Service tax not leviable on income earned via buying and selling space on ships

Tiger Logistics India Ltd Vs Commissioner of Central Tax (CESTAT Delhi)

CESTAT Delhi held that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions would not be leviable to service tax.

Facts- Service tax appeal has been filed by M/s. Tiger Logistics (India) Ltd to assail that part of the order passed by the Commissioner Adjudication, Central Tax, GST, East that confirms the demand of service tax amounting to Rs. 5,65,06,546/- with interest u/s. 75 of the Finance Act, 1994 and penalty u/s. 78(1), 77(1)(a), 77(2) and 70 of the Finance Act.

The appellant is engaged in providing the Customs clearance of cargo on behalf of the clients; along with customs clearance, transportation service as an incidental service to the clients; and Freight forwarding.

The actual amount of freight paid by the appellant to the airlines or shipping lines may be more or less than the amount of freight agreed to with the customer; the differential being the profit or loss accruing to the appellant from the sale of cargo space. The appellant claims to act on a principal-to-principal basis with their clients for rendering this service.

The issue involved in this appeal is regarding demand of service tax on the Mark Up/Differential Ocean Freight, Container Detention Charges, Toll Tax, Brokerage, Forklift Charges, Fumigation Charges and Sundry Charges.

The order dated 18.11.2021 passed by the Commissioner adjudicates the Statement of Demand dated 22.12.2017 as also the Statement of Demand dated 29.09.2020. The former Statement of Demand proposed a demand of Rs. 2,48,97,489/- for the taxable services rendered by the appellant during the period 01.03.2015 to 31.03.2017 after mentioning that the legal provisions regarding the issues had been discussed in detail in the show cause notice dated 23.04.2015 issued by the Principal Commissioner. The latter Statement of Demand proposed a demand of service tax amounting to Rs. 3,16,09,047/- for the taxable services rendered by the appellant for the period 01.04.2017 to 30.06.2017. This Statement of Demand also mentioned that the legal provisions on the issues had been discussed in detail in the earlier show cause notice dated 23.04.2015 issued by the Principal Commissioner.

Conclusion- The Division Bench in Marinetrans India Pvt. Ltd. vs. CST held that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions would not be leviable to service tax.

Accordingly, the demand of service tax on mark up on ocean freight, container detention charges and toll taxes. Further, penalty u/s 78 of the Finance Act is set aside as suppression is not proved.

FULL TEXT OF THE CESTAT DELHI ORDER

Service Tax Appeal No. 52405 of 2022 has been filed by M/s. Tiger Logistics (India) Ltd.¹ to assail that part of the order dated 18.11.2021 passed by the Commissioner Adjudication, Central Tax, GST, East² that confirms the demand of service tax amounting to Rs. 5,65,06,546/- with interest under section 75 of the Finance Act, 1994³ and penalty under section 78(1), 77(1)(a), 77(2) and 70 of the Finance Act.

2. Service Tax Appeal No. 52621 of 2022 has been filed by the Commissioner Central Goods and Service Tax (CGST)⁴ claiming the following relieves in regard to the aforesaid order dated 18.11.2021 passed by the Commissioner:

“A. Whether the Order-in-Original No. 41-42/Commr/Delhi East/AP/2021 dated 18.11.2021 passed by the Commissioner, CX & GST, Delhi East in the case of M/s Tiger Logistics (India) Limited [earlier known as Tiger Logistics (India) Private Limited], 804-A-807, 8th floor, 60, Skylark Building, Nehru Place, New Delhi-110019, was legally correct & proper to the extent of:

(i) Imposition of penalty under Section 78(1) of the Finance Act, 1994 which was not proposed in any of the Show Cause Notices.

(ii) Non-imposition of penalty under Section 76 of the Finance Act, 1994 which was proposed in both the Show Cause Notices.

B. Whether by an order passed under sub-Section (7) of Section 86 of the Finance Act, 1994 the Hon’ble Tribunal should modify the aforesaid order; and

C. Any other order as may be deemed fit and proper by the Hon’ble CESTAT, under the circumstances of the case, in furtherance of the objectives of judicial discipline and serving the principles of natural justice.”

3. Service Tax Appeal No. 52622 of 2022 has been filed by the department with regard to the order dated 18.11.2021 passed by the Commissioner claiming the following claims:

“A. Whether the Order-in-Original No. 41-42/Commr/Delhi East/AP/2021 dated 18.11.2021 passed by the Commissioner, CX & GST, Delhi East in the case of M/s Tiger Logistics (India) Limited [earlier known as Tiger Logistics (India) Private Limited], 804-A-807, 8th floor, 60, Skylark Building, Nehru Place, New Delhi-110019, was legally correct & proper to the extent of:

(i) Imposition of penalty under Section 78(1) of the Finance Act, 1994 which was not proposed in any of the Show Cause Notices.

