Cenvat credit on foreign commission, Service Tax

[saket s]

We are paying service tax on foreign commission because it is an intermediary services and not taking input service tax credit, I understand vide Notification NO. 02/2016-CE (NT), DT. 03/02/2016 cenvat credit can be taken on such commission. Please clarify.

Thanks

Posts / Replies

[Rajagopalan Ranganathan]

Sir,

According to rule 9 (c ) of “Place of Provision of Service Rules, 2012 the place of provision of services in respect of “Intermediary services” shall be the location of the service provider.

According to rule 2 (f) of the same rule,” intermediary" means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the 'main' service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account.

Therefore since place of provision of service by the foreign agent is located outside the taxable territory you need not pay any service tax on such commission. If you have paid you can seek the refund of service tax paid subject to Doctrine of Unjust Enrichment. That is, if you have passed on the tax to your client then you cannot claim the refund. Since no service tax is payable on commission paid to foreign service provider you are not eligible to avail the credit of service tax paid by you. If you avail the Department will initiate action to recover such credit as wrongly taken credit with interest and penalties.

[saket s]

Sir, Thanks.

However, the case is that we are receiving commission in India (not paying commission) from foreign party and paying service tax on it under intermediary services. In this is whether are we eligible for credit?

[KASTURI SETHI]

Sh. Saket S

What I understand you are providing intermediary services (classified under the erstwhile category of BAS and now under the category of "Other Than Negative") to a foreign based company while being located in India. Service provider is located in India. As per Rule 9(c) provision of location is in India.Enjoyment of service is in India.You should be eligible for input service credit if you are getting commission on account sales of dutiable goods.

[Rajagopalan Ranganathan]

Sir,

To take credit of service tax paid on input service you should be a service receiver. If the service provider in located outside taxable territory (Out side India) then as a receiver of service you have to pay service tax under reverse charge mechanism. In that case you are eligible to take the credit. What is the service you are receiving?. What is the output service provided by you or what are you manufacturing in which the input service is utilized? If you elaborate on these line it will be easier to suggest a solution.

[saket s]

Sir,

We are agent for various foreign principals for marketing their products in India and solicit orders from users of these in India. The Company receives commission which is a percentage based on the quantum of sales orders booked from customer in India. The commission is paid by the principals situated outside India in convertible foreign exchange.

After introduction of Notification No.14/2014-Service Tax dated 11-07-14 w.ef. 01-10-2014 the above commission which was not taxable has become taxable as per amended definition of “Intermediary Services” and amended provision of Rule 9 under Place of Provision of services.Now, can we take credit basis Notification NTF. NO. 02/2016-CE (NT), DT. 03/02/2016.

[KASTURI SETHI]

Sh.Saket S. Ji,

In my view you are eligible for credit.

[Ganeshan Kalyani]

As asked by Sri Rajagopalan Sir, very essential point to be noted before pondering on to take the credit is to analyse what is the taxability of your output product manufactured or service provided. Thanks.

[CS SANJAY MALHOTRA]

Dear Friends,

Very interesting issue, with minor change in POP, issue has become debatable.

Prior to change in POP, agents in India earning commission from overseas sellers were considering same as Export of service and service tax was exempt.

In case of Commission paid from India to overseas agents, service recipient were paying service tax in capacity of deemed service provider. Accordingly they were eligible for service tax CENVAT.

Now with change in POP, the commission paid from India to overseas agents is exempted from service tax as the POP is the location of service provider.

Interestingly the commission earned by agents in India from foreign sources is liable to service tax.

Question comes are they eligible for CENVAT ???

Here the tax is paid by service provider in the capacity of service provider and not the deemed service provider under reverse service charge. Hence Service tax credit is not eligible.

Can this be treated as Export of Service, which makes person eligible for refund???

AS per POP, for commission received in India, service is treated as provided in India thus Export can't be treated...

I think the issue is debatable and might end into litigations.

The above are my thoughts and others seniors might have divergent views.

[saket s]

So, even under Notification NO. 02/2016-CE (NT), DT. 03/02/2016, this scenario is not getting covered?

