Bharat Petroleum Corporation Limited v. The Board of Trustees of the Port of Mumbai

15. Mr. Engineer submitted:- (a) The Way Leave Agreements are agreements that essentially provide permission to Petitioners to construct and maintain at its own cost oil and steam pipe lines subject to payment of licence fee. The agreements make it clear that the Mumbai Port Trust is not constructing or maintaining the pipe lines but only giving licence or permission to Petitioners to construct and maintain the pipe lines; (b) By the Amended Finance Act, 2001 dated 11th May, 2001 service tax on port services was introduced. The Finance Act, 2001 introduced 15 new services and for the first time in the definition of taxable service, the service provided to any person, by a port or any person authorized by the port, in relation to port services, in any manner was introduced and, port services have been defined as any service rendered by a port or any person authorized by the port, in any manner, in relation to a vessel or goods. The arrangement between Petitioners and Respondents cannot, by any stretch of imagination, be called a port service and therefore, will not fall within the definition of taxable service and hence, the question of charging any service tax does not arise;

(c) The relationship between Petitioners and Respondents would not fall within the services contemplated under Section 42 of the Major Port Trusts Act because Mumbai Port Trust is only charging a licence fee for giving permission to Petitioners to carry out construction/laying down of pipe line work on the Mumbai Port Trust’s land and, the compensation that Petitioners are paying to Respondents is also defined in the Way Leave Agreements as licence fee;

(d) Respondents have not undertaken any of the services referred to in Section 42 of the Major Port Trusts Act.

16. Learned amicus curiae Mr. Engineer, in effect, submitted that the stand of Petitioners is correct. The licence fees that Petitioners pay Respondents cannot attract any service tax because Respondents are not rendering any port service to Petitioners.

17. Ms. John for Petitioners adopted the submissions of Mr. Engineer. Ms. John further stated that after the Finance Act, 2010 came into force and as it provided for renting of any immovable property would also be a taxable service, and the Act provided for retrospective effect from 1st June, 2007, Petitioners have been, without prejudice to their rights and contentions, paying service tax from 1st June, 2007. Ms. John states that even that has been challenged in another Petition which is not before us.

18. Mr. Bhalwal appearing for Respondents submitted that: (a) The demand for service tax is in respect of the levy/storage charges payable by Petitioners in respect of the facility of storage and transportation of petroleum/oil products extended by Respondents and the said facility amounts to a taxable service as contemplated under Section 65(72) of the Finance Act, 1994 as amended by the Finance Act, 2001 and read with sub Section 42 of the Major Port Trusts Act, 1963; (b) As per Section 65(51) of the Finance Act, 1994 as amended by Finance Act, 2001, port services means any service rendered by a port or any person authorized by the port, in manner, in relation to a vessel or goods. Port Services as contemplated under Section 42 of the Major Port Trusts Act consists of port and port services and also includes storage services. Therefore, Respondents are justified and entitled to the payment of the service tax under the Way Leave Agreements on payments made by Petitioners under the Way Leave Agreements;

(c) So many companies have paid service tax, but it is only

19. In our opinion the Way Leave Agreements are agreements that essentially provide permission to Petitioners to construct and maintain at its own cost oil and steam pipe lines subject to payment of licence fee. The arrangement is clear that Mumbai Port Trust is not constructing or maintaining the pipe lines but is only giving a licence or permission to Petitioners to construct and maintain the pipe lines. The opening page of the Way Leave Agreement says “Way Leave Agreement for laying and maintaining four oil pipe lines and a steam pipe line at Wadi Bunder on the Elphinstone Estate”. The agreement provides as under:- …..WHEREAS by diverse Indentures of Lease the Company is seized and possessed of as a lessee the plots of land at Elphinstone Estate of the Trustees shown coloured pink on the plan hereto annexed AND WHEREAS the Company was desirous of laying and maintaining four oil pipe lines under an across other land and railway tracks belonging to the said Trustees' and an overhead steam pipe line over and across the said Trustees’ Railway as hereinafter more particularly described that is to as say (a) one underground 6" dia. mild steel oil pipe line……. (b) one underground 8" dia. mild steel oil pipe line……. (c) one underground 10" dia. mild steel oil pipe line……. (d) one underground 12" dia. mild steel oil pipe line…… (e) one overhead 4" steam pipe line……..

