Case Law Details
Shipping Corporation of India Ltd Vs Commissioner of Central Excise & Service Tax (CESTAT Mumbai)
Proposals in the show cause notice (SCN) should necessarily be founded on the letter of law and, not on external sources
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Mumbai set aside a tax demand of ₹3.58 crore against Shipping Corporation of India Ltd (SCI) for ‘business auxiliary service’ and ‘taxable service’ provided between October 2009 and September 2014. The case arose after an audit found that SCI had not paid service tax on ‘trade commission’ retained while chartering vessels for oil companies. The tax department contended that the retained amount qualified as ‘commission’ for acting as an agent and was taxable under Section 65(105)(zzb) of the Finance Act, 1994, until June 2012, and under Section 66B thereafter. However, SCI argued that the amount was a trade discount and not taxable.
The tribunal criticized the reliance on external sources such as dictionaries and Investopedia to define taxable terms, emphasizing that show cause notices must be based strictly on statutory provisions. It found that the adjudicating authority had not sufficiently examined SCI’s contractual obligations with vessel owners and oil companies to establish a tax liability. SCI cited judicial precedents, including Coromandel Fertilisers Ltd v. Union of India (1984) and Hindustan Gas & Industries Ltd v. Collector of Central Excise (1991), to argue that mere terminology in financial records does not determine taxability.
CESTAT also noted the absence of ‘intermediary’ as a defined taxable category under the Finance Act, 1994, despite its use in determining SCI’s tax liability post-July 2012. It referenced Amrit Foods v. Commissioner of Central Excise (2005) and Brindavan Beverages (P) Ltd v. Commissioner of Central Excise (2007), where vague and non-speaking orders were deemed invalid. The tribunal concluded that the order lacked statutory credibility and failed to establish a clear link between the services provided and the alleged tax liability.
In light of these deficiencies, CESTAT remanded the matter to the original adjudicating authority for a fresh decision, instructing it to address the legal grounds for taxation based on statutory provisions rather than external interpretations.
The matter was argued by Ld. counsel Bharat Raichandani along with Advocate Neha Chakraborty.
FULL TEXT OF THE CESTAT MUMBAI ORDER
This appeal lies against demand of ₹ 3,58,67,793 for rendering of ‘business auxiliary service’ as well as ‘taxable service’ between October 2009 and September 2014 and of ₹ 14,35,303 between April 2014 to March 2015 under section 73 of Finance Act, 1994, along with applicable interest under section 75 of Finance Act, 1994 besides imposition of penalty under section 78 on the first of the demands and under section 76 of Finance Act, 1994,
2. The proceedings had been initiated following audit which, on perusal of the books of accounts, noted that tax liability under Finance Act, 1994 had not been discharged on ‘trade commission’ retained by them after paying off the ship-owners towards charter of other vessels from the charges levied upon their customers. From the facts and circumstances narrated in the impugned order, it would appear that M/s Shipping Corporation of India Ltd offered vessels on charter to various oil companies for lifting of crude from outside India to be delivered for refining in India. The agreements with these entities stipulates that, in the event of non-availability of vessels of M/s Shipping Corporation India Ltd, the charterer was responsible for provisioning with other vessel owners to be made available for cargo of the oil companies. It is reported that, as per commercial practice, owners of such vessels offered ‘commissions’ to the appellant as well as ‘brokerage and commission’ to other agents with the netted amount to be committed to them. It is also on record that, prior to 1st July 2012, ‘freight charges’ were not taxable and that, thereafter, exclude from tax through the negative list in section 66D of Finance Act, 1994. The dispute is thus, limited to the retained portion of the freight collected from the oil companies which jurisdictional tax authorities contended to commission received by the appellant herein for acting as an agent on behalf of oil companies in engaging vessels on charter and taxable in terms of section 65(105)(zzb) of Finance Act, 1994 upto June 2012 and as ‘taxable service’ under section 66B of Finance Act, 1994.
