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Introduction: In a landmark decision of Coca Cola India Pvt. Ltd. vs. CCE, Pune-III 2009 (242) ELT 168 (Bom), the Honourable Bombay High Court categorically held that credit was admissible of service tax paid by the concentrate manufacturer on advertising service used for marketing of soft drinks removed by the bottling company. Any activity relating to business could be covered under the definition of input service as per Rule 2(1) of the CENVAT Credit Rules, 2004 (CCR) provided there is a relation between the manufacturer of concentrate and such activity. Service tax paid on advertisements, sales promotion and market research is admissible as credit for payment of excise duty on concentrate especially when such expense forms part of a price of a final product which suffers excise duty. Within a short time frame of this decision, yet in another landmark case viz. CCE, Nagpur vs. Ultratech Cement Ltd. 2010 (20) STR 577 (Bom), the Court held that the scope of the definition of input service is very wide and it covers not only the services used directly or indirectly in or in relation to manufacture of final products, but also various services used in relation to the business of manufacturer whether prior to manufacture or post manufacturing activity, whether having a direct nexus or integrally connected with the business of manufacturing the final product. All services in relation to business of manufacture of the final product are covered. When these two well reasoned decisions were pronounced in quick succession, it largely appeared that many disputes relating to the CENVAT credit of service tax paid on various services used for business purposes would be settled based on the observations in the above cases. In many decisions as a matter of fact, the Tribunals have relied upon or followed the above decisions. Nevertheless, litigation for the CENVAT has been continuing for services such as transportation for employees, mobile phones, group insurance health policies, outward freight, outdoor caterer’s services, travel agent’s services etc., used by a manufacturer since these services and many others are not used directly in relation to the activity of manufacture. The nexus theory is often interpreted very narrowly by the revenue authorities both vis-à-vis manufacturers and service providers.
Nevertheless, the activity directly related to sale of a manufactured final product liable for excise duty or in the course of exports appeared less questionable for admissibility of credit particularly considering the definition of input service provided in CCR at least prior to the amendment made with effect from 01-04-2011 read as follows:
“(l) “input service” means any service, –
(i) used by a provider of taxable service for pro viding an output service; or
(ii) used by the manufacturer, whether directly or indirectly in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.”
[emphasis supplied].
Controversy:
It can be seen that the above definition specifically includes the expression “sales promotion” in addition to advertisement and market research. Prima facie it hardly appears controversial that when a manufacturer of an excisable product pays commission to agents domestically or abroad, whether it has any nexus with the sale of such products as the services of agents are directly used for effecting or augmenting sale. The service of the commission agents is exigible to service tax as business auxiliary service considering it a service in relation to sale or promotion of client’s goods under the erstwhile section 65(19)(i) of the Finance Act, 1994 (the Act) since 09-07-2004. When a manufacturer pays commission to an overseas agent for executing sales abroad, the manufacturer is liable to pay service tax on such commission under reverse charge mechanism applicable u/s. 66A of the Act since 18-04-2006. Since the commission paid directly is related to the sale of the final product, the CENVAT credit of service tax so paid under reverse charge has been available to such exporter-manufacturer.
When the Commissioner of Central Excise, Ludhiana filed an appeal [reported in CCE, Ludhiana vs. Ambika Overseas 2012 (25) STR 348( P&H)] against ruling of the Tribunal that the assessee was entitled to avail credit of service tax paid to the foreign commission agents for services of procuring orders as these services were input services, the Punjab & Haryana High Court found no reason to interfere with the decision of the Tribunal as revenue failed to establish illegality or perversity in the order of the Tribunal. As against this decision, in a detailed order passed in the case of Commissioner of C. Ex. Ahmedabad vs. Cadilla Healthcare Ltd. 2013 (30) STR 3 (Guj), the question that was raised before the Court for consideration that whether the service of a commission agent for promotion of sale of final products of the assessee which is categorised as business auxiliary service (u/s. 65(19)(i) of the Act) would fall within the purview of “input service”. According to the assessee, the commission agents find buyers for the assessee’s goods and thereby they promote sales of the assessee’s goods. The definition of input service specifically includes services in relation to sales promotion whereas according to the revenue, the commission agent is a person directly concerned with the sale and purchase of goods and is not connected with sales promotion. In view hereof, the meaning of the expression “sales promotion” was examined by the Court in detail and at the end of which, a fine distinction was made between services in relation to ‘sales’ and “sales promotion” to hold that the service of commission agent was observed as one in relation with ‘sale’ and therefore not falling within the purview of the main or the inclusive part of the definition of input service in terms of Rule 2(l) of CCR. Arriving at the above conclusion, reliance was placed on the decision in Commissioner of Income Tax vs. Mohd. Ishaque Gulam 232 ITR 869 wherein the Madhya Pradesh High Court distinguished expenditure made on the sale promotion and commission paid to the agents and held that commission paid to the agents cannot be termed as expenditure on sales promotion. Further, for the contention that in any case, the service provided by the commission agent was in relation to business activity of the assessee and the list of activities in the inclusive part of the definition of input service was illustrative as the words “such as” preceded the said list of services, it was observed that unless the activity was analogous to the business activity, it could not be considered input service. Since the service of the commission agents was found not analogous with accounting, auditing, recruitment, coaching and training, credit rating, quality control, share registry, security services etc., it was held that it did not qualify to be “input service.”
