Commission agents are quite common in the manufacturing sector, especially in respect of foreign commission agents, used for penetrating markets overseas. Assessing authorities at numerous occasions have contended that the services of commission agents are post-manufacturing and even post-clearance of goods, and therefore do not qualify as input services.The different tribunals have not accepted the contention of the adjudicating authorities and have extended CENVAT benefits to the manufacturers. The tribunals have observed that the activities of commission agents, in fact, cause the removal of goods and are concluded before the removal. On other occasions, they have also held that the activities of commission agents are activities in relation to the business of manufacturing.
However, in a recent ruling, in Commissioner of Central Excise v. M/s Cadila Healthcare Limited (2012-TIOL-12-HC-AHM-ST), the Gujarat High court has distinguished its judgment by emphasing the technical aspects of the relevant provisions governing the matter. Before we go on to analyse the judgement, it seems worthwhile to refer to the relevant provisions applicable here.The reference to the term commission agent’ can be derived from the definition of Business Auxiliary services’ as prevalent in pre-negative list regime where it was defined as any person who acts on behalf of another person and causes sale or purchase of goods, for a consideration.The definition of input services’ under the CENVAT rules has two aspects. The relevant portion of the definition states that the services used by manufacturer, whether directly or indirectly, in or in relation to the manufacture of final product and clearance of final product up to the place of removal. The second part is, the inclusion list, which specifies the services in relation to advertisement, sales promotion, activities relating to business, such as accounting, auditing, financing as eligible input services. The inclusion list has been amended by the Budget 2011 and the words activities relating to business, such as’ were removed.The Gujarat High court, after examining these provisions, ruled that the commission agent services cannot be stated to be a service used directly or indirectly in, or, in relation to manufacture or clearance of final product. Against the contention of the assessee it further held that the commission agent merely represents its principle for sale of goods and therefore the services are directly related to sale of goods than the sales promotion.
Though the term sales promotion’ is not defined in the Act or the Rules, the court has relied upon the dictionary meaning to hold that it means activities to promote and thereby boost the sale of goods in a more generic sense which caters to a larger population of consumers being targeted. These conditions are not entirely fulfilled while rendering commission agent services.
The court has further said, it did not find merit in the contention of the assessee that commission agent services were services relating to business. The court explained that for an activity to be related to business activity has to be analogous to the activities mentioned after the words such as’. As per the court commission agent services are not analogous to the services of accounting, auditing, financing, recruitment, etc which follows the words such as’ in the definition here.
It is worth mentioning here, the Circular No. 943/04/2012-Central Excise issued by Central Board of Excise and Customs on 29 April, 2012, which was issued post the introduction of amendments in the definition of input services’ by the Budget 2011. The circular went on to clarify that even after the removal of words activities relating to business, such as’ from the definition of the input services’ the CENVAT credit is admissible on the services of sale of dutiable goods on commission basis.As opposed to the rather narrow, technical reading followed by the court while deciding this matter, the circular, indicates a much broader intention of the lawmakers, to allow credit for such services.
The real objective behind envisaging the CENVAT credit scheme, especially in making available the cross credit between services and manufacturing would be to do away with the cascading effect of taxation. Service tax being a consumption and destination-based tax, should be borne by the consumer and should not result as an expense charged to business.
In keeping with the fact that post-negative list the service tax is payable on almost all the services, it is worthwhile to urge the government to revise and simplify the definition of input services’ under CENVAT credit rules to keep the cascading effect of service tax and excise duty at minimum. Post this judgment it seems all the more imperative to do so and, perhaps, the Budget 2013 would be the most suitable opportunity for the same.
Supported by Tajinder Singh The author is leader, indirect tax practice, PwC
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