DECEMBER 29, 2015

By S B Parikh

1. IT is well known that Cenvat credit of service tax paid on sales commission agent's service is being denied in Gujarat after pronouncement of the Judgement of Gujarat High Court in the case of Cadila Healthcare Ltd. - 2013-TIOL-12-HC-AHM-ST (Para 5.2 of the Judgment refers). Whereas, in other states, such Cenvat credit is being allowed based on the clarification given at serial number 5 of Circular No. 943/04/2011-CX dated 29.04.2011, which is as under:

2. This clarification was not discussed in the case of Cadila Healthcare.Many are of the view that if this clarification was brought to the notice of High Court in case of Cadila, the outcome could have been different. In subsequent cases of Astik Dyestuff Pvt. Ltd. - 2014-TIOL-237-HC-AHM-ST and Dynamic Industries Ltd. - 2014-TIOL-1692-HC-AHM-ST, this clarification was brought to the notice of Gujarat High Court. But, the High Court refrained from taking a different view and Cenvat credit on sales commission agent's service was disallowed. The High Court of Punjab & Haryana, in the case of Ambica Overseas - 2011-TIOL-951-HC-P&H-ST had already allowed such credit, which was brought to the notice of Gujarat High Court in the case of Cadila. But, the Gujarat High Court did not concur with the views taken by P&H High Court.

3. To reiterate, after pronouncement of the judgement of Gujarat High Court in Cadila Healthcare, the position is that Cenvat credit on sales commission agent's service is being denied in Gujarat; whereas in other parts of country it is being allowed based on the P&H High Court's Judgement in Ambica Overseas and Board's Circular dated 29.04.2011. Presently, many manufacturers in Gujarat are taking Cenvat credit on commission agent's service within the prescribed time-limit of 1 year and reversing it immediately under protest to avoid interest and penalty. If the Supreme Court decides this issue in their favour, they intend to file a refund claim to restore the credit.

4. After amendment to the definition of the term 'intermediary' given at Rule 2(f) of the Place of Provision of Services Rules, 2012, w.e.f. 01.10.2014, service tax is not leviable on the services provided by foreign commission agents to Indian manufacturers, as the place of provision of this service is outside India in terms of Rule 9 ibid. However, service tax is leviable on the services provided by Indian commission agents and, therefore, the question remains whether Cenvat credit of the service of sales commission agent is admissible or not.

5. There was a long standing demand that CBEC should clarify this issue at the earliest because it has nationwide ramification. Now, the clarification has been issued vide Instruction F.No. 96/85/2015-CX.I dated 07.12.2015. Vide this Instruction, Minutes of Tariff Conference held on 28th & 29th October, 2015 have been published. The present issue was raised by Meerut Zone in the Conference and following clarification has been offered at Point No. B.30 of the Minutes, which is reproduced below:

"B.30 - Meerut Zone - Cenvat Credit - Admissibility of Cenvat Credit on Service Tax Paid on Sales Agency Commission Service:

Issue: CBEC vide its Circular No. 943/4/2011-CX dated 29.04.2011 at point No.5 has clarified that credit of service tax paid on sales commission services (Business auxiliary services) used in relation to manufacture/sale of finished goods is admissible under Cenvat Credit Rules, 2004. However, there are conflicting judgments of Hon'ble High Courts in this regard. Hon'ble High Court of Gujarat in case of Cadila Health care [2013(030) STR 0003] has disallowed the said Cenvat credit whereas Hon'ble Tribunal in case of Birla Corporation Ltd - [2014(35) STR 977] followed the judgment of Hon'ble High Court of Bombay and allowed the credit. Board may be requested by the conference to issue necessary clarification on the subject to avoid further litigation and to achieve uniformity in the practice of assessment.

Discussion & Decision:

The conference discussed the issue in detail and the facts of both the cases where apparently conflicting judgments have been delivered. It was noted that the judgment of Hon'ble High Court of Gujarat was in a very specific set of circumstances where the sales commission agent seemed to be only trading in the goods i.e. buying and selling the goods without undertaking any sales promotion or advertising. In the said judgment, Hon'ble Court noted that "there is nothing to indicate that such commission agents were actually involved in any sales promotion activities as envisaged under the said expression. Obviously, commission paid to the various agents would not be covered in this expression since it cannot be stated to be a service used directly or indirectly in or in relation to the manufacture of final products or clearance of final products from the place of removal". Board Circular No. 943/4/2011-CX., dated 29.4.2011 at point no. 5 on the other hand has explained the situation where the commission agent renders the service of sales promotion in following words - "……. Moreover the activity of sale promotion is specifically allowed and on many occasions the remuneration for same is linked to actual sale…….". Board circular directs that input service credit would be available when there is a element of sales promotion as sales promotion is a service. Thus, the conflict between the judgment and the circular is not as large as is perceived. Both the Board circular and case laws on the subject allow credit of input services, when the activity of the sales commission agent involves an element of sales promotion."

6. By above clarification, the Conference has denied that there is any large conflict between the Cadila judgement (supra) and Circular dated 29.04.2011. It has been decided that when the activity of sales commission agent involves an element of sales promotion, Cenvat credit would be admissible. However, when the sales commission agents are engaged only in trading in goods i.e. buying and selling the goods without undertaking any sales promotion or advertising (as in the case of Cadila), Cenvat credit may not be admissible.

7. I fail to understand as to how sales commission agent can be engaged in trading of goods i.e. buying and selling the goods, as discussed in the Minutes. If a person is engaged in trading of goods by buying and selling on his own account, he cannot be termed as commission agent, but he is a trader. There is no levy of service tax on trading of goods and so the question of taking Cenvat credit on this activity does not arise. Commission agent causes sale or purchase of goods on behalf of another person known as Principal. Commission agents do not buy or sell the goods on their own account. In case of trading, title in the goods are first transferred in the name of trader and then transferred in the name of another buyer. Whereas, in case of sales through commission agents, title in the goods are never transferred in name of commission agent, but directly transferred from seller to buyer. Commission agent can never be termed as buyer, seller or trader. The activity of a trader attracts VAT/Sales Tax; whereas, the activity of commission agents attracts service tax. It is felt that the aforesaid difference between the activity of trader and commission agent has not been considered in the Tariff Conference.

8. After publication of these Minutes in the form of Instruction, it is quite possible that Central Excise officers in other parts of country may start issuing Show Cause Notices for denying Cenvat credit of service tax paid on sales commission agent's service alleging that they are not engaged in sales promotion but merely getting commission on sales routed through them . On the other side, assessees will try to establish that the commission agents are engaged in sales promotion and, therefore, the credit is admissible. Agreement/Contract between the manufacturer and commission agent, if any, narrating the activities to be carried out by the commission agent, would be an important document to ascertain whether the commission agent is engaged in sales promotion or not.

9. The basic aspect is that Cenvat credit is allowed to avoid cascading effect of duty, which is not discussed in the judgements which disallows Cenvat credit on service of commission agents. If the commission paid to agents goes into the costing of final product and thereby the assessable value of final product includes the value of sales commission, there should be no reason to disallow Cenvat credit of service tax paid on such commission.

10. To conclude, I feel that activities of all sales commission agents are covered under sales promotion and Cenvat credit on commission agent's service should be admissible to avoid cascading effect of taxes. Hopefully, the Apex Court verdict comes sooner and gives a burial to the issue.

(The views expressed are strictly personal.)