Freight and markup recovered on principal-to-principal international transport are not taxable as business support services.

Balmer Lawrie and Co. Ltd. provided customs house agent, logistics, business support, business auxiliary, renting of immovable property and transportation-related services. In arranging export and import cargo transportation by sea and air, it contracted with customers on a principal-to-principal basis and engaged shipping lines, airlines or shipping agencies for transporting the cargo. Its customer invoices included freight charges, together with a mark-up, as well as ancillary charges such as LCL, documentation, delivery-order, terminal-handling and other charges. Service tax was paid on the ancillary charges but not on the ocean/air freight component.

The Department treated the freight-related activity and the mark-up as “support service of business or commerce” under Section 65(104c) of the Finance Act, 1994, and alleged that the appellant could not claim exclusion under the “pure agent” provisions in Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. A demand was raised for April 2010 to June 2012 under the pre-negative-list regime and from July 2012 to March 2015 under Sections 66B and 68. The extended limitation period and an equivalent penalty under Section 78(1) were also invoked. The adjudicating authority confirmed the demand, interest and penalty, leading to the present appeal.

Whether the ocean/air freight charges and the mark-up recovered by the appellant from its customers constituted consideration for “support service of business or commerce” or any other taxable service during April 2010–March 2015?

Whether the appellant’s failure to satisfy the “pure agent” conditions under Rule 5(2) could make the freight component or its mark-up taxable under Section 67 and Rule 5 of the Valuation Rules?

Whether the extended limitation period under the proviso to Section 73(1) and the penalty under Section 78(1) were sustainable?

The Tribunal applied the positive-list regime under Section 65(105) of the Finance Act, 1994 for the period up to 30 June 2012 and the post-1 July 2012 regime under Section 66B read with the negative list in Section 66D(p)(ii). It held that international transportation of goods by vessel or aircraft from a place outside India to a customs station in India was not an independently taxable service during the disputed period.

Section 67 and Rule 5 of the Valuation Rules govern valuation only where a service is otherwise taxable; they cannot create taxability or convert a non-taxable activity into a taxable service.

The Tribunal relied on the principal-to-principal distinction recognised in CBEC Circular No. 197/7/2016-Service Tax dated 12 August 2016 and followed decisions including Balmer Lawrie and Co. Ltd. v. Commissioner of Service Tax, Delhi-II, United Shippers Ltd., Agility Logistics Pvt. Ltd., APL Logistics (India) Pvt. Ltd., Fairmacs Shipping and Transport Services Pvt. Ltd., Team Global Logistics Pvt. Ltd. and Ceva Freight (India) Pvt. Ltd., which held that freight forwarders’ mark-ups on ocean or air freight, earned on a principal-to-principal basis, do not constitute consideration for business support service.

Extended limitation under Section 73(1) requires fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade tax; a bona fide interpretational dispute does not satisfy that standard.

The Tribunal found that the substance of the appellant’s arrangement was transportation of cargo through shipping lines and airlines on a principal-to-principal basis, with the freight cost and a commercial margin recovered from customers. The Department had already accepted that the ancillary documentation, terminal-handling and delivery-order charges were separately taxable; the dispute concerned only the freight component and the mark-up embedded in it.

Since international ocean/air transportation was outside the service-tax net under both the pre-2012 and post-2012 statutory regimes, the Department could not re-characterise the same consideration as business support service merely because the appellant earned a mark-up or did not qualify as a “pure agent”. Rule 5 was therefore irrelevant to the threshold question of taxability.

Consistent Tribunal authority and the CBEC circular supported the conclusion that a principal contracting for transportation, rather than merely acting as a booking intermediary, was not liable to service tax on the freight and mark-up.

As the demand failed on merits, the extended limitation and penalty also could not survive; in any event, the existence of a substantial and bona fide body of judicial opinion negated suppression or intent to evade tax.

The valuation provisions could not independently impose tax on the non-taxable transportation activity. The demand, interest and penalty under Section 78(1) were set aside. The impugned Order-in-Original dated 1 March 2017 was annulled, and the appeal was allowed with consequential relief, if any, in accordance with law.