CENVAT Credit eligible on Sales Commission

Federal Mogul TRP (India) Ltd Vs Commissioner of Central Tax (CESTAT Bangalore)

We find that input service as defined under Rule 2(l) of CENVAT Credit Rules, 2004 explicitly includes activity of sales promotion and the explanation to Rule 2(l) of CENVAT Credit Rules, 2004 inserted by Notification No.2/2016-CE(NT) dated 3.2.2016 holding that sales promotion includes services by way of sale of dutiable goods on commission basis.

We also find that this explanation added by way of amendment is declaratory in nature and is applicable retrospectively as held in the decision in the case of Essar Steels India Ltd. and others cited supra. We also find that in appellant’s own case for the subsequent period, this Tribunal vide its Final Order No.20201-20205/2019 dated 25.2.2019 has allowed the credit on sales commission covering the period January 2015 to February 2016.

We also note that the Board vide Circular No.96/85/2015-CX dated 7.2.2015 has clarified that decision in the case of Cadila Healthcare Ltd. cited supra applies in case where the agent is undertaking only sales and no sales promotion. Whereas in the present case, it is clearly evident from various terms and conditions contained in clause (3) of the Agreement that M/s. FMGIL undertakes the activity of sales promotion.

Hence, we hold that the decision in the case of Cadila Healthcare Ltd. is not applicable in the present case. This issue is no more res integra and has been settled in favour of the assessee in various decisions cited supra wherein it has been consistently held that sales commission fall under definition of ‘input service’. By following the ratio of the above said decisions, we hold that denial of CENVAT Credit on sales commission is not sustainable in law.

FULL TEXT OF THE CESTAT JUDGEMENT

The appellants have filed these four appeals against the impugned orders dated 20.12.2011, 30.1.2012, 6.11.2013 and 3.4.2017 passed by the Commissioner of Central Taxes whereby the Commissioner has denied the CENVAT credit on sales commission paid to sister concern and Commissioner has also denied the CENVAT credit on service tax paid on outward transportation from factory to the buyers premises during the period from April 2008 to April 2010 and also imposed penalties. Since the issue involved in all the four appeals is identical, therefore, all the appeals are being disposed of by this common order. The details of all the four appeals are given herein below:

2. For the sake of convenience, the facts of appeal No. E/663/2012 are taken.

2.1 Appellants are engaged in the manufacture of Pistons and rings falling under Chapter 84 of the Central Excise Tariff Act, 1985. Appellant and their sister concern M/s. Federal Mogul Goetze India Limited (hereinafter referred to as FMGIL) are functioning within the common premises and with common human resources at Yelahanka. Similarly, the Head Offices of both the entities at New Delhi are functioning at the same location with the same human resources as well. Further, the two units have separate PAN numbers. Further, the sales and marketing of the product are undertaken by FMGIL as per Marketing Agency Agreement dated 29.9.1997 between the two units. For the said services, FMGIL charges „sole selling charges‟ and collected service tax from the appellant by raising invoices and subsequently the appellant availed CENVAT credit on service tax paid on Sole selling commission paid to FMGIL. Department entertained the view that „sole selling agent‟ service provided by FMGIL to the appellant does not qualify as „input service‟ as defined under Rule 2(l) of CENVAT Credit Rules, 2004. Further, the department was also of the view that outward transportation of finished goods only up to the place of removal can be considered as „input service‟ and outward transportation on FOR basis, the appellants are not entitled to claim CENVAT credit. On these allegations, various show-cause notices were issued as mentioned in the table above and after following due process, the demand was confirmed as shown in the table above. Hence, the present appeals.

