Is Service Tax applicable on C&F Charges

Date of Introduction: 16.07.1997 vide Notification No.26/97-ST dt.11.07.1997.

Definition:

“Clearing and forwarding agent” means any person who is engaged in providing any service, either directly or indirectly, concerned with the clearing and forwarding operations in any manner to any other person and includes a consignment agent.

(Section 65(16) of Finance Act, 1994 as amended)

Taxable event & Scope of Service:

Taxable service means any service provided to a client, by a Clearing & Forwarding Agent in relation to clearing & forwarding operations, in any manner.

(Section 65(72) (j) of Finance Act, 1994 as amended)

The clearing and forwarding agents are engaged / appointed by manufacturer of goods (both excisable and non-excisable goods), producers and distributors of goods and shall also include such agents appointed for agricultural and mineral goods.

Normally, there would be a contract between the principal and the clearing and forwarding agent detailing the terms and conditions and also indicating the commission or remuneration to which the C&F agent is entitled.
 

A clearing and forwarding agent normally undertakes the following activities:
 

If factories or persons are engaging brokers for sending their goods directly to their customers, on the basis of orders procured by them, services rendered by brokers would amount to services provided by a Clearing& forwarding Agents and would be liable for payment of Service Tax.

Value of Taxable Service:

The value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. (Section 67 of Finance Act, 1994 as amended)

However as per sub rule (8) of Rule 6 of Service Tax Rules, 1994 the value of taxable service in relation to the services provided by a clearing and forwarding agent to a client for rendering services of clearing and forwarding operations in any manner shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client engaging such agent.

For the services rendered, the C & F agent receives commission or remuneration, which usually consists of two components:

1. minimum commission on a flat rate or turnover basis depending on the packages/consignments handled, and

2. a variable commission based on performance which is computed on the performance indicators agreed upon between the agent and the principal.

The above two constitute the remuneration or commission paid to the C & F agent by the principal.

Case Laws:

In the case of Laghu Udyog Bharati and other v. U.O.I. and others [1999 (112) ELT 365 (SC)], the Supreme Court was examining whether provisions in Rule 2(XII) and (XVII) of the Service Tax Rules, 1994 (as amended in 1997) are contrary to provisions of Sections 65 and 66 of the Finance Act, 1994. The said Rule 2(XII) stipulated that:

“in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom, remuneration or commission (by whatever name called) is paid for such services to the said agent.”

The Hon’ble Supreme Court, after analysing various provisions of Chapter V of the Finance Act, 1994 as amended, has referred to provisions in Section 68 (1A), which was introduced by the Finance Act, 1997. The section provided that the Service Tax introduced by the Finance Act, 1997. The section provided that the Service Tax for such service was to be collected from such person and in such manner as may be prescribed and to such person all the provisions shall apply as if he is the person responsible for collecting the Service Tax in relation to such service. The Apex Court then observed “as we read Section 68, it does not in any way seek to alter or change the charge of Service Tax levied under Section 66 which is on the person responsible for collecting the Service Tax. It also does not to our mind, in any way, amend any of the sub-sections of Section 65, which contains the definition of different expressions.  All that Section 68(1A) enables to be done is that with regard to assessees or the persons who are responsible for collecting the Service Tax, the individual or the officer concerned can be identified and it is that person who would be a person responsible for collecting the Service Tax. In other words, this provision, namely Section 68 (1A) cannot be so interpreted, as to make a person as an assessee even though he may not responsible for collecting the Service Tax. The Service Tax is levied by reason of the services, which are offered. The imposition is on the person rendering the service. Of course, it may be indirect tax, it may be possible that the same is passed on to the customer but as for the levy and assessment is concerned it is the person rendering the service who alone can be regarded as an assessee and not the customer. This is the only way to provisions can be read harmoniously.”

The Apex Court, thereafter, analysed the provisions in Section 70, (person responsible for collecting Service Tax to furnish prescribed return), section 71 (Assessment) and section 94 (power of Central Government to make Rules) and held that “we have no hesitation in holding that the provisions of Rule 2(d) (XII) and (XVII), in so far as it makes persons other than the clearing and forwarding agents or the persons other than the goods transport operator as being responsible for collecting Service Tax are ultra-vires the Act, itself. The said sub-rules are accordingly squashed”.   The Supreme Court, thereafter, ordered that “any tax which has been paid by customers or clients of the clearing and forwarding agents as of the goods transport operator shall be refunded within twelve weeks on their making a demand for refund.”

This decision was delivered by the Apex Court on 27^th July, 1998 but in the meantime, the said Rule 2(d) (XII) was substituted vide Service Tax (Amendment) Rules, 1998 effective from 16.10.1998. The substituted Rule 2(d) (III) reads as “in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such services to the said agent”.

 However, the said Rule 2(d) (iii) was omitted vide Notification No.7/99-ST, dt.23.08.1999 by the Service Tax (second amendment) Rules, 1999 with effect from 01.09.1999.

A clearing and forwarding agent normally undertakes the following activities: