COMMR. OF CENTRAL EXCISE, BHAVNAGAR vs. M/S GUJARAT MARITIME BOARD,JAFRABAD

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS.3347-3348 OF 2014 COMMISSIONER OF CENTRAL EXCISE, BHAVNAGAR …APPELLANT VERSUS M/S GUJARAT MARITIME BOARD, JAFRABAD ...RESPONDENT J U D G M E N T R.F. Nariman, J. 1. The issue raised in the present civil appeals is with JUDGMENT regard to service tax payable on wharfage charges. The respondent - M/s Gujarat Maritime Board (hereinafter referred to as “GMB”) is a statutory body constituted under the Gujarat Maritime Board Act, 1981 (hereinafter referred to as “GMB Act”). This authority administers and operates minor ports in the State of Gujarat. GMB entered into an agreement dated 28.2.2000 with Larsen & 1 Page 1 Toubro which ultimately became M/s Ultratech Cement Limited (hereinafter referred to as “UCL”) whereby a licence was granted to UCL to construct and use a jetty

UCL in their cement factory which was situate close to the said jetty at Pipavav port. As the true construction of this agreement is the bone of contention between the parties, we will refer to it in a little detail hereafter. 2. It is alleged that service tax was payable on wharfage charges by GMB collected by them from their licensee UCL under the taxable category of “port services”. The revenue authorities initiated investigation against GMB for under-valuation and short payment of JUDGMENT service tax. Ultimately, a show cause notice dated 6.3.2009 was issued to collect 80% of service tax payable on wharfage charges which was not paid by the assessee. This was for the period 1.10.2003 to 31.3.2006, the differential amount being a sum of Rs.1,67,45,620/-. A further amount of Rs.12,53,076/- was also demanded for the period 2003 October upto 2 Page 2 2007-2008 on account of the provision of direct berthing facilities provided for captive cargo of a ship size of 10,000 DWT and above on account of lease rent for use

16.7.2009, the Commissioner, Central Excise held that it is clear that the nature of service provided, which is wharfage, is squarely covered under the head “port services” as defined in the Finance Act, 1994. The amount of rebate/concession granted in wharfage charges amounting to 80% allowed to the licensee should, therefore, be included for purposes of calculation of service tax. Equally, the amount that was demanded on account of lease rent for waterfront usage was also JUDGMENT confirmed, together with interest and penalty, which was imposed on the assessee. 3. In appeal from this order, CESTAT by its judgment dated 1.8.2013 reversed the Commissioner’s order holding that no service at all was rendered by the Gujarat Maritime Board in relation to any vessel and, therefore, no amount was payable by way of service tax. Equally, on 3 Page 3 an analysis of the agreement between GMB and UCL, it was held that 20% of wharfage charges which was payable under the agreement was really payable as

of the nature of licence fee/rental and not being of the nature of payment for services rendered would equally render the payment bad in law. 4. Shri Yashank Adhyaru, learned senior advocate appearing on behalf of the revenue has taken us through the Gujarat Maritime Board Act and the Finance Act, 1994. It is his contention that on a conjoint reading of the two Acts and in particular Section 37 of the Gujarat Maritime Board Act and Section 65(82) of the Finance JUDGMENT Act, 1994, it is clear on a correct reading of the agreement between GMB and UCL that service was rendered by GMB as owner of the jetty, the service being the provision of a space for landing of goods from vessels which are allowed to berth there. As an alternative argument, on a correct reading of the agreement, it was also argued that GMB had authorized UCL to render the 4 Page 4 service of wharfage and since what was collected was actual wharfage charges in accordance with the schedule of rates prescribed under the Gujarat Maritime Board Act,

from vessels on the said jetty. It was further argued by learned counsel that the reason why only 20% of the wharfage charges was collected and not the entire amount was a pure internal arrangement between GMB and UCL with which revenue is not concerned. He further assailed the findings of the Tribunal stating that the finding that the ownership of the jetty vests in UCL is contrary to the agreement between the parties and that 20% of wharfage levied and collected cannot be said to JUDGMENT be rental or licence fee but is wharfage charges collected under the GMB Act for the service of allowing goods to be landed at the said jetty. According to learned counsel, the Gujarat Maritime Board was the owner and in control of the said jetty throughout the term of the agreement and all findings to the contrary by the Tribunal were incorrect. 5 Page 5 5. Shri P.P. Tripathi, learned senior advocate appearing for the respondent countered all the aforesaid submissions and supported the Tribunal judgment.

