Service tax demand on freight mark-up unsustainable as cargo space trading constitutes commercial activity not service

CESTAT Chennai held that service tax demand on mark-up received on freight charges was not sustainable. The appellant's activity of arranging cargo transportation constituted trading of cargo space rather than rendering of service. Following precedents from Tiger Logistics, Direct Logistics, and Emu Lines cases, the Tribunal ruled that mark-up on ocean/air freight differential between amounts collected from shippers and paid to carriers does not attract service tax liability. The impugned orders were set aside and appeal was allowed.

---

---

Issues Involved:
1. Liability of Service Tax on ocean freight and air freight charges.
2. Liability of Service Tax on the mark-up received by the appellant on freight charges.
3. Applicability of Section 66D(p)(i) of the Finance Act, 1994, and Rule 10 of the Place of Provision of Services Rules, 2012.
4. Interpretation of the activity as a service or trading of cargo space.
5. Allegation of suppression of facts for evasion of Service Tax.

Summary:

1. Liability of Service Tax on Ocean Freight and Air Freight Charges:
The appellant, engaged in Clearing and Forwarding Agency Service and Cargo Handling Service, was found to collect ocean and air freight charges from customers, which were higher than the amounts paid to shipping companies. The Department contended that these charges, including the mark-up, were subject to Service Tax under Section 65B(44) of the Finance Act, 1994, from 01.07.2012. However, the Tribunal held that ocean freight and air freight charges were not subject to Service Tax during the disputed period as per Section 66D(p)(i) of the Finance Act, 1994, which placed transportation of goods by aircraft or vessel from a place outside India to the customs station in India in the negative list until 01.06.2016.

2. Liability of Service Tax on the Mark-Up Received:
The Department argued that the mark-up on freight charges constituted a service. The Tribunal, referencing previous decisions (e.g., Tiger Logistics and EMU Lines Pvt. Ltd.), determined that the appellant's activity of arranging transportation and collecting a mark-up was trading of cargo space, not a service. The Tribunal noted that the appellant bought space on ships and sold it to customers, incurring profit or loss based on market conditions, which is a business activity, not a taxable service.

3. Applicability of Section 66D(p)(i) and Rule 10:
The appellant argued that under Section 66D(p)(i) of the Finance Act, 1994, and Rule 10 of the Place of Provision of Services Rules, 2012, the place of provision for transportation of goods is the destination of the goods. Since the destination in export shipments is outside India, no Service Tax was payable. The Tribunal agreed, noting that the demand for the period before 01.06.2016 was not sustainable as the services were in the negative list.

4. Interpretation of the Activity as a Service or Trading of Cargo Space:
The Tribunal emphasized that the appellant's activity of buying and selling cargo space was a business transaction rather than a service. The Tribunal cited that any profit from such transactions could not be considered consideration for a service. This interpretation was consistent with previous rulings, including the Supreme Court's upholding of the Tribunal's decision in EMU Lines Pvt. Ltd.

5. Allegation of Suppression of Facts:
The Department alleged suppression of facts due to non-disclosure of the full value of taxable services in ST-3 returns. The Tribunal found no deliberate suppression with mens rea to evade tax since all transactions were recorded and disclosed during the investigation. The Tribunal noted that the appellant paid the disputed Service Tax along with interest before the issuance of the Show Cause Notice, making the issuance of the notice unnecessary under Section 73(3).

Conclusion:
The Tribunal set aside the impugned orders, concluding that the appellant's activities did not attract Service Tax on ocean freight, air freight, or the mark-up received. The appeals were allowed with consequential relief as per law.

---