By TIOL News Service

MUMBAI, NOV 02, 2016: THE Appellantis rendering Port Services and is duly registered. They had entered into an agreement with M/s South West Port Ltd, Mormugao, (SWPL) under which it had leased out/rented out pieces or parcels of land which were situated in the operational area of the harbour to SWPL on which the latter had constructed a jetty which was used for loading and unloading of cargo from ocean going vessels, in lieu of which it received license fee and royalty from SWPL.

The case of the department is that while the appellant Assessee had discharged service tax on the license fee, however, no tax has been paid on the amount recovered towards royalty. Inasmuch as Service Tax was leviableon the amount of ‘royalty' under the head of Renting of Immoveable Property services.

The CCE, Goa confirmed the tax liability of Rs.6,82,36,532/- and imposed interest but did not impose any penalty u/ss 76, 77 and 78 by invoking s.80 of FA, 1994.

Incidentally, the appellant while arguing on merits had also submitted that the entire demand was barred by limitation as the revenue was in the knowledge of the agreement and that another show cause notice F.No.CX-ST/Mormugao Port/57/08-09 dated 4.9.2009 had been earlier issued with reference to the very same agreement which was the subject matter of the present proceedings.

The appellant is before the CESTAT and inter a lia submitted that the principal-client relationship which is the basic tenet for applicability of service tax was not existing between the Assessee and SWPL.

Revenue is also aggrieved with the non-imposition of penalties.

The AR reiterated the findings of the adjudicating authority.

The Bench while mentioning that it was deciding the case on merits & not on the point of limitation observed –

+ 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 specific consideration by way of licence fees is charged by the Assessee (this licence fee is not subject matter of dispute in this appeal), the Assessee had also granted a permission to SWPL to conduct port operations at Mormugao. This permission was necessary for SWPL to obtain as the right to exploit the water front by operating a port at Mormugao was by law vesting only with the Appellant. Therefore, besides leasing out of the land and the water area to SWPL, the other facility/right given to SWPL is the right to conduct port operations at Mormugaowater-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 Appellant, for which it is entitled for Royalty is the grant of permission/licence to carry on business on the water front at Mormugao. This exclusive right to exploit the water front which was available only to the Assessee as per law was relinquished by the Assessee in favour of the joint venture that the Assessee had with SWPL. In addition to the above contribution, the Assessee was also obliged to do many more things for the smooth running of the port operations.

+ The arrangement between the Assessee and SWPL is the public-private partnership. … These PPP arrangements are described sometimes as collaboration, joint venture, consortium, joint undertaking, but regardless of their name or the legal form in which these are conducted. These are arrangements in the nature of partnership with each co-venturer contributing in some resource for the furtherance of the joint business activity.

After adverting to the judgment of the apex Court in the case of Faqir Chand Gulativs Uppal Agencies Pvt Ltd. - 2008-TIOL-147-SC-MISC interpreting the meaning of the term ‘joint venture', the CESTAT added –

+ We are of the view that the agreement betwee 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 n the Assessee and SWPL is joint venture between the two, where the two co-venture are jointly controlling a common activity and sharing the revenue therefrom.

+ The question that arises for consideration is whether the activity undertaken 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 to the other partners nor is there any consideration fixed as a quid pro quo for any particular service of a partner. All the resources and contribution of a partner enter into a common pool of resource required for running the joint enterprise and if such an enterprise is successful the partners become entitled to profits as a reward for the risks taken by them for investing their resources in the venture.

+ A contractor-contractee or the principalclient relationship which is an essential element 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.

+ 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 clear. Unless it can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service. [Cricket Club of India vs Commissioner of Service Tax, 2015-TIOL-2062-CESTAT-MUM refers]

+ We are accordingly of the view that activities undertaken by a partner /co-venturer for the mutual benefit of the partnership/joint venture cannot be regarded as a service rendered by one person to another forconsideration and therefore cannot be taxed.

As regards the support derived by the CCE, Goa in reaching the conclusion to levy tax on Royalty by citing the Appellants own action of paying service tax on Royalty when the negative list regime of taxation was introduced, the CESTAT observed that - "Since there is no estoppel in law, we find this aspect to be totally irrelevant for deciding the Appellants liability for the past period."

Conclusion: There is no service that has been rendered by the Appellant, much less the taxable service of renting of immoveable property. The money flow to the Assessee from SWPL, under the nomenclature of Royalty, is not a consideration for rendition of any services but in fact represents the Appellant's share of revenue arising out of the Joint Venture being carried on by the Assessee and SWPL.

The appeal by assesseewas allowed and the Revenue appeal was dismissed.

(See 2016-TIOL-2843-CESTAT-MUM)