International Clearing & Shipping Agency Vs Commissioner of GST and Central Excise (CESTAT Chennai)
Conclusion: Department did not have a case that assessee had not discharged Service Tax on the agency commission received as a Steamer Agent or CHA. The demand was raised on the mark-up made which was the profit out of the difference in value of ocean freight collected by the shipping line and paid by the exporter / client, therefore, the demand of Service Tax on freight brokerage could not sustain and required to be set aside.
Held: Assessee received a brokerage / rebate from the shipping line on the ocean freight that they had to pay to the shipping lines. It was in the form of the discounts or incentives paid to the CHA and such amount was not a consideration for providing any CHA services. In fact, assessee did not provide any CHA service to the shipping line. They act as an agent on behalf of the importer / exporter. So the incentive or the discount received by assessee from the shipping line could not be treated as a consideration received for CHA services. Department demanded service tax on freight brokerage. It was held in the case of Commissioner of Service Tax, New Delhi Vs. Karam Freight Movers [2017 (4) GSTL 215 (Tri. Del.)], Tribunal observed that the mark-up value collected by the assessee from the exporter was an element of profit in the transaction. The said amount was not a commission earned by assessee and was not while acting as an agent of the exporter or shipping line and could not be considered as a consideration. Assessee while acting as an agent on behalf of the shipping line was discharging the Service Tax as Steamer Agency services. Tribunal took the view that the mark-up value collected by assessee being an element of profit in the transaction could not be subject to levy of Service Tax. In the present case also the Department did not have a case that assessee had not discharged Service Tax on the agency commission received as a Steamer Agent or CHA. The demand was raised on the mark-up made which was the profit out of the difference in value of ocean freight collected by the shipping line and paid by the exporter / client. The demand of Service Tax on freight brokerage could not sustain and required to be set aside.
FULL TEXT OF THE CESTAT CHENNAI ORDER
The issues involved in all these appeals being the same, they are heard together and disposed of by this common order.
2. Brief facts are that the appellant is a partnership firm and is holding certificate of registration from the Service Tax Commissionerate under CHA Services and Steamer Agency Services. They were filling returns and also discharging Service Tax under these heads. The officers of the internal audit attached to Chennai Commissionerate verified the accounts of the appellant. On scrutiny of the profit and loss account submitted for the financial years from 1997-2004, it revealed that the appellant has not discharged Service Tax on (i) operational surplus, (ii) service charges / tax exempted and (iii) freight and brokerage. A Show Cause Notice was issued proposing to demand the Service Tax on the above amounts alleging that these are in the nature of consideration received for CHA services as well as Steamer agent services. Separate Show Cause Notices for the same period were issued in regard to CHA services / Steamer agency services. After due process of law, the original authority vide separate orders confirmed the demand, interest and imposed penalties. Aggrieved by such order, the appellant preferred appeals before the Commissioner (Appeals) who upheld the same. Hence, these appeals.
2.1.1 The Ld. Counsel Ms. Radhika Chandrasekar appeared and argued for the appellant. The Ld. Counsel adverted to paragraph 7.0 of the findings in appeal No. 212/2007 and submitted that the allegation of the Department is that the appellant has not paid Service Tax on the following heads.
a) Operational surplus.
b) Service charges / Tax exempted.
c) Freight and Brokerage, etc.,.
2.1.2 The Show Cause Notice dated 20.04.2005 was adverted to by the Ld. Counsel to submit that the Department has alleged that the appellant has collected various charges in the nature of expenses incurred by them for payment of statutory levies, pilotage and berth hire charges, Indian Coast light dues paid to the port authorities, cargo expenses paid to the port authorities, charges paid to transporters such as CONCOR/Railways/Private Transporters, Chartered Accountants Fee, Income Tax deductions, Brokerage paid to Export cargo, etc.,. It is alleged in the Show Cause Notice that apart from the amount that has been reimbursed by the client for meeting the costs for providing the services, the appellant has collected over and above actual charges and has reflected the same as Operational surplus in their financial statements. The demand has been raised based on such figures obtained from profit and loss account, balance sheet and income tax returns. It is explained by the Ld. counsel that such operational surplus are nothing but reimbursable expenses and not subject to levy of Service Tax for the period prior to 2015. In the regular course of business as CHA on the request of clients, the appellant incurs certain additional expenses on behalf of these clients for activities such as loading and unloading, transport charges, etc.,. These expenses incurred on account of the exporter / importer are reimbursed by the client. As it is extremely cumbersome to maintain precise accounts of each of the expenses incurred separately, the appellant collect amounts from their client to cover these expenses. Since there is an element of approximation, the amount collected from the clients may be in excess of that is actually incurred. This difference is computed at the time of preparation of balance sheet and the excess amount is noted under the head “operational surplus”. On the other hand, whenever there is a short fall in the amount collected as against the amount actually recovered, it results as “operation deficit”. It is pointed out by the Ld. counsel that the operational surplus is not a payment received for any taxable service and is therefore outside the levy of Service Tax. The decision of the Hon’ble Supreme Court in the case of Baroda Electric Meters Ltd. Vs. Commissioner of Central Excise [1997 (94) ELT 13 (SC)] was relied by the Ld. counsel to argue that the profit made by a dealer on transportation by collecting equalized freight in excess of freight actually incurred was held to be not includable in the assessable value. The decision though rendered under excise law, the view taken by the Court is applicable to the present situation where the appellant makes a very small profit after equalisation of various expenses. The appellant had collected amounts from the clients to meet expenses of providing the CHA service and later some amount would arise as surplus after incurring the expenses. These amounts are reflected as operational surplus in the financial statements. Being expenses reimbursed, the Department cannot demand Service Tax.
