661/- towards the aforesaid service provided to DCI under Supply of Tangible Goods Service for the relevant period.
viii) Ld. Advocate took us through a sample copy of the invoice issued by appellant to DCI dt. 28.05.2007 showing hire rate per week of INR 15.743.000 6 Appeal Nos.ST/502-504/2010 for the number of operational hours, at 100%, at 85%, and at 0%, has been separately worked out along with compensation for wear and tear at INR 3.60 per cubic metre dredged and total amount charged along with VAT at 4%.Charter hire per week of operation was IRN 15,743 millions excluding VAT + INR 3.70 millions excluding service tax was the rate for crew and crew officers of vessel.
2.4 Dharti Dredging & Construction Ltd. (DDCL)
(i) The agreement with the appellant was again only a Charter Hire agreement. The appellant had hired Vessel : TSHD Vlaanderen XX, Class: b.v. : 13/3 hopper dredger deep sea AUT-MS, Call sign : ORTO, Flag : Belgium.
(ii) This vessel along with control and supervision was given by appellant to DDCL who was liable to pay charges for hire and also liable to compensate them for excessive wear and tear. In terms of clause 7 (C) of the agreement, the vessel shall be delivered by appellant with a Master / Captain, officers and key crew and the rate fixed for charter is inclusive of salary and other costs.
(iii) As per the agreement, appellant was nowhere accountable for the dredging volume during operation and the operating permits / approvals and visas required for execution as work for the vessel and all employees and representatives assigned to the project are arranged and paid for by the charterer.
(iv) There is nothing in the contract to show that it is a dredging contract or that the appellant is responsible for carrying on dredging at respective location or that payment is linked to the quantity dredged etc. 7 Appeal Nos.ST/502-504/2010
(v) There is no clause of retention money for ensuring performance by the appellant as in the case of a dredging contract.
(vi) Ld. Advocate drew our attention to Charter Hire Agreement entered into with DDCL on 19.07.2006 to point out that particulars of agreement included charter hire per day, place, date and time of delivery of vessel and redelivery etc.
(vii) The charter hire of the vessel would therefore fall only in the category of supply of tangible goods service which became taxable only w.e.f. 16.5.2008.
(viii) The activities were carried beyond 12NM from the sea shore of India and, therefore, not taxable.
2.5 Hazira Port Pvt. Ltd. :
(i) The contract was only for supply of man power and equipment for maintenance of geo bags bund, foreshore protection bund, rear bund, etc.
(ii) Service tax has already been discharged on man power supply service.
The leasing of equipment can onlybe taxedunder supply of tangible goods service w.e.f. 16.05.2008
(iii) Geo bags are synthetic products of polyester used for protection of hydraulic structures and river banks from severe erosion and can by no stretch of imagination be regarded as site formation services.
(iv) Ld. counsel submitted that as per the work completion certificate issued by Hazira Port Pvt. Ltd. the dredging had commenced on 30.09.2004 and was completed on 30.03.2005. Payment for the above services was received on 09.06.2005.
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(v) The dredging services were brought in the tax net w.e.f. 16.06.2005 only. Therefore, as on 16.6.2005, the dredging work as well as the payment for the dredging services had already been received by the appellants and, hence,the Department cannot require the appellants to pay service tax for dredging services carried out prior to 16.06.2005.
2.6 Dharma Port:
(i) Appellants had entered into three different contracts for dredging, reclamation of land and soil stabilization.
(ii) Ld. Advocate took us to the Letter of Intent to award dredging and reclamation works contract dt. 31.10.2006. Appellants had already discharged service tax liability on dredging services. However, the Commissioner has confirmed the demand on soil stabilization and land reclamation activities holding that being a composite contract, the dominant activity is dredging and also that the summary of payment documents show payment for „dredging and soil stabilisation‟ and „dredging and land reclamation works‟. The Letter of Intent relied by Commissioner to hold that these three activities form a composite contract. The Letter of Intent is precursor to the separate agreements executed later. For the same reason, the LI has no validity after execution of agreement.
In the payment details, by error, it was shown as total amount for dredging and reclamation work. That dredging was not performed in respect of site formation and soil reclamation contracts. Further, the soil stabilization contract and the land reclamation contract do not require any extraction of material from the offshore area. In the reclamation contract specified materials are required to be extracted from the specified area and necessary activities are undertaken to 9 Appeal Nos.ST/502-504/2010 protect the fill area and the appellant was required to develop containment dikes etc. to stop erosion of fill material.
