CBEC: Credit of ST paid on Service provided by Commission agents under Excise—Why cheat the assessee?
The government of India has absolute right to levy the taxes therefore it is imperative that the taxation provision should be clearly spelt out so that there is no ambiguity & room for distortion & devious interpretation to put the assesses into trouble. However, the miraculous Indian bureaucracy will never let that happen because if there is transparency in the law then there is no scope for harassment & extracting the pound of flesh. This has remained the distinct hallmark of the Indian bureaucracy & the biggest set- back in the progress of the country.
The case pertains to availment of Cenvat Credit in relation to Service Tax paid on commission in respect of domestic orders booked by agents under the head Business Auxiliary services (BAS). Please note that Commission is paid for booking of orders on behalf of the Principal & rendering other services in execution with the sales of goods. Please note that the goods can never be supplied to the buyers without the order/sale contract being signed. Therefore signing of the sale contract is related with the sale of goods & this is promotional activity because it is the outcome of personal selling resulting into culmination of order for supply. Once the sales contract is signed, it results in the supply of goods. It is also pertinent to point out here that there would be no use of the manufacturing activity if there is no sale possible because without sale of goods no purpose is served. Thus it is beyond any element of doubt that booking of the orders is directly/indirectly related to the manufacturing activity of the business entity. Therefore, there is no way that the Cenvat credit thereof can be denied to the manufacturer when the substantive conditions that there is a taxable Service on which Tax is paid & there is a documentary evidence of tax payment. There is no dispute raised by the department that there is Service Tax payable on the commission paid to the local agent. Secondly, there is no dispute about the tax payment document. Under these circumstances, the manufacturer is entitled to the Service Tax credit in respect of the Service tax paid & the same cannot be denied as it relates to the manufacture of goods.
Please note that the main reason for the Cenvat credit is that cascading effect of the taxes & duties is mitigated. Therefore, credit of duties & taxes is allowed to the manufacturer/Service provider & from the said credit, the manufacturer/service provider is allowed to discharge the liability in relation to his duty/tax payments. Therefore, by way of general principles of Cenvat Credit itself, it is crystal clear that credit of service tax related directly or indirectly to the business activity cannot be denied because if this is not carried out then the Cenvat credit chain will break & the tax will become cost to the manufacturer/service provider & this is not what is envisaged by the law in terms of Cenvat credit scheme. The law is not a rational code but the lawmakers who are out to prove that the law is an ass & I am responsible for it deserve no respect in any case.
It is significant to point out that any amount of commission was subject to the payment of applicable taxes under the Excise as well as the Customs Acts respectively at all points of time.
Please see S 4 (3) (d) of the Central Excise Act,1944.
The same is reproduced below for ready reference:
(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.]
Please note that when Excise Duty is paid at the time of the removal of goods, the Cenvat credit on the said commission amount is allowed.
Thus any person with little common sense will realize that the manufacturer has already paid Excise Duty on the Commission amount while discharging the excise duty therefore there is absolutely no way that the GoI/Department can collect the Service Tax on the same amount once again because the manufacturer is paying the commission once only & not twice. Therefore, the collection of the Service Tax on Commission in itself is absolutely illegal. The government/department cannot pocket this tax for the second time in a Value added Taxation regime. This is elementary but then the idiosyncrasies reign supreme because there is no responsibility & accountability in the system.
As pointed out, the Service Tax on Commission should not have been paid as such because the manufacturer has already discharged liability of having paid the excise duty at the time of the removal of goods because commission is part of the transaction value. However if the service tax stands paid, the credit needs to be allowed. For this, reliance is placed on Bajaj Allianz General Insurance Co. Ltd. Vs. Commissioner of Central Excise, Pune-III [2014-TIOL-1540-CESTAT-MUM]. Here in this case, it is ruled that Cenvat Credit of the Service tax wrongly paid under reverse charge is nothing but refund of the erroneously paid Service tax which cannot be denied.
Please refer the CBEC circular No. 118/12/2009-S.T., dated 23-11-2009, which specifies that the refund of the Service Tax paid by the exporter under the reverse charge mechanism is available to the exporter. The point of law is that how the refund can be available if the tax credit is not due to the exporter. Thus once again, this CBEC circular in itself establishes in respect of exports that the credit of Service Tax paid by the manufacturer in case of commission cannot be disallowed. Please note that common sense tells you that the interpretation of the law cannot be differently applied in case of Domestic Tariff Area (DTA) & Export transactions. The readers would note that this law underwent change in July, 2014 when the services were exempted based on the location of the intermediary.
