The Chennai bench of the Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) ruled that the ocean freight markup is not subject to service tax,
The appellant, Fairmacs Shipping & Transport Services Pvt. Ltd. engaged in clearing and forwarding services for the import and export of goods to and from India, has been accused of not including higher Ocean Freight Charges in their taxable value for service tax purposes. According to Section 65B(44) of the Finance Act, 1994, “service” is defined as any activity performed for consideration, which includes declared services. The appellant’s activities appear to fall under the definition of ‘support services’ as stated in Section 65B(49).
Support services encompass various operational functions that entities typically perform themselves but can outsource. The services provided by the appellant do not fall under the Negative List of Services specified in Section 66D of the Finance Act and are not exempt under Notification No. 25/2015-ST, effective from 01.07.2012. Furthermore, per Rule 3 of the Place of Provision of Service Rules, 2012, the service’s location is defined as that of the service recipient.
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Represented by Ms. Radhika Chandrasekar, the appellant argued that they operate as international freight forwarders, purchasing cargo space from shipping lines and selling it to clients. They asserted that they discharge service tax in compliance with legal provisions. The appellant claimed that their role is on a principal-to-principal basis, which should exempt them from service tax liability.
The appellant maintained that, prior to 01.07.2012, freight services were not taxable. They further contended that for services post-01.07.2012, neither export freight nor import freight was taxable, especially regarding imports prior to 01.06.2016. The SCNs did not clearly specify taxable service categories for the period before 01.07.2012.
M. Selvakumar, representing the Department, reiterated that the definition of ‘support services’ encompasses all services related to business or commerce, regardless of the principal-agent relationship. The Department maintained that the appellant’s activities qualify as support services, thus subjecting the markup on freight charges to service tax.
Further contended that the appellant did not meet the conditions under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, which allows exclusion of costs incurred as a pure agent of the recipient. Consequently, the markup on freight charges was deemed subject to service tax as ‘support services.’ Multiple Show Cause Notices (SCNs) were issued for various periods, leading to demands for service tax.
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After evaluating the arguments from both sides, The two member bench of the tribunal comprising Vasa Sesha Giri Rao (Technical member) and Sulekha Beevi C.S (Judicial member) noted the precedents, including a ruling from the Supreme Court concerning a similar case, EMU Lines Pvt. Ltd. v. Commissioner of GST and Central Excise, which concluded that the markup on ocean freight should not incur service tax.
The tribunal ultimately decided that the Department’s demands could not be sustained and set aside the impugned orders. The appeals were thus allowed, with any consequential reliefs to be provided according to the law.
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