(iii) These site formation services are in relation to construction of port under Notification No.17/2005-ST and accordingly they claim exemption under that notification. They also are eligible for exemption under Notification No.25/2002- ST for income earned on account of soil stabilization under works contract services.
2.6 GangavaramPort :
(i) The object of agreement of Gangavaram Port was not to carry out dredging activity but only to develop port site for cargo handling and storage and to achieve the object it was necessary that port back up area is filled up.
They had entered into charter hire agreement with Dredging International NV and the vessel was used by the latter for advance extraction of the material for filling up of port back up area. As per the contract with Dredging International NV, the charter hire per week charges, hire payment, place, date and time of delivery / redelivery to the area of port etc. was involved. Thus, there was no dredging contract and there was no obligation to carry out any dredging on the part of the appellant under the said contract. The charter hire agreement charges would attract levy of service tax under Supply of Tangible Goods only. Such service became taxable only w.e.f. May, 2008. The period involved being prior to 16.05.2008, no service tax is payable.
(ii) At any rate, even the ultimate work done by the customers of appellants to the port authorities is only site formation services, since use of dredger is for carrying out soil stabilization and land reclamation which does not amount to provision of dredging services by the appellant. The material dredged and suitable for land reclamation are extracted from the designated zones for site 10 Appeal Nos.ST/502-504/2010 formation services. To enable cargo handling facilities, land should be filled in the port back up area in order to improve the bearing capacity of the underlying land so as to handle the load of cargo at the port without sinking. Hence, activity would only be „Site Formation Services‟ and being in relation to port, these are exempted under notification 17/2005 dated 07.06.2005.
(iii) For carrying out the dredging activities a separate contract was executed with the port and the appellant has discharged service tax liability on that contract.
2.8 Import of Services
(a) Maintenance and Repair Services: The adjudicating authority has concluded that assignment location is mentioned as Chennai / Nagapattinam; that part of the maintenance services were provided in India and hence tax would be attracted under Rule 3 (2) of the Import of Services Rules. Ld. Advocate submits that in regard to invoices where services were performed in India service tax has been paid. However, in respect of services involving taxable value of Rs.21 crore paid for maintenance and repair services when the vessel wasnot in India cannot be subjected to service tax levy and tax liability will have to be reworked accordingly. Ld. Advocate prays for a remand in the matter.
(b) Man Power Supply Services : (i) Department has taken the view that person claimed to be employees of assessee are actually employees of two foreign service providers. Ld.
Advocate submits that appellant had made salary payment to the expatriate employees employed under them, though salary payment had been routed through foreign parties M/s.Bellsea and M/s.Beggerwerkem Decloedt. These foreign companies made payment to the employees on behalf of the appellant 11 Appeal Nos.ST/502-504/2010 on reimbursement basis without any mark up. With each of the expatriates employees a contract for employment was entered into which clearly shows that employee is that of the appellants and was required to perform duties directed by the appellants. Monthly salary was also provided for in the contract. Hence liability to pay salaries rested with the appellant and not with the foreign companies.
(ii) Appellants only provided facility to these employees that their net salary would be credited in their bank accounts at their home country. For this purpose, the payments were routed through foreign parties and who in turn remitted the same amount to the account of the employees.
(iii) At the end of employment, these employees gave resignation letters to the appellant only.
(iv) Ld. Advocate adverted to the contract with M/s.Bellsea to point out that latter is not providing any services to the appellant by deputing secondees to appellants and that employees were working under direct control of the appellants.
(v) The foreign companies through whom money was routed to the secondees were functioning only as pure agents and for this reason also there can be no tax liability on reverse charge mechanism.
(c) Management Consultancy Services : (i) It is submitted that they only received legal services and not any
management , business consultancy services from M/s.PinsentMazons, U.K.
(ii) Ld. Advocate adverted to a copy of invoice to point out that PinsentMazons are a law firm registered with "Solicitor‟s Regulation Authority".
(iii) Legal services became taxable only w.e.f. 01.09.2009 12 Appeal Nos.ST/502-504/2010 3.1 The Ld. A.R Shri K. Veerabhadra Reddy supported the findings in the impugned order.
