Service Tax Demand on Commission Paid to Foreign Ship Brokers Quashed Citing Defective SCN: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has set aside substantial service tax demands raised against shipping company holding that the show cause notice failed to clearly specify the statutory basis under which the services were taxable. The Tribunal ruled that such an omission rendered the demand unsustainable in law. The bench of Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that show cause notice itself has not let in evidence of any positive act of wilful misstatement or suppression of facts with intent to evade payment of duty on the part of the Appellant. It is no more res-integra that it must be alleged in the show cause notice that the service tax has not been paid by reason of fraud, collusion or wilful mis-statement or suppression of fact on the part of the Appellant with intent to evade its payment. Mere non-declaration cannot be said to be wilful withholding of vital information. Sanmar Shipping Ltd., a Chennai-based company engaged in ship chartering and related maritime activities, was registered under service tax for services including supply of tangible goods and transportation through national waterways and inland waterways. During an audit, the tax department observed three alleged irregularities: Firstly, the commission paid to foreign ship brokers for canvassing cargo voyages. Secondly, payments made to overseas Protection and Indemnity (P&I) Clubs for covering third-party liabilities associated with shipping operations. Thirdly, Short payment of service tax on freight services, allegedly due to non-inclusion of brokerage-related expenses in the taxable value. Based on these findings, the department issued a show cause notice proposing service tax demands under the reverse charge mechanism for services received from abroad. The adjudicating authority confirmed a service tax demand of ₹2.38 crore for the period April 2006 to December 2010and ₹48.9 lakh for January 2011 to March 2012, along with interest and penalties. In a subsequent proceeding, an additional ₹7.58 lakh demand was also confirmed. The department classified the commission paid to foreign agents as Business Auxiliary Services (BAS), contending that the brokers promoted the company’s business by securing voyages for its vessels. Since these services were received from entities located abroad, the department argued that Sanmar Shipping was liable to pay service tax under the reverse charge mechanism in terms of Section 66A of the Finance Act, 1994. Similarly, the department treated payments made to P&I Clubs as consideration for general insurance services, asserting that these clubs provided marine insurance cover for third-party liabilities. The department further alleged that brokerage commissions paid indirectly through service recipients should have been included in the taxable value of freight services under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. Sanmar Shipping challenged the tax demand on several grounds. The company argued that foreign ship brokers merely acted as intermediaries facilitating negotiations between ship owners and charterers, and did not perform activities that could be classified under Business Auxiliary Services. It also contended that the show cause notice did not specify which sub-clause of the statutory definition of BAS applied to the alleged service, despite the definition containing multiple distinct categories. Regarding the payments to P&I Clubs, the appellant submitted that these entities operate as mutual insurance associations, where members pool funds to cover risks such as cargo damage, pollution, and other maritime liabilities. The company maintained that such arrangements were based on principles of mutuality and did not constitute general insurance services provided by an insurer. The company further argued that the activities occurred outside India, with payments made in foreign exchange and services rendered in international waters. After examining the records and submissions, the Tribunal found serious defects in the show cause notice. The bench noted that the notice failed to identify the specific clause within the definition of Business Auxiliary Service under Section 65(19) of the Finance Act, 1994 under which the alleged activity was taxable. The Tribunal observed that the definition of BAS contained multiple sub-clauses covering different categories of services, and the department had neither specified the relevant clause nor explained how the activity of ship brokers fit within it. According to the Tribunal, this omission deprived the appellant of proper notice and the opportunity to effectively defend itself. The bench held that a demand cannot be sustained when the notice does not clearly identify the statutory provision under which the activity is sought to be taxed. The Tribunal also examined the department’s reliance on Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 to include certain expenses in the taxable value. Case Details Case Title: M/s. Sanmar Shipping Versus Commissioner of GST and Central Excise Citation: JURISHOUR-228-CES-2026(CHEN) Case No.: Service Tax Appeal Nos. 40795 - 40796 of 2014 Date: 04.03.2026 Counsel For Appellant: Radhika Chandrasekhar, Advocate Counsel For Respondent: M. Selvakumar, Authorised Representative Click Here To Read Order Read More: Appellate Authority Can’t Direct Re-Examination of Refund Limitation When Timeliness Was Never Disputed by Dept.: CESTAT

Service Tax Demand on Commission Paid to Foreign Ship Brokers Quashed Citing Defective SCN: CESTAT

Membership Required

Latest articles

Delivery of Research Reports Abroad Constitutes ‘Part Performance’, Qualifies as Export: CESTAT

Customs Valuation: CESTAT Quashes Export Value Enhancement for Violation of Natural Justice, Remands Matter

SEZ Units Entitled to Service Tax Refund on Input Services Used in Authorised Operations: CESTAT Chennai Allows Nokia India’s Appeal

Customs Penalty Unsustainable Without Evidence of Abetment: CESTAT Quashes Penalties U/s 112(a)

More like this

Delivery of Research Reports Abroad Constitutes ‘Part Performance’, Qualifies as Export: CESTAT

Customs Valuation: CESTAT Quashes Export Value Enhancement for Violation of Natural Justice, Remands Matter

SEZ Units Entitled to Service Tax Refund on Input Services Used in Authorised Operations: CESTAT Chennai Allows Nokia India’s Appeal

About us

Company

Categories