CA Abhishek Chopra
CENVAT Credit on sales commission- explanation inserted whether prospective or retrospective?
Sales Commission is a commission paid to the various selling agent. It is an inevitable expense which has become fixed expenditure in every business or trade or commerce. Sales commission may be paid for number of reasons like market creation, development, advertisement, identifying potential customers to name a few.
Assessee and Department have been involved in tug of war on cenvat credit on inputs, input services and capital goods. The assessee attempting to avail credit of every possible input / capital goods /input service by liberally interpreting their definitions and department denying the Cenvat credit by following the principle of literal interpretation. Cenvat Credit on sales commission has always been a sensitive issue since dawn.
Special case of state of Gujarat High court with regards to cenvat credit on sales commission
Being omnipresent in almost every trade and business, debate on credit of service tax on sales commission attained importance. Various High Courts have taken contrary stand with regards to eligibility of the cenvat credit on sales commission.
In state of Gujarat this issue gained more controversy after the Judgement delivered by Hon’ble Gujarat High Court in case of M/s CADILA HEALTHCARE LTD reported at [2013- TIOL-12-HC-CESTAT-AHM]. Hon’ble High Court of Gujarat denied the credit of commission agent’s services by taking a different view:
“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”.
Various SCN by department denying cenvat credit of sales commission
Taking cue from the judgment, department issued letters calling information related to sales commission paid and Cenvat Credit availed from assesses. The department denied the cenvat credit and recovered interest and penalty for wrong availment of cenvat credit.
This issue created havoc among the trade since the amount involved is such cases was relatively high and many assessee has reversed the cenvat credit along with applicable interest and many received Show cause notice for demanding reversal of cenvat credit along with interest and penalty and this creates serious financial crisis to the assessee.
Present amendment inserting explanation
Recently on 3rd February, 2016, Central Government has issued Notification No. 02/2016–Central Excise (N.T.) inserting explanation to Rule 2(l) after sub clause (C) that
“Sales promotion includes services of sale of dutiable goods on commission basis”.
By virtue of the said explanation CENVAT credit of service tax paid to the commission agent for sale of dutiable goods on commission basis is eligible for cenvat credit. As happens clarification brings more ambiguity, new issue cropped up of change being prospectively or retrospectively.
This question has been addressed by Hon’ble CESTAT Ahmedabad in M/s. Essar Steel India Limited Vs. CCE & ST, SURAT-I, 2016-VIL-155-CESTAT-AHM– ST wherein the CESTAT held it to be retrospective. Relevant excerpt of the judgment is reproduced for ready reference:
“22. An Explanation inserted in a Section/Rule, is generally to explain the meaning of the words contained in the Section/Rules. The purpose of Explanation is to explain the meaning and intendments of the Section/Rule. Sometimes, the Explanation may be inserted to clarify intendments of the Section/Rule. Sometimes, the Explanation may be inserted to clarify a doubtful point of law, which would be effectively retrospectively. In the present case, the expressions in the Explanation as inserted by Notification No. 2/2016 CE (supra), make it clear that it is for explaining the meaning of clause ‘sales promotion’ in the context of Rule 2(l) of the Rules, 2004. It is to provide an additional support to the dominant object of the word ‘sales promotion’ in Rule 2(l) in order to make it meaningful and purposeful. The language of the Explanation is consistent with Board Circular to the benefit of the Assessee and it would be effective retrospectively.”
Possible situation with recourse:
1. Those who have reversed the cenvat credit along with interest and penalty?
Can claim refund of service tax along with interest and penalty.
2. Those who have reversed under protest and has received SCN?
Can represent to appellate authority and can claim refund of amount paid under protest.
3. Those who have not agreed for reversal and received SCN?
Can represent before respective appellate authority and drop the proceeding.
4. Those who have not availed cenvat credit of service tax paid on sales commission?
Can avail the cenvat credit within one year from date of invoice provided the other condition as mentioned in CCR, 2004 is comply with.
(Author is a Practicing Chartered Accountant in Service tax from Ahmedabad and can be reached at email@example.com)