3. Heard both sides and perused the records.

4. Learned counsel for the appellant submitted that the impugned orders are not sustainable in law as the same has been passed without appreciating the facts and the law and the judicial precedents on the same issue. She further submitted that the appellants have appointed FMGIL as their „sole selling agent’ for marketing and promoting the products of the appellants which is covered under the inclusive part of definition of „input service’ as defined under Rule 2(l) of CENVAT Credit Rules, 2004. She further submitted that as per the terms of agreement, the duties of FMGIL includes promotion and marketing of the products of the appellant, seeking orders, assistance in sale of products, maintaining good relations with customers, providing consultation and advice in relation to the above, receiving orders from customers in relation to the products, notifying the customers / prospective customers of all the terms and conditions of sale as determined by the appellant and while the appellant undertake the sale of the product. She further submitted that the term „input service’ as defined under Rule 2(l) of CENVAT Credit Rules, 2004 explicitly includes the activity of „sales promotion’. Further, the explanation of Rule 2(l) of CENVAT Credit Rules, 2004 inserted by Notification No.2/2016-CE (NT) dated 3.2.2016 holding that sales promotion includes services by way of sale of dutiable goods on commission basis. She further submitted that this amendment is declaratory in nature and hence is effected retrospectively. For this submission, she relied upon the following decisions.

> Essar Steels India Ltd. vs. CCE & ST, Surat – 2016 (335) E.L.T. 660 (Tri. – Ahmd.)

> Stanley Seating vs. CCE, Bangalore-III – 2017 (3) G.S.T.L. 137 (Tri. – Bang.)

> Simboli Sugar Ltd. vs. CCE, Meerut – 2018 (363) E.L.T. 1172 (Tri. – All.)

> Beloorbayir Biotech Limited vs. CCT, Bangalore – 2018-VIL-370-CESTAT-BLR-ST

4.1 It is her further submissions that relying upon these cited decisions supra, this Tribunal in the appellant’s own case vide Final Order No.20201 – 20205/2019 dated 25.2.2019 has allowed credit on sales commission covering for the period January 2013 to February 2016. She also submitted that Board vide Circular No.96/85/2015-CX-I dated 7.12.2015 has also clarified that the decision in the case of M/s. Cadila Healthcare Limited: 2013 (30) STR 3 (Guj.-HC) applies in case where the agent is undertaking only sales and not sales promotion. Whereas in the present case, it is clearly evident from Clause (3) of the Agreement that M/s. FMGIL undertakes the activity of sales promotion and therefore, the decision in the case of Cadila Healthcare Ltd. (supra) is not applicable to the facts of the present case. She also submitted that in respect of appeal No. E/663/2012, CENVAT credit on outward transportation has also been denied whereas it should have been allowed on outward transportation upto buyers premises on the ground that point of sale is buyer‟s premises. Learned counsel also submitted that CENVAT Credit cannot be denied only on the ground that document on the basis of which credit has been availed does not contain all the details. That credit can be availed even if the documents provide substantial details such as service tax payable, description of the goods, assessable value, etc., as detailed in the proviso to sub-rule (2) of Rule 9 of the CENVAT Credit Rules, 2004. It is her further submission that once it is established that appellants are substantially entitled to take credit, the substantive right of the appellant cannot be taken away by stressing on procedural aspect. Further, when there is no dispute that input service has been actually received, the credit cannot be denied on the ground of procedural lapses. For this submission, the learned counsel relied upon the following decisions:

> Gujarat State Petronet Ltd. vs. CCE, Ahmedabad – 2013 (32) STR 510 (Tri. – Ahmd.)

> CCE & ST., Ahmedabad vs.Meghmani Organics Limited – 2016 (42) STR 81 (Tri. – Ahmd.)

> EUPC – Weslpun Coatings (India) (Ltd.) vs. CCE, Vadhodara – 2009 (19) STR 478 (Tri. – Ahmd.)

