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Cenvat Credit denied for Service Tax paid to Commission Agents
10 April, 2013 Ahmedabad :
Cenvat Credit denied for Service Tax paid to Commission Agents

The concept of Cenvat has its roots deep enrooted in the modified value addition tax system for the yester years. The underlying principle being that the cost of goods should be kept under control and there should be no cascading effect of taxes or duties. The same concept was made applicable to Services with a motive to ensure that there are no taxes imposed on taxes. But the very purpose and spirit of law gets defeated if the law makers interpret with a revenue biased approach rather than an open mind. Businessman concentrate on production and marketing equally. Selling on commission basis is very basic and oldest marketing strategy. Many companies appoint their sales person on commission basis. Now this service of commission agent was specified under Business Auxiliary Services, which covered any service in relation to promotion or marketing or sale of goods produced or provided by or belonging to the client; or promotion or marketing of service provided on behalf of the client and includes services as a commission agent. The term ‘input service’ has been defined under Rule2(l) of Cenvat Credit Rules 2004. Accordingly input service includes advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal. In the above backdrop it is clear that commission to agents for selling the product is taxable. But question arises whether such service tax paid is available as Cenvat Credit?

Honorable High Court of Gujarat in the case of CCEx, Ahmedabad Vs. Cadila Healthcare Ltd (STO 2012 Guj 1138) discussed this issue at length. it was contended that service tax paid on commission paid to commission agents for sale of final products is available as credit according to the inclusive part of the definition of ‘input service', which includes services in relation to sales promotion. At the initial stage of proceeding the Adjudicating Authority held that a commission agent is a person who acts on behalf of another person and causes sale or purchase of goods. In other words, he is directly responsible for selling or purchasing on behalf of another person and that such activity cannot be considered as sales promotion. According to the Adjudicating Authority there is a clear distinction between sales promotion and sale. A commission agent is directly concerned with sales rather than sales promotion. He, accordingly, held that service provided by commission agent does not fall within the purview of the main or inclusive part of the definition of ‘input service' and, therefore, the assessee was not eligible for CENVAT credit in respect of the service tax paid on commission paid to foreign agents. The tribunal reversed the decision of the adjudicating authority vide its judgment and allowed the credit of the same. (STO 2009 CESTAT 1778).

The department approached the High Court which held that every activity related to the business of the assessee would fall within the inclusive part of the definition of input services. For an activity related to the business, it has to be an activity which is analogous to the activities mentioned after the words "such as". What follows the words "such as" is "accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security". Thus, what is required to be examined is as to whether the service rendered by commission agents can be said to be an activity which is analogous to any of the said activities. The activity of commission agent, therefore, should bear some similarity to the illustrative activities. In the opinion of High Court, none of the illustrative activities is in any manner similar to the services rendered by commission agents nor are the same in any manner related to such services. Under the circumstances, though the business activities mentioned in the definition are not exhaustive, the service rendered by the commission agents not being analogous to the activities mentioned in the definition, would not fall within the ambit of the expression "activities relating to business". Consequently, CENVAT credit would not be admissible in respect of the commission paid to foreign agents. This decision has a long standing impact on the internal costing of goods and services as the cost of taxes paid on such services are no more reimbursable or creditable under the cenvat credit scheme and thus generating a cascading effect of taxes on taxes. Spirit of the cenvat scheme appears to be defeated.

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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