2.1.3 The Ld. counsel relied upon the decision in the case of Union of India Vs. Intercontinental Consultants and Technocrats Pvt. Ltd.[2018-TIOL-76-SC-ST] to argue that the Hon’ble Apex Court has categorically held that Service Tax cannot be levied on reimbursable expenses.
2.1.4 The Trade Notice No. 39-CE/97 dated 11.06.1997 was relied by the Ld. counsel to explain that the Department has issued clarification with regard to the nature of expenses that is usually incurred by CHA / Steamer Agents etc., while discharging their services. It is clarified in the said circular that Service Tax is to be paid only on the agency commission and not on the expenses collected from the client. The Ld. counsel argued that the demand of Service Tax raised on operational surplus cannot sustain for these reasons and the same may be set aside.
2.2.1 The second issue is with regard to the demand on service charges / tax exempted. It is submitted by the Ld. counsel that the appellant had rendered services as a sub-contracting CHA to other main CHA. During the relevant period, the Trade Notice referred above had categorically stated that the sub-contracting CHA is not required to pay the Service Tax on the bills raised by him on the main CHA. The said Trade Notice was withdrawn in 2007 only. Basing upon this circular, the appellant had not discharged the Service Tax as a sub-contracting CHA and was of the view that these services are exempted.
2.2.2 The Ld. counsel was fair enough to submit that in the case of Commissioner of Service Tax, New Delhi Vs. Melange Developers Private Limited [2020 (33) GSTL 116 (Tri. –LB)], the Larger Bench of the Tribunal had occasion to examine the issue whether the sub-contractor is liable to pay Service Tax even though the main contractor has discharged the Service Tax. The issue was answered in the affirmative and against the assessee (sub-contractor). It is submitted by the Ld. counsel that the period involved in these appeals is prior to 2007 when the Trade Notice issued by the Department was in vogue and therefore the appellant had not discharged the Service Tax on the bona fide belief that they are not liable to pay the same.
2.3 The third issue is with regard to the Freight and Brokerage Charges. It is submitted that the appellant received brokerage / rebate from the shipping lines as a CHA on the ocean freight that they have to pay. It is in the form of a discount or an incentive paid to the CHA and it is not for providing any CHA service. It is explained that the appellant does not provide any CHA service to the shipping line and therefore the discount / incentive received by the appellant from the shipping line cannot be treated as a consideration received for CHA service / Steamer Agent service. Further, these amounts are not received from their clients but from the shipping lines and therefore Service Tax cannot be demanded by the Department alleging that they fall under CHA services / Steamer Agent services. The decisions in the cases of Commissioner of Service Tax Vs. AVR Cargo [2018- TIOL-2097], Commissioner of Service Tax Vs. Karam Freight Movers [2017 (4) GSTL 215], Commissioner of Service Tax Vs. Continental Carriers [2017-TIOL-3964] and Greenwich Meridian Logistics (I) Pvt. Ltd. Vs. Commissioner of Service Tax, Mumbai [2016 (43) STR 215] was relied by the Ld. counsel to argue that the demand of Service Tax on such freight brokerage received from the shipping lines is not subject to levy of Service Tax under CHA services / Steamer Agent services.
2.4 The Ld. counsel submitted that the entire demand has been raised by taking the figures in the profit and loss account and comparing the same with the ST-3 returns filed by the appellant. The decision of the Hon’ble High Court of Madras in the case of Firm Foundations & Housing Pvt. Ltd. Vs. P.R. CST [2018 (16) GSTL 209] W.P. No. 21799/2017 and W.M.P No. 22810/217 decided on 06.04.2018 was relied by the Ld. counsel to submit that the income reported and reflected in the profit and loss account is irrelevant for the purposes of determination of taxable value. The Hon’ble High Court had remanded the matter to strictly adhere to the provisions of Rule 3 of Point of Taxation Rules, 2011 in order to raise proper demand. The decision in the case of Reynolds Petro Chem Vs. Commissioner of Service Tax [2023 (68) GSTL 292] was relied by the Ld. counsel to argue that the Service Tax demand cannot be based on TDS/26 AS statement.