tax was absent in the present case as there is no service rendered of any kind by his client the respondent on the facts of the present case to UCL nor has UCL been authorized by GMB to render any service mentioned in Section 37 of the Act and that, therefore, the authority to levy service tax was absent. He also argued that the 20% of wharfage charges that was paid under the agreement was really only a measure to calculate what is in fact payable as licence fee and that, therefore, the agreement JUDGMENT read as a whole would lead to the conclusion that no service was in fact rendered by the respondent and, therefore, no service tax could be collected. 6. It is important first to advert to the Finance Act, 1994 under which the charge is laid for service tax. Section 65(82) defines “port service” as under:- 6 Page 6 “Port service” means any service rendered by a port or other port or any person authorized by such port or other port, in any manner in relation to a vessel or goods;”

(zn) which reads as follows:- “Taxable service” means any service provided or to be provided- “(zn) to any person, by a port or any person authorized by the port, in relation to port services, in any manner;” Further, under Section 67 of the said Act, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him. JUDGMENT 8. The relevant provisions of the Gujarat Maritime Board Act are as follows:- “35. Power to permit erection of private wharves, etc. within a port subject to conditions: (1) No person shall make, erect or fix within the limits of a port or port approaches any wharf, dock, quay, stage, jetty, pier, place of 7 Page 7 anchorage, erection or mooring or undertake any reclamation of foreshore within the said limits except with the previous permission in writing of the Board and subject to such conditions, if any, as the Board may specify.

37. Scales of rates for services performed by Board or other person:- (1) The Board shall from time to time frame a scale of rates at which and a statement of the conditions under which any of the services specified hereunder (except the State charges) shall be performed by itself or any person authorized under Section 32 at or in relation to the port or port approaches- JUDGMENT (a) transshipping of passengers or goods between vessels in the port or port approaches; (b) stevedoring, landing and shipping of passengers or goods from or to such vessels, to or from any wharf, quay jetty, pier, dock, berth mooring stage, or erection, land or building in the possession or occupation of the 8 Page 8 Board or at any place within the limits of the port or port approaches; (c) cranage or porterage of goods on any such place;

(e) any other service in respect of vessels, passengers or goods excepting the services in respect of vessels for which fees are chargeable under the Indian Port Act, 1908 (15 of 1908). (2) Different scales of rates and conditions may be framed for different classes of goods and vessels and for different ports. 32. Performance of services by Board or other person:- 1) The Board shall have power to undertake the following services:- (a) stevedoring, landing, shipping or transshipping passengers and goods between vessels in port and the wharves, piers, quays, or docks belonging to or in the possession of the Board; JUDGMENT (b) receiving, removing, shifting, transporting, storing or delivering goods brought within the Board’s premises; (c) carrying passengers within the limits of the port approaches, by such means and subject to such restrictions and conditions as 9 Page 9 the State Government may think fit to impose; and

(3) Notwithstanding anything contained in this section, the Board may authorize any person to perform any of the services mentioned in sub-section (1) on such terms and conditions as may be agreed upon. (4) No person authorized under sub-section (3) shall charge or recover for such service any sum in excess of the amount leviable according to the scale framed under Section 37, 38 or 40. JUDGMENT (5) Any such person shall, if so required by the owner perform in respect of the goods any of the services and for that purpose take charge of the goods and give a receipt in such form as the Board may specify. (6) The responsibility of any such person for the loss, destruction or deterioration of goods of which he has taken charge shall, subject to the other provisions of this Act, be that of a bailee under Section 151, 152 and 161 of the Indian Contract Act, 1872 (IX of 1872). 10 Page 10

9. Since a large part of the arguments on both sides revolved around the agreement dated 28.2.2000, between GMB and UCL, it would be important to advert to the various provisions of the agreement. The agreement begins as follows: “THE ARTICLES OF AGREEMENT made at th Gandhinagar on this day 28 February, two thousand between the GUJARAT MARITIME BOARD, a Board constituted under the Gujarat Maritime Board Act, 1981 – (Gujarat Act No.XXX of 1981) having its office at Opp. Air force station, ‘Chh’ Road, Sector No.10-A, Gandhinagar, hereinafter referred to as the “BOARD” (which expression shall unless it be repugnant to the context or meaning thereof mean and include its successors and assigns) of the one part and Larsen & Toubro Limited having its Registered Office at L&T House, Ballard Estate, Mumbai – 21, hereinafter referred to as the “LICENSEE’ (which expression shall unless it be repugnant to the JUDGMENT 11 Page 11 context or meaning thereof mean and include its successors and assigns) of the other part;

AND WHEREAS the Board and the Licensee have already entered into License agreement which is modified and this license Agreement in modification of previous Agreement is entered into by and between the Board and the Licensee as appearing hereinafter; AND WHEREAS in consideration of the Licensee constructing a Captive jetty as aforesaid at its cost initially to be adjusted against the Rebate, that may be granted by the Board, the Board as empowered under Section 35 of the Gujarat Maritime Board Act, 1981 granted to the Licensee a license or permission for construction/use of the captive Jetty on the said port at the place aligned, demarcated, provided and approved by the Board upon the terms and conditions specified herein on Build, transfer, Operate and Maintain basis; JUDGMENT NOW IT IS AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: 12 Page 12

