Water Supply to Ships Is ‘Port Service’: CESTAT Ahmedabad Upholds Pre-2010 Service Tax Liability, Grants Partial Penalty Relief

Water Supply to Ships Is ‘Port Service’: CESTAT Ahmedabad Upholds Pre-2010 Service Tax Liability, Grants Partial Penalty Relief

Introduction

The Customs Excise and Service Tax Appellate Tribunal (CESTAT) has held that the supply of fresh water to vessels within a port area constitutes “port services” and is liable to service tax under the Finance Act, 1994 for the period prior to the exemption introduced on July 1, 2010. A Bench comprising Judicial Member Dr. Ajaya Krishna Vishvesha and Technical Member Satendra Vikram Singh observed that the activity involves operational services related to vessels within a port and therefore falls within the scope of taxable port services before the exemption was notified.

Factual Background

The dispute arose from an audit conducted by the department into the records of Sea Shipping Services, which supplied fresh water to vessels operating within a port area. During the audit, it was found that the company had issued debit notes to its customers towards reimbursement of expenses incurred for the supply of fresh water to ships. The department noted that an amount of ₹66.25 lakh had been recovered by the company without payment of service tax. The authorities took the view that the activity of supplying water to vessels within the port area formed part of “port services” as defined under Section 65(82) of the Finance Act, 1994.

Procedural Background

Based on the audit findings, the department issued a show cause notice seeking recovery of ₹6.82 lakh as service tax under the proviso to Section 73(1) of the Finance Act, along with interest under Section 75 and penalties under Sections 77 and 78. The Additional Commissioner confirmed the demand and imposed penalties. The decision was subsequently upheld by the Commissioner (Appeals). Aggrieved by these orders, Sea Shipping Services filed an appeal before the Ahmedabad Bench of CESTAT challenging the demand and penalties.

Issues

1. Whether the supply of water to vessels within a port area constitutes “port services” liable to service tax under the Finance Act, 1994.

2. Whether the transaction amounted to sale of goods or provision of a taxable service.

3. Whether the extended period of limitation and penalties were justified.

Contentions of the Parties

The appellant argued that the transaction was essentially a sale of water and not a service. It contended that the company purchased water and supplied it to ship owners on a back-to-back basis, and the amounts recovered from customers were merely reimbursements of expenses.

The appellant further submitted that water is treated as goods and is exempt from VAT under the Gujarat Value Added Tax Act, 2005. On that basis, it argued that the transaction could not be subjected to service tax.

The Revenue argued that the activity involved more than a simple sale of water. It involved procurement, transportation and pumping of water to vessels operating within the port area.

The department relied on clarifications issued by the Central Board of Excise and Customs stating that supply of water to vessels forms part of the taxable value of port services.

Reasoning and Analysis

The Tribunal examined the documentary evidence placed on record and observed that the invoices issued by the appellant showed not only the cost of water but also associated charges for transportation, pumping and other operational expenses. This indicated that the activity involved service elements connected with the functioning of vessels within the port area.

The Bench also referred to a clarification issued by the Central Board of Excise and Customs dated July 9, 2001 and Notification No. 31/2010-ST dated June 22, 2010. The Tribunal noted that the exemption for such services was introduced only from July 1, 2010, which implied that the activity was taxable prior to that date. Based on these factors, the Tribunal concluded that the supply of water to vessels within the port area formed part of “port services” and was therefore liable to service tax before the exemption came into effect. However, the Tribunal observed that there was no evidence to show that the appellant had deliberately attempted to evade payment of service tax. In the absence of such mens rea, the imposition of penalty under Section 78 was considered unjustified.

Decision

The CESTAT upheld the demand of service tax and interest against the appellant for the supply of water to vessels within the port area for the period prior to July 1, 2010. However, the Tribunal set aside the penalty imposed under Section 78 of the Finance Act, 1994, while affirming the penalty under Section 77. The appeal was accordingly disposed of with partial relief granted to the appellant.

In this case the appellant was represented by Advocate Sharan Rayaprol. Meanwhile the respondent was represented by Assistant Commissioner, Rajesh Nathan.