2.5.1 The Ld. counsel argued on the ground of limitation also. It is submitted that the first Show Cause Notice dated 08.01.2003 covers the period 09.09.1997 to 31.03.2002, in respect of Custom House Agent services as well as Steamer Agent Services. Part of the demand in this Show Cause Notice falls within the normal period.
2.5.2 The second Show Cause Notice dated 14.07.2004 has been issued for the period 01.04.2002 to 31.03.2003 for Steamer Agent Service and Custom House Agent services. The said Show Cause Notices are within the normal period.
2.5.3 The third Show Cause Notice dated 14.07.2004 covers the period 01.04.2003 to 31.03.2004 for the respective services viz., Steamer Agent Service and Custom House Agent services. These Show Cause Notices are dated 20.04.2005 and 23.12.2005. Part of the demand in these Show Cause Notices would be beyond the normal period. The Ld. counsel submitted that the appellant has not discharged the Service Tax on operational surplus on the bona fide belief that these are reimbursable expenses and not being consideration received for CHA service and Steamer Agent services. Further, the entire amount has been accounted by them properly and reflected in the financial statements. The figures have been collected by the Department from such financial statements which itself would prove that there is no suppression of facts on the part of the appellant. There is no positive act of suppression alleged by the Department in the Show Cause Notice apart from bare averment that the appellant has suppressed facts with intent to evade payment of Service Tax.
2.6 The Ld. counsel also argued that the penalty imposed under various Sections may be set aside invoking Section 80 of the Finance Act, 1994, as it stood during the relevant period. The appellant did not discharge Service Tax under operational surplus for the reason that these are reimbursable expenses. The appellant did not discharge Service Tax under exempted service (sub-contracting CHA) for the reason that the Trade circular had clarified that the sub-contracting CHA is not required to pay Service Tax. The appellant did not discharge Service Tax on the brokerage for the reason that these are incentives / discount received from the shipping line and is not consideration for providing CHA services / Steamer Agent services. The Ld. counsel prayed that the appeals may be allowed.
3.1 The Ld. Authorised Representative O.M. Reena appeared and argued for the Department. The Ld. AR submitted that from the Show Cause Notice itself it can be seen that reimbursable expenses have been excluded for raising the demand. Only the actual amounts which have been received by the appellant from the client for the expenses incurred have been included for raising the demand. The appellant has mentioned “operational surplus” in their financial statements. This is the amount collected from the client over and above the actual expenses incurred by them. For this reason, the said operational surplus is subject to levy of Service Tax and cannot be excluded in the nature of reimbursable expenses.
3.2 The second issue is with regard to the demand of Service Tax under “exempted service” (sub-contracting CHA). The appellant has provided services on behalf of other CHA and has collected consideration for the same. The appellant has not discharged Service Tax on such consideration and is liable to pay the Service Tax as demanded in the Show Cause Notice. The decision of the Larger Bench of the Tribunal in the case of Melange Developers Private Limited (supra) was relied by the Ld. AR. It is also pointed out that after the earlier Trade Notice, the master Circular No. 96/7/2007-ST dated 23.08.2007 was issued by the Department superceeding all the earlier circulars and clarifications. In this circular, it was clarified that a sub-contractor is liable to discharge Service Tax even though the main contractor has paid Service Tax on the very same services.
3.3 The third issue is with regard to the freight brokerage which has been received by the appellant from the shipping lines. It is submitted by the Ld. AR that no documentary evidence has been adduced by the appellant to show that these are incentives received from the shipping lines.
3.4 The appellant has suppressed these figures from the Department and therefore the invocation of extended period is also legal and proper. The Ld. AR adverted to paragraphs 7.11 to 7.13 of the Order-in-Original No. 2/2005 dated 23.12.2005 to argue that the demands confirmed are legal and proper. It is prayed that the appeals may be dismissed.
4. Heard both sides.
5. The issues:-
(i) whether the demand of Service Tax confirmed vide impugned order along with interest and the penalties imposed is sustainable or not.
(ii) whether the invocation of extended period in raising the demand is sustainable or not.
6.1 On perusal of the Show Cause Notice, it is seen that on the basis of the financial statements, the Department has raised the demand on three heads viz., (i) operational surplus, (ii) service charges / tax exempted and (iii) freight and brokerage. It is stated in the Show Cause Notice that on intimation the appellant had submitted the complete set of balance sheet, profit and loss account for the financial year 2003-2004, sample copies of invoices raised during the aforesaid period and statement of operating surplus under various heads for the aforesaid financial year. After scrutiny of the balance sheet with schedules and the breakup details for operational surplus furnished by the assessee, the department was of the view that the appellant though has discharged Service Tax on Agency commission / Service charges they have not paid Service Tax on “operational surplus”. The Show Cause Notices have been issued separately on CHA services and Steamer Agent services on these amounts. The details of the Show Cause Notice and the period involved is furnished by the appellant as below:-
