by Miss Ruhi Jhota

Sales Commission expense is directly proportional to total sales of any business. Companies generally hire sales people to make sales of its goods or services,in exchange of commission as a consideration. This expense they take into account as ‘business auxiliary service’ liable to charge of Service Tax. Therefore, thisraises the cost of goods or services, when the credit of the Service Tax is not allowed.

With the amendment of definition of ‘Input Services’ as given in Section 2(l) of the Cenvat Credit Rules, 2002 vide Notification No. 3/2011 CE (NT) dated 01.03.2011 removing the words ‘activities relating to business, such as’ w.e.f. 01.03.2011. This led to confusion as to whether credit of Business Auxiliary Service on account of Sales Commission will be disallowed after such deletion.

Thereafter said issue was resolved vide point no. 5 of the Circular No. 943/4/2011-CX., dated 29.04.2011, which specifically mentioned that activity of sales promotion will be allowed. The Circular has held that, ‘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.’

But then Gujarat High Court vide its order dated 07.11.2012, took a contrary view that there was a distinction between sales promotion and sales commission. A commission agent is directly concerned with sales rather than sales promotion and thus does not fall within the purview of the main or inclusive part of the definition of ‘Input Service’. Therefore, the assessee was denied Cenvat Credit in respect of the Service Tax paid on commission paid.

The High Court also held that though the business activities mentioned in the definition are not exhaustive, the service rendered by the commission agents is not analogous to the activities mentioned in the definition and would not fall within the ambit of the expression “activities relating to business”. Thus the Cenvat Credit on Sales Commission was disallowed under the judgement of Hon’ble High Court of Gujarat in the case of CCEx, Ahmedabad Vs. Cadila Healthcare Ltd (2013 (30) S.T.R. 3 (Guj.)). This resulted in disparity leading to disallowance of Cenvat on Sales Commission to all the assessees in the State of Gujarat, where it was allowed toother similarly placed assessees in all other states.

Recently the Government took anaffirmativestand to bring clarification to the difference of opinion existing between the intention of the statute and the Department interpretation, by inserting an Explanation to the definition of Input Service under Section 2 (l) of Cenvat Credit Rules, 2004 vide Notification No. 02/2016-Central Excise (N.T.) dated 03.02.2016. The said Explanation reads as ‘For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.’ This has led to transparency in the intention of the Cenvat Credit Rules, 2004resulting into eligibility of Cenvat credit which will be allowed on the sales commission service, which is to be treated as input service.

As the recent Notification has shed light on the real intention of the Government from the very beginning, Board should now abide by the same by issuing instructions to allow the benefit of the Cenvat for the disputes relating to the past periods as well. This will lead to true synchronization of the law and the trade,leadingtowards better harmony and growth.

Contributed by Miss Ruhi Jhota:

Ruhi is a lawyer and practicing in Indirect Taxes. She possesses strong research background which is required to present the complexity of taxation in terms that a layman can understand.

Contact for queries: ruhijhota@gmail.com