Service tax demand quashed as OLSPs not Business Auxiliary Service u/s 65(19); defective SCN invalidated

CESTAT Kolkata-AT allowed the appeal and set aside the service tax demand, interest and penalties raised under Business Auxiliary Service. It held that the overseas logistic service providers (OLSPs) were not providing services "on behalf of" the appellant to its customers, but were instead contracting directly with shipping lines/airlines and then with the appellant, with no privity of contract between OLSPs and the appellant's customers. Consequently, clause (vi) of Section 65(19) was inapplicable. Further, the SCN was held to be legally defective as it failed to specify the particular sub-clause of Section 65(19) invoked, a defect that could not be cured at the adjudication stage.

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Issues Involved:
1. Whether the demand of service tax for the period April 2005 to 18.04.2006 is sustainable.
2. Whether the services provided by OLSPs to the Appellant are taxable under the category of "Business Auxiliary Service".
3. Whether the demand is sustainable when the Show Cause Notice fails to specify the exact sub-clause under Section 65(19).

Summary:

Issue 1: Demand of Service Tax for the Period April 2005 to 18.04.2006
The demand of service tax amounting to Rs. 2,11,90,438/- for the period April 2005 to 18.04.2006 is not sustainable. The Hon'ble Bombay High Court in Indian National Ship Owners Assn. vs. Union of India held that the recipient in India is liable to service tax for services received from abroad only from 18.4.2006 after the enactment of Section 66A of the Finance Act, 1994. This ruling was upheld by the Supreme Court. Hence, the demand for the period prior to 18.04.2006 is set aside.

Issue 2: Taxability of Services Provided by OLSPs
The services provided by OLSPs, including collecting cargo, arranging storage abroad, and customs clearance, were classified by the appellant under 'Clearing and Forwarding Agency Service'. The Department classified these services under "Business Auxiliary Service" as per Section 65(19)(vi) and (vii). The Tribunal observed that the OLSPs were not acting as agents of the Appellant to the customers of the Appellant. There was no contract between OLSPs and the customers of the Appellant, thus the services cannot be taxed under clause (vi) of "Business Auxiliary Service". The Tribunal also noted that the expression "on behalf of the client" presupposes the existence of three parties, which was not the case here. Therefore, the demand under "Business Auxiliary Service" is not sustainable.

Issue 3: Deficiency in Show Cause Notice
The Show Cause Notice did not specify the exact sub-clause of Section 65(19) under which the demand was raised. The Tribunal held that it is a settled law that defects in the notice cannot be cured by the adjudicating authority's observations. This view is supported by the decision in Syniverse Mobile Solutions Pvt Ltd vs. Commissioner of Cus, CE & S.T, Hyderabad, where it was held that it is essential for the Show Cause Notice to clearly indicate the sub-clause under which the service tax is demanded. Hence, the demand along with interest and penalty is not sustainable due to the lack of specificity in the Show Cause Notice.

Conclusion:
The demand of service tax, interest, and penalties confirmed in the impugned order is set aside. The appeal filed by the appellant is allowed.

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