CA Pradeep Jain, CA Preeti Parihar, CA Neetu Sukhwani
“Cenvat Credit” has been a highly sensitive issue since its inception. The assessees always attempt to avail credit of every possible input / capital goods / input service which has suffered the incidence of duty/tax by liberally interpreting their definitions. However, the department always follow the principle of literal interpretation and try to deny every possible Cenvat credit availed by the assessee. Though all the three definitions viz input, capital goods and input services are issue of litigation, yet currently, the definition of input services have been the most volatile one. Availment of Cenvat credit on each and every service, whether or not specifically mentioned in this definition, has been clarified by way of judicial pronouncement; yet ambiguities prevail due to divergent decisions on the same service. One recent example is the Cenvat credit on the services of commission agent wherein two divergent decisions of High Court are available, one allowing the credit, another denying it. This piece of diction is about this issue of admissibility of Cenvat credit on the services of Commission agent.
Legal provisions in issue:-
Since we are going to analyze the admissibility of Cenvat credit on the services of commission agent in view of High Court decisions which pertain to the period from year 2004 to 2006, it is worth mentioning here the definition of input service as given in the rule 2(l) of the Cenvat Credit Rules, 2004. During the material time, this definition read as follows:-
“(l) “input service” means any service, –
(i) used by a provider of taxable service for providing an output service; or
(ii) used by a 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 up to 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 up to the place of removal; “
Thus, as per above definition, the input service means every such service which is-
Thus, if the service availed by the assessee falls in any of the above three, it is considered as an input service as per rule 2(l) ibid and its credit can be availed. The last/inclusive part of the definition of input services is the root of majority of the cases in litigation. This inclusive portion contains certain services which are specifically listed therein, however, it starts with the phrase “and includes …..” which implies that the list given herein is merely illustrative and many more services are includible in this list.
There are a no. of judicial pronouncements interpreting the inclusive part of the definition of input services which has allowed the credit on almost all the services used by the service provider or manufacturer by holding that the list given in this part is merely illustrative and many other services too can be included therein. These decisions as decided in favour of assessees includes the decision of Coca Cola India Pvt. Ltd. v. Commissioner [2009 (15) S.T.R. 657 (Bom.)] and COMMISSIONER OF C. EX., NAGPUR Versus ULTRATECH CEMENT LTD.[2010(260) ELT 369 (BOM.)]. In the decision of M/s Ultratech Cement which is a landmark judgment on the issue, hon’ble Mumbai High court has held that the inclusive part of the definition of input services covers the services rendered prior to commencement of manufacture as well as services rendered after manufacture. It was also held that the list given in this definition is illustrative and many more services can also be included therein. By taking shelter of this decision, many of the assessees have contested and have availed credit in respect of many such services that were not specifically included in the above list like courier services, CHA services, etc. However, the recent judgment given by the High Court has denied the credit even in respect of services that are specifically listed in the inclusive portion of the input service definition. This judgment is given by hon’ble Gujarat high court in the case of M/s Cadila Healthcare Ltd. wherein credit on services rendered in respect of services of commission agents has been denied despite fact that the sales commission is specifically listed in the inclusive part. This judgment has raised the question mark on the previous decisions of High Court in the case of M/s Ultratech Cement Ltd & Hindustan Coca Cola Beverages.
Judgment in the case of M/s Cadila Healthcare Limited:-
The landmark judgment in the case of M/s Ultratech Cement Ltd was being followed by most of the Judicial bodies and Cenvat credit was allowed on almost every type of the services availed by the assessees under old definition, prior to amendment made therein w.e.f. 1.7.2012. However, recently, Hon’ble High Court of Gujarat has denied the credit of commission agent’s services in the case of M/s CADILA HEALTHCARE LTD. [2013-TIOL-12-HC-CESTAT-AHM] by taking a view that commission paid to various foreign agents cannot be considered as 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. It is also held that this service cannot also be covered under the inclusive part of the definition of “input service” under the head “services used in relation to advertisement or sales promotion” as the commission agent is directly concerned with sales rather than sales promotion. The Gujarat High Court took a view that the reference made by M/s Cadila Healthcare to the definition of business auxiliary service as defined under section 65(19) of the Finance Act, 1994 which lays down that business auxiliary service means any service in relation to (i) promotion or marketing or sale of goods produced or provided by or belonging to the client or (ii) promotion or marketing of service provided on behalf of the client and includes services as a commission agent was not applicable in the present case as this service is not used for manufacture of final product and is not used for clearance of final product from the place of removal. The commission agent is directly concerned with the sales and not with promotion of their products, therefore, it is also not related to any activity specified in the inclusive part of the definition of input service. Reference was also made on the definition of “sales promotion” given in the “Oxford Dictionary of Business” and “The Advanced Law Lexicon by P. Ramanatha Aiyar, third edition” wherein it was concluded that in case of sales promotion, a large population of consumers is targeted and such activities relate to promotion of sales in general to the consumers at large. Furthermore, it was also held that the words “activities relating to business” are followed by words “such as” which does not means that every activity relating to business would fall within the inclusive part of the definition.
