The beauty of law lies in the fact that it is not static. It moves with the need of society and intend to cater legitimate aspiration of the society.
In the year 2013 in the matter of, Commissioner of Central Excise Ahmedabad-III Versus Cadila Healthcare Ltd., 2013 (30) S.T.R. 3 (Guj.) Hon’ble High Court of Gujarat ruled that service tax paid on the commission of the commission agent is not an input service and as such credit of tax paid cannot be availed. The judgment was received by the revenue with much gusto. The demands for credit reversal were raised PAN India on the basis of this judgment and conveniently contrary judgment on the subject were ignored or overlooked.
The Hon’ble High Court Punjab and Haryana also dealt with the issue in CCE vs Ambika Overseas, 2012 (25) S.T.R. 348 (P & H) prior to Cadila (supra) and settled the law as follows:
2. The appellant has claimed that the following substantial question of law arises for consideration by this Court :
“Whether the Hon’ble CESTAT was correct in holding that the respondent is entitled to avail the CENVAT credit on the services provided by Overseas Commission Agents (provided in relation to canvassing and procuring of orders) as input services despite the fact that the services of “overseas commission agents” are post removal services and do not fall under the ambit of the definition of “input service” given under Rule 2(l) of Cenvat Credit Rules, 2004, which defines “input services” as the services used in or in relation to the manufacture or clearance of final products from the place of removal?”
8. The Tribunal while affirming the order of Commissioner (Appeals) and adjudicating the issue in favour of the respondent had come to the conclusion that the activities in respect of which Cenvat had been filed, were pre-removal activities and the same could not be held to be post-removal. It was further observed that canvassing and procuring orders were in relation to ‘sales promotion’ and would fall under sales promotion activities. These activities were, thus, included in the definition of input services and the assessee was entitled to benefit of Cenvat credit of service tax. It would be advantageous to notice here the findings recorded by the Tribunal in para 6 of its order which are to the following effect:
“I have carefully considered the submissions from both sides. The canvassing and procuring orders are activities preceding removal of the goods by the manufacturers. Without the firm order, the respondents were not expected to remove the goods to a foreign destination. Therefore, the submission of the learned DR that these activities are post-removal activities cannot be accepted. Further, the definition of the ‘input services’ includes services used in relation to ‘sales promotion’ and these activities can rightly be described as sales promotion activities. Sales promotion activities undertaken at given point of time also aims at sales of goods which are to be manufactured and cleared on future. Any advertisement given as a long term impact cannot be treated as post- clearance activities and, therefore, sales promotion has been specifically included in the definition of input services. As regards the other contention that the documents on which the respondent has taken the credit is not the prescribed document, it is to be noted that the respondent is not a service provider per se. They are basically the service recipients. They are required to pay service tax as a deemed service provider. Under these circumstances, the respondents have paid service tax using TR-6 challans and taken credit treating the said documents as documents covered by Rule 9(1) of the Cenvat Credit Rules, 2004. There is nothing irregular about it.”
And accordingly appeal of the department was dismissed. The law settled in Ambika Overseas (Supra) by the Hon’ble High Court was followed by the Tribunal in the matter of Birla Corporation Ltd. CCE (2013) 288 ELT 427 (CESTAT). The relevant para is as follow:
6. We have carefully considered the submissions made from both the sides. The point of dispute in this case is as to whether the services of commission agents for procuring sales orders received by the appellant is an input service or not for the purpose of availing Cenvat credit. Though, in the order-in-original dated 27-2-2009 the Additional Commissioner has given a finding that the commission and brokerage paid to the commission agents and brokers was the payment made for the service provided after the removal of cement from the place of removal and as such said service does not fall within the ‘input service’ as defined under Rule 2(l) of the Cenvat Credit Rules, we find that no basis for this finding has been given. The services of commission agents/brokers are availed for procuring the sales orders against which the manufacturer makes direct supplies to the customers and the commission agents/brokers get the commission. These services, of commission agents/brokers are as in the nature of sales promotion, an activity specifically covered in the inclusive portion in the definition of input service. This service, in our view, would also be covered by the term “activity related to business” which was also covered by the definition of ‘input service’ during the period of dispute. We, therefore, hold that the services, in question, are covered by the definition of ‘input service’. We are supported in this view by the Tribunal’s judgments in the cases of Commissioner vs Abhishek Industries Ltd. – 2008 (9) S.T.R. 562 (Tri.-Del.), Commissioner v. Bhilai Auxiliary Industries (Final Order No. 1611/2008-SM(BR), dated 10-12-2008, CCE, Ludhiana v. Rightway Fabrics Pvt. Ltd. – 2011 (24) S.T.R. 505 (Tri.-Del.) and Lanco Industries Ltd. v. CCE, Tirupathi reported in 2010 (17) S.T.R. 350 (Tri.-Bang.) wherein it has been held that the services of commission agent for procuring sales orders for a manufacturer on commission is an activity related to business of manufacture and is covered by the definition of input service.