AND WHEREAS the Trustees have agreed to permit the said oil and steam pipe lines to be constructed and maintained subject to the payment of the Licence fee hereinafter reserved and the observance and performance by the Company of the terms and conditions hereinafter contained AND WHEREAS the company has constructed at its own costs in all respects the said pipe lines (hereinafter called the said said Pipe Lines") accordingly accordingly to the plans approved on behalf of the Trustees and in the positions as shown on the said plan…….

1. The Company shall and will as from the first day of September One Thousand Nine Hundred and Fifty Five and during the continuance of this Agreement pay in advance to the Trustees at the office of the Estate Manager the Licence fee of Rupees One Thousand Four Hundred and Four only per annum clear of all deductions on the first day of September of every year the first of such payments having become payable on the First day of September One Thousand Nine Hundred and Fifty Five in respect of the the year ending on the 31st day of August One Thousand Nine Hundred and Fifty Six provided that during the continuance of this Agreement the Trustees shall have the right on the expiry of every five years to revise the way leave fee in their absolute discretion.

2. The Company shall and will pay all rates, taxes, charges, assessments and outgoings now payable or hereafter to become payable in respect of the pipe lines or any part of the pipe lines.

3. …..

4. The Company shall and will at its own expenses maintain and keep the pipe lines or any trench in which the pipe lines may be laid for the time being and all works in relation thereto in good and substantial repair and conditions and in sound working order so that the pipe lines and trench shall be capable of carrying the heaviest wheel traffic likely in the opinion of the Trustees to come on to or pass over the same from time to time. The Company shall not open up or break the surface of any land or works belonging to the Trustees for the purpose of effecting repairs or renewals to the trench or pipe lines without first obtaining the consent in writing of the Trustees’ Chief Engineer and shall restore with the least delay any such land or works disturbed or damaged thereby to the satisfaction in all respects of the Trustees provided that any works necessary to the portion of any of the pipe lines pasing under over or in the immediate vicinity of the Trustees' Railway or underground services shall if the Trustees so desire, be carried out by the Trustees at the expense of the Company.

5. …..

6. …..

7. …..

8. This Agreement shall continue and be in force until determined by either party by giving two months' notice in writing so as to expire at the end of any calendar month and on the determination of this Agreement the company shall forthwith at its own costs discontinue such user and remove the pipe lines and fill in and restore the land and works to the Trustees and restore such parts thereof as may be disturbed or damaged by such removal to the satisfaction in all respect of the Trustees provided that in the event the company making default in complying with the said notice the Trustees may, if they so think fit, employ workmen and others and disconnect and/or remove the pipe lines and any trench in which the same may be laid and carry out the work of levelling and restoring the said land and work as aforesaid and the Company will on demand pay to the Trustees all costs, expenses and charges incurred thereby or in relation thereto AND PROVIDED FURTHER that in any event the Trustees may if they so desire carry out the work of such removal and restoration so far as it relates to the removal of such part of any of the pipe lines as may then be lying under or in the immediate vicinity of roads and rail-tracks or underground services and the restoration of such land works and in that event the Company shall and will on demand pay to the Trustees all costs expenses and charges incurred thereby or in relation thereto. The Company shall not be entitled to any compensation or damage in the event of the Trustees requiring it to remove the pipe lines or any of them and any trench as hereinbefore provided.

9. The user of the pipe lines shall be at the sole risk and at the sole responsibility of the Company and if at any time owing directly or indirectly to the existence of the pipe lines or the user thereof or of any negligence on the part of the Company any claim for damage or loss or otherwise shall be substantiated by any persons against the Trustees the Company (anything herein contained or done under the terms of these presents notwithstanding) shall forthwith upon demand pay and make good the same and will also make good to the Trustees all and singular the costs charges and expenses which they may have incurred in regard or with reference to or in connection with any such damage or any such claim as aforesaid. (Emphasis supplied)

