Supply of Water to Vessels Within Port Area Taxable as ‘Port Service’ Prior to July 2010: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has held that the supply of fresh water to vessels within a port area constitutes a taxable “port service” under the Finance Act, 1994, and is liable to service tax for the period prior to 1 July 2010. The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh (Technical Member) has observed that charges recovered by the appellant included multiple elements beyond the cost of water, such as transportation and operational costs incurred in delivering the water to vessels. This indicated that the transaction involved service components rather than a simple sale of goods. The appellant/assessee, Sea Shipping Services was registered under various service tax categories including port services, goods transport agency services, clearing services, supply of tangible goods services, and transportation of goods through waterways. During an audit of its records, tax authorities discovered that the company had issued debit notes to customers for reimbursement of water supply charges, amounting to ₹66.25 lakh, without paying service tax on the amount. The department treated these activities as services rendered in relation to vessels within the port, falling under the category of “Port Services” as defined under Section 65(82) of the Finance Act, 1994. Consequently, a show cause notice dated September 24, 2014 was issued demanding service tax of ₹6.82 lakh, along with interest and penalties. The adjudicating authority confirmed the demand and imposed an equivalent penalty under Section 78 and an additional ₹10,000 penalty under Section 77. The Commissioner (Appeals) upheld this order, leading the assessee to approach the Tribunal. Before the Tribunal, the appellant argued that the amounts collected represented sale of fresh water rather than provision of a service. The company contended that the water supplied to vessels was purchased and then sold to ship owners, and therefore constituted sale of goods rather than a taxable service. Water was exempt from VAT under the Gujarat VAT Act, indicating that the transaction was treated as sale of goods by the State authorities. The debit notes reflected actual expenses and reimbursements, including transport and pumping charges, without separate service charges. The activity qualified for exclusion under the “pure agent” principle under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. The show cause notice was issued beyond the normal limitation period, since the demand was based on records already available with the department. The appellant also relied on earlier Tribunal rulings which held that sale of goods cannot be subjected to service tax. The department argued that the charges collected were not merely for sale of water, but included several components such as procurement, transportation, pumping, and delivery to vessels. Therefore, the activity was intrinsically connected with services provided within the port area. The department further relied on a CBEC clarification dated July 9, 2001, which specifically stated that water supply charges form part of the taxable value of port services. The Tribunal observed that the key issue was whether the activity amounted to sale of water or provision of a service related to port operations. The Tribunal also relied on the CBEC clarification which lists water supply charges among the various charges forming part of port services. Accordingly, it held that supply of water to vessels within the port area was taxable as port service prior to July 1, 2010. However, the Tribunal also pointed out that Notification No. 31/2010-ST dated June 22, 2010, which came into effect from July 1, 2010, granted exemption from service tax on supply of water within ports and airports. Thus, the tax liability applied only for the period prior to the notification’s effective date. While upholding the service tax demand and interest, the Tribunal took a lenient view regarding penalties. It noted that there was no evidence of deliberate intention (mens rea) to evade service tax. The bench set aside the penalty imposed under Section 78, which was equivalent to the tax amount, but upheld the penalty under Section 77 for procedural violations. The Tribunal ultimately partly allowed the appeal, confirming the service tax liability but granting relief from the major penalty. Case Details Case Title: Sea Shipping Services Versus Citation: JURISHOUR-346-CES-2026(AHEM) Case No.: Service Tax Appeal No. 11127 of 2017 – DB Date: 12.03.2026 Counsel For Appellant: Sharan Rayaprol, Advocate Counsel For Respondent: Rajesh Nathan, Assistant Commissioner (AR) Click Here To Read Order Read More: Customs Broker Licence Suspension In Heroin Smuggling Case Linked to Mundra Port Upheld: CESTAT

Supply of Water to Vessels Within Port Area Taxable as ‘Port Service’ Prior to July 2010: CESTAT

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