Sharing of Costs with Overseas Group Companies Not a Taxable Service: CESTAT Deletes Demand [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Bench at Mumbai has set aside the service tax demands raised against appellant, ruling that the company’s activity of purchasing and selling cargo space on airlines and shipping lines constitutes a principal-to-principal commercial transaction, and not a taxable service under Business Auxiliary Service (BAS) or Business Support Service (BSS). The Tribunal also rejected the extended limitation invoked by the Department.

CEVA Freight, engaged in freight forwarding, logistics and cargo booking, procured bulk space on ships and aircraft at negotiated rates and resold that space to exporters and importers. The Department alleged that the margin earned by the company amounted to service charges for marketing or promoting the business of airlines and shipping lines, and further held that cost-sharing with overseas group companies was taxable.

The Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) observed that the company acted independently, issued House Bills of Lading/Air Waybills, undertook legal responsibility for transportation, and bore commercial risks including loss due to unutilised space. These features, the Tribunal held, clearly established a principal-to-principal relationship, not an agency arrangement. Since CEVA Freight was not promoting or marketing the services of the carriers, the activity could not be brought within the scope of BAS/BSS.

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Relying on a consistent line of precedents, including Total Transport Systems, Greenwich Meridian Logistics, and EMU Lines, the Tribunal reiterated that freight forwarders who contract for space in their own right cannot be treated as intermediaries or service providers to shipping lines. The Tribunal noted that the Supreme Court had upheld earlier rulings holding such margin-based space trading to be non-taxable.

The Tribunal also placed weight on CBEC Circular No. 197/7/2016, which clarifies that freight forwarders acting as principals, assuming risk and issuing transport documents, are not liable to service tax for export freight. In such cases, the transaction amounts to providing transportation service on one’s own account, not an intermediary service.

On the issue of reimbursements from overseas group companies, the Tribunal found that the payments represented mere cost-sharing without any element of service, following the Supreme Court’s ruling in Gujarat State Fertilizers & Chemicals Ltd., which held that cost-sharing does not constitute a taxable service.

Concluding that the Department had incorrectly invoked BAS/BSS and failed to establish any deliberate suppression for extended limitation, the Tribunal set aside the Order-in-Original dated 16.11.2015 in toto. The appeal was allowed with consequential relief, resulting in complete deletion of the tax, interest, and penalties.

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