[KASTURI SETHI]

Sh.Saket S.,

Sh.Sanjay Malhotra CS, Sir, has given you the best critical analysis. None of the experts has kept you in dark. The issue is not doubt-free. It is prone to litigation. When we write the words, "in my view", it means "If" and "But" are involved here in the situation. Pl. wait for views of other experts. After the views of experts, namely, Sh.Rajagopalan Ranganathan, Sh.Ganeshan Kalyani and Sh.Sanjay Malhotra, CS, Sirs, I think this case is worth re-examination. I am not changing my stand at the same time. Still I am tilted towards eligibility. Whether this scenario is getting covered or not in this notification ? Nothing can be said in a hurry. However, this notification is not in isolation.

[saket s]

My thanks all the experts who have contributed to this post. Any further input is most welcomed.

Saket S

[Rajagopalan Ranganathan]

Sir

From your initial query dated 18.5.2016 I understood that you are paying commission to an intermediary located in non-taxable territory (foreign country) for providing commission agency service to you and you are paying service tax on the commission paid by you. In view of my understanding i replied citing the provisions of rule 2 (f) and rule 9 of POP Rules.

Again in your query dated 18.2.2016 you have stated that "you are agent for various foreign principals for marketing their products in India and solicit orders from users of these in India. The Company receives commission which is a percentage based on the quantum of sales orders booked from customer in India. The commission is paid by the principals situated outside India in convertible foreign exchange.

Rule 6A of Service tax Rules, 1994 states that -

Export of services.-

RULE 6A. (1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

(a) the provider of service is located in the taxable territory ,

(b) the recipient of service is located outside India,

(c) the service is not a service specified in the section 66D of the Act (Negative List),

(d) the place of provision of the service is outside India,

(e) the payment for such service has been received by the provider of service in convertible foreign exchange.

You are satisfying the conditions (a), (b) and (d). Therefore the service provided by you is export of service and not liable to service tax. Payment of service tax on reverse charge mechanism arises only when the service provider is located in non-taxable territory (foreign country) and the service receiver is located in taxable territory ( India, excluding State of Jammu & Kashmir). In case the service provider is located in taxable territory ( India, excluding State of Jammu & Kashmir) and service receiver is located in non-taxable territory (foreign country) then tha activity will be treated as export of service.

Notification No.02/2016-Central Excise (N.T.) dated 3.2.2016 inserts an explanation in rule 2 (l) of Cenvat Credit Rules, 2004 stating that "for the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.”. This explanation was inserted to remove the difficulty created by the following judgments of Gujarat High Court, namely, -

(1) CCE vs. Cadila Healthcare-2013 (30) S.T.R. 3 (Guj.). = 2013 (1) TMI 304 - GUJARAT HIGH COURT

(2) Astik Dyestuff v. CCE-2014 (34) S.T.R. 814 (Guj.). = 2014 (1) TMI 776 - GUJARAT HIGH COURT

(3) CCE v. Dyanamic Industries-2014 (307) ELT 15 (Guj.) = 2014 (8) TMI 713 - GUJARAT HIGH COURT

In the above cases it was held that service of commission agent is not input service. By inserting the explanation as mentioned above sales commission agent service is included in sales promotion and service tax paid on sales commission is eligible for cenvat credit. I hope the above views will clarify your doubts in this matter.

[CS SANJAY MALHOTRA]

Dear Mr. Rajagopalan ji,

Place of Provision in case of Intermediary services is the location of service provider which in this case is India. Hence POP is India and Export of Service does not qualify.....

[KASTURI SETHI]

Dear all experts,

I agree with Sh.CS Sanjay Malhotra, Sir. It does not amount to export of service as (d) is also not qualified. Whether any service amounts to export of service or not, depends upon "the effective use and enjoyment of the service" . In this context, Board's Circular No. 111/5/2009-S.T., dated 24-2-2009 as amended vide Circular No. 141/10/2011-TRU, dated 13-5-2011 (para 3 and 4) read with Export Rules are relevant.

