2023 (5) TMI 192 - AT - Service Tax

Appellant prevails: mark-up charges on freight income not taxable. Appeal allowed, no penalty.

M/s. Console Shipping Services India Pvt. Ltd. Versus Commissioner of Service Tax, Delhi-II

The Tribunal ruled in favor of the appellant, holding that the mark-up charges on freight income were not subject to service tax. The order under ... Levy of Service tax - ocean cargo / air cargo freight income, as received by appellant as marked up charges - Business Auxiliary service or not - Brokerage and special commission/incentive - penalty - Extended period of limitation. Ocean cargo / air cargo freight income, as received by appellant as marked up charges - Business Auxiliary service or not - HELD THAT:- The issue has been addressed in the decisions of this Tribunal itself specifically in the case of DHL Logistics (P) Ltd. vs. Commissioner of Service Tax, Mumbai [2017 (8) TMI 600 - CESTAT MUMBAI]. It has been held that the freight rebate is a revenue stream generated out of trading of the space in the airline incentives. Unless the space is booked by the appellant specifically for a client the components of the Business Auxiliary Service do not come into play. In the instant case, there is no such allegation and the appellants are booking the space for their own trading activities. In these circumstances demand of service tax under BAS cannot be sustained and the same is set aside. Brokerage and special commission/incentive - to be an income received in the activity of trading of freight space in various shipping lines, or not - HELD THAT:- Reliance placed in the case of Karam Freight Movers [2017 (3) TMI 785 - CESTAT NEW DELHI] where it was held that The surplus earned by the respondent arising out of purchase and sale of purchase and sale of space and not by acting for client who has space or not on a vessel. It cannot be considered that the respondents are engaged in promoting or marketing the services of any “client.” - demand do not sustain. Penalty - Extended period of limitation - HELD THAT:- It is observed to be an apparent fact that the appellant was otherwise discharging the liability for providing the chargeable services and was admittedly filing the regular ST-3 returns. Once it is held that there was no liability upon the appellant to be discharged as far as the markup charges are concerned there remains no reason with the Department to invoke the extended period of limitation while issuing the impugned Show Cause Notice. For want of intention to evade duty there can be imposed no penalty upon the appellant. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the mark-up/markup charges earned by a freight forwarder on resale of ocean/air cargo space (difference between amount paid to carriers and amount recovered from exporters/importers) are taxable as 'Business Support Service' under section 65(105)(zzzq) of the Finance Act, 1994. 2. Whether the freight forwarder's activity of buying cargo/space in its own account and reselling the same to exporters/importers constitutes a taxable service (including Business Auxiliary/Business Support Service) or is a non-taxable trading activity/principal-to-principal transaction. 3. Whether export/import freight up to first Indian Customs station and place-of-provision rules/notifications (including Notification No. 28/2012 and Place of Provision of Services Rules, 2012) preclude levy of service tax on such mark-up charges. 4. Whether CBEC circulars and prior Tribunal decisions (including decisions treating freight forwarders as principals vs intermediaries) govern the taxability question and how they are to be applied. 5. Whether penalty and invocation of extended period of limitation are sustainable where markup charges are held non-taxable and there is no intent to evade duty (including relevance of regular ST-3 filings for other taxable services). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of mark-up charges as 'Business Support Service' Legal framework: Service tax liability is determined by whether consideration is received for provision of a taxable service as defined in the Finance Act, 1994; 'Business Support Service'/'Business Auxiliary Services' classification depends on existence of a service relationship (service provider, service recipient, and client) and supply of specified services. Place of provision and specific exemptions can render certain cross-border services non-taxable. Precedent treatment: Multiple Tribunal decisions (including those relied upon by the Tribunal) have examined mark-up/commission earned by freight forwarders and held such income to be non-taxable where it arises from trading cargo space on principal account (e.g., DHL Logistics, Karam Freight Movers, Continental Carriers, Greenwich Meridian etc.). These decisions are followed rather than distinguished. Interpretation and reasoning: The Tribunal reasons that where the appellant purchases cargo space in bulk on its own account and thereafter resells it, the resultant profit/mark-up is a trading income, not consideration for performing a 'Business Support Service.' A BAS characterization requires at least three parties (service provider, service recipient, and a client whose business is being supported/promoted). In transactions where only seller (carrier) and buyer (exporter/importer) exist and the freight forwarder acts on its own account, the essential elements of BAS are absent. Accordingly, mark-up derived from such trading cannot be treated as service consideration under BAS. Ratio vs. Obiter: Ratio - The primary holding is that mark-up on resale of cargo space bought and sold on principal account is not taxable as BAS. Obiter - Observations on transactional facts (e.g., when similar receipts could be taxable if acted on behalf of a client) serve as guidance but the binding ratio pertains to principal trading activity. Conclusion: Mark-up charges arising from purchase and resale of cargo/space by a freight forwarder on its own account are not taxable as 'Business Support Service.' Issue 2 - Characterization: principal vs intermediary and consequence for tax liability Legal framework: Distinction between acting as an intermediary (agent) and acting as a principal is central: intermediaries facilitating transportation may attract tax under certain