(ii) Non-imposition of penalty under Section 76 of the Finance Act, 1994 which was proposed in both the Show Cause Notices.

B. Whether by an order passed under sub-Section (7) of Section 86 of the Finance Act, 1994 the Hon’ble Tribunal should modify the aforesaid order; and

C. Any other order as may be deemed fit and proper by the Hon’ble CESTAT, under the circumstances of the case, in furtherance of the objectives of judicial discipline and serving the principles of natural justice.”

4. The appellant claims to be engaged in providing the following services:-

(i) Customs clearance of cargo on behalf of the clients;

(ii) Along with customs clearance, the transportation service as an incidental service to the clients; and

(iii) Freight forwarding.

5. The actual amount of freight paid by the appellant to the airlines or shipping lines may be more or less than the amount of freight agreed to with the customer; the differential being the profit or loss accruing to the appellant from the sale of cargo space. The appellant claims to act on a principal to principal basis with their clients for rendering this service.

6. The issue involved in this appeal is regarding demand of service tax on the Mark Up/Differential Ocean Freight, Container Detention Charges, Toll Tax, Brokerage, Forklift Charges, Fumigation Charges and Sundry Charges.

7. The order dated 18.11.2021 passed by the Commissioner adjudicates the Statement of Demand dated 22.12.2017 as also the Statement of Demand dated 29.09.2020. The former Statement of Demand proposed a demand of Rs. 2,48,97,489/- for the taxable services rendered by the appellant during the period 01.03.2015 to 31.03.2017 after mentioning that the legal provisions regarding the issues had been discussed in detail in the show cause notice dated 23.04.2015 issued by the Principal Commissioner. The latter Statement of Demand proposed a demand of service tax amounting to Rs. 3,16,09,047/- for the taxable services rendered by the appellant for the period 01.04.2017 to 30.06.2017. This Statement of Demand also mentioned that the legal provisions on the issues had been discussed in detail in the earlier show cause notice dated 23.04.2015 issued by the Principal Commissioner.

8. It would, therefore, be appropriate to refer to the show cause notice dated 23.04.2015 issued by the Principal Commissioner containing reasons for proposing service tax under various heads for the period October 2009 to February 2015. They are:

9. The aforesaid show cause notice dated 23.04.2015 was adjudicated by the Commissioner by order dated 19.01.2016 and the demand was confirmed with penalty and interest. The order is reproduced below:

ORDER

“177 In view of the above discussion and findings, the following Order is passed:-

(i) I hereby confirm the demand of Service Tax amounting to Rs.3,59,11,270/- (inclusive of Cesses) (Rupees Three Crores Fifty Nine lakh Eleven thousand Two hundred and Seventy only) against M/s Tiger Logistics (India) Ltd. (earlier known as M/s Tiger Logistics (India) Pvt. Ltd] and order that the said amount is liable to be recovered from M/s Tiger Logistics (India) Pvt. Ltd under Section 73 of the Finance Act, 1994 as amended read with Section 66 and Section 68 ibid and Rule 6 of Service Tax Rules, 1994. I hereby appropriate Rs.1,50,19,264 (Rupees One Crore Fifty Lakh Nineteen Thousand Two Hundred and Sixty Four only) that has been already deposited by the Noticee as Service Tax during investigations as stated in para 42;

(ii) I hold that the Service Tax liability of Rs.8,74,11,671/- (Rupees Eight Crores Seventy Four lac Eleven Thousand Six hundred and Seventy One only) was discharged through Cenvat Credit at the relevant time in the past in term of Rule 3(4) of Cenvat Credit Rules 2004 read with Section 66 and Section 68 ibid and Rule 6 of Service Tax Rules, 1994. In view of the due discharge of service tax liability in the past at the relevant time by the Noticee, I order that Rs. 8,74,11,671/-(Rupees Eight Crores Seventy Four lac Eleven Thousand Six hundred Seventy One only) stands appropriated. I also order that interest not chargeable under section 75 of the Finance Act, 1994, on the said amount;

(iii) Interest at the applicable rates, on the above mentioned confirmed demand of Service Tax i.e. on Rs.3,59,11,270/- (inclusive of Cesses) (Rupees Three Crores Fifty Nine lak Eleven thousand Two hundred and Seventy only), is liable to be recovered from the Notice under Section 75 of the Finance Act, 1994 read with Rule 14 of Cenvat Credit Rules, 2004 and Rs.44,02,121 (Rupees forty four lakh two thousand one hundred and twenty one only already deposited by the Noticee as interest during investigation, is hereby appropriate against the said interest liability.