2. The Board has granted permission to the licensee for continuing with construction and use of the Captive Jetty at the site demarcated on the plan, a layout of which has been annexed to this agreement. 3. The Licensee shall pay and continue to pay for the license granted under this Agreement a license fee of Rs.10,000/- (Rupees Ten Thousand only) per annum to the Board regularly on or before the 30th day of April every year during the currency of this agreement. JUDGMENT 12. The ownership of the structure so constructed vests in the Board and the Licensee shall have no right, title, interest or other proprietary right in respect of such structure or in respect of the land on which the structure is constructed, it being specifically understood that water-front is the sovereign right of the Government. 13 Page 13

PROVIDED that and it is agreed that the cost can be divided for the purpose of obtaining finance for the Jetty construction, it being, however, clearly understood that the water-front is a sovereign right of Government and the right of the Licensee is limited only for the purpose of mortgage or hypothecation to the extent of investment made by it and its right to concur in the event of transfer or take over of the entire project to which the Jetty is attached, subject, however, to the prior approval of the Board for transfer of license. The Licensee shall not be allowed to transfer the jetty separately as the same is directly connected to the project to which the Captive Jetty is allowed to be constructed. PROVIDED further that whatever rebate and concession is granted by the Board against the cost of construction, the equivalent amount at the relevant time shall be utilized by the Licensee in repayment of loan so that at the end of the period of this agreement when the Licensee may not have right of rebate under this agreement, then the construction is free of any liability in respect of such loan. JUDGMENT PROVIDED further that the Bank or financial institution granting loan to the licensee shall not have any right against the Board. 14 Page 14

15. The Board may, in order to decide the safety of the structure or for any other purpose, carry out inspection every six months from the date of issue of the Completion Certificate. The Licensee shall carry out maintenance and repairs to the structure at its own cost, whenever so directed by the Board upon inspection. No alteration or extension of the Jetty shall be done without prior permission of the Board in writing PROVIDED that this clause shall not preclude the Board from carrying out inspection at any time, instead of every six months. JUDGMENT 16. The Licensee shall at its own cost repair and maintain the jetty in good order and condition to the satisfaction of the Board during the tenure of this agreement and on the failure of the Licensee to do so, the Board shall be entitled, but not bound, to do so at the cost of licensee. This condition however, does not entitle the Licensee to refrain from carrying out repair or maintain the Jetty in good order and condition and it is further 15 Page 15 agreed that non-performance by Licensee shall be considered as a breach of condition of this agreement.

18. It is agreed that subject to the priority right of the Licensee for user of Jetty under the preceding clause, it is further agreed that the Jetty shall when the same is not in use by the Licensee, be open to use by the Board for itself or for the traffic being regulated by the Board for the purpose of embarking or disembarking their ships, boats, tugs, etc. and for loading and discharging cargo. The Licensee or its Agents shall not by any act of commission or omission, restrict the use of the Jetty and back up area by the Board except when it is actually used by the Licensee for the purpose provided for in this agreement. JUDGMENT PROVIDED that this clause shall not be construed to mean that Licensee has any ownership or transferable right in the property and the Licensee is not entitled to levy any charges or compensation from the Board. 16 Page 16

A. The Licensee shall have to pay landing/shipping fees (popularly known as wharfage charges) @ 20% of the actual landing and shipping fees specified in the Schedule of Port Charges prescribed for Captive Jetty. The landing and shipping fees shall be calculated for this purpose as per the schedule of landing and shipping fees, as may be revised or amended from time to time. This concession shall be called 'REBATE' and it will be set off as aforesaid against the Capital Investment (cost of construction as mentioned in Clause 24) made by the Captive Jetty holder, and the same shall be calculated in a prescribed format. Once the Capital Investment is recovered through the Rebate, the Captive Jetty holder shall have to pay thereafter, landing and shipping fees at the normal rate as per the Schedule of Port Charges in force from time to time prescribed for captive jetty. JUDGMENT B. The Licensee shall also be entitled, as in the normal case to a concession in payment of landing/shipping fees for coastal transportation of the cargo from one port under the Board to another port under the 17 Page 17 Board @ 25% and from one port under the Board to another Indian Port or vice-versa @ 15% or at the rate as may be applicable from time to time.

