CESTAT: Ocean Freight Trading Not Service; Vague Service Tax Demand of Rs. 20.32 Lakh Set Aside

Balaji Integrated Shipping India Pvt Ltd. Vs Commissioner of Central Tax (CESTAT Hyderabad)

CESTAT Hyderabad allowed the appeal filed by Balaji Integrated Shipping India Pvt. Ltd. and set aside the impugned order confirming Service Tax demands relating to Ocean Freight and differences between financial records and ST-3 returns. The appellant, a Clearing and Forwarding agent registered under Clearing and Forwarding Agency Services and GTA Services, was alleged to have excluded Ocean Freight, CWC/CONCOR charges and CFS charges while determining taxable value. Revenue also alleged that the appellant had added a markup to Ocean Freight and was liable to Service Tax on the freight and markup. The Tribunal found the appellant’s claim that it was trading in container space to be correct and, on that ground alone, set aside the demands of Rs.60,56,570/- and Rs.21,12,773/-. The Tribunal also held that the separate demand of Rs.20,32,859/- was vague because Revenue had not identified the head of service under which the alleged short payment arose. Since the period in dispute was prior to 01.07.2012, that demand was also set aside. The Tribunal further found no case of suppression, fraud or wilful mis-statement and consequently set aside penalties under Sections 77 and 78. The appeal was allowed and the impugned order was set aside, with consequential benefits as per law.

Background of the Case

Balaji Integrated Shipping India Pvt. Ltd. was a Clearing and Forwarding agent registered with the Department of Service Tax under the heads Clearing and Forwarding Agency Services and GTA Services.

On scrutiny of its financial records and comparison with ST-3 returns, the Department noticed that the appellant had entered into agreements with customers for clearance of export goods by sea. The bills raised by the appellant included Ocean Freight, CONCOR/CWC charges, handing charges, CFS charges, Customs/Overtime charges, Agency charges, Documentation charges, Examination charges, opening/repacking charges and sundry charges.

Revenue observed that the appellant excluded Ocean Freight, CWC/CONCOR charges and CFS charges from the gross amount charged for Service Tax purposes. While it was observed that the appellant was acting as a pure agent in recovering actual expenditure in respect of certain charges, Revenue took the view that the appellant was not acting as a pure agent in relation to Ocean Freight because it recovered the freight after adding its markup.

Service Tax Demands on Ocean Freight and Short Payment

According to Revenue, the markup represented consideration for services provided by the appellant and, under Section 67(i) of the Finance Act, the gross amount for Service Tax purposes was required to include the markup on Ocean Freight.

On the basis of Ocean Freight details furnished by the appellant for 2008-09 to 2012-13, Revenue alleged Service Tax liability of Rs.60,56,570/-.

A further reconciliation of financial records with ST-3 returns resulted in an alleged short-payment of Rs.20,32,859/-, calculated as follows:

GTA Service Tax Already Paid

Revenue further alleged that the appellant was liable to discharge Service Tax of Rs.5,48,770/- for GTA services for 2008-09 to 2009-10. The appellant accepted this liability and deposited Rs.5,48,770/- through challan dated 19.04.2012, together with interest of Rs.2,22,459/- through a separate challan dated 28.04.2012.

A Show Cause Notice dated 30.01.2014 was issued invoking the extended period of limitation and proposing the above demands, along with appropriation of the amount paid towards GTA service and penalties under Sections 77 and 78 of the Finance Act. The notice was adjudicated on contest through Order-in-Original dated 26.04.2016. The proposed demands were confirmed along with appropriation of the tax already paid towards GTA service. Penalties of Rs.10,000/- under Section 77 and Rs.86,38,199/- under Section 78 were also imposed.

A similar periodical notice dated 26.03.2015 was issued for 2013-14 and was also adjudicated through the common Order-in-Original. An amount of Rs.21,12,773/- was confirmed on account of Ocean Freight with interest, along with penalty of Rs.2,11,277/- under Section 76 and Rs.10,000/- under Section 77.

Appellant’s Contention: Activity Was Trading in Container Space

The appellant contended that it was a trader in bulk cargo space. It booked bulk space for an entire container and thereafter sold the space by way of retail to prospective exporters requiring the whole or part of the container, after adding its markup.

According to the appellant, Revenue had demanded Service Tax by comparing the Ocean Freight collected or received with the Ocean Freight expenditure reflected in its financial accounts. The appellant argued that its activity constituted purchase and sale of cargo space and was therefore trading activity rather than provision of service.

