2024 (9) TMI 1828 - AT - Service Tax

Service tax cannot be levied on markup charged over ocean freight; prior rulings affirmed and demand annulled

CESTAT allowed the appeal and set aside the impugned orders, holding that service tax cannot be levied on the markup collected over ocean freight. The ... Liability of appellant to pay service tax on the markup of the freight charges collected by them - clear allegation in the Show Cause Notice is that the appellant collected ocean freight charges higher than the amount actually paid to the freight liners / steamer agents - HELD THAT:- The very same issue as to whether the markup on freight charges collected by an assessee is subject to levy of service tax under Business Support Services was considered by the Tribunal in the case of Team Global Logistics Pvt. Ltd. Vs. Commissioner of GST and Central Excise [2023 (12) TMI 568 - CESTAT CHENNAI]. The period involved in the said decision was prior to 01.07.2012 and the demand raised was under BSS alleging that the assessee was providing support services. The Tribunal after analyses of the issue held that the amount collected by the appellant is nothing but a markup on freight charges. The ocean freight per se is not subject to levy of service tax and therefore the demand on the markup also cannot be subject to service tax. It is to be noted that the very same issue travelled upto the Supreme Court in the case of EMU Lines Pvt. Ltd. Vs. Commissioner of GST and Central Excise [2023 (6) TMI 64 - CESTAT MUMBAI] wherein the Tribunal held that the demand raised on the markup of ocean freight collected by the appellant cannot be subjected to levy of service tax. The said decision was affirmed by the Hon'ble Supreme Court as reported in [2023 (2) TMI 1155 - SC ORDER]. The demand cannot sustain. The impugned orders are set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the differential/markup on ocean/air freight collected by a freight forwarder/clearing & forwarding agent constitutes 'consideration' for a taxable service falling under the definition of 'Support Services' (Section 65B(49) / Business Support Service) or is merely trading in cargo space not liable to service tax. 2. Whether the appellant's activity is correctly classifiable as an 'intermediary' under the Place of Provision of Services Rules, 2012 (Section 2(f) and Rule 3 / Rule 10), thereby attracting service tax, or whether it is principal-to-principal supply with place of provision outside India for exports. 3. Whether the freight component (and any markup) in import transactions prior to 01.06.2016 was outside the negative list (Section 66D(p)(ii)) and, post-amendment, whether any liability arises on the freight/markup and on whom. 4. Whether amounts collected by the appellant were reimbursable expenses/pure agent receipts excludable under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, and whether the conditions for such exclusion were satisfied. 5. Whether Show Cause Notices/Statements of Demand were consistent and specific in their allegations (i.e., support service / intermediary / reimbursable expense), and whether any allegation outside the SCN vitiates the demand. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of markup on freight as Support Services (Section 65B(49) / Business Support Service) Legal framework: Section 65B(49) defines 'Support Services' inclusively as infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions entities ordinarily carry out themselves but may outsource. Section 67(3) requires inclusion in gross amount of any amount received towards taxable service. Determination of Value Rules govern valuation including exclusions. Precedent treatment: Multiple Tribunal decisions (including decisions referred to in the judgment such as Greenwich Meridian, Team Global, AGX Logistics, EMU Lines and other Tribunal precedents) have analyzed whether markup on cargo-space trading constitutes taxable consideration for Business Support Services and, where facts show principal-to-principal buying/selling of cargo space, have held the markup to be trading profit not consideration for a service. EMU Lines decision was ultimately affirmed by the Supreme Court, reinforcing the proposition that mere trading in cargo space does not amount to rendering a taxable service under BSS. Interpretation and reasoning: The Court examined whether the differential is consideration for supporting the client's business or merely freight (trading margin). The factual matrix demonstrated that the appellant purchased cargo space (master contract with carrier), then sold space to shippers (separate contracts) with issuance of transport documents in its own name (House Bill of Lading), and bore commercial risk - typical features of trading in cargo space on principal account. The Tribunal reasoned that if no service is rendered (i.e., activity is trading), no service tax can be levied regardless of amounts received; and where ocean/air freight per se is not taxable for the relevant period, the markup cannot be taxed as a service consideration. The inclusive definition of support services does not automatically capture transactions that are trading in nature; classification must reflect substance over form. Ratio vs. Obiter: Ratio - where the appellant acts on principal-to-principal basis (buys and sells cargo space, issues transport documents in its name, bears market risk), the markup is profit from trading and not consideration for a taxable support service; therefore service tax does not apply. Obiter - broader comments on inclusive language of Section 65B(49) not overriding the need to identify the true nature of the transaction. Conclusion: The markup on freight charges, on the factual matrix considered, is not taxable as Business Support Service; the demand on such markup cannot be sustained. Issue 2 - Characterisation as 'Intermediary' and place of provision (Place of Provision Rules; Rule 10) Legal framework: Place of Provision Rules, 2012: Rule 3 (location of service recipient), Rule 10 (transportation of goods other than mail/courier - place of provision is place of destination). Section 2(f) defines 'intermediary' as a person who arranges/facilitates provision of a service/supply but excludes a person who provides the main service on his account. Precedent treatment: Tribunal authorities and Board guidance (Education Guide, Circulatory clarifications) have distinguished freight forwarders acting as intermediaries from those acting on their own account; where the freight forwarder acts on his own account (principal), Rule 10 places export freight outside service tax. Where activity is intermediary, service tax may apply depending on place of provision. Interpretation and reasoning: The Tribunal analyzed documentary and factual evidence (master/house