Whether the Logistic support services provided in lieu of handling of export cargo would be classified as a Business Auxiliary Service?

PJ/Case Law/2018-2019/3483

Case:APL LOGISTICS INDIA (PVT.) LTD. Versus COMMISSIONER OF S.T., CHENNAI
Citation:2018 (12) G.S.T.L. 84 (Tri. - Chennai)
Issue: Whether the Logistic support services provided in lieu of handling of export cargo would be classified as a Business Auxiliary Service?

Brief facts:- M/s. APL Logistics India (Pvt.) Ltd. (in short, M/s. APLLIPL), the appellants herein are engaged in providing “Logistic Support Services,” such as, Cargo Consolidation, De-consolidation, Documentation, Customs Clearance, Freight Forwarding and other related services. The present dispute is with reference to two no. of items generated by appellants out of providing services to independent cargo exporters to the overseas buyers, namely, Container Freight Services (in short, “CFS”) and Cargo Receipt (in short “CR”) Issuance Charges received by them from the Indian exporters of cargo. It appeared to the department that appellants are providing the services on behalf of overseas logistics company appointed by the overseas buyer and hence service tax liability would arise under the heading of Business Auxiliary Services. In adjudication proceedings, vide the impugned order dated 26-2-2008, the lower authority has confirmed differential tax liability of Rs. 1,12,03,673/- along with interest liability thereon and penalties under various provisions of law. Hence, this appeal.

Appellant’s contention: When the matter came up for hearing on behalf of the appellants, Shri Prasad Paranjape made oral and written submissions, which can be broadly summarised as under :-
(a)   The nature of services provided by them are absolutely in the nature of handling export cargo. The services of the appellant commence right from the stage of cargo delivery in the warehouse till it is loaded in the ocean-going vessel.
(b)   The scope of services rendered by the appellants and for which they are paid are in the nature of Cargo Handling Services. Further, the definition of Cargo Handling Services, specifically excluded any services in relation to export of cargo. Undisputedly, in the appellant’s case, charges are received only towards handling of the export cargo and, therefore, such charges should not be liable to service tax.
(c)   Revenue is in error to propose and confirm classification of their services as Business Auxiliary Service. Any service will be taxable as Business Auxiliary Service only when the same is provided on behalf of a third party. In the present case, the appellant provides Cargo Handling Services on their own account and also accounts for income earned from these services in their own financial statements as their own income. In view of this, classification of services as Business Auxiliary Service is erroneous.
(d)   Authority has erred in relying on Clause 3.1 of the Agreement, dated 28th Dec., 2002, to hold that consideration received by the appellant is on behalf of the foreign company. The agreement authorises only the appellants to provide the impugned services and further authorises them to charge and retain the service fee collected as their own income. Only in a situation where income earned by the appellants are insufficient to meet the costs and 5% margin of the appellant’s business in India that will enable the foreign logistics company recoup the difference. This does not mean that the charges are payable by the foreign logistics company to the appellants in the normal circumstances. If that was to be so, then the charges for the impugned services would have been first accounted as income in the books of foreign logistics company and then the same would have been accounted as payable to the appellant. Since, in the present case, the entire income is booked by the appellants as their own income, the Revenue’s reliance on Clause 3.1 of the Agreement, dated 28th Dec., 2002, is erroneous and not sustainable.
(e)   Even applying the principles of classification as enumerated under Section 65A of the Finance Act, 1994, the correct classification for the services rendered by the appellants will be Cargo Handling Service. They draw support for these averments on the basis of C.B.E. & C. Circular No. 59/8/2003, dated 28-6-2003, which has illustratively clarified that in the case of C & F or insurance agents, since their services are specifically covered in respective service categories of C & F Service or Insurance Auxiliary Service, despite an overlap of the said services with Business Auxiliary Service, the same will be classified under the respective categories and not under Business Auxiliary Service category.
(f)    Once a specific description of service is excluded from the ambit of taxable service, then the same cannot be sought to be included in any other service category. For this proposition, the appellants rely on the following case laws :
(i)    Kerala State Industrial Enterprises v. Commissioner of Central Excise & Service Tax, Cochin reported in 2012 (28) S.T.R. 574(Ker.); and
(ii)   J.M. Baxi & Company v. Commissioner of Service Tax (Adjn.), Mumbai reported in 2013 (31) S.T.R. 453(Tri.-Mum.).
(g)       The “Logistics Management Services” of the nature provided by the appellants and impugned in the present case were specifically covered under the category of Support Services for Business or Commerce (BSS), which was introduced for the first time on 1st May, 2006. As a matter of caution and based on the advisory received from the Industry Association, the appellants commenced paying service tax on these services with effect from 1st May, 2006 (for CFS charges as “BSS”) and from 1st Feb., 2006 (for CR issuance charges as “BAS”. The Revenue has never objected to the payment by the appellants under the categories.
(h)       Even assuming without admitting that the services provided by them will qualify as Business Auxiliary Service, since the said services are provided to overseas logistic companies, the same will qualify as export of services and not liable to service tax following the ratio of various Tribunals and High Courts decisions as under :-
(i)        Commissioner of Service Tax, Mumbai-II v. SGS India Pvt. Ltd., reported in 2014 (34) S.T.R. 554(Bom.); and
(ii)       Vodafone Essar Cellular Ltd. v. Commissioner of Central Excise, Pune-III reported in 2013 (31) S.T.R. 738(Tri.-Mum).