> C.C.E. Jalandhar vs. J.C.T. Limited – 2009 (13) S.T.R. 22 (P&H)

4.2 Learned counsel also submitted that the substantial demand is barred by limitation. The show-cause notice dated 7.2.2011 and 25.10.2011 were issued to the appellants to demand CENVAT credit availed during the period December 2006 to April 2010 and May 2010 to July 2011 respectively. Hence, on application of the normal period of limitation of one year, the demand for the period December 2006 to January 2010 and May 2010 to September 2010 is respectively barred by limitation. Further, the appellant submit that they have not suppressed any facts from the department, much less acted with an intent to evade payment of duty and hence, longer period of limitation in terms of Section 11A cannot be invoked in the present case because the appellants have been regularly filing ER-1 returns disclosing the availment of credit and it is not the case of the department that the appellant has not disclosed the credit availment in their books of accounts or in their returns. Further, the fact of availment of credit of service tax paid on the sales commission paid to FMGIL was known to the department during the CERA audit conducted for the period January 2008 to April 2010. She also submitted that it is a settled law that when the demand is based on audit objection, the extended period is not invokable and also that suppression cannot be alleged when the matter involves interpretation of legal provisions. For this submission, she relied upon the following decisions:

> CCE & ST, Tirupathi vs. Sri Sai Sindu Industries – 2017 (49) STR 84 (Tri.–Hyd.)

> Commissioner vs. Dynamic Industries Ltd. – 2014 (307) ETL 15 (Guj.)

She also submitted that extended period of limitation cannot be invoked for the period May 2010 to July 2011 as department had issued the show-cause notice for the earlier period i.e., December 2006 to April 2010 on the similar facts and issue in dispute. For this, she relied upon the decision of the apex court in the case of Nizam Sugar Factory vs. CCE, AP: 2008 (9) STR 314 (SC). She also submitted that the appellants were under the bonafide belief that they were entitled to CENVAT credit on freight charges paid to the transporter as an „activity relating to business‟ as during currency of relevant period i.e., April 2008 to April 2010 the subject activity treated to be an activity relating to business by Larger Bench of Tribunal in the case of ABB Ltd.: 2009 (15) STR 23 (Tri.-LB) which was later set aside by the Hon‟ble High Court of Karnataka. Hence, the credit of Rs.2,41,168/- availed on fright charges paid for the period April 2010 to January 2011 is barred by limitation. For this submission, she relied upon the decision of the Hon‟ble High Court of Chhattisgarh in the case of SKS Ispat and Power Ltd. Vs. CCE: 2019 (27) GSTL 328 (Chhattisgarh) and on penalties. Learned counsel submitted that when the issue involves interpretation of the provisions of the CENVAT Credit Rules, penalty under Section 11AC of the Central Excise Act, 1944 is not sustainable. For this, she relied upon the following decisions:

> Transafe Services Ltd. vs CCE, Haldia – 2017 (3) G.S.T.L. 445 (Tri. – Kolkata)

> Accenture Services Pvt. Ltd. vs. CST, Mumbai – II – 2015 (40) S.T.R. 719 (Tri. – Mumbai)

5. On the other hand, the learned AR for the department reiterated the findings of the impugned orders and submitted that the sole selling agent services provided by FMGIL to the appellant does not qualify as „input service’ as defined under Rule 2(l) of CENVAT Credit Rules, 2004 as sales commission paid in relation to sale of products do not have any connection with the manufacture of final products by the appellant. Further, she submitted that commission being paid to FMGIL is solely based on and is directly connected to sale of goods and is 5% of the net price of the goods sold in the market. Hence, appellant is paying commission to FMGIL for sales only. She also submitted that payments made to M/s. FMGIL are towards agency services associated with marketing of goods and the activities of the sole selling commission agent are post manufacturing activities and are services received in relation to duty paid on goods beyond the place of removal and hence, credit is not admissible.