Reliance was placed on Tiger Logistics (India) Pvt. Ltd. Vs CST – 2022 (63) GSTL 337 (Tri. Del) and Haiko Logistics India Pvt Ltd. Vs CST, Delhi – 2023 (13) Centax 79 (Tri-Del), contending that similar demands had been set aside.

Challenge to Demand of Rs.20.32 Lakh as Vague

With respect to the demand of Rs.20,32,859/-, the appellant contended that Revenue had not identified the service or the head under which Service Tax was allegedly short paid.

The appellant submitted that receipts appearing in the income ledger could include non-taxable receipts, other income or reimbursements. Therefore, according to the appellant, Revenue was required to identify the specific taxable service and establish the corresponding liability rather than simply compare figures appearing in the income ledger with the taxable value declared in ST-3 returns.

The appellant further submitted that its books of account and vouchers were properly maintained and that the information relied upon by Revenue had been taken from records maintained in the normal course of business. It therefore contended that there was no concealment, fraud or misstatement and that the extended period of limitation was not available.

Tribunal Finds Container Space Trading Claim Correct

After considering the rival contentions, the Tribunal found that the appellant had both receipts in the freight account and expenditure under Ocean Freight in its financial accounts.

The Tribunal accepted the appellant’s claim that it was trading in container space. On this ground alone, it set aside the Ocean Freight-related demand of Rs.60,56,570/- as well as the further demand of Rs.21,12,773/- relating to the subsequent period.

Rs.20.32 Lakh Demand Set Aside for Vagueness

The Tribunal separately considered the demand of Rs.20,32,859/- arising from the alleged difference between the taxable value in the income ledgers and the value declared in ST-3 returns.

It found that the demand was vague because Revenue had not identified the head of service under which the alleged short payment had occurred. The Tribunal held that Revenue was required to identify the head of service under which Service Tax was sought to be demanded.

Since the period under dispute was prior to 01.07.2012, the Tribunal set aside the Rs.20,32,859/- demand as vague and uncertain.

The Tribunal’s approach is consistent with the principle considered in Shubham Electricals Vs Commissioner, which was relied upon by the appellant in support of the requirement for identification of the specific taxable service.

Penalties Under Sections 77 and 78 Set Aside

In view of its findings, the Tribunal held that there was no case of suppression, fraud or wilful mis-statement. Consequently, the penalties imposed under Sections 77 and 78 of the Finance Act were set aside.

Final Decision

The Tribunal allowed the appeal and set aside the impugned order. The appellant was held entitled to consequential benefits as per law.

The operative outcome was therefore:

• Ocean Freight demand of Rs.60,56,570/- set aside;
• Ocean Freight demand of Rs.21,12,773/- for 2013-14 set aside;
• Demand of Rs.20,32,859/- set aside as vague and uncertain;
• Penalties under Sections 77 and 78 set aside; and
• Appeal allowed with consequential benefits as per law.

The order was dictated and pronounced in open court.

Cases Discussed

• Tiger Logistics (India) Pvt. Ltd. Vs CST, Delhi – 2022 (63) GSTL 337 (Tri-Del)
• Haiko Logistics India Pvt Ltd. Vs CST, Delhi – 2023 (13) Centax 79 (Tri-Del)
• Shubham Electricals Vs Commissioner – 2015 (40) STR 1034 (Tri. Del.)

FULL TEXT OF THE CESTAT HYDERABAD ORDER

Appellant is a Clearing and Forwarding agent registered with the Department of Service Tax under the Head Clearing and Forwarding Agency Services and GTA Services.

2. On scrutiny of their financial records and on comparison with the ST-3 returns, it appeared that they were entering into agreements with various customers for clearance of export goods by sea. As per the agreements, they are charging the customers for Ocean Freight, CONCOR/CWC charges, handing charges, CFS charges, Customs/Overtime charges, Agency charges, Documentation charges, Examination charges, opening/repacking charges, sundry charges, etc., in the bills issued by them. On verification of the invoices raised, it appeared that they are excluding (i) Ocean Freight (ii) CWC charges/CONCOR charges (iii) CFS charges from the gross amount charged for the purpose of discharging service tax liability, in respect of the above mentioned three charges. It was observed that they are acting as pure agent inasmuch as they are recovering only the actual expenditure incurred by them from the recipient of service. However, in respect of ocean freight, it appeared they are not acting as pure agent as they are recovering the ocean freight after adding their markup to the actual expenditure incurred. It appeared that they are not acting as pure agent and the markup was collected as a consideration for services provided by them to their customers. Further, under Section 67(i) of the Act, it appeared that gross amount for the purpose of calculation of service tax shall include markup amount on the ocean freight charges. It appeared that service tax is payable on the amount of ocean freight plus the markup of the appellant assessee on the basis of details of ocean freight submitted by the appellant for the period 2008-09 to 2012-13. It appeared that they are liable to pay service tax of Rs. 60,56,570/-. Further on reconciliation of financial records with ST-3 returns, it appeared that service tax is short-paid which is calculated as follows:

