2025 (5) TMI 1913 - AT - Service Tax

Handling charges for breakage-free transit of fragile goods not includible in assessable value for service tax

M/s Kajaria Ceramics Limited Versus Commissioner of Central Excise and Central Goods & Service Tax, Alwar

CESTAT New Delhi held that handling charges collected for ensuring breakage-free transit of fragile goods are not includible in assessable value for ... Taxability of the handling charges - such handling charges constitute part of the assessable value for service tax purposes or are exempted as transit insurance or compensation for breakage during transit - HELD THAT:- The Ahmedabad Bench of this Tribunal in the case of Gujarat Borosil Ltd. Vs. Commissioner of Central Excise and Service Tax, Surat-II [2017 (7) TMI 1034 - CESTAT AHMEDABAD]. The issue involved in said case was whether the amount equal to 7% of the value of the goods, collected as transit insurance charges from the dealers/buyers for safe delivery of the manufactured goods free from breakage in transit. The goods in the present case are fragile tiles and the handling charges received as nothing but the charges for ensuring delivery free from breakage in transit is includible in the assessable value and chargeable to duty. In Gujarat Borosil Ltd. the Tribunal had categorically noted that the issue of charging duty on the charges by adding the same to the assessable value is settled by this Tribunal as similar proceedings initiated has been decided in GUJARAT BOROSIL LTD. VERSUS COMMISSIONER OF C. EX., SURAT-II [2009 (12) TMI 379 - CESTAT, AHMEDABAD] and Revenue’s appeal against the said judgement before the Apex Court was dismissed by Order dated 19.07.2010. Based on these facts the Tribunal arrived at the conclusion that the amount equal to 7% of the value of the goods collected as insurance charges under the head “cost of transportation” from the dealers/buyers is not the excess amount of insurance charges collected and retained by the appellant but the amount has been collected as compensation for breakages during the course of transit by issuing credit notes. Thus, the payment made by the assessee to its customers for breakages and losses neither tantamounts to insurance nor cost of transportation and is includible in the assessable value. In the present case the handling charges collected by the appellant are meant for breakage free transit of the manufactured goods as it was in case of transportation charges in Gujarat Borosil wherein these charges are denied to be included in the taxable value. Hence we find no reason to differ from the said findings. Conclusion - Handling charges or amounts collected as compensation for breakages or losses during transit, which are not paid as insurance premium to an insurance company, do not constitute taxable service under service tax law. The service tax demand has wrongly been confirmed on the handling charges received by the appellant - appeal allowed. 1. ISSUES PRESENTED and CONSIDERED Whether the handling charges collected by the appellant from dealers/customers, purportedly for risk assessment and insurance premium, are liable to service tax. Whether the amounts collected as handling charges, which are adjusted against claims for breakage or damage during transit, constitute consideration for taxable service or are part of the assessable value of goods. The applicability of precedents regarding transit insurance charges and their inclusion or exclusion from taxable value or service tax liability. Whether the demand for service tax on handling charges for the period January 2016 to June 2017 is sustainable in light of earlier decisions on identical issues for previous periods. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Handling Charges as Service Taxable Service Relevant legal framework and precedents: The legal question revolves around whether handling charges collected as insurance premium or risk assessment fees attract service tax under the relevant service tax laws. The Tribunal referred to its earlier decision in the appellant's own case for the previous period, which held that such charges are not liable to service tax. Additionally, the Tribunal relied on the decision in Gujarat Borosil Ltd., where charges collected as transit insurance were held to be includible in the assessable value rather than being subject to service tax. The Supreme Court's ruling in Surya Roshni Ltd. was also pivotal, clarifying the nature of transit insurance charges and their treatment for tax purposes. Court's interpretation and reasoning: The Tribunal noted that the handling charges in question were collected to cover risk assessment and potential damage during transit, with any claims settled by issuing credit notes to customers. The Tribunal distinguished between actual insurance premiums paid to insurance companies and amounts collected and retained as compensation for breakages. It held that such handling charges do not constitute a service liable to service tax but rather relate to the valuation of goods or compensation for losses. Key evidence and findings: The department's allegation was that the appellant charged handling fees under the guise of insurance premiums without paying service tax. The appellant contended that the