Supreme Court Overturns High Court on Service Tax Classification: Union of India vs. Coastal Container Transporters Association (2019)

Date of the Judgment: 26 February 2019

Citation: 2019 INSC 172

Judges: Uday Umesh Lalit, J., R. Subhash Reddy, J.

Can a service provider who arranges for both road and sea transport of goods be taxed under “cargo handling service” or “goods transport agency”? The Supreme Court of India addressed this question in a recent judgment, overturning a decision of the High Court of Gujarat. This case revolves around the classification of services for the purpose of service tax under the Finance Act, 1994. The bench, comprising Justices Uday Umesh Lalit and R. Subhash Reddy, delivered the judgment, with Justice R. Subhash Reddy authoring the opinion.

Case Background

The Coastal Container Transporters Association and two transport companies, Yamuna Shipping Logistics Pvt. Ltd. and Pushpak Logistics Pvt. Ltd., filed a writ petition before the High Court of Gujarat. These companies are engaged in transporting goods. The dispute arose when the tax authorities issued show cause notices to the companies, proposing to tax their services under the category of “cargo handling service.” The companies argued that their services should be classified as “goods transport agency,” which attracts a lower rate of service tax. The companies relied on circulars issued by the Central Board of Excise and Customs (CBEC) to support their claim.

The tax authorities contended that the companies were splitting their transactions into three parts to evade taxes: road transport to the port, sea transport, and road transport from the destination port to the consignee. They argued that the entire transaction should be considered “cargo handling service,” which would attract a higher tax rate.

Timeline

Course of Proceedings

The High Court of Gujarat, while allowing the writ petition filed by the respondent companies, quashed the show cause notices. The High Court held that the services provided by the respondents fell under the category of “goods transport agency” and not “cargo handling service.” The High Court relied on the circulars issued by the CBEC and concluded that the department could not take a stand contrary to these circulars. The High Court also rejected the preliminary objection raised by the appellants regarding the maintainability of the writ petition at the show cause notice stage.

Legal Framework

The case revolves around the interpretation of the Finance Act, 1994, specifically:

• Section 73(1) of the Finance Act, 1994: This section empowers the authorities to issue show cause notices for the recovery of service tax. The High Court quashed the show cause notices issued under this section.
• Section 65(23) of the Finance Act, 1994: This section defines “cargo handling service.” The High Court referred to this definition to conclude that the services provided by the respondents did not fall under this category.
  According to the source, the definition of “cargo handling service” under Section 65(23) of the Act, Circular No.B11/1/2002-TRU dated 01.08.2002, means *loading, unloading, packing or unpacking of cargo and includes cargo handling services, services provided for freight in special containers or in non- containerised freight, services provided by container freight terminal or any other freight terminal, for all modes of transport or any other service incidental to freight.*
• Section 65(50b) of the Finance Act, 1994: This section defines “goods transport agency.” The respondents claimed that their services fell under this category.
• Section 66F of the Finance Act, 1994: This section provides principles for the interpretation of specified descriptions of services or bundled services. Sub-section (3) deals with the taxability of bundled services.

The High Court also considered the following circulars issued by the CBEC:

• Circular No.B11/1/2002-TRU dated 01.08.2002: This circular explains the meaning of “cargo handling service”.
• Circular No.104/7/2008-S.T. dated 06.08.2008: This circular provides instructions on the classification of services.
• Circular No.186/5/2015-S.T. dated 05.10.2015: This circular further clarifies the classification of services.

The court also considered Rule 5 sub-rule (2)(ii) of Service Tax (Determination of Value) Rules, 2006 which are framed in exercise of powers under Section 94 of the Finance Act, 1994.

Arguments

Appellants’ Arguments (Union of India & Ors.):

• The appellants argued that the High Court erred in entertaining the writ petition against the show cause notices. They contended that the issue of classification of services should be decided by the adjudicating authority.
• The appellants submitted that since the respondents undertook the responsibility of delivering goods from consignor to consignee, and also provided cargo handling services (even through other service providers), their services should be classified under “cargo handling service.”
• The appellants argued that the circulars relied upon by the High Court were applicable only to cases where transportation was undertaken solely by road. The appellants contended that the circulars were not correctly interpreted by the High Court.
• The appellants contended that the shipping lines raised bills in the name of the respondents and if any service tax was charged, the respondents were within their rights to take cenvat credit of the same. However, that would not change the nature of service rendered by the respondents from “cargo handling service” to “goods transport agency”.
• The appellants distinguished the case of Deputy Commissioner, Central Excise & Anr. v. Sushil and Company, stating that in that case, the assessee was only supplying labour and not doing any work of loading and unloading.
• The appellants relied on the judgments of the Supreme Court in Union of India & Anr. v. Guwahati Carbon Limited and Union of India v. Hindustan Dev. Corpn. Ltd. to argue that writ petitions should not be entertained at the show cause notice stage, especially when the dispute relates to classification.