20. Therefore the agreement is clear that:- (a) It was for leasing of plots of land at Elphinstone Estate of the Mumbai Port Trust where Petitioners were desirous of laying and maintaining four oil pipe lines under and across other land and railway tracks belonging to port and an overhead steam pipe line over and across the port’s Railway; (b) Respondents permitted Petitioners to construct and maintain the oil and steam pipe lines subject to payment of licence fee;

(c) Petitioners have constructed pipe lines at its own cost for which permission has been given by Respondents;

(d) The compensation payable was “licence fee in the sum mentioned in the said agreement every year in advance which licence fee shall be revised upwards after every 5 years”; (e) The agreement restricts payment of rates, taxes, charges, assessments and outgoings to be paid by Petitioners only in respect of the pipe lines or any part of the pipe lines; (f) Petitioners shall and will, at its own expenses, maintain and keep the pipe lines or any trench in which the pipe lines may be laid in good and substantial repair and conditions and in sound working order; (g) The agreement can be terminated any time by giving two months notice by either party and on the determination of the agreement Petitioners shall, at its own costs, discontinue the use of the pipe lines and remove the pipe lines and fill in and restore the land and works to the port to the satisfaction of Respondents; (h) If Petitioners fail to restore the land to the satisfaction of Respondents, Respondents may do what was required to be done by Petitioners and demand from Petitioners all costs, expenses and charges incurred thereby or in relation thereto;

(i) That, use of the pipe lines shall be at the sole risk and responsibility of Petitioners.

21. Admittedly as provided in the agreement, Respondents have been charging only an annual fixed fee from the time the agreement was entered into as late as upto 2001. Copies of the bills annexed to the Petition also indicate that these are fixed charges irrespective of whether any oil cargo passes through the pipe lines and irrespective of the quantity of the oil cargo that passes. The agreement also clearly indicates that pipe line laid was to be used for only Petitioners’ cargo and not for any third party. It is also not anybody’s case that Petitioners were charging any fee from any third party. Petitioners were using the pipe lines for passage of only its own cargo.

22. The above makes it clear that Respondents were only charging a licence fee for giving permissions to Petitioners to carry out construction/laying down of pipe line work on the port land and nothing else.

23. The concept of imposition of tax on services was introduced by Finance Act, 1994. By the Finance Act, 2001 that came into force on 11th May, 2001, service tax was introduced on 15 new services. Section 65(72) of Finance Act, 2001 defines taxable service. Clause (zn) of Section 65(72) provides for port services. Section 65(72)(zn) of the Finance Act, 2001 reads as under:- (72) “taxable service” means any service provided:- ……... (zn) to any person, by a port or any person authorised by the port, in relation to port services, in any manner; What is port services is defined under Section 65(51) and it provides as under:-

65. Definitions- In this Chapter, unless the context otherwise requires:- …….. (51) “port services” means any service rendered by a port or any person authorised by the port, in any manner, in relation to a vessel or goods;

24. Section 42 of the Major Port Trusts Act, 1963 sets out the services that Respondents can provide. Sub-section 1 of Section 42 of the Major Port Trusts Act, 1963 reads as under:- (1) A Board shall have power to undertake the following services - (a) landing, shipping or transhipping passengers and goods between vessels in the port and the wharves, piers, quays or docks belonging to or in the possession of the Board; (b) receiving, removing, shifting, transporting, storing or delivering goods brought within the Board’s premises;

(c) carrying passengers by rail or by other means within the limits of the port or port approaches, subject to such restrictions and conditions as the Central Government may think fit to impose;