3. We cannot but notice the impugned order does refer to reliance upon the meaning of certain expressions accorded by Merriam Webster dictionary and Investopedia in the show cause notice to propose the impugned recovery, viz., ‘freight’ and ‘address commission’ respectively. It would appear to us that proposals in the show cause notice should necessarily be founded on the letter of law and, while an adjudicating authority may fall back upon outside reference such as publication and other sources in response to contentions of the notice, for interpretation, show cause notice should restrict itself to the provisions of law. Moreover, reliance on an external source which is not recognized in the statutes amounts to filling gaps in law that show cause notice issued under section 73 of Finance Act, 1994 should not. Notwithstanding this peculiarity, we proceed to decide the appeal on the common ground that the amount paid by customer to appellant under agreement to be ‘freight’ and ‘address commission’ to be the amount retained after paying off ‘vessel owner’ in accordance with those respective agreements.
4. From the impugned order, it would appear that the tax liability has been fastened on the ground that, for the period prior to 1st July 2012 ‘address commission’ was the consideration received by M/s Shipping Corporation India Ltd as ‘commission agent’ included in definition of ‘business auxiliary service’ in section 65(19) of Finance Act, 1994 and, as ‘intermediary’, for the period after 1st July 2012. At this stage it must be noted by us that ‘intermediary’ is not referred to in Finance Act, 1994 let alone as an activity liable to tax. It would appear that the expression has been drawn upon from the ‘Education Guide’ made available upon transition to the ‘negative list’ regime of Finance Act, 1994 and contextual restriction from empowerment under section 66C of Finance Act, 1994 to stipulate the place of provision of services essential in taxability of any ‘service’, other than excepted, excluded and exempted, without having to be identified by nomenclature. Such tax design pivoted upon ‘taxable territory’ subsumed hitherto existing Rules for taxing services procured from abroad and those rendered outside India. Location of provider of taxable service was upon determination as ‘intermediary’ with the dilution in the said Rules was deemed to be taxable territory.
5. According to Learned Counsel for the appellant, ‘address commission’ is merely ‘trade discount’ inasmuch as it is a component of the agreement between appellant and owners of the vessels chartered by the appellant. He placed reliance on the decision of the Hon’ble Supreme Court in Coromandel Fertilisers Ltd v. Union of India and others [1984 (17) ELT 607(SC)] and Hindustan Gas & Industries Ltd v. Collector of Central Excise [1991 (54) ELT 383 (Tribunal)]. It was further contended that the appellant was never an ‘agent’ of the oil companies for providing the service which happened to be exempted or excluded and reliance was placed on the decision of the Hon’ble High Court of Delhi in Poona Bottling Co Ltd and another v. Union of India and others [1981 (8) ELT 389 (Del.)] which was affirmed by the Hon’ble Supreme Court. It was also contended that ‘commission’ deployed in ‘narration’ in ‘books of accounts’ had no bearing on determination of taxability for which reliance was placed on the decision of the Hon’ble Supreme Court in Delhi Stock Exchange Association Ltd v. Commissioner of Income Tax, Delhi [(1961) 41 ITR 495 (SC)] and in Assam Small Scale Industries Development Corporation Ltd and others v. JD Pharmaceuticals and another [2005 (8) SCALE 298]. Reliance was also placed on the decision in National Building Corporation Ltd v. Commissioner of Central Excise & Service Tax, Patna [2011 (23) STR 593], in order1, in Apeejay Shipping Limited v. Commissioner of Service Tax, Kolkata disposing off appeal2 against order3 of Commissioner of Service Tax, Kolkata, in order4, in Commissioner of Service Tax v. Sidh Designers Pvt Ltd and others, disposing off appeal5 against order6 of Commissioner of Service Tax, New Delhi. Reliance was also placed on the decision of the Tribunal in Autobahn Enterprises Pvt Ltd v. Commissioner of Service Tax, Mumbai [2022 (56) GSTL 312 (Tri.-Mumbai)] and of the Hon’ble Supreme Court in Super Poly Fabriks Ltd v. Commissioner of Central Excise, Punjab [2008 (10) STR 545 (SC)].
6. According to Learned Authorised Representative, the claim of the appellant to have engaged with ship owners and with oil companies separately, and on ‘principal–to-principal’, is not tenable as the contractual terms makes it plain that they are nothing but facilitators or agents for the ‘cargo owners’ insofar as ‘in-charter’ vessels are concerned. Reliance was placed by him on the decision of the Hon’ble High Court of Bombay in Union of India v. Mahindra & Mahindra Ltd [2012 (25) STR 6 (Bom)]. Relying on the decision of the Tribunal in Trade Wings Ltd v. Commissioner of Service Tax, Mumbai [2008 (12) STR 549 (Tri.Mumbai)], it was contended that the fee received as ‘intermediary’ is taxable which the Tribunal, in Global Asian Services v. Commissioner of Service Tax [2013 (29) STR 164], affirmed on liability arising upon provision of ‘intermediary services’ for arranging transportation.
