Mark-Up On Non-Taxable Ocean, Air Freight Can't Be Taxed As Business Support Service: CESTAT Chennai

On 28 August, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that service tax cannot be imposed on the mark-up earned by a freight forwarder on ocean or air freight when the underlying freight was not taxable during the relevant period.

Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao observed that where the principal activity itself was outside the service tax net, the profit earned from that activity could not be separated and taxed as consideration for a distinct service. The Bench observed:

“Where the principal activity is non-taxable by legislative design, the profit or margin earned in the course of that very activity cannot be severed and taxed as if it were consideration for a distinct service.”

The case concerned Balmer Lawrie and Co. Ltd., which provides logistics and Custom House Agent services. The company arranged transportation of import and export cargo through shipping lines and airlines, paid freight charges to them and subsequently recovered the freight from its customers with a mark-up.

The Service Tax Department sought to tax the mark-up by classifying the activity as “Business Support Service”. It took the view that since Balmer Lawrie recovered freight from its customers at an amount higher than what it had paid to the shipping lines, the difference was liable to service tax. The demand covered the period from April 2010 to March 2015.

Balmer Lawrie challenged the demand, arguing that ocean and air freight were themselves outside the service tax net during the relevant period. It contended that merely earning a margin while recovering such freight could not convert the transaction into a separate taxable service.

The Tribunal accepted the company's contention. It observed that valuation provisions can determine the value of a service that is otherwise taxable, but cannot themselves create a tax liability. A non-taxable transaction cannot become taxable merely because the taxpayer earned a margin or did not qualify as a “pure agent”.

The Bench also noted that similar disputes had already been decided in favour of freight forwarders, including an earlier case involving Balmer Lawrie itself. The consistent view was that a mark-up earned on ocean or air freight in transactions undertaken on a principal-to-principal basis could not be treated as consideration for Business Support Service.

Accordingly, the CESTAT set aside the service tax demand on the freight and mark-up for the period from April 2010 to March 2015. It also set aside the interest and penalty imposed on Balmer Lawrie and allowed the appeal.

For Appellant: S. Muthu Venkatraman, Advocate

For Revenue: Anoop Singh, Authorised Representative