Brief Facts of the Case

1

BRIEF FACTS OF THE CASE :-

M/s. Safewater Lines (I) Private Limited, located at 304, Shivalik-9, GulbaiTekra, Off. C.G.Road, Ahmedabad – 380 006 (hereinafter also referred to as “the assessee”) is providing services under the category of “Business Auxiliary Services” which are taxable services as defined under sub clause 105(zzb) of Section 65 of Finance Act, 1994. The assessee is registered with Service Tax Commissionerate having Service Tax Registration No. AAICS8700NST002.

2. During the course of audit for the period 2007-08 to 2010-11 it was observed that:

2.1 The assessee had wrongly availed and utilized CENVAT credit.

The assessee has three other branch offices located at Mumbai, Vadodara & Delhi. The assessee did not opt for centralized registration of all these three branches at Ahmedabad. During the year 2007-08 to 2010-11, the assessee availed and utilized CENVAT credit of service tax paid on the input services received and utilized at these three branch offices (ie. other than Ahmedabad branch).

2.1.1 The assessee had not opted for Centralized registration, hence, the input services received at the premises other than registered premises does not qualify as ‘input service’ as defined vide sub-clause (i) of clause (l) of Rule 2 of the CENVAT Credit Rules, 2004. Further, the document on which the CENVAT credit has been availed do not conform to the definition of proper documents as mentioned in Rule 9(1) of CENVAT Credit Rules,2004 read with Rule 4A of Service Tax Rules,1994 in as much as the document on the basis of which the CENVAT Credit has been taken were showing the service receiver premises which was other than the premises for which service tax registration was taken.

2.1.2 The details of such CENVAT credit availed by the assessee are as under.

Year / Basic CENVAT / Cess CENVAT / Total CENVAT
2007-08 / 1,33,942 / 3,938 / 1,37,880
2008-09 / 3,38,720 / 10,124 / 3,48,844
2009-10 / 2,38,350 / 7,149 / 2,45,499
2010-11 / 2,41,471 / 7,243 / 2,48,714
Total / 9,52,483 / 28,454 / 9,80,937

Therefore, the assessee had wrongly availed and utilized CENVAT credit amounting to Rs. 9,80,937/-.

2.2 The assessee had received input services on which input service credit had been taken by them and the value of the services were transferred to their Bombay branch office to provide the output service from their side. Therefore, there appeared to be no output service to the extent of value of input services transferred to their Bombay branch and the accompanied input service credit to that extent appeared to be not admissible.

2.2.1 In the instant case, the tax payer had only accumulated input service credit on the input service received by them but output service had not been provided by them. The details of such CENVAT credit by the tax payer are as under;

Year / Basic CENVAT / Cess CENVAT / Total CENVAT
2007-08 / 1,26,548 / 3,672 / 1,30,220
2008-09 / 1,53,265 / 4,897 / 1,58,162
Total / 2,79,813 / 8,569 / 2,88,382

Therefore, CENVAT credit amounting to Rs. 2,88,382/- availed during the period 2007-08 and 2008-09 appeared to be not admissible to them.

2.3 The assessee had shown income of refund of freight (“Brokerage”) in their ledger account by bifurcating Global Freight Forwarding Income (“GFF income”). During the course of Audit, it was observed that the assessee had received income as brokerage under the head of ‘Refund of Freight (Brokerage)’ from the shipping lines and did not pay any service tax on the same.

2.3.1 The assessee had in their defence contended that the income received by them was on account of ‘freight refund’ and hence was not chargeable to service tax. This argument of the assessee was not tenable as they failed to submit the documentary evidences in support of their defence. It thus appeared that the so called refund amount was nothing but brokerage earned by the said assessee from Shipping Company. These brokerage earned by the said assessee from Shipping Company was nothing but a commission which falls under the category of “Business Auxiliary Services”. It appeared that the services provided by the assessee fell under the category of “Business Auxiliary Service” and hence service tax was required to be paid on the amount received in lieu of said services. During the period from 2007-08 to 2010-11 the said assessee received a total amount of Rs. 65,03,820/- under the head ‘Refund of Freight (Brokerage)’and hence they were required to pay service tax amounting to Rs.6,50,427/- along with interest at the applicable rate.

