No Service Tax payable on Ocean Freight/Sea Transportation Services: Bombay HC [Read Order]

The Bombay High Court has held that service tax is not leviable on ocean freight or sea transportation services. The Petitioner is a company incorporated under the Companies Act, 1956, and is a manufacturer of fully drawn yarn, air texturized yarn and cotton yarn at its unit at Silvassa. It was contended that the Petitioner is one of the top yarn manufacturing units in India. In the course of its activity, the Petitioner imports various raw materials, namely, Purified Terephthalic Acid ( PTA ) and Mono Ethylene Glycol ( MEG ) used in the manufacture of the final product. The Petitioner is also importing certain spare parts and accessories required for its plant and machinery. Such raw materials, spare parts and accessories for machinery are being imported by the Petitioner from the foreign suppliers under CIF ( Cost, Insurance and Freight ) Contract, wherein the entire cost of transportation of goods upto the customs station in India is incurred by the foreign supplier. In short, the company imports raw materials and spare parts for its manufacturing process, with the entire cost of transportation covered by foreign suppliers under CIF contracts. The dispute arose when the tax department conducted an audit, issuing a final report demanding service tax payment for the period of April 2017 to June 2017.

The petitioner complied, paying the service tax along with interest. The issue involves the restructuring of Chapter V of the Finance Act, 1994, in 2012, introducing the “Negative List of Taxation Scheme.” The petitioner argues that the transportation of goods by vessel from a non-taxable territory to another non-taxable territory was initially exempted from service tax but later made inapplicable through subsequent notifications. The petitioner further contended that under the GST regime, IGST at 5% is imposed on the importer for the transportation of goods in a vessel from a non-taxable territory to another non-taxable territory.

The court supported the petitioner’s claim, holding that the service tax on ocean freight, payable under the reverse charge mechanism, would not be legally valid. The Bench of Justices G. S. Kulkarni and Firdosh P. Pooniwalla, relied on the precedent set by the Gujarat High Court in the case of SAL Steel Ltd. vs. Union of India. In this earlier case, it was held that no tax is leviable under the Integrated Goods and Services Tax Act, 2007, on ocean freight for services provided by entities in non-taxable territories, specifically in the context of transporting goods by vessel from a location outside India to the customs station in India. However, the court restricted the entitlement subject to the petitioner filing the necessary  refund application, subject to lawful requirements, including the principles of unjust enrichment.

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