2025 (5) TMI 1913 - AT - Service Tax

Taxability of the handling charges - such handling charges constitute part of the assessable value for service tax purposes or are exempted as transit insurance or compensation for breakage during transit - HELD THAT - The Ahmedabad Bench of this Tribunal in the case of Gujarat Borosil Ltd. Vs. Commissioner of Central Excise and Service Tax Surat-II 2017 (7) TMI 1034 - CESTAT AHMEDABAD . The issue involved in said case was whether the amount equal to 7% of the value of the goods collected as transit insurance charges from the dealers/buyers for safe delivery of the manufactured goods free from breakage in transit. The goods in the present case are fragile tiles and the handling charges received as nothing but the charges for ensuring delivery free from breakage in transit is includible in the assessable value and chargeable to duty. In Gujarat Borosil Ltd. the Tribunal had categorically noted that the issue of charging duty on the charges by adding the same to the assessable value is settled by this Tribunal as similar proceedings initiated has been decided in GUJARAT BOROSIL LTD. VERSUS COMMISSIONER OF C. EX. SURAT-II 2009 (12) TMI 379 - CESTAT AHMEDABAD and Revenue s appeal against the said judgement before the Apex Court was dismissed by Order dated 19.07.2010. Based on these facts the Tribunal arrived at the conclusion that the amount equal to 7% of the value of the goods collected as insurance charges under the head cost of transportation from the dealers/buyers is not the excess amount of insurance charges collected and retained by the appellant but the amount has been collected as compensation for breakages during the course of transit by issuing credit notes. Thus the payment made by the assessee to its customers for breakages and losses neither tantamounts to insurance nor cost of transportation and is includible in the assessable value. In the present case the handling charges collected by the appellant are meant for breakage free transit of the manufactured goods as it was in case of transportation charges in Gujarat Borosil wherein these charges are denied to be included in the taxable value. Hence we find no reason to differ from the said findings. Conclusion - Handling charges or amounts collected as compensation for breakages or losses during transit which are not paid as insurance premium to an insurance company do not constitute taxable service under service tax law. The service tax demand has wrongly been confirmed on the handling charges received by the appellant - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

• Whether the handling charges collected by the appellant from dealers/customers, purportedly for risk assessment and insurance premium, are liable to service tax.
• Whether such handling charges constitute part of the assessable value for service tax purposes or are exempted as transit insurance or compensation for breakage during transit.
• Whether the findings of the earlier adjudications and appeals, including the Tribunal's prior decision in the appellant's own case and relevant precedents, apply to the present period and facts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Handling Charges as Service Taxable Service

Relevant legal framework and precedents: The dispute centers on whether the handling charges collected by the appellant, described as insurance premium or risk assessment charges, are taxable under the service tax regime. The Tribunal referred to its earlier decision in the appellant's own case for the previous period and the Gujarat Borosil Ltd. case, which dealt with transit insurance charges and their inclusion in the assessable value. The Supreme Court's judgment in CCE, Nagpur v. Ispat Industries Ltd. and Surya Roshni Ltd. were also pivotal.

Court's interpretation and reasoning: The Tribunal examined whether the handling charges are genuine insurance premiums paid to insurance companies or merely amounts collected and retained by the appellant as compensation for breakages or losses during transit. The Court noted that genuine transit insurance premiums paid to insurance companies are not includible in the assessable value for service tax. However, amounts collected as compensation for breakages or losses, which are subsequently reimbursed to buyers via credit notes, do not amount to insurance and must be included in the assessable value.

Key evidence and findings: The appellant charged handling fees ranging from 0.6% to 1% under the guise of insurance premium, but the department found that these amounts were not paid to any insurance company. Instead, these amounts were adjusted against claims for damages paid to buyers. The department issued show cause notices for non-payment of service tax on these handling charges. The appellant relied on the Tribunal's earlier decision in its own case and the Gujarat Borosil Ltd. decision, which held that such charges are not taxable service if they do not constitute insurance premium but are compensation for breakage.

