The Customs, Excise & Service Tax Appellate Tribunal has delivered a definitive ruling that service tax on ocean freight under reverse charge cannot be levied on Indian importers when the service is entirely rendered outside India. This judgment reinforces constitutional limits on legislative overreach and aligns with the Supreme Court’s stance on the extraterritorial application of indirect taxes.
Background & Facts
The Dispute
The respondent, Netafim Irrigation India Pvt. Ltd., imported drip irrigation components and incurred ocean freight charges payable to foreign shipping lines under CIF contracts. Under Notification No. 15/2017-ST, the Department sought to impose service tax on the importer under reverse charge, arguing that the service was partially rendered in India and consumed domestically.
Procedural History
- 2019: Department issued show cause notice demanding Rs. 84.31 lakh in service tax, Swachh Bharat Cess, and Krishi Kalyan Cess under Section 73(1) and Section 74(1) of the Finance Act, 1994.
- 2020: Additional Commissioner confirmed the demand and imposed penalty under Section 78.
- 2020: Commissioner (Appeals) set aside the demand, relying on SAL Steel Limited v. Union of India.
- 2025: Department filed appeal before CESTAT, challenging the appellate order.
Relief Sought
The Department sought to restore the original demand and penalty. The respondent sought confirmation of the appellate order and dismissal of the appeal, citing binding precedents.
The Legal Issue
The central question was whether Section 66B of the Finance Act, 1994 permits the levy of service tax on ocean freight services under reverse charge when the entire service is provided outside India by a foreign service provider to a foreign shipping line, and the recipient is located in India.
Arguments Presented
For the Appellant
The Department contended that:
- The service was partially performed in Indian territorial waters, triggering taxability under Section 66B and the Place of Provision of Services Rules, 2012.
- The Supreme Court in GVK Industries and Glyph International affirmed Parliament’s power to tax extra-territorial acts with nexus to India.
- Gujarat Ambuja Cements and Mafatlal Industries established that legislative convenience in tax collection is beyond judicial review.
- The Gujarat High Court’s decision in SAL Steel was under appeal and could not bind the Tribunal.
For the Respondent
The respondent argued that:
- The ocean freight service was rendered entirely outside India by foreign entities; no service was provided within taxable territory.
- The reverse charge mechanism cannot be applied where the service provider is not located in India and no service is rendered within Indian territory.
- The Supreme Court in Union of India v. Mohit Mineral Pvt. Ltd. had already declared IGST on ocean freight unconstitutional, and the reasoning applied equally to service tax.
- CESTAT Delhi and Ahmedabad had consistently followed SAL Steel in similar cases.
The Court's Analysis
The Tribunal undertook a rigorous analysis of legislative competence, territorial nexus, and precedent. It emphasized that Section 66B authorizes taxation only where the place of provision of service is in the taxable territory. The Place of Provision of Services Rules, 2012, explicitly exclude services rendered entirely outside India from the scope of taxation.
"The service of ocean freight under CIF contracts is provided by a foreign shipping line from a port outside India to a port in India. The performance is complete upon arrival at the Indian port. No service is rendered within Indian territory by the foreign provider."
The Tribunal noted that the Department’s reliance on GVK Industries and Glyph International was misplaced, as those cases concerned legislative power to tax extraterritorial effects, not the provision of service. Here, the service was not provided in India at all.
It further held that the Supreme Court’s decision in Mohit Mineral - which struck down IGST on ocean freight as violative of Article 245 - was directly analogous. The reasoning that taxation without territorial nexus violates constitutional limits applied with equal force to service tax.
The Tribunal also rejected the Department’s argument that SAL Steel was sub judice, noting that the decision had been upheld by the Supreme Court in Kiri Dyes and Chemicals. The Tribunal was bound by the ratio of these decisions.
The Verdict
The respondent won. The Tribunal upheld the Commissioner (Appeals)’s order, holding that service tax on ocean freight under reverse charge is ultra vires Sections 64, 66B, 67 and 94 of the Finance Act, 1994 when the service is entirely rendered outside India. The appeal was dismissed.
What This Means For Similar Cases
Reverse Charge Cannot Apply to Foreign-Provided Services
- Practitioners must challenge any demand for service tax or GST on services rendered entirely abroad by foreign entities, even if the recipient is in India.
- The burden shifts to the department to prove actual provision of service within Indian territory.
Precedent from GST Regime Applies to Service Tax
- Mohit Mineral is not confined to GST; its constitutional reasoning governs all indirect taxes, including service tax.
- Any demand based on the same factual matrix (CIF contracts, foreign shipping lines) is legally unsustainable.
Administrative Convenience Does Not Override Constitutional Limits
- Arguments invoking Gujarat Ambuja Cements or Mafatlal Industries to justify tax collection at convenient points are invalid if there is no territorial nexus.
- Courts will not uphold taxation based solely on legislative convenience without a constitutionally valid connection to Indian territory.