(d) receiving and delivering, transporting and booking and despatching goods originating in the vessels, in the port and intended for carriage by the neighbouring railways, or vice versa, as a railway administration under the Indian Railways Act, 1890 (9 of 1890) (e) piloting, hauling, mooring, remooring, hooking, or measuring of vessels or any other service in respect of vessels; and (f) developing and providing, subject to the previous approval of the Central Government, infrastructure facilities for ports. Did Respondents render any services listed under Section 42 of the Major Port Trusts Act, 1963 to Petitioners? Answer is no. None of the service listed in Section 42 was being provided by Respondents to Petitioners. Though Respondents have relied upon Section 42 in the affidavit-in-reply, Respondents have not elaborated. Respondents simply say the said facility of storage/transportation of said petroleum/oil products amounts to a taxable service as contemplated under Section 65(72) of the Finance Act, 1994 as amended by the Finance Act, 2001 and read with the provisions of Section 42 of the Major Port Trusts Act, 1963. Elaboration was particularly necessary since the Way Leave Agreements provide for laying of pipe lines at the cost of Petitioners and maintenance by Petitioners of the pipelines. Even annual compensation payable was called licence fees. Further, the services provided for under Section 42 of the Major Port Trusts Act, 1963, Respondents levy and collect charges based on the Port-Scale of Rates, that later came to be approved by Tariff Authority for Major Ports (TAMP). The License Fees paid by Petitioners was not as per the Port Scale of Rates. Therefore, the nature of the Way Leave Agreements cannot be stated to be for Port Services under Section 42 of the Major Port Trusts Act,

1963.

25. Now let us examine whether the fee payable to Respondents under the Way Leave Agreements for granting permission to Petitioners to lay/construct and maintain its own pipe lines was for a port service defined under the Finance Act, 2001. The Hon’ble Apex Court in All India Federation of Tax Practitioners Vs. Union of India[1] held service tax is a value added tax. For Respondents to be entitled to levy service tax or become liable to pay any service tax to the Government of India, Respondents must render a service and to render a service it must do some activity which amounts to value addition. In our view, merely granting a licence/permission to a person to carry out construction of pipe lines or maintain its own pipe lines on land belonging to Respondents would not amount to a service or port service. In fact the Government of India in its circular dated 9th July, 2001 bearing No.F.No.B.11/1/2001-TRU has clarified as under:- Port services:

1. As per the section 65(51), the “port services” means any service rendered by a port or any person authorized by the port, in any manner, in relation to a vessel or goods. As per section 65(72)(zn), taxable service is any service provided to any person by a port or any person authorized by the port, in relation to port services, in any manner.

2. Port services generally consist of port and dock services (these are for services rendered in relation to vessels), cargo handling and storage services, railway haulage services, and container handling services (these are for services rendered in relation to goods). The Dock Labour Board of the Port provides service of labour for handling of goods. The port or the person authorised by the port rendering these services is the service provider. 2.[1] Some of the specific charges for the services rendered in respect of port services are as follows.

(i) Port and dock charges consisting of berthing and mooring charges, port dues, pilotage and towage, water supply charges, salvage and diver charges, anchorage fee;

(ii) Cargo handling and storage charges consisting of wharfage for general cargo, warehousing, charges, cranage charges, ore handling charges, wharfage on petroleum products, wighment charges for lorries, traffic appliance charges, weighment charges for goods; (iii)Railway haulage charges for rail-borne goods, local haulage and storage;

(iv) Container handling charges consisting of import, export and transhipment wharfage on containers, equipment charges for handling of containers, container storage charges;

(v) Labour charges.

2.[2] All these charges from part of taxable value of port services. Demurrage charges are recovered by port authority as a rental for storage of goods. The fact that these charges apply only if the goods overstay a prescribed free period, does not detract from their being in the nature of charge for providing aservice in relation to goods. Accordingly they would form part of taxable value. The Dock Labour Board is liable to pay service tax on the labour charges recovered by them. However, estate rentals of the port which is charged for renting of accommodation provided to outsiders and port users, lease rental for land, etc. will not be liable to service tax as these are not services rendered in relation to goods or vessels. For any other charge not mentioned above, the Commissioner may decide the inclusion/exclusion in the value of taxable service on merits.

26. The Government of India has itself clarified that estate rentals of the port which is charged for renting of accommodation provided to outsiders and port users, lease rental for land, etc. will not be liable to service tax as these are not services rendered in relation to goods or vessels. From the definition of port services it is clear that only a service rendered in relation to a vessel or goods can fall under the category of taxable service. By this notification, the Government of India itself has clarified that lease rental for land will not be liable to service tax because those are not services rendered in relation to goods or vessels. As stated earlier the amounts being collected under the Way Leave Agreement are nothing but licence fee for the permission given to Petitioners to lay their pipe lines. In order to charge service tax for such amounts Respondents must provide a service and for that it must do some activity which amounts to value addition. It is not Respondents’ case that pipe lines were either laid by Respondents or are being maintained by Respondents. In the case at hand, it is Petitioners who have laid the pipe lines and have been maintaining the pipe lines. The pipe lines also do not belong to Respondents because the agreement itself provides that on termination of the Way Leave Agreements Petitioners are bound to remove the pipe lines and restore the land at its own cost. Therefore, it cannot be stated that Respondents are providing port services under the Way Leave Agreement. Respondents are also not doing any activity which amounts to value addition.

