Sindhu Cargo Services Pvt. Ltd. Vs Commissioner of CGST & Service Tax (CESTAT Chennai)
Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, in Sindhu Cargo Services Pvt. Ltd. Vs Commissioner of CGST & Service Tax, Final Order Nos. 40490–40491/2025 dated 2 May 2025, allowed two appeals challenging service tax demands under Customs House Agent (CHA) Services and Business Auxiliary Services for financial years 2007-08 and 2008-09. The dispute arose from the Department’s attempt to include expenses reimbursed by clients in the taxable value of CHA services and to levy service tax on certain income and receipts recorded in the appellant’s books. The Tribunal held that the demands were unsustainable on merits and that the extended period of limitation and penalties could not be justified.
The appellant was registered for providing Customs House Agent Services, Steamer Agent Services and Business Auxiliary Services. During scrutiny of its trial balance, schedules and records, the Department noticed that the appellant had excluded certain amounts received towards unloading charges, fumigation charges, harbour dues, documentation processing, vehicle charges, delivery order charges and transportation charges while computing taxable value. The Department considered these amounts includible under Section 67 of the Finance Act, 1994 read with Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, alleging that the appellant had failed to establish that it acted as a pure agent under Rule 5(2). The adjudicating authority confirmed the demands with interest and penalties, and the Commissioner (Appeals) upheld the orders despite the appellant furnishing a chartered accountant’s certificate and supporting particulars of expenditure and reimbursement.
The appellant contended that it had discharged service tax on the consideration received for CHA services and that amounts paid to third parties and reimbursed by clients on actuals were not consideration for any independent taxable service. It relied on the Supreme Court’s decision in Union of India Vs Intercontinental Consultants and Technocrats Pvt. Ltd., 2018 (10) GSTL 401 (SC), which affirmed that Rule 5(1), insofar as it included reimbursable expenditure in the taxable value, exceeded the scope of Sections 66 and 67 of the Finance Act, 1994. The Tribunal accepted this contention, observing that the Supreme Court had recognised the prospective character of the amendment to Section 67 effective from 14 May 2015. It consequently held that the demands on reimbursable expenses could not survive for the periods involved in the appeals.
Regarding Business Auxiliary Services, the Department had sought to tax receipts described as profit sharing, commission and incentives, alleging that they represented consideration for sales promotion. The Tribunal found that the demand was founded on figures taken from financial statements rather than invoices or evidence establishing that taxable services had actually been provided to a client. Merely recording income under a particular accounting head could not establish the existence of a taxable service under Section 65(105) of the Finance Act, 1994. Relying on Greenwich Meridian Logistics (I) Pvt. Ltd., New Era Travel & Cargo Agencies and International Clearing & Shipping Agency, the Tribunal held that taxability could not be determined empirically from profit and loss account entries without demonstrating a connection between the receipts and taxable services.
The Tribunal also rejected the invocation of the extended limitation period. The appellant had pointed out that an earlier show cause notice dated 26 March 2008 had already been issued on similar charges, and that the present proceedings arose from documents and trial balances furnished to the Department. The Tribunal found no evidence of a positive act of suppression or wilful misstatement with intent to evade service tax. Considering the interpretational nature of the issues, the extended period and penalties were held untenable. Accordingly, the Tribunal set aside Order-in-Appeal No. 106/2015 (STA-I) dated 20 April 2015, along with the underlying demands, consequential interest and penalties, and allowed both appeals with consequential relief, if any, in accordance with law.
Cases Discussed
- Union of India Vs Intercontinental Consultants and Technocrats Pvt. Ltd., 2018 (10) GSTL 401 (SC) — Rule 5(1) could not enlarge the taxable value beyond the consideration for services under Sections 66 and 67; the 2015 amendment was prospective.
- Intercontinental Consultants & Technocrats Pvt. Ltd. Vs Union of India, 2013 (29) STR 9 (Delhi High Court) — Rule 5(1) of the Service Tax Valuation Rules, 2006 was held ultra vires the statutory valuation provisions; affirmed by the Supreme Court.
- International Clearing & Shipping Agency Vs Commissioner of GST & CCE, Final Order No. 40197/2025 dated 12/02/2025 — Relied upon concerning reimbursements, Business Auxiliary Services and accounting entries.
- Sri Runadasan Freight Services Vs Commissioner of GST & CE, Final Order No. 40187/2025 — Relied upon concerning service tax on reimbursable expenses. The source prints the order date as 07/02/2015.
