Service tax on Free Delivery

[Suresh Kumar]

We are a small time ecommerce Company selling goods online. We started the business from April 2015 and for the period for Apr 2015 to Mar 2016, we have provided free delivery to all our customers. From April 2016 on wards we started charging Delivery charges separately. Since we started collecting delivery charges separately, we also started paying Service tax on the same from Apr 2016. Now the Service tax department is of the view that we have to pay Service tax from Apr 2015 on wards because we have provided that service to customers. Our view is of that since we have not collected charges from customers, we are not liable to pay. Please help if our assumption is correct, do we need to pay service tax if the service is provided at free of cost?

[Himansu Sekhar]

What is the reason cited by the department?

[KASTURI SETHI]

Dear Querist,

Nobody provides free service. I think delivery charges were being recovered in guise. They are added to the price in a hidden way. That is why the department is asking for ST. If you want to prove, the department will not listen to because there is "no free lunch". It is not charitable. I think so.

Otherwise Service without consideration does not qualify the definition of 'Service' under the Finance Act. Free Service is out of Service Tax.

[Himansu Sekhar]

You are correct sir. When the taxable value is not ascertainable, section 67 is applicable. One has to prove the nil consideration. There will be no tax.

[Ganeshan Kalyani]

Additionally, if the recovery of delivery charges are only to pay to the agency carrying out delivery on behalf of you, then pure agent provision would of use to you. But then the amendment stating that reimbursement is also taxable would need to be taken care.

Further, in my view, if the consideration were offered to tax under VAT then service tax provision should not apply.

[KASTURI SETHI]

Dear Sir,

Issue of 'pure agent' does not come into picture here. ' C & F Services" is best example of pure agent.

[Nash Industries I Pvt Ltd]

The tax department is the most innovative department as they find various innovative ways to levy the tax.

In this case, per se tax is not liable for the past period as it is not collected. However, agree with Mr Sha and Mr Kasturi that it is to be proven that the price do not include the delivery charges and that the charges were borne by the company.

Regards

S.Ramaswamy

[Ganeshan Kalyani]

If delivery activity is carried out by the company itself then "pure agent" concept would not apply. If any third party is assigned the work of delivery of item then , in my view, pure agent provision would apply.

Further the pricing structure need to be checked whether delivery charges were inbuilt in the price or not. If not then no service tax as there is no consideration as rightly said by Sri Kasturi Sir. Thanks.

AI Summary

Service tax on free delivery: absence of consideration may preclude liability but supplier must prove nil consideration.
Whether free delivery is taxable depends on whether the delivery constitutes a Service for consideration or truly nil consideration. Supplier must prove nil consideration and that delivery costs were not recovered; if delivery is performed by a third party and merely reimbursed, the pure agent concept may exclude reimbursement, though reimbursement taxability rules and any embedded pricing will be determinative.