Calcutta High Court Upholds Service Tax On C&F and Transport of Steel, Excludes Bending & Bundling

On 4 February, the Calcutta High Court held that service tax applies to “Clearing and Forwarding” (C&F) services and transport expenses for steel products. The Court clarified that activities such as transporting, storing, forwarding, and record-keeping fall within the scope of C&F services, while bending, bundling, and stock verification of goods do not.

A Division Bench of Justices Rajasekhar Mantha and Ajay Kumar Gupta dismissed an appeal by Naresh Kumar & Co., which claimed exemption from service tax on payments received for C&F services rendered to Tata Iron & Steel Company Limited (TISCO) and Tata Ryerson Ltd (TRL).

The Court observed that the appellant could not claim exemption on transportation charges, which formed part of the remuneration received from the companies. It noted:

“40. The appellant has dishonestly claimed exemption of service tax on Rs 36,56,555 on the direct expenses of Rs 6,64,45,249... for forwarding the goods to their destination. The transportation charges form part of the remuneration received by the appellant from the said companies. Therefore the appellant cannot claim exemption from service tax on the direct expenses….”

The dispute relates to the period from September 1999 to March 2004. The appellant received, unloaded, transported, stored and forwarded goods and also undertook stock verification and bending and bundling of steel products. However, the appellant voluntarily registered for service tax only on 27 May 2002, 38 days after a search and seizure operation at its office. The Court ruled that this registration relates back to the start of services in 1999.

The Court upheld service tax liability for the period at Rs. 49,27,918 for C&F services provided to TISCO, Rs. 48,396 for C&F services provided to TRL, and Rs. 36,56,555 for direct transport expenses. It added:

“41. The appellant has also undertaken the work of bending and bundling the goods of the said two companies. This area of work, however, clearly falls outside the scope of clearing and forwarding services….”

The Court quashed the tax demands for bending and bundling (Rs. 3,71,610) and stock verification (Rs. 80,402), noting that these activities involve changing the character or evaluating the quality of goods, whereas a C&F agent's work is limited to preservation and handling.

On limitation, the Court noted that Section 73 of the Finance Act, 1994, allows a five-year recovery period when a taxpayer suppresses information to evade tax. Rejecting the argument that the claim was time-barred, the Court held that voluntary payments towards past dues on 29 January 2004 triggered a renewal of the cause of action.

It noted:

“64. The said payment has established the jural relationship between the appellant and revenue authority... The amount of the said payment by the appellant, however, did not cover all the past dues of service tax. Accordingly, the general manager of the appellant was interrogated on June 10, 2004. On September 13, 2004, the Show Cause Notice was issued.”

The Court ruled that the registration in 2002 applied retrospectively to the start of services in 1999, reasoning that the registration would be “meaningless” if it did not include the actual period of service and noting that the appellant was “always aware” its remuneration was subject to tax but was merely “testing the water” until the search and seizure.

Further, the Court also set aside the Tribunal's decision to remand the issues of limitation and penalty, expressing "anguish" at the Tribunal's "attitude of 'passing the buck'" when adequate evidence existed to rule on those matters directly.

The Court imposed a monthly penalty of 15% on the upheld tax amounts, choosing a reduced rate because the appellant eventually registered and made partial payments toward its dues.

In addition to the penalty, it held that the appellant must pay 10% simple annual interest on the total tax owed, calculated from the date the appeal was filed until the final payment is made.

Finally, while the Court quashed the specific taxes on bending, bundling, and stock verification under the "C&F" category, it granted the Department liberty to re-tax these services under a more appropriate legal heading.

For Appellant: Advocates J.K. Mittal, Paritosh Sinha, AmitavaMitra, Urmi Sengupta, Naman Aggarwal

For Respondent: Advocates U.S. Bhattacharyya, K.K. Maiti