The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai has definitively held that the hiring of dredgers and vessels under bareboat charter agreements, where full possession and effective control are transferred to the charterer, does not constitute a taxable service under the 'supply of tangible goods' category. This ruling resolves a long-standing dispute over the taxability of offshore equipment leasing and reinforces the principle that contractual terms determining control are decisive in tax classification.
Background & Facts
The Dispute
The appellant, International Seaport Dredging Pvt. Ltd., is engaged in dredging and reclamation of seaports. It hires dredgers and vessels from non-resident owners under two Standard Bareboat Charter Agreements. The Department of Service Tax issued three Statements of Demand (SODs) dated 03.10.2013, 15.09.2014, and 31.08.2015, covering the period October 2011 to September 2014. These notices alleged that the hiring of vessels from foreign owners constituted a supply of tangible goods service, attracting service tax on reverse charge basis under Section 66A of the Finance Act, 1994.
Key Facts
- The appellant entered into bareboat charter agreements with foreign vessel owners, predominantly between 2011 and 2014.
- Under the charter agreements, the appellant assumed full operational control, including:
- Appointment and payment of master, crew, and officers
- Maintenance, repair, and provisioning of vessels
- Payment of fuel, lubricants, insurance, and all operational expenses
- Compliance with maritime regulations and safety standards
- The charterers were required to redeliver the vessels in good condition at the end of the term.
- The owner retained legal title but had no operational involvement.
- The SODs relied on the same factual premise as earlier proceedings adjudicated in 2013 (OIO No. 729/2013).
Procedural History
- 03.10.2013: First SOD issued for period October 2011 - September 2012
- 15.09.2014: Second SOD issued for period October 2012 - September 2013
- 31.08.2015: Third SOD issued for period October 2013 - September 2014
- 25.01.2017: Commissioner of Service Tax, Chennai, passed impugned order confirming demand of service tax, interest, and penalty
- 2018: CESTAT Madras Bench allowed a prior appeal by the appellant in International Seaport Dredging Ltd. v. Commissioner of Service Tax, Chennai, 2018 (12) GSTL 185 (Tri.-Mad.), holding that bareboat charter transfers possession and control and is outside the scope of taxable service
- 23.01.2026: Hearing before CESTAT Chennai Regional Bench
- 28.04.2026: Final order passed in the present appeal
The Parties' Positions
For the Appellant
- Relied on the final and binding decision of CESTAT Madras in its own case (2018), which held that bareboat charters involve transfer of possession and control.
- Cited Great Eastern Shipping Co. Ltd. v. State of Karnataka (2004) 136 STC 519 (Kar.), affirmed by the Supreme Court in 2020 (32) GSTL 3 (SC).
- Relied on Commissioner of Central Tax v. Shelf Drilling F.G. McClintock Ltd. (2023) 12 Centax 2 (SC), which held that offshore drilling units under bareboat charter are not taxable under 'declared service'.
- Cited multiple CESTAT rulings from Madras, Mumbai, and Bombay Benches consistently holding that bareboat charters are excluded from 'supply of tangible goods'.
- Argued that restrictions on use (e.g., dredging only, no sub-leasing without consent) do not negate transfer of control.
For the Respondent
- Reiterated the Adjudicating Authority’s finding that there was no transfer of possession or effective control.
- Contended that the vessel owners retained control through contractual restrictions and technical oversight.
- Did not challenge the prior CESTAT decision in the appellant’s favor, nor did it present new evidence or legal arguments.
Relief Sought
The appellant sought:
- Setting aside of the impugned order dated 25.01.2017
- Cancellation of service tax demand, interest, and penalties for the period October 2011 to September 2014
- Declaration that the bareboat charter arrangements are not taxable under 'supply of tangible goods service'
The Legal Issue
The central question was whether the hiring of vessels under a bareboat charter, where the charterer assumes full possession, control, maintenance, and operational responsibility, constitutes a taxable 'supply of tangible goods service' under Section 65(105)(zzzzj) of the Finance Act, 1994, or whether it falls within the exclusionary clause for transactions involving transfer of possession and effective control.
