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Tax On Ocean Freight Services

Taxability of Ocean Freight services provided by Foreign Shipping Line to Foreign Exporter (Import on FOB contracts) has been a matter of debate since the Budget of 2016. Let us see the timeline, of how things went bad to ugly over the recent times.

The Finance Act, 2016 made Ocean Freight Services involving any Indian entity counterpart taxable, however, the insufficient amendments at the time left the services provided by a Foreign service provider (Foreign Shipping Line) to a Foreign service recipient (Foreign Exporter) exempted, by virtue of S. No. 34 (c) of Notification 25/2012-ST.
34.

Services received from a provider of service located in a non- taxable territory by –
(c) a person located in a non-taxable territory;
The bell rang at ministry on the 12/01/2017 and they removed the exemption, and casted the liability to discharge service tax on Ocean Freight services (provided by Foreign Shipping Line to Foreign Exporter), upon Person in Charge of the Vessel vide Rule 2 (1) (d) (EEC) of the Service Tax Rules, 1994 (‘the Rules’). The word face palm, was invented for this peculiar day.
“2 (1) (d) (EEC) in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods”
On 13/04/2017, the bell rang again, what followed was a flurry of changes. The liability was now shifted upon the importer, who was also given the option to pay tax as percentage of CIF Value.
“2 (1) (d) (EEC) in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the importer as defined under clause (26) of section 2 of the Customs Act, 1962 (52 of 1962) of such goods”
“6 (7CA) The person liable for paying service tax for the taxable services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, shall have the option to pay an amount calculated at the rate of 1.4% of the sum of cost, insurance and freight (CIF) value of such imported goods.”
If service tax was not enough, they brought GST. Section 5 (3) was incorporated under the IGST Act, 2017 to cover the Reverse Charge principles. Could they’ve been wrong this time?
Notification No. 10/2017-IT (Rate) was issued, on 28/06/2017, S. No. 10, very identical to the current Rule 2 (d) (EEC) of the Rules was introduced through which importer was again made liable to pay GST. However, the fault with making importer liable to pay GST is, unlike Section 68 of Finance Act, 1994 read with Rule 2 (1) (d) of the Rules which had the power to enforce reverse charge liability upon any person, Section 5 (3) of IGST Act, merely provides that reverse charge liability can be fastened upon only “recipient of goods and services or both”.


“68 (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 66B 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.”
“5 (3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Sl. No.Category of Supply of ServicesSupplier of serviceRecipient of Service
(1)(2)(3)(4)
10Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.A person located in non-taxable territoryImporter, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.

Conclusion: An Importer who has nothing to do with the service being carried out by Foreign Shipping Line for Foreign Exporter, therefore he cannot be shoved into the shoes of a recipient. Besides, Importer doesn’t fit into the definition of recipient as well, provided under section 2 (93), per clause (a) of which the recipient is clearly identifiable as the Foreign Exporter. Therefore S. No. 10, should be stuck down when challenged before the Courts.
Consequently, we are back to Zero. With S. No. 10 in violation of Section 5 (3), I am sure, the bell will ring again, but the problem is, the bell will be deemed to be rang on 28/06/2017.
(Disclaimer: This write up is based on the understanding and interpretation of authors and the same is not intended to be a professional advice.)
[For any query, get in touch at sahil.vsgca@gmail.com]

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