2026 (1) TMI 324 - AT - Service Tax

Air cargo transport services arranged under consolidated contracts-classification as operator vs intermediary; tax demands set aside

The dominant issue was classification and taxability of services for air cargo transportation arranged by the appellant. For the pre-1.7.2012 period, the ... Classification of service - Business Auxiliary Service or transport of goods by aircraft service - Aeroflot invoiced the appellant for transportation of cargo and the appellant paid Aeroflot for transporting the goods from Delhi or Goa to the destination - no lis between the exporter and Aeroflot - nature of the services rendered by the appellant - who were the service recipients. Classification of service before 1.7.2012 - HELD THAT:- In the first place, if the appellant is not covered under section 65 (105) (zzn), the appellant will not be rendering a taxable service at all and if so, the eligibility of exemption or otherwise is irrelevant. Secondly, it is found that the term ‘aircraft operator’ must be interpreted as per the statutory definition in section 65 (105) (3b) insofar as it pertains to this Act according to which “aircraft operator' means any person which provides the service of transport of goods or passengers by aircraft. Nothing in this definition requires one to either own or lease or run an aircraft. So long as one provides the service of transport of goods or passengers by aircraft, one is covered by the definition of ‘aircraft operator’. The appellant provided the service of transporting goods of the exporters by air using the services of Aeroflot, domestic airlines, etc. and hence is squarely covered by the term aircraft operator and is covered by the charging section 65 (105) (zzn) of the Act which service, undisputedly was exempt by notification no. 29/2005-ST dated 15.7.2005. Classification of service after 1.7.2012 - where the service has been provided since as per section 64, the Finance Act applies to the whole of India and if the service is provided outside India, it will not be in the taxable territory and hence no service tax can be charged? - HELD THAT:- The easiest way to examine the nature of the service is to ask ‘what did the service recipient pay the service provider for’? It is the consideration that is received which is exigible to service tax. The appellant offered to its clients, the exporters, a package deal of transporting their goods from their places upto the destination and charged a consolidated sum for this service. It did not offer to act as an intermediary between the exporter and Aeroflot or any other service provider for a service. In a contract of such nature, the intermediary’s responsibility would be confined to linking the two parties for a consideration for such service. The actual service would be rendered by the airline who would bill the exporter for its service of transportation. Clearly, the appellant had not rendered ‘intermediary service’ to its clients. It provided the service of transporting the goods by air to the destination. As per Rule 10 of the POPS service, the place of provision of service is the destination outside India. Therefore, no service tax is payable on the service as the provisions of the Act extend only to the whole of India and not beyond. The impugned order confirming the demand of service tax with interest and imposing penalties cannot be sustained - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the appellant's end-to-end cargo logistics activity for exporters, prior to 01.07.2012, was correctly classifiable as Business Auxiliary Service (procurement of services for a client) or as transport of goods by aircraft, having regard to the actual manner in which the service was rendered. (ii) Whether, for the period after 01.07.2012, the appellant was providing an intermediary service attracting place of provision under Rule 9 of the Place of Provision of Services Rules, 2012, or providing transportation of goods attracting Rule 10, and consequently whether the service was taxable in India when the destination was outside India. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Classification of service prior to 01.07.2012-Business Auxiliary Service vs transport of goods by aircraft Legal framework (as discussed by the Court): The Court examined the competing statutory entries relied upon in the decision under challenge: 'business auxiliary service' (including procurement of services as inputs for a client) and 'taxable service' in relation thereto; and 'taxable service' of transport of goods by aircraft provided by an 'aircraft operator', along with the statutory definition of 'aircraft operator' as a person who provides the service of transport of goods or passengers by aircraft. Interpretation and reasoning: The Court held that classification must be determined by the actual service rendered and not merely by the label in the agreement. On facts, the appellant did not merely connect exporters with airlines for a commission; instead, it offered exporters a consolidated 'package' for transportation from the exporter's place up to the final overseas destination, issued the Airway Bill covering the whole journey, and recovered a single consolidated consideration. The appellant, in turn, paid Aeroflot and other service providers for the international and domestic legs and ancillary activities. There was no direct billing or privity between exporters and Aeroflot/other carriers for the transportation service. These features showed principal-to-principal dealings and not procurement by the appellant 'for' the exporters in the manner contemplated for Business Auxiliary Service. Conclusions: The Court concluded that the activity was not Business Auxiliary Service under the procurement limb, because the appellant was not procuring transportation services for exporters as an agent; it was rendering the composite transportation service on its own account using third-party carriers. The Court further concluded that the appellant fell within 'aircraft operator' because the statutory definition required only that a person provides transport of goods by aircraft and did not require ownership/lease/operation of aircraft. Consequently, the service was covered under transport of goods by aircraft and was exempt during the relevant period as found by the Court. Issue (ii): Taxability after 01.07.2012-intermediary under Rule 9 vs transportation under Rule 10; place of provision and taxable territory Legal framework (as discussed by the Court): The Court treated as undisputed that after 01.07.2012, services (other than those in the negative list) were taxable, and that taxability depended upon whether the service was provided in the taxable territory. The Court considered the Place of Provision of Services Rules, 2012, including Rule 9 (relied upon by Revenue for intermediary services) and Rule 10 (relied upon by the appellant for transportation of goods). Interpretation and reasoning: The Court rejected the intermediary characterization by focusing on what consideration was paid 'for'. Exporters paid the appellant for the transportation package up to the destination, not for arranging a contract between exporters and Aeroflot or any other carrier. In an intermediary model, the airline would render and bill for transportation, and the intermediary would only earn a facilitation consideration. Here, the appellant billed exporters itself for the entire service and assumed responsibility for performance using other carriers. Therefore, Rule 9 was inapplicable. Applying Rule 10, the place of provision for transportation of goods (other than mail/courier) was treated as the destination of the goods, which on the Court's findings was outside India. Conclusions: The Court held that, post 01.07.2012, the appellant provided transportation of goods (not intermediary service), the place of provision under Rule 10 was the overseas destination, and therefore the service was outside the taxable territory. As a result, no service tax could be demanded in India on the consideration received for such transportation. Final outcome applying the above conclusions: Since the classification and place-of-provision findings negated taxability for both periods, the Court set aside the demand of service tax along with interest and penalties, and allowed the appeal.