2025 (11) TMI 434 - AT - Service Tax

Appeal allowed: Freight is consideration paid to shipping line; arrangements are principal-to-principal transactions; marketing brokerage irrelevant

CESTAT All. (AT) allowed the appeal, holding the matter settled by a coordinate bench: the arrangements constitute principal-to-principal transactions so ... Taxability - Business Auxiliary services - services of promotion for marketing - receiving brokerage from shipping line for providing services for promotion and marketing - HELD THAT:- The issue in the present case is no longer res integra and has been decided by the coordinate bench of the Tribunal in the case of Bluemoon Logistics (P) Ltd. [2024 (3) TMI 285 - CESTAT ALLAHABAD] holding that 'Ergo, it is nothing but a principal-to-principal transaction and the freight charges are consideration for space procured from shipping line. Correspondingly, allotment of procured space to shippers at negotiated rates within the total consideration in a multimodal transportation contract with a consignor is another distinct principal-to-principal transaction. We, therefore, find that freight is paid to the shipping line and freight is collected from client-shippers in two independent transactions.' There are no merits in the impugned order - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether brokerage/commission received by a customs house agent from shipping lines for canvassing/promotion/marketing of cargo space is taxable as Business Auxiliary Services (BAS) under Section 65(19) of the Finance Act, 1994 (and corresponding charging provisions), or whether such receipts constitute trading in cargo space/principal-to-principal transactions not amenable to service tax. 2. Whether amounts received from shipping lines as brokerage fall within the scope of Customs House Agent (CHA) services or must be separately classified and taxed under BAS. 3. Whether reliance on a departmental circular that addressed valuation/exclusion for CHA (now rescinded) is relevant to exclude brokerage from taxable BAS receipts. 4. Whether extended limitation (proviso to Section 73(1)) and penalties/interest (Sections 75, 76, 78, and waiver under Section 80) are invokable where tax demand on brokerage is sustained or otherwise unsustainable on merits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of brokerage/commission from shipping lines: legal framework Legal framework: Service tax is chargeable under the Finance Act on taxable services defined in Section 65/65A (including BAS under Section 65(19)). Charging provisions (Section 68) and valuation/payment rules (Service Tax Rules, Rule 6 and Rule 4A) govern liability. Departmental circulars give illustrative scope of BAS. Precedent Treatment: The Tribunal's coordinate bench decisions and higher court affirmations (as considered by the Tribunal) have held that where an entity merely purchases and resells cargo space on its own account (principal-to-principal), surplus from such trading is not consideration for rendition of BAS and thus not taxable; conversely, where services to promote/market a carrier's services are rendered for the carrier, such activity is BAS and taxable. Interpretation and reasoning: The Court examined the nature of receipts from shipping lines. Where the CHA/agent receives brokerage specifically for canvassing, promotion, evaluation of prospective customers, customer management and operational assistance that effectively aids the shipping line in acquiring/retaining exporters/importers as customers, such activity falls within BAS as defined by Section 65(19) and illustrated by Board circulars (illustrative list including evaluation of prospective customers, operational assistance for marketing, services provided in relation to getting a customer, etc.). The Court reasoned classification depends on the nature of activity, not the label of the recipient or mode of billing; if distinct services (BAS) are rendered to shipping lines separate from CHA services to exporters/importers, BAS is taxable on brokerage received. Ratio vs. Obiter: Ratio - brokerage received from shipping lines for activities that promote/market the shipping line's services and assist in procuring customers is classifiable as BAS and taxable; the test is the nature of activity (promotion/marketing/auxiliary support), not nomenclature. Obiter - general observations on Rule 4A invoice obligations and on the rescission of an earlier CHA valuation circular as not affecting BAS classification. Conclusion: The Court concluded that brokerage received from shipping lines for canvassing/promotion of cargo is liable to service tax as BAS where the activity objectively constitutes promotion/marketing/auxiliary services to the carrier. Issue 2 - Distinction between CHA services and BAS; composite services Legal framework: CHA services are defined separately (entry/departure of conveyances, import/export clearance) and taxable under specific sub-clauses (Section 65(105)(h) for CHA and 65(105)(zzb)/65(19) for BAS). Classification rules require assessing the nature of each service; resort to sub-section 2(b) of Section 65 only when service is classifiable under multiple heads. Precedent Treatment: Tribunal authorities have held that where providers perform different services, each