The appellant is a merchant exporter engaged in the export of goods such as fabrics, sarees, dress material etc. to various countries.
During refund audit, it was observed that the appellant reflected commission amount ranging from 11% to 12.5% paid to commission agent located outside India, which is above 1% of the FOB value of the export goods. It was alleged that the foreign commission is chargeable to service tax under ‘Business Auxiliary Service’.
Appellant submitted that commission is nothing but the trade discount given to the buyer. No third person, as commission agent is involved in the transaction, therefore no service of commission agent is involved.
There is no contract of commission agent service with any of the commission agent, there is no person to whom payment of commission was made therefore, it is clear that no service provider i.e. foreign commission agent exists in the present case.
The trade discount even though in the name of commission agent was given by the appellant to the foreign buyer, by any stretch of imagination cannot be considered as commission paid towards commission agent, hence cannot be taxable.
The commission deducted by the appellant in the present case in the invoice is nothing but a trade discount and the same is not subjected to service tax.
FULL TEXT OF THE CESTAT JUDGEMENT
The brief facts of the case are that the appellants are merchant exporters and engaged in the export of goods such as fabrics, scarves, sarees, dress material etc to various countries. During the audit of the refund claims filed by the exporters, it was observed that in some of the shipping bills, the appellant have shown the commission amount to the tune ranging from 11% to 12.5% paid to the commission agent located outside India which is in excess of one percent of the FOB value of their export goods for which the said service has been used as stipulated under Notification No. 18/2009-ST dated 07.07.2009. Therefore, the enquiry has been initiated against the appellant on the ground that they have neither obtained service tax registration nor paid the service tax on the services received by them from their foreign commission agent to whom commission of 11%-12.5% was passed on. During the enquiry, the enquiry officers have collected copies of shipping bills, bank realization certificates, balance sheets, copies of contract/ agreement made with their foreign commission agent, for the period of 2007-08 to 2011-12. The case of the department is that, 11% commission shown in the invoice which was deducted from the invoice value is nothing but commission paid to the commission agent towards export of goods therefore, the said 11%-12.5% commission is chargeable to service tax under the head ‘Business Auxiliary Service’-Foreign Commission Agent in terms of Section 65(19) of the Finance Act, 1994 and is taxable service vide Section 65(105) (zzb) of Finance Act, 1994 read with section 66A of the said Act under reverse charge mechanism. Accordingly, show cause notices were issued and the Adjudicating Authority confirmed the demand along with penalty and interest. Therefore, the appellants filed the present appeals. The issue in all the appeals is common.
2. Shri K.I. Vyas, learned Counsel appearing through video conference on behalf of the appellants at the outset submits that they have not appointed any commission agent for promotion of sale of goods exported by them. The goods were directly exported to foreign buyers and in the export invoices on FOB/CIF value, the amount equal to 11%-12.5% was shown as deduction under the head of commission. He submits that this commission is nothing but trade discount given to the buyer. No third person, as commission agent is involved in the transaction, therefore no service of commission agent is involved. There is no evidence that there is any commission agent exists and any commission is paid to him. Therefore, since no commission agent is involved, the appellant have not availed any service of commission agent. Accordingly, the amount of 11%-12.5% deducted in the invoice being sales discount, is not towards any service charge, hence, the entire demand is not tenable. In support of his submission, he placed reliance on the following judgments:-
(a) Duflon Industries Pvt. Limited vs. CCE, Raigad – 2017 (47) STR 335 (Tri. Mumbai)
(b) Wanbury Limited vs. CCE & ST, Raigad – 2019 (21) GSTL 154 (Tri. Mumbai)
3. He alternatively submits that even if the contention of the Revenue is accepted that 11%-12.5% deduction shown in the invoice, if at all treated as commission, even then no service tax is payable as the service tax if any payable is refundable in terms of Notification No. 41/2007-ST dated 06.10.2007 and 18/2009-ST dated 07.07.2009. The Adjudicating Authority has denied this exemption on the ground that the condition prescribed for allowing exemption has not been fulfilled by the appellants. He submits that there is no dispute that the goods have been exported and so called condition related to the export goods which has been established on the basis of sales invoice, shipping bills, appellant’s bank realization certificates therefore, the major criteria for allowing the exemption has been fulfilled. Since the exemption was claimed subsequent to the export goods, only due to this reason the department has raised demand. There may be some technical or procedural lapse, however for that lapse, exemption cannot be denied. He placed reliance on the following judgments:-
(a) CC (Prev.) Amritsar vs. Malwa Industries Limited 2009 (235) ELT 214 (SC)
(b) Sambhaji vs. Gangabai – 2009 (240) ELT 161 (SC)
(c) CC (Prev.) Mumbai vs. M. Ambalal & Company – 2010 (260) ELT 487 (SC)
(d) Share Medical Care vs. UOI – 2007 (209) ELT 321 (SC)
4. Learned Counsel further submits that since commission is related to
export of goods and same is in any case not taxable or even if taxable, the same is refundable therefore, the entire exercise is Revenue neutral. Since there is clearly a Revenue neutrality in the present case, the demand raised invoking extended period will not survive as there is no malafide intention to evade payment of service tax. In his support he placed reliance on the judgment in the case of P.P. Mills Pvt. Limited vs. CCE, Salem – 2016 (46) STR 317 (Tri. Chennai) and Texyard International vs. CCE, Trichy – 2015 (40) STR 322 (Tri. Chennai).
