The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside service tax demands raised on freight rebates, brokerage, incentives and airway bill fees earned by a customs clearing and shipping company, holding that profit generated from the purchase and sale of cargo space cannot be subjected to service tax under “Business Auxiliary Service.”
The Bench of Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member), allowed two appeals filed by International Clearing and Shipping Agency (India) Private Limited after noting that the same issue had already been decided in the company’s favour for earlier periods.
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The company was registered for providing Customs House Agent services and other taxable services. The dispute arose from two Statements of Demand issued by the Service Tax Department.
The first Statement of Demand, dated October 9, 2012, covered the period from April 2011 to March 2012. The second, dated April 3, 2014, related to the period from April 2012 to June 2012.
Both demands relied on allegations contained in earlier show cause notices covering the period between April 2009 and March 2011. The department alleged that the company had failed to pay service tax on incentives, airway bill fees, rebates, brokerage and other amounts received in connection with its freight-forwarding activities.
Following adjudication, the authorities classified these receipts as consideration for Business Auxiliary Services and confirmed the service tax demands along with applicable interest and penalties. The Commissioner of Service Tax (Appeals-I), Chennai, subsequently upheld the adjudication orders, prompting the company to approach the Tribunal.
Before the CESTAT, the company argued that its activity involved purchasing cargo space from airlines or shipping lines and selling that space to customers. The difference between the price paid for cargo space and the price charged to customers represented a freight margin, discount or commercial profit and not consideration for any service provided to an airline or shipping line.
It was submitted that the company was not acting as an agent of the airline or shipping line and did not promote their services. According to the company, neither the airline nor the shipping line could be regarded as its client for the purpose of levying service tax under Business Auxiliary Service.
The company also relied on a CBEC circular dated August 12, 2016, clarifying the tax position of freight forwarders acting as principals. It contended that a freight forwarder acting on a principal-to-principal basis would not be liable to service tax where the transportation of goods was from a place in India to a destination outside India.
Counsel for the company further pointed out that the Tribunal had already decided identical disputes concerning earlier periods in its favour. In a November 2023 order, the CESTAT had set aside demands relating to the reimbursement of expenses under Customs House Agent and Steamer Agency services, as well as service tax demands on freight, brokerage and incentives.
The Tribunal had again ruled in the company’s favour in February 2025 for the period from 2006-07 to 2010-11. That decision set aside service tax demands concerning rebates, brokerage, incentives and airway bill charges.
The CESTAT noted that the two Statements of Demand involved in the present proceedings were based on the allegations contained in the earlier show cause notices. Those earlier allegations had already been examined by the Tribunal while deciding the dispute for the preceding periods.
Referring to its February 2025 decision, the Bench reiterated that profit earned through the purchase and sale of cargo space could not be subjected to service tax. Similar conclusions had also been reached in cases involving other freight-forwarding and cargo agencies.
The Tribunal observed that, in the earlier proceedings, the show cause notices initially proposed taxation of freight, rebates, brokerage and operational surplus under Customs House Agent services. However, the adjudicating authority subsequently sought to tax those receipts under Business Auxiliary Service.
Such a change in the taxable category was impermissible because an adjudicating authority cannot confirm a demand on a ground or under a service category that was not proposed in the show cause notice. Doing so would amount to travelling beyond the scope of the notice, the Tribunal reiterated.
The Bench also emphasised that the statutory definition of Business Auxiliary Service contained several distinct clauses. Therefore, whenever the department sought to classify an activity under that service, it was necessary to identify the specific clause covering the activity in question.
Neither the show cause notices nor the adjudication orders had specified the particular limb of Business Auxiliary Service under which the company’s freight-related receipts were taxable. The demands were consequently unsustainable on this ground as well.
The Tribunal further rejected the method of determining tax liability merely from income reported in the company’s profit and loss account. The description or accounting nomenclature assigned to a receipt could not, by itself, establish that the amount represented consideration for a taxable service.
According to the CESTAT, taxability under the Finance Act, 1994, must be determined by establishing that the amount was received as consideration for an identifiable taxable service. An accounting entry recording commercial profit could not automatically be treated as proof of the provision of a taxable service.
The earlier decision had also found that the extended limitation period could not be invoked against the company. Since the department had previously issued notices involving the same questions and those disputes had reached the Tribunal, the controversy was already known to the authorities.
There was no evidence of any deliberate suppression of facts or wilful misstatement by the company with the intention of evading service tax. The dispute was also interpretational in nature, making the allegations of mala fide conduct and the consequential penalties untenable.
The department did not demonstrate that the Tribunal’s February 2025 order in the company’s own case had been overturned by a higher judicial forum or had otherwise ceased to operate.
The CESTAT declared the appellate order sustaining the demands unsustainable and set it aside. Both appeals were allowed with consequential relief in accordance with law.
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