7. That the appellant is engaged with the oil companies to provide service of carriage of ‘crude oil’ is not in dispute. It is common ground that the freight charged for such activity was either exempted from tax or excluded for taxability in the respective tax regimes before and after 1st July 2012. It is also incontrovertible that the dispute is limited to the rendering of contracted service in the absence of their own vessels and deployment of alternative vessels. The limited question to be determined is taxability arising as ‘agents’ or ‘intermediary’ on behalf of the oil companies or taxability arising on consideration paid by vessel owners engaged by the appellant herein. The taxability of the latter prior to 1st July 2012 was held by the impugned order to be in conformity with section 65(105)(zzb) of Finance Act, 1994 read with section 65(19) of Finance Act, 1994 and to be in conformity with section 66B of Finance Act, 1994 read with section 65B(44) of Finance Act, 1994 and section 66C of Finance Act, 1994.
8. The essence of ‘business auxiliary service’ which is the intended target of tax, is the presence of a provider of service between a service/product belonging to one and required by another. The retained amount has been sought to be taxed by the fitment of carriage of cargo belonging to oil companies by vessel belonging to others as acting on behalf of oil companies, from contract, and causing receipt of service from vessel owners to oil companies. From a perusal of the impugned order, it would appear that the adjudicating authority has examined the contract, at least of a particular customer with the appellant herein and corresponding contract of appellant herein with owner of a vessel under on flag of Liberia. That the link between the two intended in the former to ensure that technical specification were not amenable to dilution was not tested for subordination of the latter and nor was the commercial terms of the latter examined for conformity with former deprives the finding that:
‘4.5.2 The above conditions indicate that as and when M/s SCI are unable to provide their owned vessels to the charterers, M/s SCI can in-charter vessels against payment of freight, dead freight and demurrage etc for the in- chartered vessels on back-to-back basis, as per charter party terms finalized by SCI.
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6.1 I find that the amount recovered in the guise of “address commission” being a recovery for expenditure towards their administrative expenses, DG-Shipping license fees, taxes, P&I and other related expenses is an income towards commission charged by M/s SCI and is independent of Freight and will clearly and unambiguously fall within the ambit of ‘Commission’ and therefore, I have no hesitation in concluding that M/s SCI are acting as as Commission agent in respect of such transactions.
to be lacking in statutory credibility. Furthermore the reliance on
In this respect the explanation to definition of Business Auxiliary Service is squarely applicable as reproduced at para 1.9.1 above ie
“Explanation- For the removal of doubts, it is hereby declared that for the purposes of this clause, –
(a) “Commission Agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person –
(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services’
adduced to conclude that appellant is ‘commission agent’ has not tested conformity with section 65(105)(zzb) of Finance Act, 1994 either.
9. Insofar as taxability on ‘intermediary’ for the period after 1st July 2012 is concerned, the very same terms and conditions of contracts had been cited as sufficing to conclude that service had been provided to oil companies by vessel owners through the agency of the appellant.
10. It is consideration paid by the oil companies to the appellant that has been segregated – to exclude that which subsisted in contract of vessel owners with appellant as payable while not excluding the amount retained – which is the basis of the demand. The test of taxability is lacking. Contextually, ‘intermediary’ is relevant only for determining ‘taxable territory’ under Place of Provision of Service Rules, 2012 inasmuch it was such amount which the notice proposed as subject to tax liability. The appellant as well as the oil companies are located in the territory of India with consequential location of the ‘provider of service’, which, in this case, is the appellant would render the tax liability to arise within the taxable territory of India; this aspect was never in dispute. However, ‘address commission’ is amount contractually withheld by the appellant and, while that may arithmetically be the difference between that received as ‘charter charges’ and paid as ‘charter charges’, is also the amount payable by the ‘vessel owner’ to the appellant as ‘commission’ for recourse to those vessels. It would, therefore, amount to consideration paid by the overseas entity to the appellant and either recompense for provision of service which was not considered by the adjudicating authority or unaccounted payment. In the haste to fall back on Place of Provision of Service Rules, 2012 for fastening liability, this aspect appear to have been overlooked. As set out in section 66C of Finance Act, 1994 and with the change of taxability from service as described to activity within the taxable territory a design for identification of activities as occurring within the taxable territory was required. Place of Provision of Service Rules, 2012 is accordingly nothing but machinery for determination of taxable entry and, necessarily, to be subordinated to the chargeability of tax under section 66B of Finance Act, 1994. The impugned order has not examined chargeability of the activity to tax within the intend of ‘taxable service’ in section 65B(44) of Finance Act, 1994 read with section 66B of Finance Act, 1994.
