2024 (1) TMI 894 - AT - Service Tax

Excess ocean freight collected by steamer agents constitutes business profit, not taxable service consideration

M/s. JN Freight Forwarders Pvt. Ltd. Versus The Commissioner of Central Excise, Customs and Service Tax, Cochin

CESTAT Bangalore held that excess ocean freight collected and retained by steamer agents cannot be subjected to service tax. The appellant purchased cargo ... Levy of service tax - Steamer Agent Service - excess ocean freight collected and retained by them for transportation of the goods to foreign destinations - HELD THAT:- There are merit in the contention of the learned advocate for the appellant. Analysing the transaction between the appellant, their customers and shipping lines, we find that the appellant do not act as agents of the shipping line for booking the cargo space or for canvassing or booking of the cargo space for their customers. They purchase the cargo space on behalf of the customers from the shipping lines on principal-to-principal basis. The excess ocean freight collected from the customers, thus cannot be considered as a commission paid by the shipping lines to the appellant. Whether Service Tax be leviable on the excess ocean freight collected from the customers is the issue now needs to be addressed. This issue of chargeability of Service Tax on excess ocean freight retained by the service provider is no more res integra and considered by the Tribunal in a series of cases. Recently, the Principal Bench in M/S. BALMER LAWRIE & CO. LTD. VERSUS THE COMMISSIONER OF SERVICE TAX DELHI II COMMISSIONERATE, NEW DELHI AND THE COMMISSIONER OF SERVICE TAX DELHI II COMMISSIONERATE, NEW DELHI VERSUS M/S. BALMER LAWRIE & CO. LTD. [2023 (5) TMI 100 - CESTAT NEW DELHI] held that This activity is a business in itself on account of the appellant and cannot be called a service at all. Neither can the profit earned from such business be termed consideration for service. There are no merit in the impugned order, consequently, the same is set aside - appeals are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the excess ocean freight collected by a service provider (difference between freight charged to customers and freight paid to shipping lines) is taxable as 'Steamer Agent Service' under the definition in Section 65(100) read with Section 65(105)(i) of the Finance Act, 1994. 2. Whether a multimodal transport operator or clearing/forwarding agent who contracts on a principal-to-principal basis with shipping lines and issues bills of lading on its own account can be treated as acting 'for or on behalf of a shipping line' within subclause (ii) of Section 65(100) (i.e., to book, advertise or canvas for cargo for or on behalf of a shipping line). 3. Whether the margin/markup realized by such service provider from differential ocean freight constitutes consideration for a taxable 'service' (Steamer Agent Service) or is a business profit not chargeable to service tax. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of excess ocean freight as 'Steamer Agent Service' Legal framework: The definition of 'Steamer Agent' in Section 65(100) includes, inter alia, persons who 'book, advertise or canvas for cargo for or on behalf of a shipping line.' Section 65(105)(i) defines taxable service in respect of 'Steamer Agent Service' as any service provided to a shipping line by a steamer agent relating to ship's husbandry, dispatch, administrative work, or booking/advertising/canvassing of cargo including container feeder services. Precedent treatment: The Tribunal has considered a line of authorities holding that differential ocean freight retained by an intermediary who buys and sells cargo space may not constitute taxable steamer agent services where transactions are on principal-to-principal basis. The Court follows the recent tribunal decisions (including the Principal Bench reasoning reproduced) that treat such margins as business profits and not consideration for a service. Interpretation and reasoning: The Court examined whether the retained differential is attributable to services rendered 'for or on behalf of a shipping line.' The factual matrix-contractual relations, issuance of Bills of Lading by the intermediary, principal-to-principal purchases from shipping lines, and sale to customers-was analyzed. The Court found that the intermediary buys cargo space on its own account and sells to customers, thereby undertaking commercial risk and trading in freight. Such trading activity, involving profit or loss, is a business operation rather than an agency/service relationship rendered to a shipping line. Ratio vs. Obiter: Ratio - where an intermediary purchases space and issues its own bills of lading, the margin realized on resale is business profit and not consideration for 'Steamer Agent Service' under subclause (ii) of Section 65(100). Obiter - any ancillary observations on differing factual arrangements (e.g., fixed commission arrangements or exclusive agency) that were not present on the facts. Conclusion: The Court concluded that excess ocean freight retained by the appellant is not chargeable to Service Tax as 'Steamer Agent Service.' The adjudicating authority's finding to the contrary is set aside. (See cross-reference to Issue 2 for agency analysis.) Issue 2: Whether acting on principal-to-principal basis precludes characterization as steamer agent Legal framework: Distinguishing activities 'for or on behalf of a shipping line' requires examination of contractual privity, the nature of the relationship (agent vs principal), issuance of bills of lading, revenue-sharing arrangements, and whether the shipping line controls or shares in the intermediary's margin. Precedent treatment: The tribunal's prior holdings, followed by the Court, treat transactions where the intermediary contracts and issues master/house bills of lading on its own account as principal-to-principal trading; such arrangements have been held not to convert the intermediary into a steamer agent for the shipping line. Interpretation and reasoning: The Court scrutinized evidence and found no contractual privity between shipping lines and the ultimate customers; the intermediary contracted with the shipping lines and with customers in separate legs. There was no proof of commission paid by shipping lines, no revenue-sharing or control over the intermediary's margin by shipping lines, and no exclusivity or ongoing agency tie. The shipping line did not fix the intermediary's margin; the intermediary assumed commercial risk. These elements negate characterization as acting 'for or on behalf of a shipping line.' Ratio vs. Obiter: Ratio - presence of principal-to-principal contracts, issuance of bills of lading by the intermediary, assumption of commercial risk and absence of revenue-sharing/commission, are determinative factors negating steamer-agent status. Obiter - remarks on situations where an actual agency contract or regular commission structure would lead to a different conclusion. Conclusion: Transactions carried out on principal-to-principal basis prevent treating the intermediary as a steamer agent; therefore, the retained differential is not attributable to services provided to a shipping line. Issue 3: Whether margin/markup is business profit or consideration for service Legal framework: Service tax liability depends on whether consideration is for a taxable service. Commercial markup/profit arising from trading activity is ordinarily treated as business profit and not as consideration for a service unless the markup remunerates a discrete taxable service rendered to the recipient defined in law. Precedent treatment: The Tribunal's holdings (as cited and followed) establish that when an intermediary buys freight space and resells it, the differential is akin to trading profit; prior decisions (including those referred) were followed to hold no service tax on such profit where the facts demonstrate purchase and resale on own account. Interpretation and reasoning: The Court applied the 'buy low, sell high' commercial analogy and emphasized the presence of two distinct contracts: between shipping line and intermediary, and between intermediary and customer. Profit arises from trade risk, not from rendering a service to the shipping line. Absent a service relationship with the shipping line (e.g., agency or commission-based remuneration), markup cannot be recharacterized as consideration for steamer agent service. Ratio vs. Obiter: Ratio - margin retained from resale of cargo space purchased on own account is business profit and not consideration for 'Steamer Agent Service' where intermediary bears commercial risk and issues bills of lading on its account. Obiter - remarks regarding taxability if facts establish commission/agency or other indicia of service to a shipping line. Conclusion: The differential ocean freight is profit from a trading activity and not consideration for a taxable service; hence no service tax is leviable on such markup under the steamer agent classification. Relief and consequential direction Given the foregoing conclusions and following the Tribunal precedent, the impugned demand and penalties relating to service tax on excess ocean freight are set aside and the appeals are allowed with consequential relief as per law.