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The article deals with the spin offs with respect to one of the proposed amendments in Service tax by Finance Bill 2016


As we know it today, the activity of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance in India is kept out of purview of Service tax by virtue of sub-clause (ii) of clause (p) of Section 66D of Finance Act, 1994.

Section 66D
(p) services by way of transportation of goods
(i) by road except the services of—
(A) a goods transportation agency; or
(B) a courier agency;
(ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance or
(iii) by inland waterways;

However Section 146 of Finance Bill has proposed to delete such sub clause, the exemption though being restored in respect of an aircraft by providing Entry No 53 to Notification No. 25/2012-ST.

146. In the 1994 Act, in section 66D,—

(ii) in clause (p), sub-clause (ii) shall be omitted.

Applying rule 10 of place of provision rules, 2012, the place of provision of such transportation service comes to Taxable territory viz India, hence satisfying every condition of service tax levy under section 65B.

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: Provided that the place of provision of services of goods transportation agency shall be the location of the person liable to pay tax.

In effect the position postulating is withdrawal of service tax exemption to Shipping lines for inward transportation. The TRU letter of Ministry of Finance, explains the situation like this

Para 4.1 Point (C)

The entry in the Negative List that covers services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance [section 66D (p)(ii)] is proposed to be omitted with effect from 1.06.2016. Clause 146 of Finance Bill 2016 may please be seen in this regard. However such services by an aircraft will continue to be exempted by way of exemption notification [Not. No. 25/2012-ST, as amended by notification No. 09/2016-ST dated 1st March, 2016 refers]. The domestic shipping lines registered in India will pay service tax under forward charge while the services availed from foreign shipping line by a business entity located in India will get taxed under reverse charge at the hands of the business entity. The service tax so paid will be available as credit with the Indian manufacturer or service provider availing such services (subject to fulfillment of the other existing conditions). It is clarified that service tax levied on such services shall not be part of value for custom duty purposes.

In addition, Cenvat credit of eligible inputs, capital goods and input services is being allowed for providing the service by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. Consequential amendments are being made in Cenvat Credit Rules, 2004 [Not. No. 23/2004-CE (N.T.), as amended by Sl. Nos. 2(b) and 5(h) of notification No. 13/2016-C.E. (N.T.) dated refers. ]

Appreciating the fact that such amendment was done to benefit the Indian shipping lines, as they were unable to utilize heavy Cenvat pending at their end. All this seems to be fine, prima facie inclining increase in importation costs.

But looking the amendment carefully keeping in mind customs act, 1962 and the valuation rules of 2007. What happening is double taxation of “transportation activity”, one by virtue of Section 66B of Finance Act, 1994 and another levy, the traditional levy of Customs duty by virtue of Section 14 of Customs Act, 1962. As it stands today, value for the purpose of customs duty is defined as follows:

14 Valuation of goods. —

For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf

Important thing to note is, the TRU letter speaks for the fact that service tax on such service shall not be part of Customs duty valuation, true but the fact that the activity itself is getting taxed doubly, no clarification or relief has been provided in this behalf. It has been settled in various celebrated judgments (Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes) that both service tax and VAT are mutually exclusive. Appreciating the fact that both VAT and Customs duty are charge on goods, then the same principle of exclusiveness should also be applicable on customs duty as well.


Imports contracts are of two types (1) C.I.F which calls for contract payment by importer to exporter including the cost of freight, insurance etc and (2) F.O.B basis under which the price is available at the port of export. Following table establishes the persons who are liable to pay service tax, given the services are liable to be taxed per Rule 10 of POP Rules, 2012

Service provider



Indian Shipping line

(1) Indian Shipping line

(2) Indian Shipping line

Foreign Shipping line

(3) Importer

(4) Exempt

SECTION 68. Payment of service tax. —

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B104 in such manner and within such period as may be prescribed105 .

(2) Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified106 by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B107 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Rule 2 (1) (d)

(G) in relation to any taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory, the recipient of such service

Reading Section 68 sub section (1) and sub section (2) r.w. Rule 2(1) (d) of Service tax rules, 1994, we can establish persons liable to pay service tax under above situations:


(1) Service provider being Indian Shipping line and Service receiver being Indian Importer, the service tax is liable to be paid under Forward Charge

(2) Similarly, Indian Shipping line will charge service tax on forward charge basis to an foreign exporter as well

In situation (3), the service provider being a foreigner, the service tax responsibilities falls upon the Indian importer by virtue of sub clause (G) of Rule 2 (1) (d)

Interesting situation is (4)th one, where service tax can only be collected under sub section (1) from the non-resident foreign shipping line, because the receiver in this case is not a person located in taxable territory viz foreign exporter

In Magus Construction  Pvt Ltd. v Union of India (2008) TMI 4479 (Gauhati High Court), court  held that although the term 'service receiver' has not been defined in the Finance Act 1994, the ' service receiver' is a person who receiver or avails the services provided by a 'service provider'

A service provider can not be a client to himself. There must exist a commercial relationship between the two i.e., service provider must charge to the client and client should pay for the services received. Client is an external person who avails the services of another person for an agreed consideration. As per amendment made byFinance Act, 2008, in definitions, whenever 'customer' was appearing, has been replaced by the words 'any person'.

But the trump card here is S. No. 34 clause (c) of Notification NO 25/2012-ST

34. Services received from a provider of service located in a non- taxable territory by –

(a)Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession;

(b)an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or

(c) a person located in a non-taxable territory;

Therefore, the whole point of bringing Indian Shipping lines on par with the foreign ones nullifies. To conclude it can be said that the amendment would do more of harm than favour to persons involved, more litigation to follow and certainly more costs to follow

A special thanks to Sh. CA Pratham Mathure for making available readers like me the service tax e-reckoner. Thank you

The author can also be reached at


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