11. The extent nature and scope of ‘intermediary service’ in taxation under Finance Act, 1994 came up before the Tribunal in over claim of having been exported and, thus, escapes tax in Sabre Travel Network India P Ltd v. Commissioner of CGST & Central Excise Mumbai Central and order7, disposing off appeal8 against order9 of Commissioner of Service Tax (Appeals), Mumbai – II, held thus
‘20. We may be pardoned for indulging in this lengthy portrayal of evolution of the tax and the progressive generalization of service converging in the present form; in its absence, the complication in assaying of export of services, in which denial arising from placement within the ‘taxable territory’, by recourse to Place of Provision of Service Rules, 2012, can be refuted only by establishing that ‘consideration’ corresponds to ‘main service’ on own account, could not have been contextually explicated. The appellant-assessee may not be factually incorrect in submitting that no consideration is received by them from the only other entity in the domestic territory, viz., travel agents and that they are in receipt of consideration for provision of service to an overseas entity. However, the consequent proposition that this factual portrayal excludes the receipts from the purview of service tax is, in our view, unexceptionable only in the erstwhile tax regime in which the enumeration of legislative intent to tax identified services implied a cluster of discrete activities with each evaluated for coverage on its own steam. In the new paradigm, every activity, save for specific exclusions, that involve a ‘provider’ and ‘consideration’, is ‘service’ but the absence of description, and, that too, qualified with ‘any other person’ therein, eliminates borderlines segregating each service. That absence is a deliberate consequence of superfluity of the extent of activities or ‘service’ in the general scheme of taxation and, conversely, where description is warranted, the span of activity is to be inferred from, ‘consideration’ paid for it. Thus, in normal circumstances, receipt of ‘consideration’ suffices for saddling the ‘provider’, subject to exclusions and exemptions afforded by section 66D and section 93, with levy of tax as ‘service’ rendered in ‘taxable territory’ under the authority of section 66B of Finance Act, 1994 much like it was in the classificatory regime. The ‘out of normal’ is the contriving, in specific circumstances, of ‘taxable territory’, under authority of section 66C of Finance Act, 1994 by recourse to Place of Provision of Service Rules, 2012 which is designed to locate the delivery of service within the ‘taxable territory’, by reference to provider, in rule 9, or recipient, in rule 8 and, in other rules, to triggering circumstances, for invoking section 66B of Finance Act, 1994. Superficial equivalence with commodity exports, by identification of recipient as claimed by appellant-assessee, does not, owing to statutory obliteration of recipient in determining the rendering of ‘service’, suffice for exacting privileges without conforming to rule 6A of Service Tax Rules, 1994.
21. Therefore, unlike in the erstwhile regime in which exclusion from taxability was determined, whenever ‘consideration’ was received in foreign currency, by subjecting the description to the trifurcated categorization in Export of Service Rules, 2005, every activity conforming to the definition of ‘service’ in section 65B(44) of Finance Act, 1994, not excluded or exempted, is taxable to the extent of ‘consideration’ having been paid from within India to ‘provider’ within or outside India. Notwithstanding the generality of rule 3 which, by its emphasis on flow of ‘consideration’ as pointer to the location of recipient in the taxable territory, should exclude any payment received from outside India, particular applicability of any other rule in Place of Provision of Service Rules, 2012 that locates the service with a provider in India, as rule 9 does, is an exception to rule 3 by discountenancing the flow of consideration. It is in these circumstances that we hold that receipt of consideration from, or location of recipient, outside India, even as it is necessary under rule 6A of Service Tax Rules, 1994, does not suffice for coverage by rule 3 of Place of Provision of Service Rules, 2012. The submissions on behalf appellant-assessee on those grounds are tenable only if it is established that they are not covered by rule 9 of Place of Provision of Service Rules, 2012. We turn to that aspect now.