3.2 With regard to the demand of service tax on activities related to Dredging Corporation of India (DCI) he submitted that the contention of the appellants that the agreement was only for hire of vessel is incorrect. He referred to the agreement dt. 17.01.2007 and submitted that as per clause 7-G, the owner / appellant is obligated to maintain records of daily / weekly and monthly production and of log sheets in the prescribed format duly signed by the representative of owner and charterer which is the basis for payment of charter hire charges. One representative of M/s.DCI is always to be on board. All these conditions would go to show that the agreement is for dredging activities. The contention of the appellant that the activities were rendered beyond 12 nautical miles is not supported by any reliable evidence. 3.3 Similarly in the agreement entered by appellants with Dharti Dredging & Construction Ltd. (DDCL), Clause 20 deals with charges for wear and tear. It is stated that excessive wear and tear will be compensated by the charterer to the owner/ appellant based on in and out survey of drag heads, as per report made by the surveyor as specified in 5A. Thus the consideration paid to appellant is closely linked to the quantity dredged and therefore the activities fall under dredging services.
3.4 In case of Hazira Port Ltd., the contract with appellant was for supply of man power and supply of equipment for maintenance of geo-bags, foreshore bund, rear bund etc. which are for preventing soil erosion and therefore rightly falls under site formation services and thus, taxable. The appellants have also rendered dredging services to Hazira port for which they are liable to pay service tax.
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Appeal Nos.ST/502-504/2010 3.5 With regard to Dharma Port the appellants were engaged not only for carrying out dredging activities but also for other services like land reclamation / soil stabilization. Though appellants discharged service tax on dredging services they did not pay service tax on income received for land reclamation / soil stabilization works. They claimed exemption under Notification 17/2005-ST dt. 7.6.2005 as also Notification 25/2007 dt. 22.05.2007 contending these are activities relating to port services which are exempted vide Notification 17/2005. He pointed out that though there separate contracts were entered by appellants with Dharma Port for dredging, soil stabilization and land reclamation the letter of intent and payment manner revealed that the predominant activity was dredging. Therefore as per Section 65A, the appellants are liable to discharge service tax on the entire amount.
3.6 The activities in relation to Gangavaram Port is contested by appellants stating that these are not dredging activities. The appellants vide letter dt. 17.11.2005 accepted the offer of work which included a) mobilization of dredging spread and site installation b) Execution of advanced extraction of material for filling in port back up area by Trailer Suction Hopper in accordance with the project specifications, drawings and agreed project schedule c) All land based works required to the above filling works (d) all survey works in accordance with the project specifications (e) Demobilization of the Dredging Spreads(s) and site clearance. Thus the scope of the activity is primarily dredging and cannot be considered to be site formation service as argued by appellant.
3.7 The demand in respect of maintenance and repair services and man power supply management consultancy services provided to foreign companies 14 Appeal Nos.ST/502-504/2010 is correct as they are liable to pay service tax under reverse charge mechanism after 18.4.2006.
3.8 The appellants failed to disclose the amount received for dredging activities, site formation service. They failed to declare in their ST-3 returns, the income on which they claimed exemption. Thus appellants are guilty of suppression of facts with intent to evade payment of service tax. The first SCN issued invoking extended period is therefore correct. That the other two notices have been issued within the normal time limit. He prayed to sustain the impugned order.
4.0 Heard both sides and have gone through the facts.
4.1 We propose to address the matter issues wise :
(i) Services provided to Dredging Corporation of India(DCI):
The adjudicating authority has concluded mainly on the ground that the dredging vessel supplied by the appellants is required to be delivered with full complement of officers and crew who operate, control and supervise the dredging work. We are not able to appreciate such an interpretation. Even a plain reading of the agreement between the appellant and Dredging Corporation of India will indicate that it is "Charter Hire Agreement". The said Charter Hire Agreement lays down charter hire per week of operation, period of hire (4 months), place, date and time of delivery as also place, date and time of re-delivery. We also find that although the vessel is hired along with a complement of officers and crew, the decision where to do the dredging work, the hours of operation etc. are totally those of the Dredging Corporation of India and appellants have no role or say in that whatsoever. The positioning of one 15 Appeal Nos.ST/502-504/2010 representative of the appellant on board the vessel may well be for co- ordination purpose, but it is nobody‟s case that the said representative calls the shots in respect of dredging operations. From the sample of the invoice produced by the Ld. Advocate (page 351 of compilation), it is in fact seen that the billing has been done based on operational hours at 100% and at 85% and even at 0%. The DCI has also been billed towards wear and tear of the dredging equipment at Rs.3.60 per cubic metre. If the services providedby the appellant indeed was only "dredging service", the appellant would not have been able to bill DCI for such wear and tear charges. In our considered opinion, the activity of the appellants may possibly fall under supply of „Tangible Goods Service‟, but surely not under „Dredging Service‟. It is interesting to note that appellants have paid service tax amount of Rs.57,03,661/- towards the services provided to DCI under the category of Supply of Tangible Goods Services. In these circumstances, that part of the impugned order confirming demand of service tax in respect of the services provided by the appellants to Dredging Corporation of India under the category of "Dredging Service" cannot sustain and will therefore have to be set aside, which we hereby do.
