Whitepaper - Goods Transport Agency Tax Paying Liability Ms. Radha Arun, Consultant to Udyog Software (India) Ltd. This document contains a study on the Goods Transport Agency: What is it, and who is liable to pay service tax on its service Udyog Software (India) Ltd. Hyderabad, Telangana, India July 01, 2015
Goods transport agency: What is it, and who is liable to pay service tax on its service Service tax on transportation of goods by road has never been a smooth ride. It was first introduced in 1997 as tax on goods transport operator and withdrawn the next year because of stiff resistance from the transporters. Again it was introduced in 2004 after inputs from the Bharadwaj committee. In its present form it is a tax on the service of goods transport agency (GTA), collected (in most cases) from the recipient of the service. As repeated audit objections raised by the departmental service tax audit teams show, several modalities of road freight service are fraught with uncertainty as to whether they are taxable or not and if taxable, who is liable to pay the tax. This paper examines the concept of GTA and who is liable to pay service tax on the service of GTA under the reverse charge mechanism. Goods transport: what is taxable and what is on the negative list Negative List Entry: The negative list of services in section 66D of the Finance Act 1994 includes an entry at clause (p)(i) as follows: (p) services by way of transportation of goods (i) by road except the services of (A) a goods transportation agency; or (B) a courier agency. This establishes that services of transport of goods by road, except for transport by a courier or a GTA, are strictly not liable to service tax. What is GTA The definition of GTA is found in section 65B(26) of the Finance Act 1994, as follows: (26) goods transport agency means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called; This definition is identical to the definition in section 65 (50b) ibid under the pre-july 2012 provisions. Thus a GTA, whether under the negative list regime or prior to it, is identified by the fact of issue of consignment note. We shall return presently to the significance of consignment note, by whatever name called, which is the focus of many disputes between the assessee and the service tax department. What is Courier Goods are also transported by road by courier for urgent delivery, and this too attracts service tax. Courier agency is defined in section 65B(20) as follows: (20) courier agency means any person engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilising the services of a person either directly or indirectly, to carry or accompany such documents, goods or articles; This definition too remains the same in the negative list regime as in the prior period. Udyog Software (India) Ltd. Wednesday, 01 July 2015 Page 1
Difference in tax treatment between GTA and courier It is important to distinguish between transport by courier and GTA because the courier pays service tax and collects it from the customer, while the service tax on GTA is paid by the customer under reverse charge. GTA: Reverse charge on person liable to pay freight Under section 68 of the Finance Act 1994 the service provider normally pays the service tax, but in case of particular services as notified, the Rules can prescribe that a person other than the service provider will be liable to pay the service tax. Thus, to bring reverse charge into effect, the service to which it will apply must be specified in a notification, and the Rules must prescribe the person who will pay service tax. Accordingly, notification 30/2012-ST names GTA as a service liable for reverse charge; and rule 2(1)(d)(B) of the Service Tax Rules 1994 defines person liable to pay service tax in respect of GTA as the person liable to pay the freight, if such person is in the taxable territory (i.e., India excluding Jammu & Kashmir) and is a factory, o a registered society, o a cooperative society, o an excise-registered dealer of excisable goods, o anybody corporate established under law, o any partnership firm whether registered or not and o Including an association of persons. If the person liable to pay freight is in a non-taxable territory (e.g. J&K), then the transporter becomes liable to pay the service tax. Thus, subject to the above, generally the entity that is liable to pay freight is also liable to pay the service tax on freight. This covers entities that are liable to pay the freight directly or through an agent. Meaning of person liable to pay freight : The wording in Rule 2(1)(d)(B) of the Service Tax Rules 1994, which defines the person liable to pay service tax for GTA service, is any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage. This raises all manner of questions and disputes over whether the consignor or consignee is liable to pay the service tax. Recovery of freight charges in the invoice In many cases the price is quoted inclusive of transportation charges; freight is paid to the transporter by the consignor of the goods and recovered from the customer as a line item on the invoice. The consignor may interpret this as a situation of the consignee being liable to pay freight, while the consignee sees it as reimbursement to the consignor. The upshot is that neither of the two pays service tax. It is seen that the service tax authorities take an expedient view on this, depending on whether it is the consignor or consignee who is the assessee before them. Udyog Software (India) Ltd. Wednesday, 01 July 2015 Page 2
