The Ahmedabad bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that notional surplus earned from the purchase and sale of cargo space in the shipping line does not fall under business auxiliary service and set aside the demand of service tax.
Chinubhai Kalidass & Bros, the appellant challenged the demand of Service tax on the income earned by the appellant on Ocean Freight. It was pointed out that the appellants are customs agents and are not involved in any transportation or cargo/container of Indian ports to foreign ports.
The appellants were procuring space in ships for the transportation of cargo/containers of their clients. They were earning a margin of difference between the amount charged from their clients and paid to the shipping lines and the same was reflected in their balance sheet as Ocean Freight trading income. The Revenue alleged that the said income is commission income earned by the noticee and the same has chargeable to the service tax under the category of “Business Auxiliary Service” as defined under section 65 (19) of the Central Excise Act, 1944.
The appellants are international freight forwarders and customs agents the appellants. It was noticed that the logistic companies buy cargo space in shipping lines and thereafter, sell the space to their customers. In all these decisions, it has been found that the said activity is purchase and sale of space in Ocean Freight.
The appellant takes responsibility for safety of goods and issues a document of title which is a multi-model bill of lading and commits to delivery at the consignee’s end. To ensure such safe delivery, appellant contracts with carriers, by land, sea or air, without diluting its contractual responsibility to the consignor. Such contracting does not involve a transaction between the shipper and the carrier and the shipper is not privy to the minutiae of such contract for carriage.
The appellant often, even in the absence of shippers, contract for space or slots in vessels in anticipation of demand and as a distinct business activity. Such a contract forecloses the allotment of such space by the shipping line or steamer agent with the risk of non-usage of the procured space devolving on the appellant. By no stretch is this assumption of risk within the scope of agency function. Ergo, it is nothing but a principal-to-principal transaction and the freight charges are consideration for space procured from shipping line.
A two member bench comprising of Mr Ramesh Nair, Member ( Judicial ) and Mr Raju, Member ( Technical ) observed that freight is paid to the shipping line and freight is collected from client-shippers in two independent transactions.
The notional surplus earned thereby arises from purchases and sale of space and not by acting for a client who has space or slot on a vessel. Section 65 (19) of Finance Act, 1994 will not address these independent principal-to-principal transactions of the appellant and, with the space so purchases being allocable only by the appellant, the shipping line fails in description as client whose services are promoted or marketed. The Tribunal set aside the impugned order.
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