(ii) Dharti Dredging & Construction Ltd.
The demand of service tax under Dredging Service has been confirmed by the adjudicating authority. We find that on similar grounds, the adjudicating authority in para 8.0 & 8.1 of the impugned order has held that supply of vessel and equipment to DhartiDredging & Construction Ltd. (DDCL) are classifiable under "Dredging Service" , hence appellant is liable for payment of service tax under that category. On perusal of the copy of the agreement filed by the Ld.Advocate, we find that the contract is a "Charter Hire Agreement" dated 16 Appeal Nos.ST/502-504/2010 19.07.2006 for hiring of the vessel TSHD Vlaanderen XX. As in the DCI contract, this agreement also spells out charter hire per day, place, date and time of delivery as also place, date and time of redelivery. Adjudicating authority has held that the "entire activities involved in dredging were carried out by the assessee with their own officers and crew using the vessel equipped for dredging". However, the adjudicating authority has not brought out as to whether the dredging is done under control and say, as decided or desired by DDCL or whether the final say is that of the appellants. From the facts on record we are convinced that appellant merely supplies the charter vessel on charter hire to DDCL. We are also unable to fathom how the adjudicating authority has reached a conclusion that "compensation for excessive wear & tear is nothing but additional consideration for dredging services......" As already observed by us in the case of DCI (supra), the very fact that wear and tear charges are billed to the service recipient will only serve to indicate that the nature and scope of dredging operations are decided by the said recipient, the appellant having no role in the matter of place and hours of operations etc.Only in such a scenario, will the appellants be able to bill the service recipient on a notional basis towards wear and tear caused by such recipient to the dredging equipment in the course of dredging operations conducted by the former. In the event, we hold that the services provided by appellant will not come within the fold of „dredging service‟. Hence that part of the impugned order demanding service tax liability in respect of the impugned services provided to "Dharti Dredging & Construction Ltd. under the category of "Dredging Services" cannot sustain and is therefore set aside.
(iii) Hazira Port
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The adjudicating Authority has held that the services provided by appellant to Hazira Port with their own man power and equipment for maintenance of Geo-bag bund and foreshore protection work is classifiable under „Site Formation Service‟ against the contention of the appellants that the activity was only man power supply services and that leasing of equipment can only be taxed under supply of „Tangible Goods Service‟ w.e.f. 16.05.2008 with respect to demand of service tax. Adjudicating authority has also held that the appellants have provided dredging service to the Hazira Port during March and April 2005. Adjudicating authority has observed that there is only a single Letter of Intent for Dredging & Land Reclamation work and the total amount is shown against dredging & reclamation as per schedule of payment procedure. Hence the services provided are only Dredging Services and not Site Formation Services. From the arguments of the Ld. Advocate, it comes to the fore that while appellants had commenced maintenance and dredging work on 30.09.2004, they had completed it on 30.03.2005 as certified by Hazira Port and payment for the above service was received only on 09.06.2005. The service tax was imposed on Dredging Services only w.e.f. 16.06.2005. Therefore, the dredging work undertaken by them at Hazira Port prior to such date cannot come under the scope of service tax under that category. We find merit in this argument. In respect of the controversy, whether the appellants had provided site formation services, we find from the contract at page 1338 of the compilation that the work contracted was supply of man power and equipment for maintenance of Geo-bag bund and foreshore protection work. This by itself is indicatory that the appellants were only responsible for supply of man power who in turn was under the control of Hazira Port for maintenance of Geo-bag bund and Foreshore protection work. It is not disputed that appellants 18 Appeal Nos.ST/502-504/2010 have paid service tax in respect of man power supplied to the Hazira Port amounting to Rs.4,95,471/-. We are therefore not able to sustain the stand taken by the adjudicating authority that the appellants have in fact provided „Site Formation Service‟. The demand on these counts requires to be set aside, which we hereby do.
