2015 (8) TMI 21 - AT - Central Excise

Denial of CENVAT Credit - input services - whether distributors/ consignment stockists of the appellant are doing any sales promotion activities in addition to selling of goods of the appellant or not - Held that - Sales promotion activities are carried out as per Clause 13 and 17 of the contract entered between the appellant and the distributors/ consignment stockists. That their case is squarely covered by the judgment in the case CCE, Ahmedabad vs. Cadila Healthcare Limited (2013 (1) TMI 304 - GUJARAT HIGH COURT). On the other hand, Revenue is of the view that no sales promotion activities are undertaken by the distributors/ consignment stockists of the appellant and therefore, no CENVAT credit is admissible as per law laid down by the Hon ble Gujarat High Court in the case of CCE, Ahmedabad-II vs. Cadila Healthcare Limited. - activities undertaken by the distributors/ consignment stockists of the appellant are purely distribution/ sales and has no element of sales promotion and, therefore, CENVAT credit taken with respect to commission paid to such distributors/ consignment stockists is not admissible. The credit so taken is required to be paid by the appellant with interest and appeal with respect to CENVAT credit on services of Sales Commission, availed by the appellant, is rejected. So far as imposition of penalties upon the appellant is concerned, it is observed that the period involved in the present proceedings is from July 2012 to March 2013. The judgment delivered by Hon ble Gujarat High Court in the case of Cadila Healthcare Limited vs. CCE Ahmedabad (2013 (1) TMI 304 - GUJARAT HIGH COURT) is dated 07.11.2012 which settled the dispute of interpretation of admissibility of CENVAT credit, inter-alia, with respect to sales commission paid by the assessees. As the issue involved was disputable, therefore, no penalty under Rule 15(1) of the Cenvat Credit Rules, 2004 is imposable. The appeal filed by the appellant with respect to penalty is thus required to be allowed. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Admissibility of CENVAT credit of service tax paid on commission charges by distributors.
2. Interpretation of sales promotion activities under the contract.
3. Applicability of the Gujarat High Court's judgment in the case of CCE, Ahmedabad-II vs. Cadila Healthcare Limited.
4. Imposition of penalties under Rule 15(1) of the Cenvat Credit Rules, 2004.

Issue-wise Detailed Analysis:

1. Admissibility of CENVAT Credit of Service Tax Paid on Commission Charges by Distributors:
The appellant argued that the commission charges paid to their distributors should be eligible for CENVAT credit as they include sales promotion activities. The first appellate authority, however, disagreed, referencing the Gujarat High Court's decision in CCE, Ahmedabad-II vs. Cadila Healthcare Limited, which held that such credits are not admissible. The appellant distinguished their case by pointing to specific clauses (13 and 17) in their contract with distributors, which they argued indicated that the distributors were involved in sales promotion activities.

2. Interpretation of Sales Promotion Activities Under the Contract:
The Revenue countered that the contract did not explicitly state that any portion of the consideration paid to distributors was for sales promotion activities. Clause 7 of the contract mentioned service charges based on sales volume but did not reference sales promotion. Clauses 13 and 17, while mentioning sales promotion materials provided by the company, did not indicate that distributors were paid for sales promotion activities. The Tribunal found that the primary agreement was for sales commission based on sales volume, not for sales promotion.

3. Applicability of the Gujarat High Court's Judgment in the Case of CCE, Ahmedabad-II vs. Cadila Healthcare Limited:
The Tribunal relied heavily on the Gujarat High Court's judgment, which distinguished between sales and sales promotion activities. The court had determined that commission agents are concerned with sales rather than sales promotion, and thus, service tax paid on commission to agents does not qualify for CENVAT credit under the definition of input service. The Tribunal applied this interpretation, concluding that the activities of the appellant's distributors were purely sales-related without any element of sales promotion.

4. Imposition of Penalties Under Rule 15(1) of the Cenvat Credit Rules, 2004:
Regarding penalties, the Tribunal noted that the period in question (July 2012 to March 2013) partially overlapped with the date of the Gujarat High Court's judgment (07.11.2012). Given that the issue of CENVAT credit on sales commission was contentious and only settled by the High Court's judgment, the Tribunal determined that penalties were not warranted. Therefore, the appeal concerning the imposition of penalties was allowed.

Conclusion:
The Tribunal held that the appellant's distributors were engaged in sales activities without any sales promotion element. Consequently, the CENVAT credit on service tax paid for commission charges was not admissible, and the appellant was required to repay the credit with interest. However, the appeal regarding the imposition of penalties was allowed, recognizing the disputable nature of the issue prior to the High Court's judgment. The final order was dictated and pronounced in the court.