The Customs, Excise and Service Tax Appellate Tribunal has clarified a long-standing ambiguity in service tax jurisprudence by holding that profit shares earned by domestic freight forwarders through multimodal international cargo transport cannot be taxed as Business Auxiliary Service. This decision reinforces the distinction between commercial profit and taxable service consideration, offering critical relief to logistics entities operating across borders.
Background & Facts
The Dispute
M/s. Uniworld Logistics Pvt. Ltd., a registered service provider engaged in international freight forwarding, was assessed for service tax on excess income received as profit shares from its overseas counterparts. The Department contended that these profits constituted brokerage or commission for promoting overseas freight forwarders’ services, thereby falling under Business Auxiliary Service as defined in Section 65(19) of the Finance Act, 1994.
Procedural History
- 2008 - 2009: Department issued Show Cause Notices for the period up to 31.03.2009, alleging taxable brokerage.
- 2010: Show Cause Notice No. 659/2010 issued for the period 01.04.2009 to 31.03.2010, proposing demand of Rs. 37.82 lakhs plus interest and penalty.
- 2016: Commissioner of Service Tax (Appeals-I) confirmed the demand.
- 2018: CESTAT Chennai, in Final Order Nos. 41624-41625/2018, had previously ruled in favor of the appellant on identical facts for an earlier period.
- 2026: Appeal filed before CESTAT Chennai’s Regional Bench, challenging the 2016 order.
Relief Sought
The appellant sought quashing of the service tax demand, arguing that its profit share arose from principal-to-principal transactions in multimodal transport, not from rendering a taxable service. It relied on binding precedents establishing that such profits are business income, not consideration for a service.
The Legal Issue
The central question was whether profit shares earned by a domestic freight forwarder from its overseas partners in multimodal cargo transport constitute consideration for Business Auxiliary Service under Section 65(19) of the Finance Act, 1994, or whether they represent incidental business profits from a principal-to-principal commercial arrangement.
Arguments Presented
For the Appellant
The appellant relied on multiple precedents, including Balmer Lawrie & Co. Ltd. v. Commissioner of Service Tax and M/s. Greenwich Meridian Logistics v. Commissioner of Service Tax, to argue that:
- The appellant acts as a principal in contracting with overseas carriers, not as an agent.
- It assumes full risk of space procurement and market fluctuations, which is inconsistent with agency.
- The profit margin arises from buying and selling transport capacity, not from promoting another’s service.
- Section 65(19) does not apply because there is no service provider-service recipient relationship; the transaction is purely commercial.
For the Respondent
The Revenue contended that:
- The appellant’s role in facilitating international freight constituted promotion or marketing of overseas freight forwarders’ services.
- The excess income received was in the nature of commission or brokerage, squarely covered under Business Auxiliary Service.
- The prior tribunal order in the appellant’s favor was an isolated ruling and should not bind the current assessment.
The Court's Analysis
The Tribunal examined the nature of the appellant’s business model and the legal definition of Business Auxiliary Service under Section 65(19), which includes services like brokerage, agency, and commission-based promotion. It held that the key distinction lies in whether the entity acts as a principal or an agent.
"Anyone who trades in any merchandise or service buys low and sells high and the margin is his profit. To earn this profit, he also takes the risk of being unable to sell... This activity is a business in itself on account of the appellant and cannot be called a service at all."
The Court emphasized that the appellant procures space from shipping lines, issues its own House Bill of Lading, and bears the risk of unsold capacity. This is not agency - it is a principal-to-principal transaction. The profit is not consideration for promoting another’s service but the result of commercial risk-taking and price negotiation.
The Tribunal further noted that its own prior decision in Uniworld Logistics for an earlier period had already settled the issue in the appellant’s favor. Judicial discipline required adherence to this precedent, especially where the facts were identical. The Department’s attempt to re-litigate the same issue was deemed impermissible.
The Court also distinguished the appellant’s operations from those of mere intermediaries who merely connect shippers with carriers. Here, the appellant assumed full responsibility for end-to-end delivery, making it a principal in the transaction chain.
The Verdict
The appellant prevailed. The Tribunal held that profit shares earned by freight forwarders in multimodal transport are business income, not consideration for Business Auxiliary Service, and therefore not taxable under Section 65(19) of the Finance Act, 1994. The impugned order was set aside, and the demand was quashed with consequential relief.
What This Means For Similar Cases
Profit Margins Are Not Automatically Taxable as Commission
- Practitioners must distinguish between agency commissions and commercial markups in logistics contracts.
- Where a party assumes risk, issues its own documentation, and controls the transport chain, the profit is business income - not a taxable service.
- Tax authorities cannot presume brokerage merely because income exceeds freight charges.
Precedent Binding Even Across Assessment Periods
- A tribunal’s ruling on identical facts in a prior period binds subsequent assessments unless there is a material change in law or facts.
- Revenue cannot re-open settled issues through successive show cause notices without new evidence.
- Practitioners should cite prior favorable orders as res judicata in similar cases.
Multimodal Transport = Principal-to-Principal Transaction
- The use of House Bills of Lading and end-to-end liability establishes principal status.
- Contracting with overseas partners does not create an agency relationship if the domestic entity retains control and risk.
- Legal documentation must clearly reflect the principal nature of the transaction to avoid misclassification.
