There are very few services which are under the shadow of ambiguity about its taxability post negative list. Freight forwarding is one such service where the taxability was always questioned. The determination of place of provision is necessary to ascertain the liability of Service Tax. According to Rule 10 of the Place of Provision of Services Rules 2012, place of provision of the service of transportation of goods by air/sea, other than by mail or courier, is the destination of the goods. Therefore place of provision of the service in case of transportation of goods by air/sea from a place in India to a place outside India, will be the place outside the taxable territory and hence does not attract leviability of Service Tax.
In most of the cases, importer and exporter do not engage directly in transportation of goods and they avail such services through other people. However, when an intermediary is involved in the transaction, the place of provision of such services will be the location of the service provider as per Rule 9 of the Place of Provision of Services Rules, 2012. An intermediary has been defined, as one who arranges or facilitates the provision of a service or a supply of goods between two or more persons, but does not include a person who provides the main service or supplies the goods on his own account.
The freight forwarders may act as an agent of an airline/carrier/ocean liner, working as a booking agent with no responsibility for the actual transportation of goods and any legal proceedings will have to be instituted by the exporters against the airline/carrier/ocean liner. When the freight forwarder acts as an intermediary, for which he merely charge the prescribed rate authorised by the airline/carrier/ocean liner without any variation, the service of transportation is provided by the airline/carrier/ocean-liner and the service of the freight forwarder will be subjected to tax. While the service provider of actual transportation will not be liable for service tax vide Circular No. 197/07/2016-S.T dated 12/08/2016.
The said Circular also clarifies that when the freight forwarder acts as a principal providing the service of transportation of goods, who negotiates the terms of freight with the airline/carrier/ocean liner as well as the exporter and undertakes all the legal responsibility and risk for the transportation, he will not be liable to pay service tax. In other words, freight forwarder, when acting as a principal, will not be liable to pay service tax when the destination of the goods is from a place in India to a place outside India and one has to deal with cases purely on the basis of the facts of the case, the terms of contract between the entities concerned. Thus a freight forwarder may be taxed or otherwise depending on his role. It is a dual effect.