Whether the activity of repairing, chipping, cleaning and painting of vessels, in furtherance of contract with its customers during the period 16-7-2001 to 30-9-2003 taxable under service tax?

The article analyses the above in light of the recent judgment in case of Homa Engg. Works vs. Commissioner of Central Excise, Mumbai [2007] 9 STT 294 (Mum. – CESTAT).

The article further provides synopsis of some recent Judgments in relation to cenvat credit availment and utilization.

1. Homa Engg. Works vs. Commissioner of Central Excise, Mumbai

The assessee was engaged in the business of repairing, chipping, cleaning and painting of vessels, in furtherance of contract with its customers during the period 16-7-2001 to 30-9-2003. The revenue demanded service tax from the assessee by stating that the service is taxable under the category of ‘port services. The assessee denied the liability by stating that services rendered by it was an independent contract with its customers and thus could not be treated as port services.

The Commissioner (Appeals) on the basis of the Board’s circular No. 67/16/2003-ST, dated 11-10-2003 and also by referring to the various provisions of the Major Port Trust Act and Finance Act, 1994 rejected assessee’s contention and upheld the demand against the assessee.

The assessee contested at the Tribunal that the scope of services to be provided by the port or other person as per section 42(e) of the 1963 Act does not specifically mention the activity of ship repair. Further, since all activities mentioned in section 42(e) are directly connected with the entry or exit of vessel, by applying the principles of ejusdem generis, the expression ‘any other services in respect of the vessels’ has to be construed as related to the activity of entry or exist of the vessels. The assessee further submitted that the consideration received for repairing of the vessel was result of contract entered into with its customers by way of negotiations and not in terms of the tariff rates and, as such, it could not be called to be a port service rendered by a person authorized by the port.

The revenue argued that inasmuch the port’s job is to execute the work provided in sections 35(1) and 35(2) of the 1963 Act, which in respect of performance itself, had been entrusted to the assessee. The assessee thus would step into the shoes of the port and services provided by it were to be considered as port services.

The Tribunal made the following observations:

• The revenue placed reliance upon section 35 of the 1963 Act, which defines power of the port to execute the work. Sub-clauses (1) and (2) of the said section stood invoked by the revenue in the impugned order. The said clause states that the work of the port will include establishing of dry dock, slipways, boat basins and workshop to carry to repair or overhauling vessels/tugs, boat machinery or other appliances. From that, the revenue concluded that inasmuch the port’s job is to execute the work provided in said section, which in respect of performance itself, had been entrusted to the assessee it would step into the shoes of the port and services provided by it were to be considered as port services. However, on a minute examination of the said provisions, it is found that the work required to be executed by the port is to provide the facility like dry dock, etc., to carry out the repairs or overhauling of vessels, etc., and not the repair job itself.

• Further, much reliance had been placed by the revenue on the provisions of section 42(e). Admittedly, the activity of ship repair is not specifically mentioned in the said section. The revenue had sought to bring the same under cause – ‘or any other services in respect of vessels’. The assessee was right in contending that all the activities mentioned in the said clause were relatable to movement of vessel and, as such, the expression ‘or any other service in respect of vessels’ has to take its colour from preceding entry. Where group of words are followed by a general expression, the subsequent general expression has to derive its meaning from the previous expression. Admittedly, piloting, hauling, mooring, remooring, hooking, or measuring of vessels are activities which are directly connected with the entry or exit of the vessel from port area. As such, the subsequent expression appearing in the said clause has to be held as covering the services which are in relation to the movement of the vessel and has to be understood and construed by applying the principle of ejusdem generis.

• Further, the assessee was right in contending that section 42 provides for authorization by the port for the various services at the rate specified by that port in the Official Gazette.

This has reflected upon the fact that various services, which can be authorized by the port to any other person, are routine services for which various rates can be fixed in advance. As far as the repairing of vessel is concerned, the charges definitely depend upon the extent of work required to be done. Such consideration depend upon the contract arrived at after much negotiations. Therefore, such contract services of repair of vessel cannot be held to be ‘port services’.

• Board’s Circular No. 67/16/2003 – ST, dated 10-11-2003 clarified that ship repair activities at the dry docks would be taxable under the port services. Having held, after examination of the relevant provisions of law that such activity would not be included under the expression ‘port services’, it was to be held that the said circular issued by Board was not in accordance with the law.

Further, as the aforesaid service is covered within the ambit of ‘Maintenance and Repair Services’ w.e.f. 1-7-2003, the assessee had rightly taken registration for the said services and had started paying duty thereafter. The revenue had not raised any objection to the said registration of the assessee and payment of duty by it under the category of maintenance and repair services. If the service being rendered by it were already covered by the above services, there was no justification on the part of the revenue to accept its registration under the category of maintenance and repair services.

2. Recent Tribunal judgments

• Excel Crop Care Ltd vs. C.C.E (Ahd. -CESTAT)

The assessee availed services of a cargo-handling agency (CHA) for export of goods. The assessee availed and utilized cenvat credit on such services against the excise duty payable on goods manufactured and cleared from the factory.

The claim of the assessee was rejected by the department on the ground that services of CHA were engaged in relation to an activity after removal from the factory and in the port area. The contention of the department was that the services of the CHA did not have any nexus with manufacture and clearance of the product from the factory.

The assessee filed an appeal against the order stating that the definition of input service under Rule 2(1) of Cenvat Credit Rules is an extended one and includes activities relating to business. Hence the services of CHA availed by them should be treated as relating to his business activity and, therefore, credit should be extended.

The Tribunal held that the CHA services availed in respect of export did not have any nexus with the manufacture and clearance of the product from the factory. The business activities, which were sought to be included in the extended definition, could not include the services rendered in the port area.

• M/s Ambutter Petrochem Ltd. M/s Prakriti Industries, M/s Mohini Industries vs. CCE Raipur. (22-6-2007)

The appellants, manufacturers of chlorine parafide have paid service tax in regard to goods transport service, involved in the transport of materials to their factories. They have also claimed credit of the service tax so paid in regard to transport of materials to their factory. The appellant had utilized the credit in relation to tax payable on subsequent transport.

The impugned order of the Commissioner had held that since the appellant is a manufacturer of products, they are not entitled to using service tax credit for payment of service tax on transport services.

The question raised before the Tribunal is whether the service tax paid can be utilized for payment of service tax.

The Tribunal held that in the present case, the appellant is treated as a service provider when it pays service tax on transport service. Corollary of it is that the transport involved is an output service. Therefore, the finding of the Commissioner that since the appellants are manufacturers of excisable goods they cannot be treated as provider of output service is not sustainable.

The Tribunal also observed that a similar decision was delivered in the case of Nahar Industrial Enterprises Ltd.

However, we feel that the above decision delivered by the Hon'ble Tribunal is debatable. The corollary derived that the transport involved is an output service, too, is arguable.