Carrying out business promotion activities along with commission agent – deprived from benefit of Notification no. 13/2003-ST dated 20-06-2003.
Valuation issue – Reimbursement of expenses necessary to provide services are liable to Service tax. However, expenses which are not necessary for provision of services but expended when reimbursed, can be excluded from the value of services.
Facts:
The respondents had entered into agreements with M/s. Skol Beverages Ltd. for promotion and marketing of Indian manufactured Foreign Liquor/Beer products. The respondents were required to take initiatives to maximise brand visibility, to monitor, report competitor’s activities, to provide infrastructure facilities to the staff of M/s. Skol Beverages Ltd., to submit periodic sales report, etc. It had received service charges under the following heads:
• Primary claim/Retailer scheme: It included discounts offered by the liquor manufacturer to the retailer. Further, to increase sales, rebate was paid to the retailers by the respondents on submission of certain proofs. The said amounts were thereafter claimed from the manufacturer by the respondents without adding any margins.
• Commission claim: It included payments for the marketing services provided by the respondents to the manufacturers and also the return on investments made by the respondents such as payment to retailers, excise duty, etc.
• Merchandiser expenses: The salary and other expenses expended by the respondents to carry out sales promotion activity were reimbursed by the manufacturer.
• Fixed office/other expenses: The respondents arranged transportation, loading – unloading etc. for which they got reimbursements from the manufacturer. The respondents paid service tax on commission income and did not pay service tax on reimbursements and the said position was confirmed by the Commissioner (Appeals).
Aggrieved by the same, the department filed an appeal contesting that the respondents were also engaged in business promotion activities along with being a commission agent and therefore, they were not entitled to the benefit of Notification no. 13/2003-ST dated 20-06-2003. Further, it was not proved that the reimbursements were actual expenses and therefore, were included in the value of taxable services and that the respondents had malafide intentions to suppress the value of taxable services and therefore, penalty u/s. 76 and 78 of the Finance Act, 1994 were also leviable.
Held:
The Tribunal observed that the commission was not merely based on volume of sales and there were reimbursements of salary of salaried personnel and therefore, the said arrangement cannot be termed to be covered within the definition of “commission agent” as provided under Notification no. 13/2003-ST dated 20-06-2003. Further, the discounts given to customers i.e. the primary claim/ retailer scheme cannot be included in the “gross amount charged” for the taxable services. However, following the Larger Bench decision in the case of Shri Bhagavathy Traders vs. CCE 2011 (24) STR 290 (Tri.-LB), merchandise, fixed office and other expenses forms integral part of the value of services and therefore, were includible in the value of taxable services, since it was necessary for the respondents to have manpower to provide agreed services. With respect to misc. expenses such as registration fees for label or brand, transportation, etc., since the expenses were not for providing services, the same may be excluded from the value of services, provided the respondents provided proof regarding such expenditure and reimbursements thereof. The respondents gave their own interpretation to the Notification and they arranged to claim reimbursements of staff expenses and therefore, section 80 of the Finance Act, 1994 (the Act) could not be invoked and the adjudicating authority may provide an option to the respondents to pay penalty @25% of the service tax dues within 30 days from the receipt of the order. However, penalty u/s. 76 of the Act need not be imposed, since penalty was imposed u/s. 78 of the Act.