Arguments Presented
For the Appellant
The appellant argued that the bareboat charter agreements clearly transferred legal possession and effective control of the vessels, as defined in Black’s Law Dictionary and affirmed by the Supreme Court in Shelf Drilling and Great Eastern Shipping. The charterers, not the owners, employed the crew, paid for fuel, insurance, repairs, and compliance costs. The Tribunal in Petronet LNG Ltd. had previously held that even where owners retained minor administrative functions, the reality of control lay with the charterer. The appellant emphasized that the prior CESTAT decision in its own case had attained finality and could not be disregarded by the same authority without new facts.
For the Respondent
The Respondent did not advance any new legal or factual arguments. It merely reiterated the Adjudicating Authority’s conclusion that the arrangement did not involve transfer of possession or control, despite the explicit terms of the charter agreements. No appeal was filed against the 2018 CESTAT Madras decision, and no evidence was presented to distinguish the current transactions from those previously adjudicated.
The Court's Analysis
The Tribunal conducted a detailed examination of the bareboat charter agreements and applied the legal principles established in binding precedents. It emphasized that the key determinant under Section 65(105)(zzzzj) is whether there is a transfer of 'right of possession and effective control'. The exclusion clause applies precisely when such transfer occurs.
"The charter talks about delivery of vessel to be taken over by the appellant at the designated place. After due survey and inventory, the vessel is to be delivered to the appellant... The vessel shall during the charter period be in full possession and at the absolute control for all purposes of the charterers and under their complete control in every respect."
The Tribunal noted that the appellant bore all operational costs, employed the crew, maintained the vessels, and bore liability for damages and regulatory compliance. These factors, the Tribunal held, were not incidental but central to the arrangement.
The Court distinguished time charters, where the owner retains operational control, from bareboat charters, where the charterer assumes the role of an owner pro hac vice. Citing Black’s Law Dictionary, the Tribunal affirmed that a bareboat charter is analogous to leasing a car or renting a house - the lessee operates the asset as if it were their own.
The Tribunal further held that restrictions on use (e.g., dredging only, no sub-leasing) are commercially reasonable and do not negate the transfer of control. The Supreme Court in Great Eastern Shipping had already rejected the argument that such restrictions render the transaction taxable.
The Tribunal also emphasized the principle of res judicata and finality of decisions. Since the 2018 CESTAT Madras decision in the appellant’s own case was unchallenged and binding, the Department could not re-litigate the same issue with identical facts. The Court cited CCE, Mumbai v. Bigen Industries Ltd. and Jayswals Neco Ltd. v. CCE, Nagpur to reinforce that once a legal position is settled between parties, it cannot be reopened absent fraud or new evidence.
The Verdict
The appeal was allowed. The Tribunal set aside the impugned order dated 25.01.2017. The service tax demand, interest, and penalties imposed for the period October 2011 to September 2014 were cancelled. The Tribunal held that the bareboat charter arrangements did not constitute a taxable 'supply of tangible goods service' under Section 65(105)(zzzzj) of the Finance Act, 1994, as there was clear transfer of possession and effective control to the appellant.
What This Means For Similar Cases
Bareboat Charters Are Exempt from Service Tax
- Practitioners can now confidently argue that any bareboat charter involving transfer of operational control - whether for dredgers, offshore rigs, or cargo vessels - is outside the scope of service tax under 'supply of tangible goods'.
- The burden is on the tax authority to prove that control was retained by the owner; mere contractual restrictions are insufficient.
Finality of Tribunal Decisions Is Binding
- A CESTAT ruling in favor of a taxpayer on identical facts and legal issues cannot be reopened by the same or another bench unless new evidence emerges.
- Tax authorities must file appeals within the limitation period; failure to do so renders the decision final and binding under res judicata.
Precedents from Other Benches Are Persuasive
- Decisions from CESTAT Madras, Mumbai, and Bombay, as well as Supreme Court rulings in Great Eastern Shipping and Shelf Drilling, form a consistent body of law.
- Practitioners should cite these precedents collectively to reinforce arguments in pending cases.
Operational Control Trumps Legal Title
- Tax liability hinges on economic reality, not legal ownership.
- Where the charterer employs crew, pays for maintenance, fuel, insurance, and regulatory compliance, the transaction is a transfer of control, not a service.
Documentation Is Critical
- Charter agreements must clearly specify the transfer of possession, control, and operational responsibilities.
- Invoices, payment records, crew payroll, and maintenance logs should corroborate the contractual terms to withstand scrutiny.