(iv) Gangavaram Port (a) While the impugned order holds that reimbursable expenses is to be
added to the value includable in the taxable service for discharging service tax liability, we find that the law is now settled on this issue and such expenses cannot be subjected to service tax levy as upheld by the Hon‟ble Apex Court in the case of Intercontinental Consultants and Techocrafts - 2018-TIOL-76-SC- ST.As per the SCN, it has been alleged that appellants have engaged in dredging services in sand trap and offshore disposal and reclamations and navigational aids. The adjudicating authority has adverted to the agreement between the appellant and the Gangavaram Port and a letter dt. 17.11.2005 of appellants confirming their acceptance to offer reduced scope of work for „advanced extraction of materials for filling in port back up area‟ by deployment of Trailer Suction Hopper Dredger or any other suitable equipment. Adjudicating authority has noted that primary activities carried out are Mobilization of Dredging Spread and Execution of advanced extraction of material by Trailer Suction Hopper, hence entire activities revolve around dredging service. Appellants have consistently argued that the object of the agreement at Gangavaram Port was not to carry out dredging activity but only to develop port site for cargo handling and storage and to achieve that objective, it is necessary that the port back up area is filled up; that for the purpose of filling up port back up area it was agreed that respective filling materials shall be dredged and 19 Appeal Nos.ST/502-504/2010 dumped at the designated site for carrying out levelling and reclamations activities ; that dredging in their case was incidental or ancillary to Site Formation Services.
(b) Ld. Advocate has also contended that appellants have entered into Charter Hire Agreement with Gangavaram Port and that as per the contract Charter Hire per week charges hire payment, place, date and time of delivery / redelivery to the area of port etc. was involved. But there was no obligation to carry out any dredging on the part of the appellants under the contract. Ld. Advocate also informed us that for carrying out the dredging service a separate contract was executed with the port and that appellant has discharged service tax liability on that contract. We find merit in this argument. While there is definitely an element of dredging services involved in the work contracted to the appellants, they have discharged service tax liability on the same. The remaining works undertaken by the appellants like base works required for filling port back up area, site clearance etc. would surely come within the fold of Site Formation Service in relation to port and hence they would be eligible for exemption under Notification No.17/2005-ST. For this reason, service tax demand confirmed by the adjudicating authority under dredging service cannot sustain and is therefore set aside. We also find merit in the contention of the Ld. Advocate that supply of vessel CSD Vlaanderen 11 to Gangavaram Port vide a contract dt. 14.12.2006 is only in the form a charter hire agreement and hence it can only be termed as supply of the vessel to Gangavaram Port for carrying out dredging service to be carried out by the latter.
(c) The Show Cause Notice alleged that the agreement is for sand trap and off shore disposal and reclamations and navigational aids at Gangavaram Port, 20 Appeal Nos.ST/502-504/2010 but the adjudicating authority has alluded to agreement between the appellant and Gangavaram Port and correspondence relating to said project and has observed that the scope of work included the following :
Mobilization of Dredging Spread and Site installation Execution of advanced extraction of material for filling in port back up area by Trailer Suction Hopper in accordance with the project specifications, drawings and agreed project schedule All land based works required to the above filling works All survey works in accordance with the project specifications Demobilization of the Dredging Spread(s) and site clearance
(d) Based on this adjudicating authority has held that the final activity carried out is demobilization of the dredging spread and site clearance; that it is an admitted fact that appellant dredged the materials using dredger and dumped the extracted materials at designed site; that merely because the materials extracted while carrying out dredging activities are dumped by the assessee at designated place, the scope of the activity which is primarily dredging cannot be construed to be "site formation activities". Based on these premises, the adjudicating authority has held that the activity carried out by appellant is in the nature of dredging service and not site formation and thus appellant provided only dredging services on which service is liable to be paid.
