Service tax on Freight Forwarder on Transportation of Goods from India to Overseas:- Clarification from CBEC, A welcome move
In a welcome move, a much awaited guidance, the CBSE issued Circular No 197/7/2016-Service tax dated August 12, 2016, to clarify doubts about “Service Tax Liability of Freight Forwarders collecting “Freight”, for shipments moving from Indian Port to any place outside India”.
There has been a matter of debate on Service tax liability of freight forwarders’ services on Export Freight, for transportation of Goods from India to any place outside India.
There are many instances wherein department imposed demands on freight forwarders on collection of freight charges for movement of goods from India to a place outside India. Few went into courts for decision and lot waiting to go.
The above said circular clarifies the situation, and will give much more relief to the Freight Forwarding Industry.
According to the Circular
“2.0 It may be noted that in terms of rule 10 of the Place of Provision of Services Rules 2012, the place of provision of the service of transpiration of goods by air/sea, other than by mail or courier, is the destination of the goods. It follows that the place of provision of the service of transportation of goods by air/sea from a place in India to a place outside India, will be a place outside the taxable territory and hence not liable to service tax. The provisions of rule 9 of the POPS Rules 2012, should also be kept in mind wherein the place of provision of intermediary services is the location of the service provider. An Intermediary has been defined , inter alia, in rule 2(f) of the POPS Rules 2012, as one who arranges or facilitates the provision of a service or a supply of goods between two or more persons, but does not include a person who provides the main service or supplies the goods on his own account. The contents of the succeeding paragraphs flow from the application of these rules”
a. Accordingly to Rule 10 of POPS Rules 2012, since destination of the services are outside India, and the freight forwarder is acting as “Principle” then the transaction will not attract Service tax.
b. As per rune 2(f) read with rule 9 of POPS Rules 2012, if the freight forwarder is acting as pure agent, then services of the freight forwarder will be taxable under service tax.
Further the concept of Agent and Principle is clarified under “2.1” & “2.2” of the above said circular.
“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.”
a. The freight forwarder is acting as pure agent of the airline/carrier/shipping line, as per rule 2(f) read with rule 9 of the POPS Rules 2012
b. The freight forwarder is not responsible for actual transportation,
c. The legal proceedings will be against airline/carrier/shipping line,
d. The shipment will be booked under account of the exporters,
e. The freight forwarder will either not Invoice or will invoice on behalf of the airline/carrier/shipping line to the exporter,
f. The freight forwarder will not be able to make any additional profit because all the transactions will be under guidance & knowledge of the airline/carrier/ocean-liner,
g. Any sum earned as Income in the hands of the freight forwarder will attract Service Tax,
h. The service tax will be applicable on the income of the freight forwarder not on the entire transaction, for example
|i. Total Freight Cost from India to New York||INR 200,000|
|ii. Billing to the Exporter by or on behalf of the Carrier, for freight to New York||INR 200,000|
|iii. Commission for Freight forwarder (will be paid by Airline/carrier/ocean Liner)||INR 10,000|
In above case INR 10,000 will attract service tax while INR 200,000 will be free from the service tax as per rule 10 of POPS rules 2012.
“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 al 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.”
a. The freight forwarder is not acting as agent but as Principle,
b. As principle, independently negotiates rates with all involved,
c. The freight forwarding is exposed to all risk related to the shipment,
d. Booking of the shipment is done under his own account,
e. Carrier raises invoices on the Freight forwarder,
f. Freight forwarder raises invoices on the exporters as principle,
g. The destination is outside India,
h. The shipper can initiate all the action against freight forwarder in relation to that particular shipment,
In above cases, the freight for transportation from any place in India to any place outside India, will not attract service tax.
Below example may make it more clear
|i. Carrier’s Invoice on Freight Forwarder , India to New York Freight||INR 200,000|
|ii. Freight Forwarder’s invoice on Exporter, India to New York Freight||INR 210,000|
Since the freight forwarder is invoicing in the capacity of the Principle, this transaction will not attract service tax.
“3.0, 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.
“4.0 Keeping this in mind, field formations may deal with cases purely on the basis of the facts of the case, the terms of contract between the entities concerned, the provisions of the Finance act, 1994, the POPS Rules 2012 and other rules.”
This circular will give lot clarity to Freight Forwarding Industry and department.
About Author :- Authored by CA Deepak Joshi, FCA, Senior Partner in Deepak Joshi & Associates. Deepak has spent almost 17 years practicing Direct & Indirect taxes including Service Tax, VAT, Excise, Customs, International Taxation. He has been associated with International Logistics Companies, reputed e-commerce companies, USA based MNCs, Sourcing & Buying agencies, start-up organisations. For any queries Deepak can be reached at firstname.lastname@example.org , email@example.com, cadeepakjoshi.com