2026 (3) TMI 1151 - AT - Service Tax

Valuation limited to gross service consideration: reimbursements and multimodal freight margins excluded from service tax for pre amendment period.

For the pre amendment period the Tribunal held taxable value is confined to the gross amount charged for the service; Rule 5 cannot extend valuation to ... Demand on reimbursable expenses and the freight margin - purchase and sale of cargo/space by a multimodal transporter (difference between price at which cargo space is booked and price at which it is sold) - business auxiliary/support services - Nature of the transactions - pre-amendment provisions of Section 67 and Rule 5. Reimbursable expenses - HELD THAT:- The Tribunal applied the Supreme Court precedent in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. [2018 (3) TMI 357 - SUPREME COURT], holding that Rule 5(1) of the Service Tax Valuation Rules, 2006 could not validly enlarge the valuation under Section 67 prior to the legislative amendment effective May 14, 2015. The reasoning emphasises that valuation must be limited to the gross amount charged 'for such' taxable service and that rules cannot exceed statutory mandate; consequently, reimbursed expenditures such as freight/air and sea charges are not includable in valuation for the periods in issue. [Paras 10, 12] Demand insofar as it relates to reimbursable expenses is unsustainable and set aside. Purchase and sale of cargo space by multimodal transporter not exigible to service tax - Margins earned by the appellant from purchase and sale (trading) of cargo space in containers/air space as a multimodal transporter are not exigible to service tax - HELD THAT:- The Tribunal found, following coordinate-bench authorities, that where the appellant acts as a multimodal transport operator contracting as principal-to-principal-procuring space from carriers and reselling or allocating that space to shippers-the consideration collected represents trading in space (purchase and sale) and not a service rendered for the carrier or client that falls within Business Auxiliary/Support Services. The absence of evidence in the SCN to show agency or that classification must change reinforced adherence to the consistent view of coordinate benches that such freight margins are not subject to service tax. [Paras 11, 12] Demand insofar as it relates to freight margins from booking and sale of cargo space is unsustainable and set aside. Penalties under sections 76 and 77 - HELD THAT:- Having held the contested demands in respect of reimbursable expenses and freight margins to be unsustainable, the Tribunal concluded that the concomitant penalties could not stand. The Tribunal therefore set aside the penalties imposed in the impugned orders in view of the dismissal of the substantive demands. [Paras 12] Penalties under sections 76 and 77 upheld in the orders below are set aside. Final Conclusion: The appeals are allowed: the service-tax demands in respect of reimbursable expenses and freight margins arising from purchase and sale of cargo space are set aside, and the penalties under sections 76 and 77 imposed on those demands are also set aside; the uncontested airway bill charge remains as not contested by the appellant. Issues: (i) Whether amounts recovered as reimbursable expenses are includible in the value of taxable services under Section 67 and Rule 5 of the Service Tax (Determination of Value) Rules, 2006; (ii) Whether the freight margin arising from purchase and sale of cargo/space by a multimodal transporter (difference between price at which cargo space is booked and price at which it is sold) is exigible to service tax as business auxiliary/support services.Issue (i): Whether reimbursable expenses recovered from customers form part of the taxable value under the pre-amendment provisions of Section 67 and Rule 5 of the Service Tax (Determination of Value) Rules, 2006.Analysis: The validity of Rule 5 in relation to Section 67 was addressed by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., holding that Rule 5(1) could not expand valuation beyond consideration for the service and is ultra vires Section 66/Section 67 as they stood prior to the amendment effective May 14, 2015. The Tribunal applied that precedent to the relevant pre-amendment period and examined the statutory scheme confining taxable value to gross amount charged ''for such service''. The Tribunal noted the legislative amendment to Section 67 in 2015 was prospective and does not govern the earlier period.Conclusion: In favour of the assessee. Reimbursable expenses recovered from customers are not includible in taxable value for the relevant pre-amendment period and demands based on Rule 5 are unsustainable.Issue (ii): Whether the profit margin on purchase and sale of cargo space by a multimodal transporter is taxable as consideration for a taxable service.Analysis: The nature of the transactions was analysed in light of statutory definitions of multimodal transport operator and consistent coordinate-bench authorities which treat procurement and resale of cargo/space by a multimodal transporter as principal-to-principal transactions amounting to trading in space rather than provision of a promotive or auxiliary service to a client. The Tribunal followed the view of coordinate benches holding that ocean/air freight collected as a result of such principal transactions and any notional surplus arise from purchase and sale of space and are not exigible to service tax under business auxiliary or business support services. The Tribunal also found absence of evidential basis in the show cause process to reclassify the transactions claimed by the assessee.Conclusion: In favour of the assessee. The freight margin from purchase and sale of cargo space by a multimodal transporter is not exigible to service tax.Final Conclusion: The appeals are allowed insofar as demands relating to reimbursable expenses and freight margins are set aside; penalties under Section 76 and Section 77 upheld earlier are set aside. The aggregate effect is relief to the assessee for the contested demands in the relevant pre-amendment period.Ratio Decidendi: For the pre-amendment period, valuation for service tax is limited to the gross amount charged for the service itself; subordinate rules cannot extend valuation to reimbursable expenditures (Rule 5 being ultra vires Section 66/67), and principal-to-principal procurement and resale of cargo space by a multimodal transporter constitutes trading in space not exigible to service tax as business auxiliary/support services.