bills of lading, risk allocation, right of recovery, issuance of transport documents in appellant's name) and found no sufficient evidence that the appellant acted as an intermediary. The mere notation in some adjudicatory findings that appellant was an intermediary was contrary to the SCN allegations and the material. The Court emphasized that the intermediary definition excludes persons providing the main service on their own account; principal-to-principal transactions fall outside intermediary scope. For export shipments, Rule 10 makes place of provision outside India where destination is outside India; accordingly, export freight (and markup) is not taxable for the disputed period. Ratio vs. Obiter: Ratio - classification as intermediary requires factual foundation; where the freight forwarder provides the main service on his account (principal-to-principal), intermediary status does not attach and Rule 10 applies to exclude export freight from tax. Obiter - discussion on the Education Guide and Board Circulars as clarificatory but not overriding statutory text. Conclusion: On the facts, appellant was acting on principal account for many transactions; the intermediary classification was not established and export freight/markup is outside service tax under Rule 10. Issue 3 - Import freight and temporal applicability of negative list (Section 66D(p)(ii)) and post-amendment liability Legal framework: Section 66D(p)(ii) (pre-01.06.2016) placed transportation of goods by aircraft/vessel from place outside India up to customs station of clearance in the negative list (not taxable). The omission of that clause from the negative list from 01.06.2016 brought ocean freight within taxable services, though notifications/exemptions applied to airfreight in specified manner. Precedent treatment: Tribunal decisions have held that prior to omission, import freight was not taxable; post-omission, legislative change affects liability, and where taxability arises, the proper taxable person may be the carrier/airline as per applicable charging provisions and place of provision. Interpretation and reasoning: The Tribunal noted import freight prior to 01.06.2016 fell within the negative list and hence not taxable; attempt to levy service tax on freight or markup for those periods would amount to double taxation since freight is included in customs transaction value. For periods after the amendment, whether liability arises depends on the statutory amendment and applicable notifications; however, in the present disputed periods the applicable law rendered freight non-taxable and any demand therefore unsustainable. Ratio vs. Obiter: Ratio - for the disputed periods falling prior to the amendment, import freight (and consequent markup) was outside the tax net under the negative list; therefore demands on such freight/markup cannot be sustained. Obiter - allocation of liability post-amendment depends on statutory amendments and notifications beyond the scope of these appeals. Conclusion: For the periods under challenge, import freight and related markup were not subject to service tax; demands based on taxing those amounts are untenable. Issue 4 - Reimbursable expenses / Pure agent exclusion under Rule 5(2) Legal framework: Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 permits exclusion of expenditure or costs incurred as a pure agent of the recipient subject to prescribed conditions. Precedent treatment: Authorities have applied Rule 5(2) where strict conditions are satisfied (e.g., disclosure, documentation, liability borne by recipient, no mark-up). Where conditions are not satisfied, amounts must be included in taxable value. Interpretation and reasoning: The Tribunal observed that several SODs/SCNs alternately alleged the amounts were consideration for support services and, in other instances, characterized them as reimbursable expenses. The record did not establish satisfaction of Rule 5(2) conditions; but where the amounts were merely ocean freight in nature (trading/reimbursable to carriers) and freight itself was not taxable in the period, the question of exclusion under Rule 5(2) became moot for the purpose of taxability on markup. Contradictory allegations by the Department undermined clarity of charge. Ratio vs. Obiter: Ratio - absence of factual satisfaction of Rule 5(2) conditions prevents exclusion; but where underlying freight is non-taxable trading transaction, Rule 5(2) analysis does not salvage a tax demand on markup. Obiter - necessity of strict compliance with Rule 5(2) conditions when invoked. Conclusion: Rule 5(2) exclusion was not factually established; nonetheless, because markup/trading nature and negative-list exclusions resulted in non-taxability for the periods considered, the absence of Rule 5(2) proof did not justify the demand. Issue 5 - Validity and consistency of Show Cause Notices (allegation specificity and variance) Legal framework: Principles require SCNs to specify the nature of alleged taxability and the legal basis; charges must fairly inform the assessee of case to be met. Precedent treatment: Courts/Tribunals have set aside demands where SCNs traverse allegations not supported by material or where the adjudicatory order travels beyond the case made in the SCN. Interpretation and reasoning: The Tribunal found that SCNs and SODs contained inconsistent allegations across periods (support services/intermediary vs. reimbursable expense), and in some instances the adjudicating authority treated the appellant as intermediary despite no clear SCN allegation to that effect. Such inconsistency weakened the Department's case; furthermore, mens rea for suppression was not established where records and disclosures had been made. The Tribunal emphasized substance: SCN must correspond to the case ultimately adjudicated. Ratio vs. Obiter: Ratio - adjudication cannot rest on a classification or allegation not raised in the SCN; contradictory or new allegations in adjudication vitiate demands. Obiter - observation on absence of mens rea where transactions recorded and disclosed. Conclusion: SCNs/SODs suffered from inconsistency; adjudicatory findings extending beyond or contradicting SCN allegations were unsustainable. Overall Conclusion Applying the statutory definitions and Place of Provision Rules, following Tribunal and Supreme Court precedents (notably holding that trading in cargo space on principal-to-principal basis is not a taxable service), and having regard to inconsistent allegations in SCNs, the Court concluded that the demand of service tax on ocean/air freight and on the markup/differential collected by the appellant cannot be sustained for the disputed periods; the impugned orders confirming such demands were set aside. This conclusion is rendered as the operative ratio of the decision.