service must be classified separately; composite service characterization is appropriate only if essential characteristics make the services inseparable or fall under multiple heads. Interpretation and reasoning: The Court found two distinct activities present: (i) CHA services rendered to exporters/importers (for which the appellant collected clearing charges), and (ii) services rendered to shipping lines in the nature of promotion/canvassing (for which brokerage was received). Because the activities differ materially (different payors, different recipients of benefit), the brokerage could not be absorbed into CHA services. The Court rejected the appellant's composite-service argument, holding that brokerage's nature aligns with BAS, not CHA; a service provider offering multiple types of services must classify and register each service separately. Ratio vs. Obiter: Ratio - classification must follow the essential nature of each distinct activity; brokerage for promoting a carrier is BAS, not subsumed under CHA. Obiter - explanation of when subsection 2(b) should be applied (only where service falls under two or more sub-clauses). Conclusion: Brokerage received from shipping lines is not CHA service; it is BAS where the service elements match Section 65(19) definitions and illustrative list. Issue 3 - Relevance of rescinded/valuation circular addressing CHA Legal framework: Board circulars clarify scope/valuation but cannot alter statutory classification; a circular dealing with valuation/exclusions for CHA does not change the nature of distinct services that are classifiable as BAS. Precedent Treatment: Authorities emphasize that measure/rules of taxation (valuation) do not determine the nature of the tax or service classification; a circular addressing computation of CHA taxable value is not determinative for BAS classification. Interpretation and reasoning: The Court held that the circular relied upon by the appellant (addressing CHA valuation and computation) was inapplicable because it dealt with CHA taxable value computation, not with whether brokerage paid by shipping lines constitutes BAS. Moreover, that circular had been rescinded for later periods. Hence it could not negate the statutory classification based on the nature of brokerage activity. Ratio vs. Obiter: Ratio - valuation or computation circulars for CHA do not change the legal character of brokerage receipts when their nature aligns with BAS. Obiter - note on rescission making the circular irrelevant for the relevant period. Conclusion: Reliance on the CHA valuation circular is misplaced; it does not exclude brokerage from BAS taxation. Issue 4 - Limitation, penalties and interest where demand on brokerage is unsustainable Legal framework: Proviso to Section 73(1) (extended period) applies on suppression/undisclosed facts; Sections 75-78 govern interest and penalties; Section 80 allows penalty waiver in certain circumstances. Precedent Treatment: Where demands are unsustainable on merits (e.g., receipts found to be non-taxable principal-to-principal trading), penalties and interest have been set aside and waiver of penalty granted; bona fide belief and bona fide payment of unrelated taxes support absence of mala fide suppression. Interpretation and reasoning: The Court noted that if the demand itself lacks foundation (because receipts are not taxable), imposition of penalties and recovery of interest lose basis. The Court considered coordinate bench and higher authority holdings that where activity is trading in space on principal basis or otherwise not BAS, demands (including extended-period invocation) fail and consequent penalties/interest are liable to be set aside; conversely, where BAS classification is established on facts, demands and associated interest/penalty may stand unless mitigating provisions apply. The Court also noted that bona fide conduct (payment where not required) and absence of suppression militate against penalty/extended limitation where applicable. Ratio vs. Obiter: Ratio - penalties/interest/extended limitation cannot survive where the underlying tax demand is unsustainable on merits; absence of mala fide suppression and bona fide belief can justify waiver or setting aside of penalties/interest. Obiter - commentary on allocation/appropriation of deposited amounts. Conclusion: If tax demand on brokerage is not sustainable, penalties and interest are to be set aside and waiver may be extended; if BAS classification is sustained on facts, normal consequences follow subject to statutory provisions. Overall Court Conclusion The Court analysed the nature of brokerage receipts and the applicable precedents, concluding that the question of taxability depends on whether the receipts represent distinct BAS (promotion/marketing/auxiliary services to shipping lines) or principal-to-principal trading in cargo space. Where facts establish pure canvassing/promotional services to shipping lines distinct from CHA activity, such receipts fall within BAS and are taxable; where the activity is bona fide purchase and resale of space on principal account (trading), receipts are not BAS and not taxable. The Court applied coordinate decisions and legal principles to the facts and allowed the appeal where the impugned order lacked merit on those grounds.