The logical questions to every person studying legal provisions arise are:
• Whether the activity in relation to ‘sale’ is less
akin to being an “input service” in relation to
manufacture than the services of share registry,
security services, credit rating etc.? Is it simply
because such services find specific place in the
definition?
• In the context of definition of input service
whether there exists a material difference between
sales promotion and sale in relation to
manufactured goods? Is sale promotion not
carried out to achieve sale?
• Is the commission agent not helping to execute
sale after identifying the buyers?
• Does the cost of final product sold and subjected
to excise duty not include the cost towards
commission payment and therefore is it not a
cost incurred before the goods are removed
from the place of removal?
Despite knowing the replies to all the above questions,
the decision of the Honourable Gujarat High Court is a reality. However, very importantly, it is
required to note here that the following relevant
facts were not placed before the Honourable Gujarat
High Court in the said case of Cadilla (supra)
while the service of commission agents was not
interpreted as input service.
(a) After the amendment of the definition of “input
service” with effect from 01-04-2011, in response to
some prevailing doubts in the trade, as to availability
of credit in respect of certain items, CBEC
issued Circular No. 943/04/2011 dated 29th April,
2011. In reply to a question that whether the credit
on account of sales commission be disallowed after
the deletion of expression “activities relating to
business”, a clarification was issued at para 5 as,
“the definition of input service allows all credit on
services used for clearance of final products upto
the place of removal. Moreover, activity of sales
promotion is specifically allowed and on many occasions,
the remuneration for the same is linked to
actual sale. Reading the provisions harmoniously it
is clarified that credit is admissible on the services
of sale of dutiable goods on commission basis”.
Thus, it is clear that the credit is available even
in the post-amendment period.
(b) Secondly, in order to provide benefit to exporters
of various goods, the services provided
by commission agents located outside India for
causing sale of goods exported by Indian exporters
are exempted vide Notification No. 42/2012-ST
dated 29-06-2012, of course, subject to fulfillment
of certain conditions laid thereunder. (The said
exemption existed earlier under Notification No.
18/2009-ST dated 07-07-2009. Prior to bringing this
Notification also, vide Notification No. 41/2007-Service
Tax, exemption by way of refund was available
to exporters in respect of this service with
effect from 01-04-2008). Since the commission paid
abroad directly relates to sale of exported goods,
instead of asking assessees to pay service tax and
then allowing the claim of refund, the exemption
is allowed on fulfillment of conditions and following
prescribed procedure. This is clearly indicative of
the fact that the service provided relates to goods
sold in the course of exports and the services are
input services for the said sales.
(c) Thirdly the two benchmark decisions referred
above viz. Coca Cola Pvt. Ltd. (supra) and Ultratech
Cement Ltd. (supra) which broadly laid principles
interpreting the scope of input service were not
considered. The instant decision of the Gujarat
High Court now poses a question mark on these
two widely followed decisions of the Honourable
Bombay High Court.
Conclusion:
Consequent upon the above decision of the
Gujarat High Court in case of Cadilla Healthcare
Ltd. (supra), the authorities at various levels of
litigation in the State of Gujarat would be required
to follow the decision in respect of dispute relating
to the CENVAT credit of service tax paid on commission
to agents. However, the credit as per the
Circular No.943 remains available. The benefit of
Notification No. 42/2012-ST also continues in case
of commission paid in respect of export sales. In
the States of Punjab & Haryana, certainly Ambika
Overseas (supra) would be followed and elsewhere
in the country, the authorities follow either of the
two decisions found convenient. The fact however
remains that the service provided by an agent of
procuring sales order was used before executing
the order by the manufacturer and therefore the
cost of which is already factored into the cost
of the final product on which the excise duty is
levied. Hence, the service should qualify to be
an input service and the CENVAT credit therefore
should be available. However, to put an end to
the controversy and frivolous litigation, if the
CBEC considers issuing a further clarification in the
matter, it would mean a proactive step in larger
interests of law-compliant assessees.
