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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.
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