Privity of contract The rule fixes liability for service tax on the person who pays or is liable to pay freight. Though it does not say liable to pay freight to the transporter, the very meaning of freight is a charge paid to the transporter for transport of goods. The person who engaged the transporter is the person who has privity of contract with him and is liable to pay him. In a batch of cases of Sumangalam Suitings and others versus CCE Jaipur, ST/959-973/2009, the goods were sent from Nepal and the freight recovered by the consignor from the consignee in India. The department treated the Nepal party as agent of the consignee for payment of freight and demanded service tax from the consignee. Rejecting this stand, the CESTAT struck down the demand with the following observations: To determine who is the person who is liable to pay service tax on GTA services under section 68(2) read with the Service Tax Rules, we have to identify the person who engaged the transporter and was liable to pay freight to the transporter; The consignor who engaged the transporter and paid him cannot be treated as agent of the consignee unless there is evidence in this regard; The contract of the consignee with the consignor was for supply of goods; The fact that the consignor arranged transport was strictly incidental to the supply of goods; Mere fact of billing of the freight by the supplier to the customer did not make them the agent of the customer or make the customer liable to pay service tax. In short, the consignee had received goods, not GTA service. The case is reported in the website of the CESTAT and can be accessed from http://judis.nic.in/dist_judis/cestat_delhi/retrieve/caseno_qry.asp by entering the bench as Delhi, subject matter as service tax and appeal number as 959 of 2009. It follows that reimbursement of freight to the consignor of the goods cannot create liability of service tax on the consignee, unless the consignor was explicitly asked to arrange and pay for the transport on behalf of the consignee. Consignment note: significance The reverse charge liability for service tax on GTA means that every entity that transacts business with a transporter for sending or receiving goods by road has to make a determination of whether it has received GTA service. The identifying factor of the GTA is the consignment note. However, rule 4B of the Service Tax Rules 1994 confuses matters by stipulating that Any goods transport agency which provides service in relation to transport of goods by road in a goods carriage shall issue a consignment note to the recipient of service. This looks like a circular definition of GTA, in which the GTA is one that issues consignment note and the GTA has to issue consignment note. Udyog Software (India) Ltd. Wednesday, 01 July 2015 Page 3
What is a consignment note: However, the Explanation to the said rule 4B saves the situation. It defines what is meant by consignment note: Explanation. For the purposes of this rule and the second proviso to rule 4A, consignment note means a document, issued by a goods transport agency against the receipt of goods for the purpose of transport of goods by road in a goods carriage, which is serially numbered, and contains the names of the consignor and consignee, registration number of the goods carriage in which the goods are transported, details of the goods transported, details of the place of origin and destination, person liable for paying service tax whether consignor, consignee or the goods transport agency. This definition makes it clear that a consignment note is to be issued against the receipt of goods for transport. Thus, a person who receives goods for transport by road in a goods carriage is a GTA. He must issue a consignment note for receipt of the goods. Consignment note is required only when GTA takes custody of goods It follows that if a person undertakes transport without receiving custody of the goods, he does not issue a consignment note and is not a GTA. This position was clearly enunciated by the CESTAT in appeal number ST/30/2011 in the case of Birla Ready Mix versus CCE Noida. In that case service tax was demanded from the appellant as recipient of the service of transportation of goods by road by GTA. The appellants, manufacturers of ready mix concrete, had hired transit mixers for taking the goods to the site and paid for the same. Payment was based on kilometres run. A clause in the contract required the vehicle operator to obtain proper receipts from the customer upon delivery. Upon examination of the terms of the contract, the CESTAT observed that: the operator was responsible only for the vehicle and there is no custodial rights or responsibilities in matter of goods carried. This obviates the need to issue consignment notes which normally is a document of title for the goods when it is in the custody of the transporter. Since the appellants are responsible for the goods transported, consignment note, which is a document of title to the goods, is not issued. There is one clause to the effect that the operator will obtain proper receipts from customers after the goods are delivered. Thus by itself cannot make the contract to be that of Goods Transport Agency as defined in Section 65(50b) of Finance Act, 1994. When consignment notes are not issued by the operator they cannot be considered as a Goods Transport Agency. The CESTAT considered the provisions of Rule 4A and 4B of the Service Tax Rules 1994 and acknowledged the circular nature of the provisions, in that the definition of GTA is dependent on a requirement laid down using the defined term itself and leads to difficulties in proper understanding of the matter. On this the CESTAT observed as follows: Udyog Software (India) Ltd. Wednesday, 01 July 2015 Page 4
Since the provision of Act has to prevail we understand the definition at Section 65(50b) has to be understood independent of Rule 4B of Service Tax Rules, 1994 to decide whether the person concerned is a goods transport agency by adopting ordinary meaning of consignment note and then apply Rule 4B of Service Tax Rules, if the person concerned is found to be a goods transport agency. Thus the CESTAT has clarified the manner in which to interpret the provision that a GTA is one that issues consignment note and the requirement that a GTA must issue consignment note. [This case is not reported on the CESTAT site; it is reported by a private publication as 2013 (30) S.T.R. 99 (Tri. - Del.).] Misconceptions leading to audit objections and demands of service tax Commonly the departmental officers, in scrutinising the service tax payments for correctness, take the amount under the head transportation of goods in the accounts of the entity and calculate service tax on this amount. If it is more than the tax actually paid, they demand service tax as short-paid. However, the amount under this head would normally include reimbursement of freight to the seller, in addition to self-payment of freight. It would also include hiring of lorries without consignment note. The foregoing discussion and case law should be of help in dealing with such illfounded demands of service tax. ********************************************************************************************************** Please connect with us at: Web: www.udyogsoftware.com Email: teammarketing@udyogsoftware.com Udyog Software (India) Ltd. Wednesday, 01 July 2015 Page 5