Service tax not applicable on freight margins for export goods transportation under Place of Provision Rules 2012

CESTAT Mumbai held that service tax was not applicable on freight margins recovered by the appellant from customers for transportation of export goods. The Tribunal determined that under Place of Provision of Services Rules, 2012, Rule 10 applied over Rule 8 due to Rule 14's non-obstante clause, which prioritizes the later-occurring rule when multiple rules merit consideration. Since the destination was outside taxable territory, services fell outside the service tax net under Section 66B post-negative list regime. The Tribunal relied on Greenwich Meridian Logistics precedent confirming freight charges are not subject to service tax. The adjudged service tax demands, interest, and penalties were set aside. Appeal allowed.

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Issues Involved:

1. Classification of services under 'Business Auxiliary Services' (BAS).
2. Applicability of service tax on freight margin.
3. Invocation of extended period for demand.
4. Place of Provision of Services Rules, 2012.

Summary:

1. Classification of Services under 'Business Auxiliary Services' (BAS):

The appeal was filed by M/s Total Transport Systems Limited against the Order-in-Original passed by the Principal Commissioner of Central GST & Service Tax, Thane Rural, Mumbai. The Department contended that the extra margin charged by the appellants over and above the freight charges billed by the shipping lines amounted to 'service charges' liable to service tax under 'Business Auxiliary Services' (BAS) as per Sections 65(19) and 65(105)(zzb) of the Finance Act, 1994. The appellants argued that their transactions involved the trading of cargo/container space on a principal-to-principal basis and did not constitute a service.

2. Applicability of Service Tax on Freight Margin:

The Tribunal, referring to earlier decisions in similar cases, held that the appellants' activities of buying and selling cargo/container space did not fall under the definition of 'Business Auxiliary Services' (BAS). The Tribunal noted that the appellants were not acting as agents for the shipping lines but were engaged in the sale of space on a principal-to-principal basis. The Tribunal cited the case of EMU Lines Pvt. Ltd. Vs Commissioner of CGST & C.E., Belapur, where it was held that the freight element or any profit on such freight could not be subjected to tax under 'Business Auxiliary Services' (BAS).

3. Invocation of Extended Period for Demand:

The Tribunal found that the Show Cause Notice (SCN) did not provide specific grounds for invoking the extended period for the demand of service tax. Citing the Supreme Court's judgment in Uniworth Textiles Ltd. Vs. Commissioner of Central Excise, Raipur, the Tribunal emphasized that the burden of proving mala fide conduct lies with the Revenue, and the SCN must explicitly state the grounds for invoking the extended period. The Tribunal concluded that no effective case was made out for invoking the extended period, rendering the demand for the extended period patently illegal and unsustainable.

4. Place of Provision of Services Rules, 2012:

The Tribunal referred to the Place of Provision of Services Rules, 2012, and found that the place of provision for goods transportation services should be the place of destination of the goods as per Rule 10. The Tribunal rejected the findings of the Commissioner that Rule 8 should apply, stating that Rule 14, which grants superimposing authority, mandates the application of the rule that occurs later, i.e., Rule 10. Therefore, the services provided by the appellants were not taxable as they were provided in respect of transportation of export goods to a destination outside the taxable territory.

Conclusion:

The Tribunal set aside the impugned order dated 05.04.2019, holding that the confirmation of adjudged demands under 'Business Auxiliary Services' (BAS) and the invocation of the extended period were not sustainable. The appeal was allowed in favor of the appellants.

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