2.4 The assessee had shown Income of refund of freight (“Brokerage”) in their ledger account by bifurcating of Global Freight Forwarding Income (“GFF income”) on which they were also not paying service tax.

2.4.1 On perusal of the definition of “Business Auxiliary Service”, it appeared that the assessee received brokerage income from Shipping Line Company as commission for booking of containers belonging to the shipping lines. Thus, the services provided by the assessee fell under the category of “Business Auxiliary Services”. From the definition given above it appeared that the so called refund amount of Rs.65,03,820/-(inclusive of taxes) was nothing but brokerage earned by the said assessee from Shipping Company. Hence, the assessee appeared to be liable to pay the service tax on the said income.

2.4.2 The income under the head of ‘Refund of Freight (Brokerage)’ received by the assessee is as under:

Year / Brokerage Amount / Rate of Service Tax / Service Tax Payable
2007-08 / 8,81,993 / 12.36 % / 1,09,014
2008-09 / 14,25,230 / 12.36 % / 1,76,158
2009-10 / 14,23,216 / 10.30 % / 1,46,591
2010-11 / 21,22,954 / 10.30 % / 2,18,664
TOTAL / 58,53,393 / 6,50,427

In view of the discussions in para supra, the assessee appeared to be liable to pay service tax amounting to Rs.6,50,427/- on the brokerage amount of Rs.58,53,393/-.

2.4.5. The said assessee was also adding their profit on the freight charges charged by the shipping lines and showing the same as freight income. The assessee was not paying service tax on such freight income stating that the same was ‘Ocean Freight Income’, the same was not chargeable to service tax.

2.4.5.1 The assessee vide its letter dated 03.09.2012 contented that

- they are registered Multimodal Transport Operator (MTO).

- they issue their own registered multimodal bill of lading to the shippers / exporters.

- they are responsible for carrying the cargo from respective Indian port to a destination port outside India. Once the cargo reaches the destination port the overseas agents appointed by them take the responsibility of delivering the cargo to the consignee.

- as they have issued their bill of lading, any damage during the carriage of cargo will be on account of them and hence they take MTO insurance to decrease the liability which might arise.

- as they do not have the vessel to carry the containers booked by them. They enter into contract with main line operators vessel owning companies wherein they pay them the freight. The contract with the main line operators and with the shippers / exporters are two different contracts and has got no correlation. Thus the freight collected from the shippers / exporters is for carriage of export cargo i.e. export freight which not liable for service tax.

2.4.5.2 The contention of the assessee that ‘Ocean Freight Income’, was not chargeable to service tax appeared to be incorrect in as much as the assessee was providing the service of booking container from shipping lines for their clients for export/import and for the same the assessee was collecting extra charges compared to what they actually pay to the container lines. Thus, by providing these kind of services to its clients the assessee was supporting its clien’s business. Hence, the services provided by the assessee appeared to be classifiable under ‘Business Support Services’.

2.4.5.3 The assessee had charged from their customers for shipping, customs clearance, terminal handling charges, repositioning charges, documentation charges, wharfage charges, surrender charges, port handling charges, pallatization charges, amendment charges, do fees, advance cargo declaration brokerage etc. The assessee had arranged the space in shipping lines and paid ocean freight and had also got commission etc. from concerned agencies. From the above facts it appeared that the assessee while performing the various activities had supported the business of exporters, importers on principal to principal basis and had also earned commission or brokerage for booking space in shipping lines for their customers. It thus appeared, that the aforesaid service rendered by the said service provider falls under the category of “Support Services of Business or Commerce” as defined in Section 65(104c) of the Finance Act, 1994, which are taxable under the respective sub-sections of section 65 of Finance Act, 1994.

