Freight Forwarder's Profit from Space Trading Not a Taxable Service: CESTAT [Read Order]

Seagull Maritime Agencies Pvt. Ltd., the appellant, is a freight forwarder engaged in booking cargo space for importers and exporters and reselling it at a margin. The company is registered under the category of “Business Support Services” and was issued a show-cause notice for non-payment of service tax on the markup earned from freight charges during the period from 2010-11 to 2014-15 and from April 2015 to June 2017.

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The department alleged that the markup, the difference between what the appellant paid to shipping lines or airlines and what it charged its customers, was a consideration for services rendered and therefore attracted service tax. A tax demand of Rs. 3.67 crore was raised along with interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The department argued that the appellant acted as an intermediary and was liable to service tax as the activity did not fall under the exemption provided in Notification No. 25/2012-ST.

The appellant’s counsel argued that it acted as a principal in its transactions and not as an intermediary or agent. They submitted that it independently negotiated and purchased space from carriers and sold it to exporters or importers at its own risk. They claimed that it was not earning any commission from either party, and any profit or loss was purely from trading in space, not service provision.

They relied on CBEC Circular No. 17/07/2016-ST, which clarified that freight forwarders acting as principals and raising invoices in their own name are not considered intermediaries and are not liable to service tax for transportation of goods to destinations outside India. They also relied on several CESTAT decisions, including Marinetrans India (P) Ltd. v. CST, Bhatia Shipping Pvt. Ltd. v. CST, and Satkar Logistics, all of which held that such trading of cargo space does not amount to rendering a service.

The revenue counsel countered that the appellant’s activities were in the nature of business support services and that the profit earned on freight should be taxable. They argued that since the appellant and the customers were both located in India, and no exemption applied, the service tax was rightly demanded.

The two-member bench comprising Binu Tamta (Judicial Member) and Rajeev Tandon (Technical Member) observed that the appellant was operating on a principal-to-principal basis and was not acting as an intermediary. The tribunal referred to the CBEC circular and past tribunal decisions, noting that when a freight forwarder purchases and sells cargo space independently and bears all commercial risks, the activity is in the nature of trade, not service.

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The tribunal explained that the appellant Shri P.K.Sahu, Advocatedid not receive any commission or act on behalf of the shipping lines or exporters. So, the profit earned from space trading could not be taxed as a service. The tribunal set aside the tax demand, penalties, and interest. The appellant’s appeal was allowed with consequential relief.

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