22. The activity of an ‘intermediary’ is not envisaged as any less of ‘service’ than contemplated by section 65B(44) of Finance Act, 1994 and this is evident from its definition in rule 2(f) of Place of Provision of Service Rules, 2012. While ‘main service’ on own account, implying adequate autonomy to negotiate ‘consideration’ to be passed on in the value chain to the next ‘provider’ and onwards until the sum of consideration is recovered in entirety from the ultimate consumer, is also no more and no less than ‘service’, the antithesis thereof, characterized by divesting of such autonomy and to be inferred from the nature of the ‘consideration’, will relegate the corresponding activity to that of ‘intermediary’ which is subordinate to a ‘main service’ on own account within which it is rendered. By designating of the activity of ‘intermediary’ as ‘service’ but not on its own account to be distinguished by provision of ‘main service’ on own account, it would appear that while being ‘provider’ – one of the two essential determinants of ‘service’ – the ‘consideration’ received, as it must for coverage under Finance Act, 1994, by the ‘intermediary’ is lesser than, or subordinate to, the consideration that corresponds to performance of the ‘main service’ on own account. Here, irrespective of the delivery of the ‘main service’ in the ‘taxable territory’ or otherwise, the ‘consideration’ received by the ‘provider’ in India is deemed to have been for service rendered in India. From this would emerge a pattern in which ‘services’ coalesce within a ‘main service’ detracting from independent existence of each of them except for the description corresponding to ‘consideration’ of the coalesced ‘main service’ rendered on own account which is characterized by the recipient of service acknowledging only one provider for contractual consideration but yet carrying on business with other entities with whom the recipient of consideration has entered into separate contracts. This is the only chain of service providers that offers latitude for several entities to participate in transactions of ‘service’ that is ‘main service; the alternative model, and more commonplace, is the sequential coalescing of ‘main service’ on own account that progressively merges to extend the ‘consideration’ and the corresponding description of the ‘service’ provided. The argument on behalf of the appellant for exclusion of the former of the alternatives from the ‘intermediary’ intended in the Place of Provision of Service Rules, 2012 makes rule 9(c) otiose.’
12. To the extent of our findings supra, we are in agreement with the contention of Learned Counsel that the impugned order is a nonspeaking order and which, as set out by Hon’ble High Court of Bombay, in Velcord Textiles v. Union of India 9199 (111) ELT 351 (Bom)], and by Hon’ble High Court of Madhya Pradesh, in Ratlam Wires Private Limited v. Union of India [2000 (120) ELT 71 (MP)] is no adjudication. It was also incumbent on the adjudicating authority to respond to the submissions that the show cause notice was vague and cryptic for which reliance was placed on the decision of Hon’ble Supreme Court in Amrit Foods v. Commissioner of Central Excise, UP [2005 (190) ELT 433 (SC)] and in Commissioner of Central Excise, Bangalore v. Brindavan Beverages (P) Ltd [2007 (213) ELT 487 (SC)].
13. In view of the inadequacy in the impugned order and such inadequacy precluding us from determining the tax liability to be legal and proper a fresh finding within the framework of the show cause notice and the contention of the noticee along with appreciation of legal authority for charging of tax under section 66 of Finance Act, 1994 and section 66B of Finance Act, 1994 in the respective periods is warranted. To enable this, we set aside the impugned order and remand the matter back to the original authority for a fresh decision.
(Order pronounced in the open court on 19/02/2025)
Notes:
1 [final order no. 77387 of 2023 dated 19th October 2023]
2 [service tax appeal no. 88 of 2012]
3 [order-in-original no. 43/COMMR/ST/KOL/201-12 dated 28th November 2011]
4 [final order no. 50814-50818 of 2023 dated 3rd July 2023]
5 [service tax appeal no. 52112 of 2014 & others]
6 [order-in-original no. 190/GB/2013 dated 05th December 2013]
7 [final order no. A/85779-85783/2020 dated 11th September 2020]
8 [service tax appeal no. 87767 of 2017]
9 [order-in-appeal no. PK/46-48/MC/2017 dated 31st July 2017]
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