- Greenwich Meridian Logistics (I) Pvt. Ltd. Vs CST, 2016 (43) STR 215 — Accounting profits and receipts do not automatically establish consideration for taxable services.
- New Era Travel & Cargo Agencies Vs Commissioner of GST & Central Excise, Final Order No. 40558/2024 dated 29/05/2024 — Relied upon regarding taxation based on accounting entries.
- International Clearing & Shipping Agency Vs CST, Final Order Nos. 40974–40979/2023 dated 01/11/2023 — Relied upon concerning taxable consideration and amounts recorded in financial statements.
- Commissioner of Income Tax (Central)-I Vs Vatika Township Pvt. Ltd., (2015) 1 SCC 1 — Cited in the reproduced Supreme Court reasoning concerning the prospective operation of substantive legislative amendments.
FULL TEXT OF THE CESTAT CHENNAI ORDER
The appellant has preferred these two appeals, assailing the impugned Order in Appeal No.106/2015 (STA-1) dated 20.04.2015( OIA in short) whereby the appellate authority has upheld the Order in Original No.11 and 12/2011 dated 31.01.2011(OIOs in short) of the adjudicating authority, confirming the demands made under the category of Custom House Agent’s Services and Business Auxiliary Services in the SCN No.84/2009 dated 25.03.2009 for the period 2007-2008, and SCN No.396/2009 dated 17.09.2009 for the period 2008-2009, along with applicable interest and imposing penalties under Section 76 and 78 of the Act as more specifically indicated therein.
2. Brief facts are that the appellant is registered with the service tax department for providing Customs House Agent service (CHA), Steamer Agent Service and Business Auxiliary Service. On scrutiny of the trial balance and schedules in respect of the financial years and the details of reimbursable expenses/commission received submitted by the appellant it was noticed by the Department that the Appellant apart from collecting service charges for providing CHA service, also incurred certain expenditure towards various charges towards procurement of services in the course of rendering Custom House Agent’s service.
3. The Department was of the view that as per section 67(1) of the Act, where the provision of service is for a consideration in money, the taxable value of service is the gross amount charged by the service provider for providing service and according to Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules in short), expenditure or cost incurred by the service provider in the course of providing taxable service shall be treated as consideration for the taxable service and is includible in the taxable value. Again, Rule 5(2) of the Valuation Rules provided that the expenditure or costs incurred by the service provider as a” Pure Agent” of the recipient of service is liable to be excluded from the taxable service, subject to the service provider qualifying as a “Pure Agent” by satisfying the conditions specified in explanation 1 to Rule 5(2) of the Valuation Rules.
4. The Department was of the opinion that the appellant has not acted as a “Pure Agent” and since the appellant has not fulfilled the conditions specified in Rule 5(2) of the Valuation Rules read with explanation 1 of the said rules so as to qualify as a pure agent, the above charges collected from the clients are to be treated as expenditure or costs incurred by the appellant in the course of providing taxable service and are liable to be included in the gross value for the purposes of charging service tax on the taxable service rendered by the appellant as per provisions of Section 67 of the Act read with Rule 5(1) of the Valuation Rules. Therefore, alleging contravention of provisions of Section 68 of the Act read with Rule 6 of Service Tax Rules, 1994 for failing to pay appropriate amount of service tax and invoking extended period of limitation on the grounds that the fact of receipt of such charges were not disclosed in the service tax returns or in any other manner and have thus suppressed the fact of receipt of the subject income with intent to evade payment of duty; show cause notice 84/2009 dated 25.03.2009 was issued demanding the aforementioned service tax payable along with appropriate interest as well as proposals to impose penalties. For the subsequent period, without invoking extended period, but on similar charges, SCN No.396/2009 dated 17.09.2009. Consequent to the replies filed by the appellant, a personal hearing was granted, after which the adjudicating authority issued the impugned OIOs No.11 and 12/2011 dated 31.01.2011 rendering a finding that the said reimbursable expenses cannot be excluded from the gross amount and consequently the appellant is liable to pay service tax along with interest on such reimbursable expenses reimbursed by their clients. Accordingly, the demand proposed in the show cause notice was confirmed along with demand of appropriate interest and imposition of penalties under Section 78 of the Act as well as Section 76 of the Act. Aggrieved by the said impugned order in original the appellant preferred an appeal before the Commissioner of Service Tax (Appeals-I), who however, vide the impugned OIA 106/2015 (STA-I) dated 20.04.2015, upheld the impugned OIOs of the adjudicating authority, holding, inter-alia, that the appellant had failed to evidence that they had acted as pure agents, even though the appellant’s did provide a chartered accountant’s certificate certifying that the appellant had billed their clients only the actual amount and furnished the data showing the details of income charged by them and expenditure met by them against such income under different heads of income and further the bill wise breakup of the same. Aggrieved by the aforementioned finding, the appellant has preferred the present appeals assailing the impugned OIA and is thus before this Tribunal.