(e) On the other hand, appellant has argued that there was only Charter Hire Agreement entered into between Dredging International NV, Belgium for charter of vessel and that the said vessel was used by the latter for carrying out dredging in Gangavaram Port area only for advanced extraction of material for filling up the port back up area.21
Appeal Nos.ST/502-504/2010
(f) From a copy of Charter Hire Agreement filed at page 1324 of the compilation, we find that there indeed is such a Charter Hire Agreement dt. 14.12.2006 between the appellant and Dredging International NV for hiring the vessel CSD Vlaanderen 11 with details of charter hire, period of hire, place, date and time of delivery and redelivery etc. for area of operation Gangavaram Port. Thus there was no dredging contract entered into by appellant. By implication, there was no obligation to carry out dredging on the part of the appellant under the contract either for Dredging International NV or of Gangavaram Port. For the same reasons that we have discussed in respect of Charter Hire Agreement with DCI and DDCL, we hold that the contract of the appellant with Dredging International NV was also only in the nature of a Charter Hire Agreement and not a contract for carrying "Dredging Services". This being so,that part of the impugned order demanding service tax liability on the appellant under dredging service in respect of the "Gangavaram Project"
cannot be sustained and is therefore set aside.
(v) Dhamra Port Company Ltd.
The impugned order has observed that appellant entered into three separate contracts with Dhamra Port for dredging, soil stabilization and reclamation of land, however paid service tax only on dredging contract and claimed exemption for income on account of reclamation under Notification No.17/2005-ST and under Notification No.25/2007-ST for income earned on account of soil stabilization under Works Contract Service. Adjudicating authority has stated that there is only single letter of intent for "dredging and land reclamation work"; that the total amount is shown against "dredging and reclamation only" as per the schedule of payment of procedure; hence from these composite activities carried out by appellant, letter of intent, payment 22 Appeal Nos.ST/502-504/2010 procedure, appellant is primarily engaged only in dredging service to Dharma Port. On the other hand, appellant has contended that they had actually entered into three different contracts for dredging, reclamation and soil stabilization; that service tax has been discharged on the dredging contract. We find this assertion to be correct. The contract dt. 16.05.2007 for "Soil Stabilization of site for construction of Dhamra Port", is found at page 1195 of the compilation. Another agreement dt. 15.05.2007 at page 1237 of the compilation between the appellant and Dhamra Port is for "Reclamation of Land for construction of Dharma Port". The agreed rates for soil stabilization work is found at page 1231 of the compilation. However, the title head of that page is indicated as "Soil Stabilization of Site for construction of Dhamra Port" and the works listed are Preliminaries, mobilization and fixed site overheads, Pre-execution Engineering, Supply of Vertical Drains and Installation of Vertical Drains. While indicating the description of servicein column for total amount, it has been indicated as "Total amount for dredging and reclamation works (Excl. Fuel)" [emphasis added]. However, Ld. Advocate has also submitted that there is no composite service but only site formation service specifically attracting the provisions of Section 65A (2) (a). Notwithstanding these assertions, we however, we find in page 95 of the specimen of dredging contract with Dhamra Port, the sample invoice filed therein indicates amount for "„dredging and reclamation works" [emphasis added]. Appellant contends that there were three separate contracts for dredging works, land reclamation and soil stabilization . It is also contended by the appellant that they have discharged service tax liability on dredging services. In these circumstances, it is not clear as to whether there were indeed three separate contracts for dredging, reclamation and soil stabilization or on the other hand, whether appellants were entrusted with a composite work 23 Appeal Nos.ST/502-504/2010 for all the three related works . We do not find any clarity from the SCN or from the findings of the adjudicating authority or even from the documents submitted by the Ld. Advocate.
Viewed in this context, we are of the considered opinion that the dispute concerning the activities done by the appellant in respect of Dhamra Port should be remanded to the adjudicating authority for deciding the issue afresh.
(vi) Import of Services
(a) Maintenance and Repair Services:
(i) The learned Advocate was at pains to put forth that, in regard to
invoices where services were performed in India, service tax has been paid. The remaining invoices, according to learned Advocate, relate to repair and maintenance activities performed on the Vessel Pacifique at the Dry Docks, Colombo for which an amount of around Rs. 21 crore had been paid to the non-resident service providers. Learned Advocate has requested that this matter may be remanded to the original Adjudicating Authority to enable the appellants to produce necessary evidence in support of this contention.
(ii) We find merit in this request. Accordingly, this issue is remanded to the Adjudicating Authority for de novo consideration, after giving sufficient opportunity to the appellant to produce supporting evidence.
(b) Manpower Supply Services: (i) The dispute relates to salary payments paid to the "expatriate"
employees employed under them. According to appellant, the salary payments had been routed through foreign companies who made 24 Appeal Nos.ST/502-504/2010 payment to the said employees on behalf of the appellant in foreign currency and on reimbursement basis without any mark up.