25. In case the direct berthing facilities provided for captive cargo (ship size calling at jetty of 10,000 DWT and above) an amount of Rs.25.00 Lakhs (Rupees Twenty Five Lakhs only) per annum will be charged as lease rent for waterfront and way leave facility compensation. 28. The Licensee shall provide all the services at or around the Jetty including dredging, navigation, water supply, fire fighting equipments, electricity, telephone, Very High Frequency (VHF) sets of HF sets and such other services and facilities which may be required at or around the Jetty and also such other services and facilities which the Board may require the Licensee to keep available at or around the Jetty. If the Licensee does not provide all or any of the aforesaid facilities, the Board may at its own discretion provide such facilities at the cost and risk of the Licensee and shall recover such costs from the Licensee. The decision of the Board regarding the amount of cost incurred for such services shall be treated as final. JUDGMENT 34. If the Licensee commits breach of any of the terms and conditions of this agreement or of any Rules, Regulations or Notifications as 18 Page 18

JUDGMENT 36. The agreement shall remain in force for a period of twenty five years or till such time 19 Page 19 as the aggregate of ‘REBATE’ availed off by the party equals the amount of the construction of the Jetty whichever is earlier from the date of commissioning of Jetty.

It is agreed and understood by the Licensee that out of the terms ‘Jetty’ the terms applicable for the purpose of this Agreement may be retained in this Agreement and other words/terms not applicable may be deleted.” 10. A reading of the agreement as a whole would lead to the following conclusions: JUDGMENT A. The agreement is a licence agreement entered into under 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. 20 Page 20 B. A licence fee of Rs.10,000/- per annum is payable by the licensee to the Board for the

constructed and the waterfront. D. The jetty is constructed for the project to which it is attached, namely, the cement factory of UCL. The licence granted to UCL is, therefore, a non-transferable one. E. The Board is entitled to carry out inspection every six months so that it can direct the licensee to maintain and repair the structure at its own cost, maintenance of the said jetty in good order and condition being that of the licensee alone, a breach JUDGMENT of which is considered as a breach of the agreement. F. The jetty is to be used mainly for the goods of the licensee and when not in use by the licensee can be used by the Board itself. G. That in consideration of the licensee constructing the jetty at its own cost, the Board has agreed to grant rebate to be adjusted against the 21 Page 21 cost of construction of the jetty by paying 20% of wharfage charges specified in the schedule of charges prescribed for captive jetties. This

against the cost of construction of the said jetty. Once the entire cost of construction is recovered through the rebate, the licensee will have to pay thereafter wharfage charges at the full rate prescribed in the schedule of port charges for captive jetties. H. For direct berthing facilities provided for captive cargo in ships which call at the jetty of 10,000 DWT and above, an amount of Rs.25,00,000/- will be charged as lease rent for JUDGMENT waterfront use. 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 22 Page 22 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

from the date of commissioning of the jetty or such time as the rebate availed of by the party equals the construction cost of the jetty whichever date is earlier. However, even after the rebate and the construction cost square off, the licensee will be allowed to use the jetty for captive purposes subject to full payment of wharfage charges so long as the project of the licensee – i.e. the cement plant of the licensee continues to function. JUDGMENT 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 23 Page 23 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

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 JUDGMENT 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). 24 Page 24 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

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 JUDGMENT 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. 25 Page 25 Public wharf . One that can be used by the public.

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 JUDGMENT 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 26 Page 26 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

is no service, therefore, rendered by GMB to UCL. 13. The other limb of Shri Adhyaru’s argument is that in any case UCL is a person authorized by GMB within the definition of “port service” and that, therefore, in any case the Section would be attracted as there is no doubt that wharfage charges are a payment for services rendered in relation to a vessel or goods. 14. As can be seen from Section 32 sub-sections (3) and (4), the Board may authorize any person to perform JUDGMENT any of the services mentioned in sub-section (1) of the said Section which includes landing of goods at wharves. We asked Shri Adhyaru to show us where such authority is given and his reply was only that it was given under the self-same agreement referred to hereinabove. We are afraid that we are unable to agree with Shri Adhyaru. The authority given to perform any of the services must first 27 Page 27 and foremost be under terms and conditions as may be agreed upon by the Board and the private person. Further, under sub-Section (4) of Section 32, it is the

recover any sum in respect of such service rendered. This is conspicuously absent in the aforesaid agreement. There is no doubt on a reading of the agreement that it is the Board itself that charges or recovers wharfage charges from the licensee - UCL and does not authorize UCL to recover such charges from other persons. This being the position, it is clear that no service is rendered by a port or by any person authorized by such port and, therefore, the very first condition for levy of service tax is JUDGMENT absent on the facts of the present case. 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”. This being so, it is unnecessary to go into any of the other contentions raised by both parties. To the 28 Page 28 extent that the impugned judgment is in conformity with our judgment, it is upheld. The appeals of the revenue are, therefore, dismissed accordingly. ……………………J. (A.K. Sikri) ……………………J. (R.F. Nariman) New Delhi; July 22, 2015 JUDGMENT 29 Page 29