5. Shri H.K. Jain, learned Assistant Commissioner (Authorised Representative) appearing on behalf of the Revenue reiterates the findings of the impugned order. He submits that in the invoice, the appellant have clearly mentioned 11% commission therefore, the same falls under the category of Business Auxiliary Service and the same is taxable under reverse charge mechanism under Section 66A of the Finance Act, 1994. He placed reliance on the following judgments:-
(a) Sulax Corporation vs. CCE, Bangalore – 2003 (160) ELT 443 (Tri. Bang.)
(b) CCE, Surat vs. Holy Creations Pvt. Limited – 2011 (263) ELT 158 (Tri. Ahmd.)
(c) Prannoy Roy vs. The Deputy Commissioner of Income Tax & Ors. – dated 04 May 2018 (Hon’ble High Court of Delhi)
(d) Olympia Paper & Stationery Stores vs. Assistant Commissioner of Income Tax, ITAT – 24 March 1997.
6. We have heard both sides and perused the record. The issue involved is that whether there is any commission paid by the appellant to Commission Agent in relation to export of their goods exists and whether that commission is liable to service tax under the head Business Auxiliary Service. In this regard, we carefully gone through the export documents such as shipping bills, export invoice of appellant, bank realization certificate. The sample copies of all the three documents are scanned below:-
7. From the above invoice, Shipping Bill and Bank Certificate, it is seen that against the C&F value shown is sales value in the invoice, the amount equivalent to 11%-12.5% was shown as deduction under the head commission and therefore, the net invoice value is the value after deduction of said 11%-12.5%. As per the invoice, 11%-12.5% commission was extended to the foreign buyer of the goods. Since there is transaction of sale and purchase between the appellant and buyer of the goods, whatever value shown in the invoice is a sale value and the deduction shown is nothing but discount given by the exporter to the foreign buyer. As per the bank realization certificate of exporter, in appendix 22A (scanned above), the amount after deduction of 11%-12.5% which was shown in column 12. The heading of column is ‘commission/ discount paid to foreign buyer, agent’. In the entire enquiry, the department has not brought any tip of evidence to show that there is a commission agent exists in this transaction and any amount of commission is paid to such person. Admittedly, in the entire transaction only two persons are involved, one the appellant as exporter of the goods and second the buyer of the goods. In the sale of goods, in case of service of commission agent, if involved, there has to be third person as service provider to facilitate and promote the sale of exporter to a different foreign buyer. In the present case, there is absolutely no evidence that this 11% is paid to some third person as commission. There is no contract of commission agent service with any of the commission agent, there is no person to whom payment of commission was made therefore, it is clear that no service provider i.e. foreign commission agent exists in the present case and no service was provided by any person to the appellant. In the absence of any provision of service, no service tax can be demanded. The trade discount even though in the name of commission agent was given by the appellant to the foreign buyer, by any stretch of imagination cannot be considered as commission paid towards commission agent service, hence cannot be taxable. This issue has been considered time and again by this Tribunal. In the case of Duflon Industries Pvt. Limited vs. CCE, Raigad (supra) and the Tribunal held as under :
“6. The entire issue revolves around the fact whether clearances effected by appellant on goods which exported by them to DEL is of actual sale or sale based on commission basis. If it is direct sale to DEL then appellant has case and if it is held that it is not direct sale, but the sale based on commission basis then appellant has no case. For this we have to examine the agreement dated 16-52001 entered between appellant and DEL. The agreement is enclosed to the appeal memorandum and on perusal of the same we find that the agreement sets out clauses about the sale of goods by appellant to DEL. The said agreement speaks of purchasing of various items from appellant by the said DEL and it also records that appellant shall allow flat deduction/commission of 8% on the invoice value to DEL. We perused the invoice raised by appellant to DEL and find that the invoice is for the sale of the goods and 8% commission is indicated as has been given on the total invoice value. It is also seen invoice value has been reduced by 8% shown as commission, is against the sale of the goods to DEL. We agree with the contentions raised by learned Counsel that the purchaser of the goods cannot be considered as a “commission