27. A similar issue came up for consideration before the Apex Court in Commissioner of Central Excise, Bhavnagar Vs. M/s Gujarat Maritime Board, Jafrabad 2. The facts in that case involved payment of service tax on wharfage charges. Gujarat Maritime Board entered into an agreement dated 28th February 2000 with M/s. Ultratech Cement Ltd. (“UCL”) whereby a license was granted to UCL to build construct and use a jetty for landing of goods and raw materials manufactured by UCL in their cement factory which was situated close to the said jetty close to Pipapav Port. The Revenue Authorities issued show cause notice dated 6th March 2003 for undervaluation and short payment of service tax. It was alleged that service tax was payable on wharfage charges collected by Gujarat Maritime Board from UCL.

28. Ultimately the Supreme Court held that the agreement between the parties made it clear that it was the duty of the licensee, i.e., UCL to maintain the jetty in good order and condition during the tenure of the agreement. Further, it was UCL that was to provide all services at/or around the jetty including dredging, navigation, water supply, etc..

Therefore, it was clear that during the currency of the agreement it was not the Gujarat Maritime Board but the licensee who kept the said jetty in such condition that it is capable of enabling vessels to berth alongside it to load and unload goods. Hence, the Supreme Court observed that no service was being rendered by Gujarat Maritime Board to UCL under the agreement, and therefore the very first condition that must be met under the definition of "port service" was not met. The Court observed that though Gujarat Maritime Board was the owner of the jetty under the said agreement, yet for providing the service of allowing a vessel to berth at the said jetty, it was necessary for Gujarat Maritime Board itself to keep the said jetty in good order. Wharfage charges were collectible because they were in the nature of fees for services rendered. The expenses that were defrayed by the Board for the maintenance of the jetty was sought to be collected as wharfage charges. This amount would necessarily include all amounts that are spent for keeping the said jetty in good condition including dredging so that vessels can berth alongside the jetty. As far as jetties operated by the Board were concerned, the Board itself defrays such expenses. It was only in cases where the jetty was primarily meant for loading and unloading goods belonging to a particular private party that repair and maintenance expenses were to be borne by the private party and not by the Board. In this circumstance, the Court observed that there was no service being rendered by Gujarat Maritime Board to UCL.

29. With respect to the argument that in any case UCL was a person authorised by Gujarat Maritime Board within the definition of "port service" and the section would be attracted as wharfage charges are a payment for services rendered in relation to a vessel or goods, was not accepted by the Court. Under Sections 32(3) and (4) of the Gujarat Maritime Board Act which is pari materia with the Major Port Trusts Act, 1963, it was observed that as the Gujarat Maritime Board itself charges or recovers wharfage charges from the licensee and does not authorise the licensee to recover such charges from other persons, it was clear that no service was rendered by a port or by any person authorised by such port and, therefore, the very first condition for levy of service tax was absent. Paragraph Nos.10, 11, 12 and 14 of Commissioner of Central Excise, Bhavnagar (supra) read as under:-

10. A reading of the agreement as a whole would lead to the following conclusions:

Section 35 of the Gujarat Maritime Board Act under which a licence or permission for construction and use of a captive jetty in Pipavav Port is entered into on a Build, Transfer, Operate and Maintain basis on certain conditions.

I. It is the licensee UCL that will provide all services at or around the jetty including dredging, navigation, etc. and if this is not done then the Board may on its own provide such facilities at the risk and cost of the licensee UCL. J. The licence is terminable on breach of the terms and conditions of the agreement or of any infraction of law. Upon such termination, the Board shall be entitled to take control or otherwise dispose of all or any part of the jetty that may have been constructed.

