Container detention charges not liable for Service Tax

The quantum of export and import determine the fiscal health of a nation. A hassle-free system and absence of bureaucratic approach, is a barometer for measuring the economic altitude a country has achieved. Government policies should be such that exporters are not forced to export taxes along with the goods or services. Keeping the cost low is a major concern to all exporters.

In a major boost to the export industry, the Government of India, through Central Board of Excise and Customs (Tax Research Unit)'s circular no. 121/3/2010-ST issued under F.No.332/29/2009-TRU, clarified that container detention charges can at best be called as 'penal rent' for retaining the containers beyond the pre-determined period and therefore the amount collected as 'detention charges' is not chargeable to service tax.

Generally, marine containers are temporarily brought into a customs territory and have to be re-exported within a specified period. Normally, a full container load is taken out of the port and the activity of stuffing or de-stuffing takes place at the premises of the exporter/importer. The shipping companies/steamer agent provide a pre-determined period within which the container (that has gone out of the port) is to be returned. This is called as 'pre-holding period' and the duration of the same is mentioned in the contract. In case there is any delay on the part of the customer in returning the container, the charges known as 'detention charges' are collected over and above the contracted amount by the shipping line. A number of litigations were initiated by the department by raising demand of Service tax on such 'detention charges' under the 'Business Support Service (BSS)' or 'Business Auxiliary Service (BAS)'.

Business Auxiliary Service is defined under Section 65(19) of the Finance Act, 1994 as any service in relation to:

• promotion or marketing or sale of goods produced or provided by or belonging to the client; or
• promotion or marketing of service provided by the client; or
  
• any customer care service provided on behalf of the client; or
  
• procurement of goods or services, which are inputs for the client; or
  
• production or processing of goods for, or on behalf of the client; or
  
• provision of service on behalf of the client; or
  
• a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944).
  

The detention charges collected by the shipping companies/steamer agent for delay in returning the container beyond the contracted period do not find classification in any of the abovementioned clauses of Section 65(19) of the Finance Act, 1994.

By issuing a much needed clarification, the Government of India, acting through CBEC, has put to rest a very contentious issue relating to Service tax liability on such detention charges recovered by the shipping companies/ steamer agent for delay in returning the container beyond the contracted period. The said circular has rightly observed that to retain the container beyond the pre-holding period is neither a service provided on behalf of the client (Business Auxiliary Service) nor is it an infrastructural support in the business of either the shipping lines or the customer (Business Support Service).

It has been observed that the Service tax department has used Business Auxiliary Services as a master key. Whenever any service to be taxed fails to fit in the definition of taxable service categories, they conveniently tax it under taxable services of BAS. This biased and "revenue-philic" approach has led to unending litigations.

By issue of the said circular, the Government of India has made its intentions of keeping litigations at a bare minimum level and facilitating international trade with an aim to achieve double digit growth rate in the present fiscal year, very clear. However, one question remains to be answered is, what took CBEC more than seven years to come out with this clarification and what will be the fate of those who have already paid the said tax under pressure from the department during the past several years? Anyway, on a positive note, things have been put to rest once for all, sending a strong signal to the departmental officers that BAS cannot be used as a category of 'other services not defined elsewhere'.