Cenvat credit is not eligible on sales commission - Gujarat High Court

[Vijay Chitte]

Recently Gujarat High court has delivered landmark judgment in COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD – II Versus M/s CADILA HEALTHCARE LTD  [2013 (1) TMI 304 - GUJARAT HIGH COURT] that manufacturer are not allowed to availed cenvat credit on service tax paid on commission agent. In this case the assessee availed of CENVAT credit of Rs.39,45,791/-  towards commission paid to foreign agents. According to the assessee, out of the total amount paid as service tax, they had availed of CENVAT credit only on that part which was attributable to dutiable products manufactured in their plant only,according to the inclusive part of the definition of ‘input service', which includes services in relation to sales promotion. Reference was made to the definition of  business auxiliary service as defined under section 65(19) of the Finance Act, 1994 which lays down that business auxiliary service means any service in relation to (i) promotion or marketing or sale of goods produced or provided by or belonging to the client or (ii) promotion or marketing of service provided on behalf of the client and includes services as a commission agent.

 

(i) The Adjudicating Authority held that on a perusal of the definition of commission agent as defined under clause(a) to the Explanation under section 65(19) of the Act, 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' as laid down in rule 2(l) of the Rules and, therefore, the assessee was not eligible for CENVAT credit in respect of the service tax paid on commission paid to foreign agents.
 

As regards the contention that in any event the service rendered by a commission agent is a service received in relation to the assessee's activity relating to business, it may be noted that the includes part of the definition of ‘input service' includes "activities relating to the business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security". The words "activities relating to business" are  followed by the words "such as". Therefore, the words "such as" must be given some meaning. In Royal Hatcheries (P) Ltd. v. State of A.P., 1994 Supp (1) SCC 429(1993 (10) TMI 85 - SUPREME Court), the Supreme Court held that the words "such as" indicate that what are mentioned thereafter are only illustrative and not exhaustive. Thus, the activities that follow the words "such as" are illustrative of the activities relating to business which are included in the definition of input service and are not exhaustive. Therefore, activities relating to business could also be other than the activities mentioned in the sub-rule. However, that does not mean that every activity related to the business of the assessee would fall within the inclusive part of the definition. 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 this court, none of the illustrative activities, viz., "accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security" 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.

In  M/s. Paras Motors Mfg. Co. Versus Commissioner of Central Excise, Daman  [2013 (3) TMI 4 - CESTAT Ahmedaba] also denied the cenvat credit on sales commission by addressing the same Gujarat High court judgment in COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD – II Versus M/s CADILA HEALTHCARE LTD  [2013 (1) TMI 304 - GUJARAT HIGH COURT].

In earlier case CADILA HEALTHCARE LTD. Versus COMMISSIONER OF C. EX., AHMEDABAD [2009 (8) TMI 172 - CESTAT, AHMEDABAD]held that the Foreign Commission agent service for sale promotion, are input services and credit on service tax paid on the same is admissible.

The Board's Circular No. 943/4/2011-CX dated 29.4.2011 (S. No. 5) clarifying that even after the deletion of expression “activities related to business” from the definition of input services, the credit of Service tax paid on the sales promotion activities and on the services of sales of dutiable goods on commission basis would be admissible as credit. Therefore, even after the activities related to business, stand deleted from the definition of inputs credit as per the Board’s Circular, the Service tax paid on commission on agent services would be available. Unfortunately this circular has not been address in this judgment which is allowed the Cenvat credit of the service rendered by the  commission agent is to be considered is Sales promotion which is analogous to the activity mentioned in the definition would fall within the ambit of the express "activity relating to business".  (refer below para of this circular.)

Issue :Is the credit of Business Auxiliary Service (BAS) on account of sales commission now disallowed after the deletion of expression “activities related to business”?

Clarification : 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.
 