(iv) I impose penalty under Section 78 (1) of the Finance Act, 1994 equal to hundred percent of the amount of service Tax confirmed for the period up to 07.04.2011 and penalty equal to fifty percent of the service tax confirmed for the period 08.04.2011 to 28.02.2015 on M/s Tiger Logistics (India) Pvt. Ltd. under first proviso to section 78(1) of the Act ibid However, as provided in second proviso to Section 78 ibid, if they pay the amount of Service Tax confirmed as above along with interest thereon, within thirty days from the communication of this order, the amount of penalty shall be twenty-five per cent of the service tax so determined. The benefit of reduced penalty shall, however, be available to the Noticee only if the amount of such reduced penalty is also paid within such period.

(v) I refrain from imposing penalty on the Noticee under Section 76 of the Finance Act, 1994;

(vi) I hereby impose penalty of Rs 10,000 each on the Noticee under the provisions of section 77(1) (a), and section 77(2) of the Finance Act, 1994.”

10. This order was assailed by the appellant before the Tribunal and by order dated 04.02.2022 the appeal was partly allowed holding that the demand of service tax on Mark up on Ocean Freight, Container Detention Charges and Toll Taxes was not leviable to service tax. The relevant portion of the order is reproduced below:

“23. In view of the appeal is partly allowed and the appeal is disposed of as below:

a) The demand of service tax on mark up on ocean freight, container detention charges and toll taxes is set aside.

b) The plea of the appellant that the service tax to the extent it had not disputed and paid it with interest was covered by section 73(3) of the Finance Act is accepted and the show cause notice to that extent is invalid. The provisions of section 73(4) of the Finance Act are not applicable because the intention is not established in the impugned order but merely omissions.

c) The penalty under section 78 of the Finance Act is set aside as the suppression is not proved.

d) The penalty under sections 77(1) and 77(2) of the Finance Act are set aside by invoking the provision of section 80 of the Finance Act.

e) The plea of the appellant for refund of the service tax already paid is rejected.”

11. The two Statements of Demand dated 22.12.2017 and 29.09.2020 emanate from the same show cause notice dated 23.04.2015, which, as noticed above, had resulted in the order of the Tribunal allowing the appeal in part. The same order, as was passed by the Tribunal, would have to be passed in this appeal.

13. Even otherwise, it is seen that the appellant provides cargo space to customers who are importers/exporters of goods. The appellant pays charges for space booking to different Shipping Lines/Airlines and later on sells such space to the exporters/importers at a slightly higher amount. The difference between the amount paid by the appellant to the Shipping Lines/Airlines and the amount recovered by the appellant from the customers (exporter/importers) is called the ^„mark-up‟. The view of the department that for the services provided by the appellant, service tax would be leviable under the category of ^„support services of business or commerce‟ for the period prior to 01.07.2012 and would continue to be taxable for the period w.e.f. 01.07.2012 as it is not covered by any service notified in the negative list, has been considered and rejected by various Division Benches of the Tribunal.

14. In Marinetrans India Pvt. Ltd. vs. CST, Hyderabad-ST⁵, the Division Bench held after considering the Circular dated 12.08.2016 issued by the Central Board of Excise and Customs that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions would not be leviable to service tax. The relevant portions of the order passed by the Tribunal is reproduced below:

“6. We have considered the arguments on both sides and perused the records. It is not in dispute that the appellant herein is purchasing the space from the shipping lines and then is selling the same to exporters. It is the case of the Revenue that this amounts to acting as an intermediary for helping the business of the shipping lines and therefore they are liable to pay service tax on business auxiliary services on the profit which they receive. It is the case of the appellant that this is a deal on principal to principal basis between them and the shipping lines and again between the exporters and them. They are not acting as an agent. They could purchase the space for a lower price and sell it at a higher price and thereby earn profit. On the other hand, if they failed to sell the space to exporters, after purchasing from the shipping lines, they may incur a loss. They are not receiving any commission whatsoever from the shipping line or from the exporters. We have considered the Circular of the C.B.E. & C. cited by the Learned Departmental Representative at Para 2.1-3 which are as follows:

“2.1 The freight forwarders may deal with the exporters as an agent of an airline/carrier/ocean liner, as one who merely acts as a sort of booking agent with no responsibility for the actual transportation. It must be noted that in such cases the freight forwarder bears no liability with respect to transportation and any legal proceedings will have to be instituted by the exporters, against the airline/carrier/ocean liner. The freight forwarder merely charges the rate prescribed by the airline/carrier/ocean liner and cannot vary it unless authorized by them. In such cases the freight forwarder may be considered to be an intermediary under rule 2(f) read with rule 9 of POPS, since he is merely facilitating the provision of the service of transportation but not providing it on his own account. When the freight forwarder acts as an agent of an airline/carrier/ocean liner, the service of transportation is provided by the airline/carrier/ ocean-liner and the freight forwarder is merely an agent and the service of actual transportation will not be liable for service tax under Rule 10 of POPS.

