CESTAT Chennai Holds Sub-Contractor Not An Independent GTA, Sets Aside ₹90 Lakh Service Tax Demand

On 2 June, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside a service tax demand of Rs.90.26 lakh against Vinoth Shipping Services, holding that a sub-contractor who only arranges transportation for a principal contractor cannot be treated as an independent Goods Transport Agency (GTA) liable to tax under the reverse charge mechanism.

Technical Member Vasa Seshagiri Rao and Judicial Member Ajayan T.V. allowed the appeal and quashed the demand, interest, and penalties, finding that the appellant only acted as a facilitator for its principal contractor, Aspinwall & Co. Pvt. Ltd., which had already paid service tax on the transportation services. The Bench held:

"...the materials on record consistently establish that Aspinwall remained the principal contractor who received work orders from customers, issued consignment notes, billed transportation charges inclusive of service tax and discharged service tax on the gross amount collected from customers."

Vinoth Shipping Services, a Tuticorin-based logistics and shipping service provider, was engaged by Aspinwall for arranging transportation of cargo connected with import and export operations at Tuticorin Port.

During an audit, the Department alleged that the appellant had paid freight charges to transporters but had failed to discharge service tax under the reverse charge mechanism applicable to GTA services for the period from 2007-08 to 2011-12. Based on this allegation, the Department confirmed a demand of Rs.90.26 lakh along with interest and penalties.

The Department contended that since the appellant paid freight to transporters, it became the "person liable to pay freight" under Rule 2(1)(d)(v) of the Service Tax Rules, 1994, and was therefore liable to pay service tax.

The appellant argued that it merely acted as a sub-contractor for Aspinwall, which dealt directly with customers, issued consignment notes, billed transportation charges and discharged service tax on the entire value of transportation services.

After examining the agreements, reimbursement records, freight documents and other evidence, the Tribunal found that the appellant only coordinated transportation activities on behalf of Aspinwall and did not independently provide GTA services.

The Bench noted that issuance of a consignment note is a statutory requirement for classification as a Goods Transport Agency. Since Aspinwall, and not the appellant, issued the consignment notes, the appellant could not be treated as a GTA.

It further held that "...Mere routing of freight payments through the appellant or temporary handling of freight disbursements cannot automatically render the appellant liable under Rule 2(1)(d)(v), particularly when the records establish that the freight element represented reimbursable expenditure incurred on behalf of Aspinwall on pure-agent basis."

The Tribunal also noted that the appellant had consistently informed the Department that Aspinwall had already discharged service tax on the transportation charges recovered from customers. Despite receiving undertaking letters and supporting documents, the Department failed to verify Aspinwall's records.

Holding that the same transportation activity could not be subjected to service tax twice, the Bench ruled that confirmation of the demand against the appellant would result in impermissible double taxation.

The Bench stated that "..The appellant merely arranged vehicles and incurred freight expenditure on behalf of Aspinwall on reimbursement basis. Consequently, the appellant cannot be artificially treated as a GTA merely by invoking the concept of subcontractor liability under the aforesaid circular, particularly when such interpretation would result in impermissible double taxation of the very same transportation activity."

The Tribunal also held that the demand raised beyond the normal limitation period was time-barred and concluded that the appellant merely facilitated transportation on behalf of Aspinwall and was neither an independent GTA nor the person liable to pay freight under the Service Tax Rules.

Accordingly, the CESTAT set aside the entire demand along with interest and penalties, finding that Aspinwall had already paid service tax on the transportation services and the extended period of limitation was not invocable.

For Appellant: K. Sankaranarayanan, Advocate

For Respondent: Sanjay Kakkar, Authorised Representative