Impact of judgment of M/s Cadila Healthcare Ltd.:-
This decision came as a setback for many manufacturers availing input service credit on the commission paid to the commission agents as they were under the impression and believed that it is covered in the inclusive part of the definition of input services in the name of “sales promotion”. Interestingly, a major part of those manufacturers/service providers have got stunned by this decision who had simply accepted their liability under reverse charge on the foreign commission agents services on the grounds that the service tax paid by them is available as Cenvat Credit. However, this decision of hon’ble High Court has ruined their dreams, thereby increasing the amount of contingent liabilities to their Balance Sheet.
Contrary judgment in the case of M/s Ambika Overseas:-
Contrary to the above judgment in the case of M/s Cadila Healthcare, the Hon’ble Punjab & Haryana High Court has taken a contradictory view in the case of COMMISSIONER OF CENTRAL EXCISE, LUDHIANA VS AMBIKA OVERSEAS [2012 (25) S.T.R. 348 (P & H)] on the same issue. In this case, it is held that commission paid to foreign agents is covered within the ambit of sales promotion and it cannot be accepted that the said service is post removal expenses and is not related to the business as canvassing and procuring orders are activities preceding removal of goods by manufacturers as without firm orders, manufacturers would not remove goods from their factory. The Punjab & Haryana High Court opined that 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 aim at sales of goods which are to be manufactured and cleared in 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.
Comparative analysis of both the decisions:-
Both the judgments are of hon’ble High Courts and none of these can be said as binding precedent on the other. The decision given in the case of M/s Cadila Healthcare Ltd. has mainly emphasized on the fact that the activities of commission agent are related to “sales”, not to the “sales promotion”, therefore, it neither fall in the main part of the definition of input service nor in the inclusive part of the definition of the input service. Further, the meaning of term sales promotion has been taken as per various legal dictionaries which more or less define it as any activity which aims to increase the sales by targeting a large no. of consumers. It has been held that since the activity of commission agent is not in nature of “sales promotion”, it cannot be considered as included in the inclusive portion of definition of input service. However, the decision of M/s Ambika Overseas has been given lightly without giving detailed analysis of term “sales promotion”. It has simply been held that the sales promotion services are those activities which are undertaken at a point of time which aims at sales of goods and the services of commission agents are of this nature only, therefore included in the definition of input services. In our view, when both the decisions will be placed before forum, definitely judgment of M/s Cadila Healthcare Ltd. will be given more weightage as it gives substantial justification to the decision so rendered. Each and every relevant part of the definition of input service has been analyzed in detail in context of the input service in issue. However, it is worthwhile to mention here that the landmark judgments given in the case of M/s Ultratech Cement Ltd. & M/s Hindustan Coca Cola Beverages were not placed before High Court which gives a different perspective of the inclusive part of the definition of input services. Regardless of this fact, whatever was placed before the hon’ble high court while rendering the judgment of M/s Cadila Healthcare Ltd., full justice has been done with it while deciding the case. Despite the fact of superiority of analytical portion of the decision of M/s Cadila Healthcare Ltd. there are few judgments in favour of assessees wherein it has been held that where there are contradictory decisions on any issue, those favouring the assessees will prevail. Some of such judgments are CCE, Jamshedpur v/s Tata Iron & Steel Co. Ltd. [1999 (114) ELT 160 (Tri-Kolkata)], CCE, Trichy v/s Dalmia Cements (P) Ltd. [1999 (114) ELT 836 (Tri-Madras)] and Crompton Greaves Ltd. v/s CCE, Mumbai-II [1997 (94) ELT 629 (Tri.-Mumbai)].
Sometimes, the legislature uses words that can be interpreted in more than one manner and the use of words having broad sense often give rise to litigations. Same is the case with the definition of “input service” as it uses phrase “activities relating to business” which has a very wide perspective. Well, as there are two sides of a coin, outcome of such controversies depends on the fate of the assessee and more over the capability of the consultant/lawyer; particularly when it comes to cases like present case where divergent decisions, with different perspectives of the same language are available. However, it is beyond any doubt that this issue of credit admissibility on commission agent’s services is going to last long as it is very common practice to avail their services. And very particularly when the assessee has paid the service tax on the services of foreign commission agent from their own pocket under reverse charge, they will not forget its credit so easily. However, the department is all set to issue show cause notices on this issue as this is very common service of which most of the assessees are availing the credit. We can only wait and watch the disposal of “n” no. of similar cases, some in favour and some against the assessees until the issue is settled by the Apex Court.