MARCH 27, 2017

By Anand Chauhan

POSITION prior to 1st June, 2016

Negative list, Section 66D, contained entry for transportation of goods under entry (p)(ii) "by an aircraft or a vessel from a place outside Indiaupto the customs station of clearance in India: accordinglythe inward ocean freight was excluded from service tax levy.

Position after 1st June, 2016

By Finance Act, 2016 this entry (p)(ii) was removed, so by virtue of Rule 10 of the Place of Provision of Services Rules, 2012, which reads -

"10. Place of provision of goods transportation services - The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of the goods",

the inward freight, after the date 1st June, 2016,came under service tax levy. Read with Rule 2(d)(i)(G) of the Service Tax Rules and entry (B) of reverse charge notification no. 30/2012-ST.

Though by notification No. 09/2016-ST, DT. 01/03/2016,w.e.f. 01.06.2016, entry was inserted in mega exemption notification no. 25/2012 as "53. Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India.", transportation by vessels was intentionally left to make inward ocean freight subject to levy.

Accordingly there were following two positions for inward ocean freight;

1. When inward ocean freight is charged by Indian shipping lines, itwas to be charged with service tax, even in cases where service recipient is in non-taxable territory (Foreign Service receiver), i.e. imports with +freight terms, like CIF etc. The logic seems to be that the ultimate cost of freight is borne by the person in taxable territory, so there is no case of ‘export of tax'.

2. Whereas in case of foreign shipping lines, when the ocean freight was to be paid by Indian recipient, the recipient had to pay service tax under reverse charge also, however, when ocean freight was to be paid byforeign service recipient, both service provider and receiver not being in taxable territory, by virtue of entry 34 of the mega exemption notification no. 25/2012 ST, was exempted from service tax.

Thus, to get benefit of this situations, in case of foreign shipping lines, it  had been advised to make all import with +freight term, so freight being paid by overseas supplier would not be subjected to Service tax.

This created anomaly in inward ocean freight to Indian Shipping lines vis-à-vis Foreign shipping lines, as it is but natural that when freight is paid by foreign supplier to foreign shipping line, it being covered under exemption, why to increase freight cost by 4.5% by taking service from Indian shipping line?

Recent Changes W.E.F 22 nd January, 2017

To curb this loophole, on 12th January, 2017, three ST notifications have been released, whereby -

1. Vide notification No.1/2017, the exemption of service provider and receiver being out of taxable territory has been removed specifically for inward ocean freight. It was done by insertion of proviso in entry 34 of mega exemption notification as - "Provided that the exemption shall not apply to - (i) ……or (ii) services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India;" So, now inward ocean freight is subjected to service tax levy.

2. Now another question rose was, who will pay service tax? Because even though being taxable, both service provider and receiver being outside taxable territory could not be make liable to pay service tax.To overcome this,vide Notification 2/2017, specific item (EEC) has been has been inserted In rule 2(d)(i) of the Service Tax Rules, for specifying person liable for paying service tax as "(EEC) in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods;".

Now Indian agent of shipping line, who performs all formalities related to the incoming vessels with customs,has been notified as a person liable to pay service tax.

3. Vide Notification 3/2017 in paragraph I, of reverse charge Notification 30/2012 notifying service for the purpose of section 68(2), in clause (A), after the sub-clause (vi), the following sub-clause has been inserted, namely:- "(vii) provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel froma place outside India up to the customs station of clearance in India;"; similar description of service has been inserted in paragraph II for specifying 100% portion payable by the person other than service provider.

Now what is creating confusion is the insertion of explanationIV by the same notification, with the language different from that of i tem (EEC) inserted in Service Tax Rule 2(d)(i), and read as - For the purposes of this notification, in respect of services provided or agreed to be provided by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, person liable for paying service tax other than the service provider shall be the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods.". This covers all the cases of inward ocean freight irrespective of location of either service provider or receiver.

It can be seen here that item (ECC) of Rule 2(d)(i) specifying person liable to pay service tax covers the cases only where both service provider and service receiver are in non-taxable territory, whereas explanation of RCM notification covers all the cases of inward ocean freight. So, if one goes by the RCM notification, in case of all inward ocean freights, Indian Agent of the service providers are liable to pay service tax. However, if one goes by Rules, the Indian agent is liable to pay service tax only in cases where both the service provider and receiver are in non-taxable territory, whereas, when service receiver is in taxable territory, by virtue of Rule 2(d)(i)(G) it is service provider who is the person liable to pay service tax. This is because that is the Rules which specify the person liable to pay service tax and the RCM notification is just notifying services and the tax portions of the liability to be paid for the purpose of section 68(2). Thus, the rule prevails over the RCM notification.

To sum up, following three situations can be explained;

a. When both service provider and service receiver are out of taxable territory, service tax will be payable by Indian agency of service provider(Shipping line/Charterer),

b. Irrespective of location of service receiver, when Service provider is in taxable territory, it will be covered in forward charge, and;

c. When Service provider is out of taxable territory, Indian Service recipient will be subject to service Tax.

In which case is CENVAT Credit available?

CENVAT Credit will be available only to manufacturer, who receives service and makes payment of freight directly to service provider (and not to supplier) i.e. when service provider is in taxable territory, animporting manufacturer will pay freight to service provider and will be receiving service tax paid bill on which he will take credit or he himself will pay service tax under RCM and will take credit on the basis of challan, when service provider is in non-taxable territory.

For ease of understanding, the provisions can be explained in tabular form as under -

As Indian shipping lines are already covered under forward charge (w.e.f. 1/6/16), now by these changes Foreign shipping lines would also be covered and both Indian and foreign shipping lines will be at par.