heads, whereas principals providing transportation (including export transport) may be outside tax net or covered by export exemptions. Rule 2(f) and Rule 10 of POPS and the definition of intermediary guide classification. Precedent treatment: Tribunal and departmental circulars recognize that freight forwarders may be either intermediaries or principals; where acting as principals (assuming legal responsibility and risks), services of transportation to places outside India are not liable to service tax under Rule 10 of POPS and related exemptions. Prior Tribunal rulings distinguishing trading activity from agency services are followed. Interpretation and reasoning: The Tribunal applies the CBEC circular and case law to conclude the appellant acted as a principal in booking and trading cargo space for its own account rather than as an agent of carriers or of exporters/importers. Consequently, freight trading income is not a commission for facilitating a third-party's business but profit on resale - a non-taxable trading receipt for BAS purposes. The presence or absence of legal liability and risk is decisive to classification. Ratio vs. Obiter: Ratio - Where freight forwarder acts as principal (assumes legal liability and risk, invoices on its own account) and trades space, activity is not intermediary/BAS and is not taxable as such. Obiter - Specific fact patterns where an intermediary status would create tax liability are explanatory. Conclusion: Freight forwarders who buy and resell space on their own account are principals, not intermediaries, and their mark-up income is not chargeable as BAS. Issue 3 - Effect of export exemption and Place of Provision rules Legal framework: Place of provision rules and Notification No. 28/2012 (exempting export/import freight up to first Indian Customs Station) inform whether cross-border freight or services connected to export are taxable. Precedent treatment: Tribunal has applied these rules/notifications to hold that export-related freight may be exempt where place of provision and notification conditions are satisfied; the present decision notes these rules but grounds its conclusion primarily on the nature of the income (trading vs service). Interpretation and reasoning: The Tribunal observes that taxation of export freight is governed by place of provision rules and notification exemptions. Even leaving aside exemption, the core reason mark-up is non-taxable is that it is not consideration for a defined taxable service. The combined effect of principal status and export-related rules supports non-taxability of such income where conditions for exemption are present. Ratio vs. Obiter: Primarily supportive/confirmatory (obiter to the extent exemption not central to the holding). The holding rests on service characterization; place-of-provision/exemption operates as additional reinforcement in appropriate cases. Conclusion: Place-of-provision rules and Notification No. 28/2012, where applicable, reinforce non-taxability of export/import freight transactions by principals; however, the decisive factor is that mark-up is trading income, not BAS consideration. Issue 4 - Role of CBEC circulars and precedent authority Legal framework: Administrative circulars and earlier Tribunal decisions guide interpretation of statutory definitions and application of tax law to freight forwarding practices. Precedent treatment: The Tribunal follows prior consistent precedents and a CBEC circular that distinguishes agent/intermediary from principal; these precedents are treated as determinative and the issue is declared no longer res-integra. Interpretation and reasoning: The CBEC circular clarifies that freight forwarders acting as principals, bearing legal liability and risk, are not intermediaries and thus are not liable to service tax for export transportation. Tribunal decisions are applied to similar factual matrices to set aside BAS-based demands; reliance on a body of consistent decisions supports finality. Ratio vs. Obiter: Ratio - Consistent precedents and authoritative circulars are applied to hold mark-up non-taxable; statements describing alternative fact patterns where tax could be payable are obiter but useful for future classification. Conclusion: The circular and consistent Tribunal jurisprudence govern the outcome; the present issue is no longer open and mark-up charges are not taxable under BAS where the freight forwarder operates on principal account. Issue 5 - Penalty and extended limitation when liability held nonexistent Legal framework: Penalty and extended limitation are predicated on existence of liability and proof of intent to evade duty. Limitation extension and penalty require circumstances such as suppression, fraud or deliberate evasion. Precedent treatment: Authorities indicate penalty should not be imposed where there is no mens rea (intent) and where taxpayer has filed regular returns for chargeable services; earlier decisions have denied penalty in analogous cases. Interpretation and reasoning: The Tribunal finds appellants filed regular ST-3 returns for services legitimately subject to tax and there was no intention to evade duty regarding markup which was not a chargeable service. Since the underlying liability (tax on markup) does not exist, extended limitation is unwarranted and penalty cannot be imposed for lack of intent to evade. Ratio vs. Obiter: Ratio - Penalty and invocation of extended limitation are unsustainable where the assessed amount relates to a non-existent liability and no intention to evade is shown. Obiter - General remarks on interplay of return filing and absence of intention. Conclusion: Penalty and extended limitation are not sustainable in respect of mark-up charges held non-taxable; the demand, interest and penalty are to be set aside. Overall Disposition The Tribunal sets aside the impugned order holding (i) mark-up/markup on resale of cargo space by a freight forwarder acting as principal is not taxable as Business Support Service, (ii) place-of-provision rules and export exemptions support non-taxability where applicable, and (iii) penalty and extended limitation cannot be sustained in absence of liability and intent to evade. The issue is held to be no longer res-integra and prior consistent decisions and the CBEC circular are followed.