5. The learned counsel, Ms. Radhika Chandrashekar, appeared and argued for the appellant. The learned counsel submitted that the appellant is in the business of providing service as a CHA and has discharged service tax on the consideration received for providing CHA services. It is submitted that while providing CHA services the appellant has excluded reimbursable charges such as unloading charges, fumigation charges, harbour dues, processing of documentation, vehicle charges, DO charges, transport charges etc., paid to third parties and customs department , while computing the value of taxable income, as these were not part of consideration received for providing services. These expenses are reimbursed by the client on actuals. The appellant did not discharge service tax on the reimbursable expenses as it is not a consideration for any services rendered. The learned counsel submits that only the service charges received as consideration for the services provided or to be provided would form part of the taxable value for the purposes of service tax and reimbursements are not liable to tax.
6. The learned counsel submits that the Honourable Supreme Court has in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, reported in (2018) TIOL 76-SC-ST : 2018 (10) GSTL 401 (SC), affirmed the decision of the Delhi High Court wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections. With respect to the demand under Business Auxiliary Services the amounts shown under the head ‘profit sharing’ and commission/incentive received is not taxable as it is not for any services rendered and they were picked up from the books of account without any correlation to the services rendered. The demand of service tax on the same has been confirmed by the adjudicating authority in the OIO. However, the Appellate authority has gone on to uphold the OIO without any specific finding in this regard and by confirming the entire demand on the ground that the appellant is not a pure agent, the finding travels beyond the SCN. The learned counsel also submits that the show cause notice could not have invoke the extended period of limitation as the SCN itself indicated that a prior SCN No.67/08 dated 26.03.08 had been issued on similar charges. The learned counsel submits that the extended period in terms of proviso to Section 73(1) can be invoked only when there is fraud, collusion, wilful misstatement, suppression of facts or contravention of any of the provisions of the chapter of the Act or the rules made thereunder with intent to evade payment of duty. The learned counsel submits that the question involved in the present matter is on interpretation of the provisions of the rules to determine the liability of the CHA to pay service tax on reimbursable expenses and thus no malafide can be attached to the appellant so as to warrant the invoking of extended period of limitation. Further, SCN was issued on the basis of the documents and Trial balance that the appellant had provided and hence no basis to invoke the proviso to section 73(1) has been made out. The Ld. Counsel stated that the issue is settled in the appellant’s favour by various decisions and submitted the decision in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, 2018 (10) GSTL 401 (SC) as well as the orders of this Tribunal vide Final order No.40197/2025 dated 12.02.2025, in M/s. International Clearing & Shipping Agency v Commissioner of GST & CCE, Chennai North Commissionerate and Final order No.40187/2025 dated 07.02.2015 in the case of M/s. Sri Runadasan Freight Services v Commissioner of GST & CE.
7. Learned Authorised Representative, Shri. N. Satyanarayana appeared for the Department and reiterated the findings in the impugned order in appeal.
8. We have heard both sides, perused the appeal records and the case laws provided as relied upon.
9. We find that the issue on levy of service tax on reimbursable expenses is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, 2018 (10) GSTL 401 (SC) which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client, apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax. The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI, 2013 (29) STR 9 (Del), wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections. The Honourable Supreme Court had also noticed the nature of reimbursable expenses that arose for consideration in the facts of the case as well as that in connected appeals before it, and has gone on to hold as under:
“21. Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed, that is, for which the service receiver has made the payments to the assessees. As per these Rules, these reimbursable expenses also form part of ‘gross amount charged’. Therefore, the core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act.
22. Section 66 of the Act is the charging Section which reads as under:
“there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses of Section 65 and collected in such manner as may be prescribed.”
23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the ‘value of taxable services’. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon.
24. In this hue, the expression ‘such’ occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendment, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.
25. This position did not change even in the amended Section 67 which was inserted on May 1, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1). Mandate of sub-section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.