In COMMISSIONER OF C. EX., JALLANDHAR Versus AMBIKA OVERSEAS [2010 (7) TMI 330 - CESTAT, NEW DELHI ]The canvassing and procuring orders are activities preceding removal of the goods by the manufacturers. Without the firm order, the respondents were not expected to remove the goods to a foreign destination. Therefore, the submission of the learned DR that these activities are post removal activities cannot be accepted. Further, the definition of the 'inputs services' includes services used in relation to "sales promotion", and these activities can rightly be described as sales promotion activities. Sales promotion activities undertaken at a given point of time also aims at sales of goods which are to be manufactured and cleared in future.

Sales promotion’ should also cover selling agent’s commission, C&F Agent’s services :- in M/s Wadpack Pvt. Ltd. Versus The Commissioner of Central Excise, Bangalore.  [2012 (11) TMI 566 - CESTAT BANGALORE], DSCL Sugar Versus Commissioner of Central Excise, Lucknow [2012 (7) TMI 30 - CESTAT, NEW DELHI],  Semco Electrical (P.) Ltd. Versus Commissioner of Central Excise, Pune [2009 (12) TMI 143 - CESTAT, MUMBAI], Pan Asia Corporation Versus Commissioner of Central Excise, Mumbai-II [2009 (7) TMI 633 - CESTAT, MUMBAI], COMMISSIONER OF C. EX., RAIPUR Versus BHILAI AUXILIARY INDUSTRIES   [2008 (12) TMI 134 - CESTAT NEW DELHI ], Commissioner of Customs & Central Excise, Raipur Versus HEG Ltd. (Sponge Iron Division) [2009 (7) TMI 562 - CESTAT, NEW DELHI], Lanco Industries Ltd. Versus Commissioner of Central Excise, Tirupathi [2009 (7) TMI 125 - CESTAT, BANGALORE], VISHAL NATURAL FOOD PRODUCTS Versus COMMR. OF CUSTOMS, BANGALORE [2010 (10) TMI 336 - CESTAT, BANGALORE]

In COMMISSIONER OF C. EX., JALANDHAR Versus AMBIKA FORGINGS [2010 (9) TMI 240 - CESTAT, NEW DELHI],  It may be stated that where there is a legislative meaning of a term used in law, it is unsafe to adopt dictionary meaning. In common business or commercial parlance business promotion adds to earning of Revenue for a seller or a manufacturer. Whether addition to revenue earning by a manufacturer is made by manufacture of extra quantity goods has earned excise duty is also relevant. If business promotion activity adds to Revenue by manufacture and sale of incremental quantity, the business promotion activity may have nexus to such sales. Accordingly, service tax paid on such service may be attributable to input service tax. Claim of Cenvat credit is made to avoid cascading effect under Rule 2 (l)(ii) of the Cenvat Credit Rules, 2004. In terms of the word "includes" in Rule 2(l)(ii) of the Cenvat Credit Rules 2004, broad activities which are having nexus to business and integrally connected are brought to the fold of input service.
 

Any activity relating to business is ‘input service’ :- In Input service definition, the use of word activities in the phrase ‘activities relating to business’ further signifies the wide import of the phrase ‘activities relating to business’. The rule making authority has not employed any qualifying word before activities like main activities or essential activities etc. Therefore, it must follow that ll and any activity relating to business falls within the definition of input service provided there is relation between the manufacturer of product (concentrate in this case) and the activity. This has been also held in COCA COLA INDIA PVT. LTD. Versus COMMISSIONER OF C. EX., PUNE-III 2009 (8) TMI 50 - BOMBAY HIGH COURT]. & CCE, Nagpur Versus Ultratech Cement Ltd [2010 (10) TMI 13 - BOMBAY HIGH COUR]. (valid up to 31st March 2011)

After considering this judgment, now the department may issue a show cause notice to every manufacturer who availed Cenvat credit on sales commission, In other side assessee may take shelter of the Board's circular and other court judgment (as above) who legally wants to challenge this judgment..

Thanks....................