Respondent’s Contention: Learned Departmental Representative Shri K.P. Muralidharan supports the adjudication. He draws attention to the agreement between APL Logistics India (Pvt.) Ltd. (APLL IPL) and APL Logistics & Warehouse (Hong Kong) Ltd., (APL WMS HKL) and the appellants in para 45 of the appeal paper book, wherein it is agreed upon that the latter has to provide or arrange for provisions of logistic services, etc., by which they assume mainly risk and earn credible returns.
The Learned Departmental Representative submits that services provided by the appellants are only for the promotion of business of the third party or the APL WMS HKL. Hence, the amounts retained by the appellants are, therefore, very much in the nature of the payment for services rendered in promoting such business. In the circumstances, the adjudicating authority has correctly demanded tax liability under the heading Business Auxiliary Service and, therefore, the impugned order does not call for any interference.

Reasoning of Judgment:From the definition of Business Auxiliary Service what comes to the fore is that “the services rendered has to be in relation to promotion or marketing or sale of goods or services provided or provided by client or procurement of goods or services or provision of services on behalf of the client or any service incidentally to any such activity.”
Thus, to qualify as a service provider of Business Auxiliary Service, the services have to be provided which would augment or enhance or supplement the business of the client, which would obviously result in improvement of the business income/profit of the client. In cases, where there is promotion or marketing of services, or provision of service on behalf of the client, there is more often an arrangement by which the service provider takes or is given the responsibility for increasing the scope for the service activity of the client, generally in a specific geographical area. The additional income that accrues out of such Business Auxiliary Service is provided to the client. On account of such Business Auxiliary Services done by the service provider, very often routed through the said service provider, there will be obviously a payment or consideration for such services rendered, in the nature of fees or a commission. This is why the services as a commission agent have also been brought within the scope of Business Auxiliary Service.
Discernably, when there is a Business Auxiliary Service provided, the service provider will markedly be responsible for resultant additional service, business and consequently additional business income/profit accruing to the client.
However, when The Adjudicating Authority examine the matter at hand, they found that no portion of the Container Freight Services (CFS) chargers and Cargo Receipt or CR Charges received by the appellants from the Indian exporters of cargo are alleged to have been remitted or transferred to the foreign client to APL WMS HKL. On the contrary, they found that in the record, a certificate issued by Chartered Accountants of the appellants confirm that CFS Charges and CR Issuance Charges is accounted by appellants as its income for the financial year 2003-06 and that the same is retained in India. This is exactly what the show cause notice itself also indirectly concedes. While there is no allegation in the show cause notice that the CFS Charges and CR Issuance Charges have been further remitted or transferred to APL WMS HKL, it has been proposed therein to levy service tax, on the entire CFS Charges and CR Issuance Charges received by the appellants. In fact, in para 9(a) of the notice, liability of Rs. 1,12,03,673/- has been calculated on the gross amount of Rs. 10,94,55,709/- (on both the CR Charges and CR Issuance Charges) holding them to be services rendered under Business Auxiliary Service.

Thus, no portion of the amount collected by the appellants from the Indian exporters of Cargo is being transmitted to APL WMS HKL. It is also pertinent to note that APL WMS HKL, does not also pay any commission fees or incentives to the appellants.

In the event, we are not able to find merit in the Revenue’s case that the appellants has provided “Business Auxiliary Service” to APL WMS HKL. Hence, the impugned order, in our considered opinion will not sustain and will have to be set aside, which we do hereby do.

Appeal is, therefore, allowed with consequential benefit, if any.

Decision: The appeal was allowed in favor of the appellant.

Comment: The kernel of the case is, the appellant is engaged in providing the “Logistic Cargo Services”. They are not providing “Business auxiliary services”..
In the present case no payments received by the appellant has been remitted to the foreign client APL WMS HKL. Thus, no portion of the amount collected by the appellants from the Indian exporters of Cargo is being transmitted to APL WMS HKL. It is also pertinent to note that APL WMS HKL, does not also pay any commission fees or incentives to the appellants. Consequently, the appellant has not provided Business Auxiliary Service and is not required to pay service tax. It will fall under “Cargo handling services” only.
Prepared by: Prateeksha Jain

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PJ/Case Law/2018-2019/3483

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