The CBEC vide circular No. 943/4/2011-CX., dated 29-4-2011 (S. No. 5 of the Table), reads as under:
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.
Therefore it is abundantly clear that the issue has been considered by the CBEC & that credit is admissible on the services of sale of dutiable goods on commission basis. The said circular is binding on the department & therefore the Cenvat credit cannot be denied. It would not be out of place to mention here that in general parlance, appointment of a commission/sales agent is construed to be a sales promotion activity because you appoint the commission/sales agent to provide better service to the customers & that culminates into higher sales. Therefore, once the issue was resolved by the CBEC itself then the pending litigation should have been withdrawn in light of the CBEC circular. The assessee should have been assured of the fact by the CBEC that they would be no longer harassed but then that is not to be. How can this inspire confidence amongst the assesses?
As evident from the circular 29.4.11, earlier the credit of Service Tax paid on activities related to the business was allowed but under the amended law the credit is restricted to services used for clearance of final products upto the place of removal. Any reader would instantly realize that the restriction is simply arbitrary & atrocious & therefore needs to be denounced. The manufacturer is running a single manufacturing unit for several decades & the expenses made in relation to filing of Income Tax, VAT returns, primary pollution treatment expenses incurred in the factory of manufacture & secondary treatment in a common effluent treatment facility set up in the industrial estate or clearing & forwarding charges paid to the consignment agent are all allowed as legitimate business expenses by the Income Tax department. These expenses may be incurred post removal of goods & outside the place of removal then can the Service Tax paid on these activities be disallowed & force the burden on the manufacturer/service provider by breaking the Cenvat credit chain? Is this not antithetical to the principle of Value added Taxation system. Can the manufacturer/service provider not engage professional services for filing returns or refrain from filing returns? Can the manufacturer avoid pollution control measures? Can the manufacturer avoid clearing & forwarding services in this vast country? Of not then how the credit can be arbitrarily restricted by the law makers even when it relates to the activity of the business directly or indirectly. If there are loopholes in this definition then the loopholes needed to be plugged by way of negative list rather than opening up a Pandora’s box for litigation by way of whimsical approach in restriction the credit.
The readers will recall that most of the manufacturers did not pay Service Tax on commission under Reverse Charge but then they were convinced to pay because the audit parties said that it is better to avoid litigation therefore pay tax dues with interest & take the credit thereof to close the issue. This trust cannot be belied at any point of time because this is the very basis of Value added Tax system. If the tax is paid on the service then the recipient should definitely get a set off.
The position is further complicated by issuance of Notification No. 02/2016-C. Ex. (N.T.) dtd. 3.2.16 wherein it is specified that sales promotion includes services by way of sale of dutiable goods on commission basis. Therefore, the field formations are holding that the credit is admissible on the services of sale of dutiable goods on commission basis w. e. f. 3.2.16 only & not from 29.4.11 though the same was specifically allowed by way of the CBEC circular. Any reader will recognize that nothing can be more derogatory than this because this points that the law is arbitrary & whether commission is sales promotion simply depends on the whims & fancy of the officials in position & the tax payers need to bear the brunt of it silently. Any person with little application of mind will comprehend that once the CBEC circular settled the issue on 29.4.11 then the credit cannot be denied to the recipient of service. The irony of the fate as explained by the Commissioner (Appeals), Surat is that Personal Hearing is allowed & no personal hearing is conducted because the case is transferred to the call book. The Commissioner (Appeal) refrains from giving any details that why the case is transferred to the call book even when asked. The moot question is that even if the CBEC circular did not put the matter to rest then what purpose was served by that circular in the first place & that can the definition of Sales Promotion be arbitrary & depend on the whims & Fancy of the officials? Why the bureaucracy should advance such idiocy recklessly & the tax payers made to suffer? The subject operative laws are already replaced but still the legacy hounds the taxpayers & this points to abject failure of the Indian bureaucracy in terms of drafting a proper law for effective implementation & nobody seems to be bothered. The biggest irony is that even the very basic tenet of Value Added Taxation is defied & not only credit being denied but even the tax on commission is being collected twice though the Commission is paid once only. This can only happen in India thanks to the miraculous Indian bureaucracy! I have not dealt with the judicial pronouncement so as not to clutter the message & we deal with the same in 2nd part.
(Author Rajiv Gupta can be reached at firstname.lastname@example.org)