3. Further, it appeared that in respect of GTS service, the appellant is required to discharge service tax of Rs. 5,48,770/- for the period 2008-09 to 2009-10. The appellant accepted this liability in respect of GTA service and deposited an amount of Rs. 5,48,770/- vide challan dated 19.04.2012 with interest amounting to Rs. 2,22,459/- vide separate challan dated 28.04.2012.

4. Further, it appeared to Revenue that the aforementioned discrepancies came to light as a result of verification of the financial records of appellant by the officers of the Department. The appellant assessee failed to discharge tax liability properly and accordingly show cause notice dated 30.01.2014 was issued invoking extended period of limitation, proposing to demand the aforesaid three amounts along with proposal for appropriation with respect to GTA service. Further penalties were proposed under Sections 77 and 78 of the Act. This show cause notice was adjudicated on contest vide Order-in-Original dated 26.04.2016 and the proposed demands were confirmed along with appropriation of tax paid under GTA service.

Further, penalty of Rs. 10,000/- was imposed under Section 77 and Rs. 86,38,199/- under Section 78 of the Act.

5. Similar periodical notice dated 26.03.2015 was issued for the period 2013-14 which also stood adjudicated by the common Order-in-Original, an amount of Rs. 21,12,773/- was confirmed on account of Ocean Freight with interest. Further penalty of Rs. 2,11,277/- was imposed under Section 76 of the Act and further penalty of Rs. 10,000/- was imposed under Section 77 of the Act.

6. Being aggrieved, the appellant is before this Tribunal. The Learned Counsel for the appellant interalia urges that the appellant is a trader in bulk cargo space. The appellant books bulk space for the whole container and thereafter sells the space by way of retail, to the prospective exporters who may need full or part of the container, after adding their markup. Admittedly, tax has been demanded by Revenue by taking the amount of ocean freight collected or received and the amount of ocean freight expenditure as per their Financial Account. As the appellant is engaged in purchase and sale of cargo space, the said activity is not service but amounts to trade. The appellant relies on the ruling under in similar circumstances in the case of Tiger Logistics (India) Ltd., Vs CST, Delhi [2022 (63) GSTL 337 (Tri-Del)]. He also relies on the ruling in the case of Haiko Logistics India Pvt Ltd., Vs CST, Delhi [2023 (13) Centax 79 (Tri-Del)] wherein under similar circumstances demand of service tax has been set aside.

7. So far as the demand of service tax of Rs. 20,32,859/- is concerned, Learned Counsel urges that the demand is vague as Revenue has not identified as to for which service or under which head of service tax, tax is short paid. It is natural that there are some receipts which are not taxable or by way of other income or by way of reimbursement. Revenue is required to identify and make out a specific case under which head of service, tax is being demanded or as short paid. It is evident from the show cause notice that service tax has been demanded by way of vague allegation by comparing the figures as per gross receipt of the income ledger and the taxable value shown in the ST-3 returns. The appellant submits that the demand of service tax being bald and vague, is required to be set aside. It is further urged that appellant has maintained proper books of accounts and vouchers. All the information has been admittedly taken from the records maintained in the normal course of business. No case of concealment or fraud or mis-statement is made out. Accordingly, it is urged that show cause notice is bad for invocation of extended period of limitation.

8. Learned AR relies on the impugned order.

9. Having considered the rival contentions, we find that the appellants have got both receipts in the freight account and also incurred expenditure under ocean freight as per their financial accounts. Claim of the appellant that they are trading in container space is found to be correct. Accordingly, on this ground alone demand of Rs. 60,56,570/- plus Rs. 21,12,773/- is set aside.

10. We further fund that the demand of Rs. 20,32,859/- is vague in its nature as no head of service has been identified by the Revenue under which the tax is short paid. Revenue is required to identify the head of service under which tax to be demanded. As the period under dispute is prior to 01.07.2012, this demand is set aside, being vague and uncertain.

11. In view of the above aforementioned findings, we find that there is no case of suppression, fraud or wilful mis-statement. Accordingly, penalties imposed under Section 77 and 78 are set aside.

12. Thus, the appeal is allowed and the impugned order is set aside. The appellant is entitled to consequential benefits as per law.

(Dictated and pronounced in open court)