6. After considering the submissions of both the parties and perusal of the material on record, we find that the only issue involved in the present appeals is viz., denial of CENVAT credit availed on sales commission paid to sister concern M/s. FMGIL for promoting sales and denial of CENVAT credit on service tax paid on outward transportation from factory to buyer’s premises during the period from April 2008 to April 2010. Before, we proceed to decide the question involved, it is pertinent to quote the relevant provisions of CENVAT Credit Rules, 2004 pertaining to input services. The definition of input service as contained in Rule 2(l) is reproduced herein below:

2(l) “input service” means any service,-

(i) used by a provider of taxable service for providing 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, modernization, 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;

6.1 Further, we find that as per clause (3) of the Agreement entered into between the appellant and FMGIL, FMGIL promotes sale of products of the appellant by doing various activities including promotion and marketing of the products of the appellant, seeking orders, assistance in sale of products, maintaining good relations with customers, providing consultation and advice in relation to the above, receiving orders from customers in relation to the products, notifying the customers/prospective customers of all the terms and conditions of sale as determined by the appellants. Further, we find that input service as defined under Rule 2(l) of CENVAT Credit Rules, 2004 explicitly includes activity of sales promotion and the explanation to Rule 2(l) of CENVAT Credit Rules, 2004 inserted by Notification No.2/2016-CE(NT) dated 3.2.2016 holding that sales promotion includes services by way of sale of dutiable goods on commission basis. We also find that this explanation added by way of amendment is declaratory in nature and is applicable retrospectively as held in the decision in the case of Essar Steels India Ltd. and others cited supra. We also find that in appellant’s own case for the subsequent period, this Tribunal vide its Final Order No.20201-20205/2019 dated 25.2.2019 has allowed the credit on sales commission covering the period January 2015 to February 2016. We also note that the Board vide Circular No.96/85/2015-CX dated 7.2.2015 has clarified that decision in the case of Cadila Healthcare Ltd. cited supra applies in case where the agent is undertaking only sales and no sales promotion. Whereas in the present case, it is clearly evident from various terms and conditions contained in clause (3) of the Agreement that M/s. FMGIL undertakes the activity of sales promotion. Hence, we hold that the decision in the case of Cadila Healthcare Ltd. is not applicable in the present case. This issue is no more res integra and has been settled in favour of the assessee in various decisions cited supra wherein it has been consistently held that sales commission fall under definition of ‘input service’. By following the ratio of the above said decisions, we hold that denial of CENVAT Credit on sales commission is not sustainable in law.

7. Coming to the denial of CENVAT credit on outward transportation from factory to the customers’ premises, learned counsel for the appellant admitted that on merit, the decision of the apex court in the case of CCE vs. Ultra Tech Cement Ltd.: 2018 (9) GSTL 337 (SC) is against the appellant and therefore, she did not argue on merits but submitted that substantial demand is beyond limitation. She further submitted that the department has invoked the extended period of limitation whereas during the relevant period, the Larger Bench of this Tribunal in the case of ABB Ltd. was favour of the appellant and the appellant had a bonafide belief that they are entitled to credit on freight charges paid to the transporter as activity relating to business. She further submitted that out of CENVAT credit of Rs.2,98,262/-, credit of Rs.2,41,168/- availed on freight charges paid for the period April 2010 to January 2011 is barred by limitation. We also find that on the point of limitation, the Division Bench of this Tribunal in the case of M/s. Sanghi Industries Ltd. vs. CCE, Kutch: 2019-TIOL-1709-CESTA-AHM in para 7, the Division Bench has dealt with the issue of limitation and has held as under:

“……As regard limitation, we find that the issue was not free from doubt and right from introduction of Cenvat Scheme under Cenvat Credit Rules, the outward GTA was the matter under litigation and for that reason the Government has to come out with clarification thereafter the matter was subject to various litigation before Tribunal, Hon’ble High Courts and Hon’ble Supreme Court, therefore no malafide intention can be attributed to the appellant, therefore, wherever the demand is for extended period, the same will also not be sustainable on the ground of time bar also.”

Therefore, by following the ratio of the Division Bench and also the fact that appellants have not concealed any material fact with intent to evade payment of duty, we hold that out of CENVAT credit of Rs.2,98,262/-, credit of Rs.2,41,168/- is barred by limitation and for the remaining amount, appellant is not entitled to avail CENVAT credit.

8. In view of our discussions above, all the appeals are disposed of accordingly.

(Operative portion of the Order was pronounced and dictated in Open Court on 26/11/2020.)