By TIOL News Service

MUMBAI, NOV 06, 2013: THE appellant had provided shipping vessels to M/s. ONGC on charter hire basis for which they were receiving consideration. The said vessels were used during monsoon period and on call out basis for storage and transportation of crude oil from Bombay High. From the agreement for charter hire it appeared that the vessel is to be used at a particular place or site for operation and service, which indicated that the vessel is stationary and primarily not used for voyage/transport of oil. The vessel is sought to be moored to the ONGC rig and acts as a mother vessel receiving oil from the rig and pumping it to other daughter vessels which does actual transporting. The vessel used as mother vessel is required to carry out ship to ship transfer of cargo to daughter vessel. Therefore, the department was of the view that the activity undertaken by the appellant in charter hiring the mother vessel was primarily for the purpose of storage of crude oil at Bombay High and the transportation was only an incidental function to the primary function of storage.

Accordingly, in respect of ten such mother vessels, the department sought to classify the services rendered under the category of "storage and warehousing services" and sought to demand service tax amounting to Rs.25,04,29,302/- during the period 01/10/2002 to 31/12/2007 vide show-cause notice dated 16/4/2008. Similar SCNs were issued for the later period from January 2008 to March 2010 and which totally demanded Service Tax of Rs.14.31 Crores.

The Commissioner of Central Excise & Service Tax (LTU) did the usual and the appellant had to knock the doors of the CESTAT.

While seeking Stay the appellant submitted that the activity carried out is providing vessels on charter hire basis to ONGC and the primary function of the said vessel is transportation of crude oil from the oil well to the ports and, therefore, the activity undertaken by the appellant is not storage and warehousing service. The appellant also referred to the Ministry letter No. 334/1/2008-TRU dated 29/02/2008 and submitted that the activity of charter hiring of vessels for off-shore operations would come under "supply of tangible goods for use service", para 4.4.2 of the letter reads -

"Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes etc., offshore construction vessels and barges, geo-technical vessels tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service".

Reliance was also placed on the decision of Bombay High Court in the case of Indian National Ship Owners Association Vs. UOI, - (2009-TIOL-150-HC-MUM) where an issue arose whether supply of vessels to ONGC for offshore operations would come under the category of mining service or under the category of supply of tangible goods for use and the High Court held that the activity of supplying vessels to ONGC for its offshore operations would not get covered under the mining services but would be covered under supply of tangible goods for use service which activity was brought under the tax net effective from 16/05/2008.

The Bench had granted an unconditional waiver from pre-deposit of dues and stayed the recovery. (See 2013-TIOL-942-CESTAT-MUM).

The appeal was heard recently.

While reiterating the submissions referred above, the appellant also relied upon the following decisions and prayed for allowing the appeals –

+ Aban Loyd Chiles Offshore Ltd. - (2012-TIOL-1874-CESTAT-MAD)

+ Karnataka State Beverages Corporation Ltd. - (2007-TIOL-1936-CESTAT-BANG)

+ Finolex Industries Ltd. - (2007-TIOL-790-CESTAT-MUM) wherein it was held that mere leasing of storage tanks would not amount to ‘storage and warehousing service' unless other activities such as security of the goods, stacking of the goods, loading or unloading of the goods in the storage area, maintaining of inventory etc. are undertaken.

The Revenue representative submitted that out of thirty and odd vessels supplied to ONGC, service tax demand has been made only in respect of ten numbers of "mother vessels"; that the utility of the mother vessel is that the oil produced in the offshore will be stored in the mother vessel and it will be transported from mother vessels to other ports in India through the daughter vessels. Thus, it is the daughter vessel which will undertake the transportation of goods and not the mother vessels. Since the mother vessels perform the storage of crude oil at the production site, they fall within the definition of ‘storage and warehousing service' and accordingly, the demands have been correctly confirmed.

The Bench while adverting to the decisions cited by the appellant observed -

"5.1 We have perused the contract entered into between the appellant and the ONGC. The contract is one for supply of vessels on charter hire basis and the operation and control of the vessel remains with the appellant. The vessels are used to store the crude oil produced at Bombay High and also to transport the same to the refineries or to the ports situated in various parts of India. The purpose of production of oil is for its use and since the crude oil is produced offshore, they have to be necessarily transported to refineries situated onshore. Storage of crude oil is only incidental to the main activity of transportation and the vessels are hired only when pumping of crude cannot be made through pipelines laid under the sea bed or in specific weather conditions. Thus, the primary object of charter hiring the vessel is for transportation of crude from the place of production i.e. in the High Sea to the refineries in India and not for "storage and warehousing". In the case of Indian National Ship Owners Association (cited supra), the Hon'ble Bombay High Court held that supply of vessels on charter hire basis for offshore operations would merit classification under "supply of tangible goods for use", which activity was brought under the service tax net with effect from 16/05/2008. The clarification issued by the Ministry at the time of introduction of said levy vide Circular No. 334/1/2008-TRU (cited supra) also makes it clear that supply of vessels for offshore operations would be exigible to service tax under the category of "supply of tangible goods for use"."

5.2…In the present case it is seen that the appellant herein, M/s. Shipping Corporation of India, does not provide for security of the goods, nor are they loading or unloading the goods, or stacking the goods, or maintaining the inventory of the goods. As per the agreement, these responsibilities rest with the recipient of the service which is ONGC. Thus, the mother vessels are being used only as temporary storage space apart from transporting the crude oil from Bombay High to refinery situated onshore or other ports in India.

6. In view of the above factual and legal position we are of the considered view that the services rendered by the appellant in respect of mother vessels cannot be classified under ‘Storage and Warehousing Services' as defined in Finance Act, 1994. Accordingly, we set aside the impugned demands. Consequently, the interest liability and penalties imposed on the appellant would also get nullified.

7. The learned counsel for the appellant has submitted that for the period w.e.f. 16/05/2008 onwards, they have discharged service tax liability under the category of ‘Supply of Tangible Goods for Use Service' as defined under Section 65(105)(zzzzj). Therefore, the tax paid by them has to be appropriated and accounted under the said taxable service."

In fine, the appeals were allowed.

(See 2013-TIOL-1652-CESTAT-MUM)