26. It is trite that rules cannot go beyond the statute. In Babaji Kondaji Garad, this rule was enunciated in the following manner :
“Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the byelaw, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with.”
27. The aforesaid principle is reiterated in Chenniappa Mudaliar holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act.
28. It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel :
“the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.”
29. In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with ‘consideration’ is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax. Though, it was not argued by the Learned Counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature. On this aspect of the matter, we may usefully refer to the Constitution Bench judgment in the case of Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited [(2015) 1 SCC 1] wherein it was observed as under :
“27. A legislation, be it a statutory Act or a statutory rule or a statutory notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work of fiction/non-fiction or even in a judgment of a court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the various principles of “interpretation of statutes”. Vis-a-vis ordinary prose, a legislation differs in its provenance, layout and features as also in the implication as to its meaning that arise by presumptions as to the intent of the maker thereof.
28. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1] , a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law.
29. The obvious basis of the principle against retrospectivity is the principle of “fairness”, which must be the basis of every legal rule as was observed in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later.”
30. As a result, we do not find any merit in any of those appeals which are accordingly dismissed.”
10. In the light of the Honourable Supreme Court’s decision reproduced supra, which has been followed by this Tribunal in the decisions in Final order No.40197/2025 dated 12.02.2025, in M/s. International Clearing & Shipping Agency v Commissioner of GST & CCE, Chennai North Commissionerate and Final order No.40187/2025 dated 07.02.2015 in the case of M/s. Sri Runadasan Freight Services v Commissioner of GST & CE, cited by the appellant, we are of the considered view that the impugned order in appeal, upholding the demands of service tax as confirmed in the impugned orders in original on this count, cannot sustain.
11. As regards the demand on the appellants on the allegation of having provided Business Auxiliary Services, it is seen from the SCN 84/2009 dated 25-03-2009 , that the income/receipts under certain headings in their accounts are sought to be subjected to levy of service tax under “Business auxiliary service” by a mere ipse dixit that it is empirical that the said receipt/income pertain to those received by the appellant as a consideration towards sales promotion. The demand of service tax on the same has been confirmed by the adjudicating authority in the OIO. However, the Appellate authority has gone on to uphold the OIO without any specific finding in this regard. We find that the Department has proceeded to demand Service Tax only on the figures taken from the financial statements (profit and loss account) and not from the invoices raised by the appellant. No evidence has been let in that these are consideration received for services provided to a client. That the demand of service tax made merely based on income reported in the P & L account, without it being shown that such income amounts to consideration received for services provided, has been held to be untenable. The decisions of the Tribunal in Greenwich Meridian Logistics (I) Pvt Ltd v CST, Mumbai (2016) 43 (STR) 215, Final Order No.40558/2024 dated 29.05.2024 in M/s. New Era Travel & Cargo Agencies v The Commissioner of GST & Central Excise, Final Order No.40974-40979/2023 dated 01.11.2023 in the case of M/s. International Clearing & Shipping Agency v CST and Final order No.40197/2025 dated 12.02.2025, in M/s. International Clearing & Shipping Agency v Commissioner of GST & CCE, Chennai North Commissionerate are on these lines. The nomenclature under which the appellant books profit in its account cannot be the basis for slotting the appellant as providing a particular taxable service under section 65(105). Determination of taxability based on such entries and assessing it to tax on this count on an empirical basis, is alien to the Finance Act 1994. We therefore hold that the demand under Business Auxiliary Services made vide the impugned orders in original, which has been upheld in its entirety by the impugned OIA, cannot sustain.
12. We also find that there is no evidence let in of any positive act of suppression or wilful misstatement with intent to evade payment of service tax on the part of the appellant, and thus the ingredients required to invoke extended period of limitation has not been established by the Department. We also find force in the contentions of the learned counsel for the appellant that the issues involved were of interpretational nature and therefore the allegation of malafides made to invoke the extended period of limitation and impose penalties are untenable.
13. In view of the foregoing facts borne out from the records and the discussions and findings stated above, we find that the appellant succeeds in its Appeals on merits as well as on its plea against invocation of extended period of limitation. The demands made in the impugned orders in original as upheld by the impugned Order in Appeal, being untenable, the demand of consequential interest and the penalties imposed also do not sustain. Hence the impugned Order in Appeal No.106/2015 (STA-1) dated 20.04.2015 is set aside.
The appeal is allowed with consequential relief, if any, in law.
(Order pronounced in open court on 02.05.2025)
