Mere Classification of Income under ‘Profit Sharing’ or ‘Commission’ in Books is Insufficient to Levy Service Tax under BAS: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) held that mere classification of income under "profit sharing" or "commission" in a taxpayer’s books of accounts is insufficient to levy service tax under the category of Business Auxiliary Services ( BAS ), absent any evidence of taxable service being rendered.

Sindhu Cargo Services Pvt. Ltd., the appellant, is a registered provider of Customs House Agent (CHA) services, Steamer Agent services, and Business Auxiliary Services. The dispute arose when the Department issued two show cause notices alleging short payment of service tax for the periods 2007–08 and 2008–09.

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The notices were based on the appellant's books of account, where certain reimbursements and income were categorized under headings such as "profit sharing" and "commission." The Department claimed that these represented consideration for taxable services, and the appellant was not eligible to exclude them from the service tax calculation, especially since the appellant had not qualified as a "pure agent" under Rule 5(2) of the Service Tax Valuation Rules, 2006.

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The adjudicating authority confirmed the demands, imposed penalties under Sections 76 and 78 of the Finance Act, 1994, and demanded applicable interest. The first appellate authority upheld the orders, despite the appellant having submitted a chartered accountant’s certificate and financial documentation showing that such expenses were reimbursed on an actual basis.

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Before the Tribunal, the appellant argued that the reimbursement of operational expenses such as transport, documentation, and customs dues did not constitute consideration for services rendered, and thus were not taxable. They further submitted that income labeled as "commission" or "profit sharing" in the books of account did not directly correlate to any service provided and could not be taxed under BAS merely based on accounting nomenclature.

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The two-member bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) found that the Department had relied merely on entries from the profit and loss account without linking them to any specific invoice or service provided. The tribunal explained that taxability must be established based on evidence of actual service rendered and not inferred from book entries.

The tribunal set aside the impugned appellate order dated 20.04.2015 and the original adjudication orders, holding that neither the demand of service tax nor the imposition of interest and penalties could be sustained. The appeal was allowed with consequential relief.

To Read the full text of the Order CLICK HERE

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