issue was already adjudicated in their favor for earlier periods. The Tribunal examined the nature of the charges, the manner of adjustment against claims, and the absence of any premium payment to insurance companies. Application of law to facts: Applying the principles established in the precedents, the Tribunal found that since the handling charges were not premiums paid to insurers but amounts collected to cover breakage risks and compensated through credit notes, they cannot be treated as a taxable service. The charges are akin to compensation or adjustments related to the goods' value rather than a separate service. Treatment of competing arguments: The Revenue argued for the taxability of the handling charges based on the departmental findings and earlier show cause notices. However, it acknowledged the Tribunal's prior decision in the appellant's own case. The appellant relied heavily on the binding effect of the earlier decision and analogous case law. The Tribunal favored the appellant's submissions, emphasizing consistency and the established legal position. Conclusions: The Tribunal concluded that the handling charges collected by the appellant do not attract service tax. The demand for service tax on these charges was held to be unsustainable and set aside accordingly. Issue 2: Inclusion of Handling Charges in Assessable Value of Goods Relevant legal framework and precedents: The Tribunal referred to the Gujarat Borosil Ltd. decision, which dealt with transit insurance charges collected as a percentage of invoice value and held that such amounts, when not paid as premiums to insurance companies but retained as compensation for breakages, are includible in the assessable value of goods for duty purposes. The Supreme Court's ruling in Surya Roshni Ltd. was also cited, which clarified that compensation paid to customers for breakages during transit does not amount to insurance or cost of transportation and thus affects valuation. Court's interpretation and reasoning: The Tribunal observed that the handling charges in the present case were similar in nature to the transit insurance charges in Gujarat Borosil Ltd., i.e., collected to ensure breakage-free transit and adjusted by credit notes for damages. It held that these charges do not represent an insurance premium paid to third parties but are amounts collected as compensation for losses during transit, which must be included in the assessable value rather than treated as separate taxable services. Key evidence and findings: The Tribunal examined the nature of goods (fragile tiles), the percentage charged as handling fees, the manner of adjustment through credit notes, and the absence of actual insurance premium payments. The evidence supported the conclusion that the charges are compensatory rather than insurance premiums. Application of law to facts: The Tribunal applied the legal principle that freight and genuine transit insurance premiums paid to insurance companies are excluded from assessable value, but amounts collected as compensation for breakages and retained by the seller are includible. The handling charges in the present case fall under the latter category. Treatment of competing arguments: The appellant argued that the handling charges are not separate services but part of the value of goods, referencing the Gujarat Borosil Ltd. and Surya Roshni Ltd. decisions. The Revenue maintained that the charges should be treated as taxable services. The Tribunal sided with the appellant, relying on binding precedents and the factual matrix. Conclusions: The Tribunal concluded that the handling charges are includible in the assessable value of goods and do not constitute a separate taxable service. Hence, service tax demand on such charges was not justified. Issue 3: Applicability of Earlier Tribunal Decisions and Consistency in Adjudication Relevant legal framework and precedents: The principle of consistency and binding effect of earlier Tribunal decisions in identical factual and legal circumstances was considered. The Tribunal's own earlier decision in the appellant's case for the previous period was central to this issue. Court's interpretation and reasoning: The Tribunal noted that the identical issue regarding taxability of handling charges had been decided in favor of the appellant in an earlier appeal. It emphasized the need to maintain consistency and avoid contradictory rulings on the same issue and facts. Key evidence and findings: The Tribunal reviewed the earlier decision dated 10.09.2024, which dealt with the same factual matrix and legal question. The Revenue did not dispute the applicability of this precedent. Application of law to facts: The Tribunal applied the principle of precedent and consistency, holding that the present appeal must be disposed of in line with the earlier decision. Treatment of competing arguments: The appellant urged disposal on the same lines as the earlier favorable decision. The Revenue acknowledged the precedent but maintained its stand on the merits. The Tribunal gave precedence to the binding earlier ruling. Conclusions: The Tribunal allowed the appeal, setting aside the service tax demand, based on the binding effect of the earlier decision and the identical nature of the issue.