Even before the Cadila (Supra) the Hon’ble Tribunal on several occasions examined the concept of the commission and commission agent and came to the conclusion that the same is input service and is related with the manufacturing activities. In fact Ambika Overseas was further followed in following judgments of the Tribunals later on:
1. IN THE CESTAT, PRINCIPAL BENCH, NEW DELHI, BAJAJ HINDUSTAN LTD. Versus COMMISSIONER OF CENTRAL EXCISE, LUCKNOW
2. IN THE CESTAT, PRINCIPAL BENCH, NEW DELHI, BAJAJ HINDUSTAN LTD. Versus
COMMISSIONER OF CENTRAL EXCISE, LUCKNOW, 2013 (30) S.T.R. 675 (Tri. – Del.).
3. IN THE CESTAT, WEST ZONAL BENCH, MUMBAI, CENTURY RAYON Versus COMMISSIONER OF CENTRAL EXCISE, THANE-I, 2014 (33) S.T.R. 427 (Tri. – Mumbai)
4. IN THE CESTAT, SOUTH ZONAL BENCH, BANGALORE, BHURUKA GASES LTD. Versus COMMISSIONER OF C. EX., CUS. & S.T., BANGALORE-I, 2015 (37) S.T.R. 818 (Tri. – Bang.)
This point has also been clarified by the departmental circular bearing no. 943/04/2011-CX dated 29.04.2011 as follow:
Is the credit of Business Auxiliary Service (BAS) on account of sales commission now disallowed after the deletion of expression “activities related to business”?
The definition of input services allows all credit on services used for clearance of final products upto the place of removal. Moreover activity of sale promotion is specifically allowed and on many occasions the remuneration for 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.
The same was further clarified through CBE&C Instruction F.No. 96/85/2015-CX.1 dated 07.12.2015. In the instruction 2015 mentioned above the case of Cadila was discussed at length and was distinguished.
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 28 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.
After the clarification above said an explanation was inserted in Rule 2 sub clause (l) with effect from 03.02.2016 vide notification no. 2/2016 C.E. (NT) and same is as follows:
(l) “input service” means any service,-
(Explanation- For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis).
The explanation to the rule as inserted by way of notification number 02/2016 (N.T.) dated 03.02.2016 has put rest to the all disputes pertaining to the availement of Cenvat credit regarding services provided by the commission agent.
Perhaps the Cadila (Supra) was not argued properly before the Hon’ble High Court as the issue of Cenvat Credit regarding commission was settled long before the year 2013, when it was pronounced. But now after the explanation inserted in Cenvat Credit rules the issue is conspicuous and is a relief to the trade. The Cadila (Supra) has created too much confusion on issue and hopefully all the issues related to this will be now settled in terms of explanation inserted. The explanation will be applicable in all pending dispute as the amendment in the rule is retrospective in nature as it has been made with intention to correct and obvious mistake/made clarification in the rule 2 (l) of the Cenvat Credit Rules [(Ralson (India) vs CCE (2015) 319 ELT 234 (SC) and WPIL Ltd. Vs CCE AIR 2005 SC=181 ELT 359 (SC 3 member bench)].
(Author Details- Prabhat Kumar, Advocate, Rajesh Kumar & Associates, Mob: 9312315121, Email: firstname.lastname@example.org, Web: www.rajeshkumar.co.in)