By TIOL News Service

MUMBAI, NOV 04, 2016: APPELLANT entered into an agreement with M/s Duflon Europe Ltd. (DEL) for the sale of goods exported by them to the said DEL.

The allegations in the SCNs are that the appellant had paid commission to this entity DEL and recorded the same in their balance sheet as 'commission' and such payment is liable to be taxed under the category of "Business Auxiliary Service" for the period 2004 to 2009.

As the demands were confirmed with interest and penalties, the appellant is before the CESTAT.

It is submitted that to conclude that the appellant has paid commission there needs to be three parties i.e. seller, buyer and a person who mediate such services. In the present case, the goods were sold directly to DEL which fact is on record and not controverted; that the phrase used in the invoices as deduction/commission is only an error and in fact it is a discount given to DEL. The appellant also takes the support of Notification No. 18/09-ST dated 07.07.2009 which excludes the commission paid to a tune of 1% of the FOB value from the payment of service tax; that in the case in hand the commission does not exceed FOB value of 1%.

The AR justified the demand by reiterating the findings of the original authority.

The Bench observed –

+ the said agreement speaks of purchasing of various items from appellant by the said DEL and it also records that appellant shall allow flat deduction/commission of 8% on the invoice value to DEL. We perused the invoice raised by appellant to DEL and find that the invoices is for the sale of the goods and 8% commission is indicated as has been given on the total invoice value. It is also seen invoice value has been reduced by 8% shown as commission, is against the sale of the goods to DEL.

+ we agree with the contentions raised by learned Counsel that the purchaser of the goods cannot be considered as a "commission agent" as the deduction/commission is for the goods sold. There is nothing on record to show that the said DEL was appointed as "commission agent" for the sale of the goods of the appellant to third parties.

+ the reliance on the clause of agreement that "DEL shall increase the market share of appellant's products" to conclude that DEL was a commission agent, seems to be erratic reading of the clauses of agreement and this itself does not amount DEL has been appointed as "commission agent". The amount indicated on the invoice and recorded in the accounts as commission, in our view, will not attract tax under reverse charge mechanism.

+ we also find strong force in the contention that in order to tax this amount as a commission, there has to be necessarily three parties, seller, purchaser and a person who negotiates such transaction. From the records it is very clear that DEL had not negotiated purchase or sale on behalf of appellant or their customers; to our mind the deduction/commission is nothing but trade discount. In view of the factual position as ascertained from the records, we hold that the impugned orders demanding service tax under reverse charge mechanism from appellant are unsustainable and liable to be set aside.

The impugned orders were set aside and the appeals were allowed.

(See 2016-TIOL-2872-CESTAT-MUM)