Operational Surplus is subject to levy of Service Tax and cannot be excluded in reimbursable expenses: CESTAT [Read Order]

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in a recent case has held that operational surplus is subject to the levy of service tax and cannot be excluded in reimbursable expenses.

M/s. International Clearing & Shipping Agency, the appellant is a partnership firm and holds the 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 the Chennai Commission 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 like considerations received for CHA services as well as Steamer agent services.  Separate Show Cause Notices for the same period were issued regarding CHA services / Steamer agency services.  After due process of law, the original authority confirmed the demand, and interest and imposed penalties.

 The Counsel Ms. Radhika Chandrasekar appeared and argued for the appellant. It was submitted that the Department alleged that the appellant has not paid Service Tax on Operational surplus, Service charges / Tax exempted, Freight and Brokerage, etc.

It was observed that the Department has issued a clarification about the nature of expenses that are usually incurred by CHA / Steamer Agents etc.s while discharging their services.  It was 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. 

In regards to the demand on service charges/tax exempted, it was submitted by the counsel that the appellant had rendered services as a subcontracting CHA to another main CHA.  During the relevant period, the Trade Notice referred to 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. 

It was observed that 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.  It was alleged that the said operational surplus is subject to the levy of Service Tax and cannot be excluded like reimbursable expenses.

However, the Counsel has been fair enough to submit that the said circular was superseded by Master Circular No. 96/7/2007-ST dated 23.08.2007 wherein it was clarified by the Department that services provided by sub-contractors are taxable even though the main contractor is discharging the tax liability. 

The Larger Bench had noted that before 2007, the Trade Notices / Instructions and Circulars had been issued exempting the sub-contracting CHA from payment of Service Tax on the bills raised on the main CHA.  The period of dispute in the appeal was before 2007, a two-member bench of Ms Sulekha Beevi C S Member (Judicial) and Mr Vasa Seshagiri Rao, Member (Technical) observed that that based on the Trade Notice which is binding upon the Department, the demand raised cannot sustain and requires to be set aside.

To Read the full text of the Order CLICK HERE

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