agent” as the deduction/commission is for the goods sold. There is nothing on record to show that the said DEL was appointed as “commission agent” for the sale of the goods of the appellant to third parties. It may be that DEL might purchase the goods from the appellant and sells the same in Europe. The reliance placed by learned DR and adjudicating authority on the clause of agreement that “DEL shall increase the market share of appellant’s products” to conclude that DEL was a commission agent, seems to be erratic reading of the clauses of agreement and this itself does not amount DEL has been appointed as “commission agent”. The amount indicated on the invoice and recorded in the accounts as commission, in our view, will not attract tax under reverse charge mechanism. We also find strong force in the contentions raised by learned Counsel that in order to tax this account as a commission, there has to be necessarily three parties, seller, purchaser and a person who negotiates such transaction. From the records it is very clear that DEL had not negotiated purchase or sale on behalf of appellant or their customers; to our mind the deduction/commission is nothing but trade discount. In view of the factual position as ascertained from the records, we hold that the impugned orders demanding service tax under reverse charge mechanism from appellant are unsustainable and liable to be set aside.”
In the matter of Hindustan Petroleum Corporation Limited – 2019 (24) GSTL 569 (Tri. Del.), identical issue was decided wherein the HPCL, under an agreement for sale to retail customer purchased CNG from Indraprasth Gas Limited, the HPCL received consideration. The Tribunal held that the said consideration is in the nature of discount as agreement between HPCL and IGL is not on principal to agent basis but on principal to principal basis therefore, HPCL is not liable to service tax under the head of Business Auxiliary Service. In the case of Prabhakar Marotrao Thaokar & Sons vs. CCE, Nagpur – 2019 (20) GSTL 294 (Tri. Mumbai), the department raised demand on discount given by manufacturer to the appellant who is a wholesale dealer while supplying goods for further distribution. The department alleged that such discount is basically sales commission and liable to service tax under the category of Business Auxiliary Service under Section 65 (105) of Finance Act, 1994. The coordinate bench at Mumbai held that the transaction between appellant and wholesale dealer is sale on principal to principal basis. The discount passed on by the manufacturer cannot be construed as commission and same is not subject matter to levy of service tax.
In the present case also, identical nature of transaction involved therefore, applying the ratio of the above judgment, the commission deducted by the appellant in the present case in the invoice is nothing but a trade discount and same is not subjected to service tax.
8. The appellant made alternative submission that if at all the commission shown in the invoice is considered as service charges and the service tax payable/paid thereon is refundable to them as per Notification Nos. 41/2007-ST dated 06.10.2007 and 18/2009-ST dated 07.07.2009 even though some procedural lapse, if any, has occurred in the present case. Since we have already decided that the amount of 11%-12.5% shown as deduction in the invoice is not towards any service charges but it is in the nature of trade discount, there is no question of involving exemption of Notification Nos. 41/2007-ST dated 06.10.2007 and 118/2009-ST dated 07.07.2009. Therefore, we are not discussing this issue.
9. As regards the limitation raised by the appellant, we agree with the appellant that firstly, on merit itself as no service exists, and secondly, the appellant have shown all the figures and data in the documents and 11%12.5% commission in the invoice, shipping bills and bank realization certificate, therefore, there is absolutely no suppression of facts on their part. Since undisputedly, the amount of commission considered by the Revenue as against Business Auxiliary Service is related to export of goods, the same in any case will not be taxable. For this reason also no malafide can be attributed to the appellant. Hence longer period of demand shall not be invoked. In this regard, the judgment relied upon by the appellant in the case of J.P.P. Mills Pvt. Limited vs. CCE, Salem (supra) and Texyard International vs. CCE, Trichy (supra) support their case. Therefore, the demand for the extended period is not sustainable on limitation also.
10. As per our above discussion and findings, we are of the clear view that since no service exists, the entire demand would not stand. Accordingly, the impugned orders are set-aside and the appeals are allowed with consequential relief, if any, in accordance with law.
(Order pronounced on 22.09.2020)