(ii) The appellants have contended that with each of the expatriates, drafts for employment had been drawn up, which, inter alia, indicated the monthly salary payable. The appellant, therefore, contends that liability to pay salaries rested with the appellants and not with the foreign companies. They also pointed out that income tax had been deducted and TDS certificates issued to these employees in form 60.
(iii) We find merit in these averments. It is a usual practice to facilitate payment of the salaries of expatriate employees in foreign currency, to be payable in their home country. It is not the case that appellants had engaged services of a manpower service provider from abroad to have the services of these persons. It is also pertinent to note that drafts were drawn up by the appellants directly with their employees and not with any manpower supply provider abroad.
(iv) Further, even the foreign agents who had facilitated routing of the salaries to the secondees, were functioning as pure agents and, hence, on this core also, service tax liability under reverse charge basis will not arise. Hence, that part of the impugned order which has confirmed service tax liability in respect of the employment of expatriate persons, cannot sustain and requires to be set aside, which we hereby do.
(c) Management Consultancy Services : (i) The Adjudicating Authority has taken a view that the foreign service
provider M/s. Pinsent Masons had provided expertise, created and sustained value, resolved issues and fulfilled commercial objectives and, 25 Appeal Nos.ST/502-504/2010 hence, the appellants were required to discharge service charge liability on the professional services under business consultancy charges, however, from 18.04.2006 onwards.
(ii) We find that both during the adjudication proceedings as also during the course of hearing, Ld. Advocate has produced invoices which point out that M/s. Pinsent Masons are a law firm registered with "Solicitor‟s Regulation Authority". Thus, they are not business consultants and is a legal firm. Legal services have become taxable only with effect from 01.09.2009. Thus, the demand raised in respect of services received from M/s. Pinsent Masons, U.K., cannot sustain under the reverse charge mechanism also and requires to be set aside, which we hereby do.
(d) The appellant has also submitted certain arguments in respect of insurance auxiliary services, consulting engineer services, wherein it is stated that they have produced the proof of payment of service tax. In regard to advances received from customers also, it is contended that the appellant has discharged the service tax and that the Additional Commissioner has dropped the demand on the very same issue. These aspects are not clear from the impugned order. We, therefore, deem it fit to remand these issues to the adjudicating authority along with the issues which have been remanded above. However, the issues with regard to insurance auxiliary services, consulting engineer services and advances are only remanded for the limited purpose of verification, as contended by the appellant. From the above discussions, it can be seen that the major part of the demand, in respect of dredging services, has 26 Appeal Nos.ST/502-504/2010 been set aside. With respect to those demands which have been sustained, we are of the view that the issue being interpretational, the penalties imposed are unwarranted and requires to be set aside, which we hereby do.
5. To sum up : the impugned order is modified as under :
i) Demand of service tax in respect of services provided by appellants to Dredging Corporation of India, under category of dredging service is set aside.
(ii) Demand in respect of service provided to Dharti Dredging and Construction Ltd., under category of dredging services, is set aside.
(iii) Demand of service tax in respect of services provided by appellant to Hazira Port, are set aside.
(iv) The demand of service tax in respect of services provided by appellant for Gangavaram Port is set aside.
(v) Demand of service tax in respect of services provided by appellant for Dhamra Port, is set aside and remanded to Adjudicating Authority for deciding the matter afresh.
(vi) Demand in respect of maintenance and repair services is remanded to the Adjudicating Authority for de novo consideration as per the discussions above.
(vii) Demand in respect of Manpower Supply Services is set aside.
(viii) Demand in respect of Management Consultancy/Legal Services is set aside.
(ix) With regard to the demand on insurance auxiliary services, consulting engineer services and advances received from customers, 27 Appeal Nos.ST/502-504/2010 these issues are remanded to the Adjudicating Authority for limited purpose of verification of the contentions made by the appellants (supra).
(x) The penalties imposed in the impugned order, including those relating to the issues that have been remanded for de novo consideration, are all set aside.
6. All these three appeals are disposed of on the above terms, with consequential benefits, if any, as per law.
(Pronounced in court on 18.06.2018)
(Madhu Mohan Damodhar) (Sulekha Beevi C.S.)
Member (Technical) Member (Judicial)
gs/sdd
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