(iii) Category III [Rule 3(1)(iii)] : For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be ‘export’, -

(a) If they are provided in relation to business or commerce to a recipient located outside India; and

(b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided.

Though circulars pertain to the period prior to POP Rules, yet they serve as guidelines determination of export of service. These circulars are still in force.

[KASTURI SETHI]

SH.CS SANJAY MALHOTRA JI,

Sir, Has that stage come to say, "We agree to disagree." ?

[CS SANJAY MALHOTRA]

Respected Sir Sh. Kasturi ji,

Appreciate the words highlighted by you "Enjoyment of Service" which is in India in the present case as per Rule 9 of POP. The same calls for non admissibility of CENVAT Credit on Service Tax.

[saket s]

Thank you all.

The import of this discussion is, if we decide to take such cenvat credit, we have to be ready for litigation.

Saket S

[KASTURI SETHI]

Sh.Saket S Ji, MY PERSONAL VIEWS

It is a moot point whether it is export of service or not. If you can muster courage to opt for litigation, in the long term, you would achieve the benefit. As per Board's circulars and POP Rules, you do not fulfill the following conditions:-

1. Place of location is within India.

2. Effective use and enjoyment of service is in India.

3. Enjoyment of performance is partly in India.

4. RCM is not applicable ??

You fulfill the following conditions :-

1. Foreign exchange is earned by you. Nobody can challenge.

2. Enjoyment of service/performance is partly in a foreign country. (Had you not procured the orders for export, India would not have earned foreign exchange.So Practically performance is fully outside India.

3. Practically Service receiver is outside India

Ultimate goal of export is earning foreign exchange for India which is being achieved by you. In my view if you fight for you legal/substantive right, ultimately you will either get refund of ST paid or input service credit of service tax paid.You can also term it as my hunch.

[vijay kumar]

Dear all,

From the above discussion, two things become clear:

1. The assessee company is the service provider and a service provider cannot take credit of his own service since it does not qualify to be "input service" in as much as the same is not used by him to provide the "output service". However, he can pass on the service tax burden to the service receiver. ST is an indirect tax and can always be collected from the receiver of the service. The SR who purchases/imports such goods and uses the same in the manufacture of his dutiable goods or for provision of his output service is rightly eligible to take the credit since it becomes "input service" for him.

The amendment vide Nofn.2/2016-CE(NT) being referred in the question is to permit cenvat credit of sales commission to a service receiver since only sales promotion was mentioned in the definition of input service and Gujarat High Court has rendered certain decisions cited above disallowing credit on sales commission, distinguishing the same from sales promotion. Department has been issuing notices on this ground. Effective 3.2.2016, credit on the sales commission will be available to the service receiver. So now, your company can pass on the credit of ST paid by you to the downstream manufacturer / service provider.

2. As regards whether it is export of service, as per POPS Rules, 2012, it is an intermediary service and according to Rule 9 ibid, the location of the service provider (assessee company) is in India. Hence Rule 6A(d) of the STR, 1994 is not satisfied, even though the proceeds are realized in convertible FC. Secondly, according to the charging section i.e. Section 66B of the FA, 1994, levy of service tax is on the service provided or agreed to be provided in the taxable territory. Since in this case service is provided and consumed in India, I don't think it becomes an export of service.

Thank you.

[KASTURI SETHI]

The terms, namely, "enjoyment of service, effective use of service, performance of service etc. were incorporated in Board's circulars with an intent to curb the misuse of export policy. The purpose of determination of "Location of Service Provider/Service Receiver" in the POPS Rules is also the same but Genuine exporters are suffering because of POPS Rules, 2012. Therefore, if the concerned association brings it to the notice of PMO office or PM direct via email for amendments in these rules, the problem will be solved. Efforts have to be made for natural justice which is legal right of the exporters because they work in the interest of our nation by way of earning foreign exchange for our India.If proper representation is made to the Govt. it will yield results. After all there is no harm in requesting the Govt. by way of representation through proper channel. Our P.M. has said so many times to bring the problem direct to him through email.

This is my view.