Respondents’ Arguments (Coastal Container Transporters Association & Ors.):

• The respondents contended that the High Court’s judgment was well-considered and did not warrant interference.
• The respondents argued that their primary activity was the transportation of goods by road and sea, and thus, their services should be classified as “goods transport agency.” They claimed that any loading or unloading activity was merely incidental to their main service.
• The respondents submitted that they did not undertake any packing or unpacking activities.
• The respondents argued that the circulars issued by the CBEC supported their case, and the department was bound by these circulars.
• The respondents relied on the judgment of the Supreme Court in Deputy Commissioner, Central Excise & Anr. v. Sushil and Company to argue that their services should not be classified as “cargo handling service.”
• The respondents also relied on the judgment of the Supreme Court in Paper Products Ltd. v. Commissioner of Central Excise to argue that circulars issued by CBEC are binding on the departmental authorities.
• The respondents argued that they receive orders from customers with a clear understanding that they merely provide service of transportation of goods by road, whereas services at port area and transportation of goods through waterways would be provided by shipping lines.
• The respondents argued that they would raise a bill for transportation of goods by road and debit note for recovery of expenses which they incur for shipping lines for providing services at port area and transportation of goods through waterways. They also stated that they would not add any margin while recovering money from their customers towards port and shipping line charges.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section of the judgment. However, the core issues addressed by the court can be summarized as follows:

1. Whether the High Court was correct in entertaining a writ petition against show cause notices, especially when the issue involved the classification of services for taxation purposes, and an alternative remedy was available.
2. Whether the services provided by the respondents should be classified as “cargo handling service” or “goods transport agency” under the Finance Act, 1994.
3. Whether the circulars issued by the CBEC were applicable to the facts of the case and binding on the tax authorities.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court distinguished the case of Deputy Commissioner, Central Excise & Anr. v. Sushil and Company [(2016) 13 SCC 223], stating that the contract in that case was only for the supply of labour and the labour was not doing any work of loading and unloading of cargo.
• The Supreme Court followed the ratio in Union of India & Anr. v. Guwahati Carbon Limited [(2012) 11 SCC 651], holding that writ petitions should not be entertained when an alternative remedy is available under the statute.
• The Supreme Court followed the ratio in Union of India v. Hindustan Dev. Corpn. Ltd. [1998 (100) ELT 14 (S.C.)], holding that writ petitions are not to be entertained at show cause notice stage when the dispute relates to classification.
• The Supreme Court discussed the case of Paper Products Ltd. v. Commissioner of Central Excise [1999 (112) ELT 765 (S.C.)], acknowledging that circulars issued by the CBEC are binding on the authorities, but clarified that their applicability is a matter to be considered based on the facts of each case.
• The Supreme Court followed the ratio in Malladi Drugs & Pharma Ltd. v. Union of India [2004 (166) ELT 153 (S.C.)], upholding the judgment of the High Court which refused to interfere at show cause notice stage.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The Court emphasized that the High Court should not have entertained the writ petition at the show cause notice stage, especially when the issue involved the classification of services and an alternative remedy was available.
• The Court noted that the applicability of the CBEC circulars and the classification of services were contentious issues that required a detailed examination of the facts of each case.
• The Court highlighted that the judgment in Deputy Commissioner, Central Excise & Anr. v. Sushil and Company was distinguishable on facts and could not be applied to the case at hand.
• The Court observed that the issue of classification of services is to be considered with reference to the facts of each case depending upon the nature of service rendered and the contract entered into.

Logical Reasoning:

The court’s reasoning was based on the following:

• “Though there is no bar as such for entertaining the writ petitions at the stage of show cause notice, but it is settled by number of decisions of this Court, where writ petitions can be entertained at the show cause notice stage. Neither it is a case of lack of jurisdiction nor any violation of principles of natural justice is alleged so as to entertain the writ petition at the stage of notice.”
• “Further the classifiability of service rendered by a particular assessee is to be considered with reference to facts of each case depending upon nature of service rendered and the contract entered into. There cannot be any general declaration, as prayed for.”
• “It is true that circulars issued by the CBEC are binding on the authorities, but at the same time, such circulars are applicable or not, is a matter which is to be considered with reference to facts of each case.”

The court did not delve into the merits of the classification dispute, stating that it was a matter for the adjudicating authority to decide after considering the facts of the case and the responses to the show cause notices.

Key Takeaways

• Writ petitions against show cause notices should generally not be entertained when an alternative remedy is available.
• Classification of services for taxation purposes is a fact-specific inquiry that depends on the nature of the service rendered and the contract between the parties.
• While circulars issued by the CBEC are binding on the authorities, their applicability depends on the facts of each case.
• The Supreme Court did not provide a definitive answer on whether the services should be classified as “cargo handling service” or “goods transport agency,” leaving it to the tax authorities to decide.

Directions

The Supreme Court allowed four weeks’ time for respondent nos. 2 and 3 to file responses/further responses to the show cause notices dated 08.10.2015 and 30.09.2015. The Court directed the appellants to consider the responses and pass appropriate orders, uninfluenced by any observations made by the Court in this judgment.

Development of Law

The ratio decidendi of this case is that writ petitions should not be entertained at the show cause notice stage when an alternative remedy is available, especially in cases involving classification of services for taxation. There is no change in the previous position of law. The court reiterated the principle that classification of services is a fact-specific inquiry and that the applicability of circulars depends on the specific facts of each case.

Conclusion

The Supreme Court overturned the High Court’s decision, holding that the High Court should not have entertained the writ petition against the show cause notices. The Court did not decide the issue of classification of services, leaving it to the tax authorities to decide after considering the responses to the show cause notices. This judgment emphasizes the importance of adhering to the statutory framework for dispute resolution and the fact-specific nature of service tax classification.