2.4.5.4 On scrutiny of ledger abstracts provided by the assessee it was noticed that the tax payer had shown income under the head of ‘Freight Income’ recovered from their clients and did not pay any Service Tax on the same. During the period from 2007-08 to 2010-11 the taxpayer received a total amount of Rs. 53,10,47,500/- (as per Freight Income Ledgers enclosed as Annexure “A”) under the head ‘Freight Income’ and had shown certain expenses under the same head and accordingly recovered excess amount. As per Rule 5 (1) of the Service Tax (Determination of value) Rules, 2006 “Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service”. Hence, the assessee would be required to pay the service tax on the gross amount received by them under the category of ‘Business Support Service’. The details are as under

(Rs. in Actuals)

Year / Total Receipt / Rate of Service Tax / Service Tax Payable
2007-08 / 9,21,46,307 / 12.36 % / 1,13,89,283
2008-09 / 12,42,50,529 / 12.36 % / 1,53,57,365
2009-10 / 11,76,79,279 / 10.30 % / 1,21,20,966
2010-11 / 19,69,71,385 / 10.30 % / 2,02,88,053
Total / 53,10,47,500 / 5,91,55,667

2.4.5.5 The said assessee did not agree with above contention for the reason stated in their letter dated 03.09.2012. The arguments of the assessee was not tenable as the ‘Ocean Freight’ was part of the composite activity which has been undertaken by the taxpayer to accomplish export/import of a particular client. The taxpayer has vivisected the composite activity into various activities resulting into artificial fragmentation of value. Thus, the taxpayer was required to pay the applicable Service Tax under sub-rule 1 of Rule 6 of Service Tax Rules, 1994. As such the taxpayer has violated Rule 6 of Service Tax Rules. The assessee appeared to be liable to pay the service tax of Rs. 5,91,55,667/- under the category of ‘Business Support Service’, alongwith interest at the rate as applicable.

3. In order to ascertain these facts the Range Superintendent issued summons dated 10.10.2012 and recorded statement of Shri Kaushal R Shah, regional manager of the assesse under Section 14 of the Central Excise Act,1944 read with Section 83 of the Finance Act,1994 on 13.10.2012

3.1 Statement of Shri Kaushal R Shah was recorded in question and answer form and hence the same is reproduced as such as below:

Question-1. A brief of business activity of M/s. Safewater Lines (I) Private Limited, Ahmedabad ?

Answer. M/s. Safewater Lines (I) Private Limited, 304, Shivalik-9, GulbaiTekra, Off. C.G.Road, Ahmedabad – 380 006 is engaged in the business of freight forwarding.

M/s. Safewater Lines (I) Private Limited, Ahmedabad is registered with Service Tax department having registration bearing No. AAICS8700NST002 dated 01-02-2006 under the category of “Business Auxiliary Services”.

Question-2. What are the document’s you have submitted in response to the summons dated 10.10.2012?

Answer. I am submitting herewith the copies of ST-3 returns pertaining to the years 2007-08 to 2011-12. With regard to your requirement for ocean freight and refund of freight(brokerage) as mentioned in sr.no.2 & 3 of your summons dated 10.10.2012 I have to state that bifurcation of GFF income such as Ocean Freight,THC, Documentation Fee etc. for the period 2011-12 requires a lot of time to compile. The reason for such delay is on account of the fact that as we are maintaining books of accounts on individual job basis therefore separate figures for taxable and non-taxable charge are not readily available. We need to manually check each and every entry of 2011-12 and arrange for the required data.

As regards the details of amount of CENVAT credit for 2011-12 as mentioned in sr.no1of your summons dated 10.10.2012 it is to state that there are about 250 to 350 invoices per month on which we are availing CENVAT credit. The bifurcation CENVATable documents into our Ahmedabad and non Ahmedabad offices requires considerable amount of time.

In view of the above I can able toproduce the details or documents as mentioned in sr. no.1,2 &3 of your summons dated 10.10.2012 only on first week of November 2012.

Question-3. Whether you have any other branch offices in addition to Ahmedabad Office?

Answer. Yes. We have three other branch offices located at Mumbai, Vadodara & Delhi.

Question-4. M/s. SafewaterLines (I) Private Limited,Ahmedabad are availing CENVAT credit of input services as provided under CENVAT Credit Rules, 2004. Please inform whether you have taken CENVAT credit on input services addressed to your branch offices located at Mumbai, Vadodara & Delhi?