The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in a recent case has held that service tax is not leviable on freight brokerage. M/s. International Clearing & Shipping Agency, the appellant is a partnership firm and holds the certificate of registration from the Service Tax Commissionerate under CHA Services and Steamer Agency Services.  They were filling returns and also discharging Service Tax under these heads.  The officers of the internal audit attached to the Chennai Commission verified the accounts of the appellant.  On scrutiny of the profit and loss account submitted for the financial years from 1997-2004, it revealed that the appellant has not discharged Service Tax on (i) operational surplus, (ii) service charges/tax exempted and (iii) freight and brokerage.

A Show Cause Notice was issued proposing to demand the Service Tax on the above amounts alleging that these are like considerations received for CHA services as well as Steamer agent services.  Separate Show Cause Notices for the same period were issued regarding CHA services / Steamer agency services.  After due process of law, the original authority confirmed the demand, and interest and imposed penalties.

The Counsel Ms. Radhika Chandrasekar appeared and argued for the appellant. It was submitted that the Department alleged that the appellant has not paid Service Tax on Operational surplus, Service charges / Tax exempted, Freight and Brokerage, etc. The appellant has collected various charges like expenses incurred by them for payment of statutory levies, pilotage and berth hire charges, Indian Coast light dues paid to the port authorities, cargo expenses paid to the port authorities, charges paid to transporters such as CONCOR/Railways/Private Transporters, Chartered Accountants Fee, Income Tax deductions, Brokerage paid to Export cargo, etc. On perusal of the Show Cause Notice, it is seen that based on the financial statements, the Department has raised the demand on three heads viz., (i) operational surplus, (ii) service charges/tax exempted and (iii) freight and brokerage.  Counsel submitted that the appellant receives a brokerage/rebate from the shipping line on the ocean freight that they have to pay to the shipping lines.  It is in the form of the discounts or incentives paid to the CHA and such amount is not a consideration for providing any CHA services.  The appellant does not provide any CHA service to the shipping line.

They act as an agent on behalf of the importer/exporter.  So the incentive or the discount received by the appellant from the shipping line cannot be treated as a consideration received for CHA services.  In the case of Commissioner of Service Tax, New Delhi Vs. Karam Freight Movers, the Tribunal observed that the markup value collected by the assessee from the exporter is an element of profit in the transaction.  The said amount is not a commission earned by the assessee and is not while acting as an agent of the exporter or shipping line and cannot be considered as a consideration.

The assessee while acting as an agent on behalf of the shipping line was discharging the Service Tax as Steamer Agency services.  The Tribunal took the view that the markup value collected by the assessee being an element of profit in the transaction cannot be subject to levy of Service Tax.  A similar view was taken by the Tribunal in the case of Commissioner of Service Tax, New Delhi Vs. M/s. Continental Carriers and in the case of Greenwich Meridian Logistics (I) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai.  A two-member bench of Ms Sulekha Beevi C S Member (Judicial) and Mr Vasa Seshagiri Rao, Member (Technical) observed that the demand is raised on the mark-up made which is the profit out of the difference in the value of ocean freight collected by the shipping line and paid by the exporter/client.  The CESTAT held that the demand for Service Tax on freight brokerage cannot be sustained and set aside the demand.