2.2 The freight forwarders may also act as a principal who is providing the service of transportation of goods, where the destination is outside India. In such cases the freight forwarders are negotiating the terms of freight with the airline/carrier/ocean liner as well as the actual rate with the exporter. The invoice is raised by the freight forwarder on the exporter. In such cases where the freight forwarder is undertaking all the legal responsibility for the transportation of the goods and undertakes all the attendant risks, he is providing the service of transportation of goods, from a place in India to a place outside India. He is bearing all the risk and liability for transportation. In such cases they are not covered under the category of intermediary, which by definition excludes a person who provides a service on his account.

3. It follows therefore that a freight forwarder, when acting as a principal, will not be liable to pay service tax when the destination of the goods is from a place in India to a place outside India.”

7. It is evident from the C.B.E. & C. circular also that the Revenue was also of the view that service tax is payable when one acts as an intermediary and not as a trader dealing on principal to principal basis on their own account which is undisputedly the case here. We, further, find that in an identical case, in the case of Phoenix International Freight Service Pvt. Ltd. (supra) the Tribunal has held that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions is not leviable to service tax. We find no reason to deviate from this view taken by the Tribunal which view is also supported by the C.B.E. & C. circular cited above. In conclusion, the demand of service tax, interest and penalties are liable to be set aside and we do so.”

(emphasis supplied)

15. In Bhatia Shipping (P) Limited vs. Commissioner of Service Tax-I, Mumbai⁶, the Division Bench followed the earlier Division Benches and observed as follows:

“5. The appellant is primarily engaged in the business of freight forwarding, clearing and forwarding and other allied activities that involve booking of Containers/Air Cargo with various Shipping Lines/Airlines for their customers and recovering other miscellaneous charges from their customers (mainly importers and exporters). The appellant provides cargo space to the customers who are importers/exporters of goods. The appellant pays charges for space booking to different Shipping Lines/Airlines and later on sells such space to the exporters/importers at a slightly higher amount. The difference between the amount paid by the Appellant to the Shipping Lines/Airlines and the amount recovered by the Appellant from the customers (exporter/importers) is called the “mark-up”.

6. The Department was of the view that this “mark-up” was for services provided by the Appellant to customers and was, therefore, liable to service tax under the category of “support services of business or commerce”, covered under section 65(104) of the Finance Act, 1994 . The Department was also of the view that after July, 2012, the service was not covered by any service notified in the negative list and, therefore, continues to be taxable.

******

10. A Division Bench of the Tribunal in the earlier decision rendered in Satkar Logistics vs. CST⁷ accepted the contention advanced on behalf of the appellant that the appellant was only trading in space and was not providing any service. The Division Bench also noted that the issue involved in the Appeal was covered by the decision of the Tribunal in Greenwich Meridian Logistics (India) Pvt. Ltd. vs. CST⁸ and Commissioner of Service Tax, New Delhi Karam Freight Movers⁹.

11. Subsequently, the decision earlier rendered in Satkar Logistics on 21.08.2018 was followed by the Division Bench of this Tribunal in Satkar Logistics.

(emphasis supplied)

12. The order passed by the Commissioner, therefore, in view of the order dated 04.02.2022 passed by the Tribunal and for the reasons stated above, cannot be sustained. The appeals filed by department would also have to be dismissed for the aforesaid reasons.

13. Service Tax Appeal No. 52405 of 2022 filed by the appellant is, accordingly, partly allowed in the following manner:

(i) The demand of service tax on mark up on ocean freight, container detention charges and toll taxes is set aside;

(ii) The plea of the appellant that service tax to the extent not disputed and paid with interest and covered by section 73(3) of the Finance Act is accepted and the demand raised in the show cause notice to that extent is set aside. The provisions of section 73(4) of the Finance Act are not applicable because intention of the appellant is not established;

(iii) The penalty under section 78 of the Finance Act is set aside as suppression is not proved;

(iv) The penalty under sections 77(1) and 77(2) of the Finance Act are set aside by invoking the provision of section 80 of the Finance Act; and

(v) The plea of the appellant for refund of the service tax already paid is rejected.

14. Service Tax Appeal No. 51621 of 2022 and Service Tax Appeal No. 51622 of 2022 filed by the department are dismissed.

(Order pronounced on 12.07.2023)

Notes:-

1. the appellant

2. the Commissioner

3. the Finance Act

4. the department

5. 2020 (33) G.S.T.L. 241 (Tri.-Hyd.)

6. 2022 136 taxmann.com 407 (Mumbai-CESTAT)

7. Service Tax Appeal No. 50411 of 2016 decided on 10.08.2021

8. (2016) 69 com 100/55 GST 635 (Mum.- CESTAT)

9. (2017) 82 com 363 (New Delhi- CESTAT)