11. The question which arises on a reading of the said agreement is, therefore, whether any service is rendered by GMB or by any person authorized by GMB in relation to a vessel or goods. The agreement makes it clear that it is the duty of the licensee, i.e., UCL to maintain the jetty in good order and condition during the tenure of the agreement. (See: clauses 15 and 16 set out above). Further, it is UCL that is to provide all services at or around the jetty including dredging, navigation, water supply etc. (See: clause 28 of the agreement). This makes it clear that during the currency of the agreement it is not the Board but the Licensee who keeps the said jetty in such condition that it is capable of enabling vessels to berth alongside it to load and unload goods. This being the position, we agree with Shri Tripathi, learned senior counsel on behalf of GMB that no service is rendered by GMB to UCL under the agreement. The agreement makes it clear that it is an agreement entered into under Section 35 of the GMB Act allowing the licensee - UCL to construct a jetty and thereafter maintain it at its own cost. We may add that the rebate in wharfage charges of 80% is a condition imposed statutorily under Section 35 of the said Act. To say that it is in the nature of lease rent or licence fee, would not be correct inasmuch as a separate licence fee is payable under the agreement. (See: clause 3 of the agreement). To that extent we agree with Shri Adhyaru, learned senior advocate appearing on behalf of revenue that the CESTAT does not seem to be correct in this behalf. But this would make no difference to the result of this case inasmuch as the very first condition that must be met under the definition of “port service” is not met on the facts of the present case.

12. Shri Adhyaru argued relying upon the definition of “wharf” and “wharfage” in Black’s Law Dictionary, Seventh Edition that all that is necessary is that a wharf be provided by the Board. The very provision of such wharf would entitle the Board to levy a fee which is nothing other than wharfage charges collected under the Schedule of rates mentioned hereinabove. To appreciate this argument we set out the definition of ‘wharf’ and ‘wharfage’ from Black’s Law Dictionary as under:- Wharf. A structure on the shores of navigable waters, to which a vessel can be brought for loading or unloading. Private wharf. One that can be used only by its owner or lessee. Public wharf. One that can be used by the public. Wharfage. 1 The fee paid for landing, loading, or unloading goods on a wharf. 2 The accommodation for loading or unloading goods on a wharf. We are afraid that we are unable to agree with Shri Adhyaru for the reason that though GMB is the owner of the jetty under the said agreement, yet for providing the service of allowing a vessel to berth at the said jetty, it is necessary for GMB itself to keep the said jetty in good order. Wharfage charges are collectible because they are in the nature of fees for services rendered. The expenses that are defrayed by the Board for the maintenance of the jetty is sought to be collected as wharfage charges. This amount would necessarily include all amounts that are spent for keeping the said jetty in good condition including dredging so that vessels can berth alongside the jetty. It is clear that so far as jetties operated by the Board are concerned, the Board itself defrays such expenses. It is only in cases like the present where the jetty is primarily meant for loading and unloading goods belonging to a particular private party that repair and maintenance expenses are to be borne by the private party and not by the Board. It is in this circumstance that we find that there is no service, therefore, rendered by GMB to UCL.

13. …….

14. …... So far as the direct berthing facilities provided for captive cargo is concerned, the lease rent charged for use of the waterfront also does not include any service in relation to a vessel or goods and cannot be described as “port service”….

30. Therefore it is apparent that where a private party itself is constructing and maintaining a facility on land belonging to port authority the mere grant of permission by the port authority to use its land for the construction and maintainance of the facility does not amount to rendering any port service and therefore would not attract service tax.

31. The Way Leave Agreements cannot be said to fall under any other category of service that was taxable at the relevant time, i.e., the period between 16th July 2001 and 1st March 2002. In this relation, it is pertinent to note that by the Finance Act, 2010, which came into operation with effect from 1st June 2007, Section 65 (105) (zzzz) was introduced into the Finance Act of 1994 by which even the “renting of immovable property” came to be included as a service. We are informed Petitioners have challenged this Finance Act, 2010 amendment.

32. We thus make the Rule granted on 16th December, 2003 absolute. Petition disposed. No order as to costs. (A. S. DOCTOR, J.) (K. R. SHRIRAM, J.)