Application of law to facts: The Tribunal applied the principles from the Surya Roshni Ltd. case, which held that compensation paid to customers for breakages during transit, not being insurance premium paid to an insurer, cannot be treated as part of transportation cost or excluded from assessable value. Similarly, the Gujarat Borosil Ltd. decision clarified that amounts collected as compensation for breakages during transit are includible in the assessable value and taxable. However, in the present case, the handling charges were collected as a form of insurance premium but not paid to any insurer, and were used to compensate buyers for breakages.

Treatment of competing arguments: The appellant argued that the issue was already decided in its favor in the earlier appeal for the previous period, and the handling charges did not attract service tax. The department contended that the charges were taxable and relied on the adjudicating authorities' findings. The Tribunal acknowledged the department's submissions but held that the earlier decision in the appellant's own case and the Gujarat Borosil Ltd. precedent were binding and applicable.

Conclusions: The Tribunal concluded that the handling charges collected by the appellant were not taxable service under service tax law since they were not genuine insurance premiums but compensation for breakages, and thus, the demand of service tax on these charges was unsustainable.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is preserved verbatim as follows:

"The entire dispute centers around collection of 'transit risk insurance' which is charged at 7% of the total invoice value. The Revenue's contention that it is collected to compensate the buyers when the goods are damaged/broken during transit by issuing credit notes and it is not paid as premium to insurance companies. Thus, the compensation paid to the buyers which are not in the nature of expenses on account of premium paid for insurance to insurance companies, therefore, ought to be included/added to the assessable value for determination of duty."

"We find that the entire issue has been misunderstood and mis-interpreted by the appellant being not considered in the proper perspective, inasmuch as, there is no doubt about the principle of law settled in a catena of cases that freight and transit insurance charge for delivery of the goods from factory gate to the buyer's premises cannot form part of the assessable value. This principle has been further strengthened by a recent judgment of the Hon'ble Supreme Court in the case of CCE, Nagpur v. Ispat Industries Ltd. - 2015 (324) E.LT. 670 (S.C.). But, the question that arises in the present case is, when in addition to freight charges and the premium for transit insurance paid to the Insurance companies, the appellants collect separately 7% as compensation when the sheet glass is damaged during the course of transit, whether to form part of the assessable value of the goods or otherwise. In our opinion, the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Surya Roshni Ltd. (supra)."

"In Surya Roshni Ltd.'s case (supra), the manufacturer of electric bulbs and tubes sold the goods on FOR destination basis. The price charged includes 2% towards transit risk insurance. The manufacturer claimed deduction, inter alia, that these insurance charges shall not include transit loss/breakage replenishing to customers. The Tribunal considering that the same as 'transit insurance', allowed deduction of the same from the value of the goods. On appeal, after analyzing the principle of law laid down in this regard, the Hon'ble Supreme (Court) observed as follows:

"4. He submitted that the cost of transit insurance was includible in this behalf he relied upon the second MRF judgment submitted, in the first instance, that although the respondent had not insured with an insurance company the goods that it was transporting to its customers the was the same in that it was providing insurance to its customers and was charging two per cent from them. In the alternative, he submitted that if this submission was not accepted and the court was of the view that it was compensation that was being paid to the customers, it was part of the cost of the transportation of the goods."

"5. We are unable to accept either submission in the case of transportation what is includible is the cost of taking out insurance to cover the goods transported; in other words, to cover oneself against a possible loss by paying a premium to an insurance company. The payment made by the respondent to its customers for breakages and losses cannot tantamount to insurance. Nor can, by any means, such compensation be treated as a part of the cost of transportation. It is a clear case of making up to the customer by means of a credit note the monies that it has lost on account of breakages or losses in transit."

Core principles established include:

• Handling charges or amounts collected as compensation for breakages or losses during transit, which are not paid as insurance premium to an insurance company, do not constitute taxable service under service tax law.
• Genuine transit insurance premiums paid to insurance companies are excluded from assessable value, but compensation paid directly to customers for breakages must be included.
• The principle applies consistently across similar cases involving fragile goods and transit risk charges.

Final determinations on each issue:

• The service tax demand on handling charges collected by the appellant for the period January 2016 to June 2017 was wrongly confirmed.
• The impugned order confirming the service tax demand was set aside.
• The appeal was allowed in favor of the appellant, holding that the handling charges do not attract service tax under the facts and law applicable.