A final good bye to ST on foreign commission ???

A final good bye to ST on foreign commission ???

CA.Pradeep Jain
CA. Vaibhav Bothra

There has always been a flurry of debate and arguments on the issue of levy of the service tax on foreign based commission agents. Government and manufacturers have always intended such service tax should not be cost to exporters. But   there was always twists in the same. It might be exemption by way of refund through notification 41/2007- ST or taking of credit on the service tax paid to commission agent. This budget has also brought a twist in this levy.
Exemption by way of refund:- The notification 41/2007-ST brought the exemption by way of refund of services tax paid on various services used by exporter. This was done to reduce the cost of exporter. Notification number 17/2008-ST also included the service of overseas commission agents in this refund list. But we all know the fate of these refund claims. The notification attached many conditions with the notification and pro-revenue officers were reluctant to give the refund to the exporters. Some cases were recently decided by tribunal in favour of exporters. The same was fate of service tax paid to overseas commission agents wherein number of conditions like copy of agreement, payment proof, mention of commission in shipping bill and commission restricted to 2% FOB value were attached.
Exemption by way of filing return:-The exporter were not getting the refund under the above notification. To overcome this position, the Central Government has introduced the notification 41/2012-ST. The Government suggested that there is no need to pay the service tax and then to take the refund from the department. Instead of the same, there should not be payment of service tax by the exporter. The notification 41/2012 was introduced for the same. The exporter starting availing the same.
Cenvat credit:- The exporter who were not getting exemption under notification 41/2007 from the department, started taking the credit of Cenvat credit of service tax paid on commission given to overseas agent. But the litigant department did not spare the exporter and gave the show cause notice that the credit is not admissible on the same. The matter travelled to Punjab and Haryana High Court and it has allowed the credit in case of Ambika overseas [2012(25)STR 348(P&H)]. But the Gujarat High Court in case of Cadila Healthcare Limited [2013(30)STR 3 (Guj)] has decided against the assessee saying that this commission is for sale and not for sales promotion. Hence it does not fall in the inclusive definition of "input services". The company went to Apex Court and matter is still pending. However in case of Astik Dyestuff (Pvt) Ltd. [ 2014(34)ELT 814] the Honourable Gujarat High Court did not referred the matter to larger bench and held that when there is conflict of views between High Courts then the decision of jurisdictional High Court is binding on the department. Following these latest judgements of Gujarat High Court, the audit parties asked the manufacturers to reverse the credit or face the music of litigation till the matter is finally decided by the Apex Court. The poor exporters reversed the credit. This remedy did not serve the purpose to them.
Amendment in place of provision services:-   Before the introduction of place of provision rules, the import and export of services were prevalent and any services provided by a foreign agent commission were treated as import of service and accordingly were taxed under reverse charge mechanism. Then in July 2012, the new Place Of Provision Of Service rules were bought in light and various rules were proposed to determine the place of provision of service and their taxability. Rule 9 of the rules stated that :
The place of provision of following services shall be the location of the service provider:-
(a)  Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;
(b)  Online information and database access or retrieval services;
(c)   Intermediary services;
(d)  Service consisting of hiring of means of transport, upto a period of one month.

“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) between two or more persons, but does not include a person who provides the main service on his account.;
Thus in light of the definition of intermediary service, the commission agents for services were included and the place of provision of such services were deemed to be the place of provider of service. Thus if a commission agent is foreign based i.e. he provides the service form a non taxable territory, the same shall not be taxable under service tax.
In the budget of 2014, commission agents for goods were included in the definition of intermediary and thus they were also exempted from the levy of service tax. But unfortunately the department never understood the provision and kept on raising demands on such transactions. In such scenario, the exporter had no other choice but to opt for filing the EXP-4 returns under notification 42/2012.
Rescinding of notification in this budget:-The Central government by this budget 2015, has rescinded the notification no. 42/2012-ST dated 29.6.2012 whereby exemption was given to commission agent located outside India who provides his service to an exporter. The reason behind this was given that this exemption notification has become redundant in view of the amendment made in the law in the previous budget, in the definition of ‘intermediary’ in the Place of Provision of service rules, making the place of provision of a service provided by such agents as outside the taxable territory.
This reason has been explained in the TRU letter issued in the budget 2015. This clarification not only provides a sigh of relief for the exporters but also removes the question of taking of the Cenvat of the tax paid under it. When no tax is payable, there arises no question of Cenvat availment on it. It can be hoped that this rescinding of exemption notification will be a boon for the exporters in an indirect way if not in a direct way.
Before parting:-This will happen only when the department officers should take this clarification in true spirit and does not simply say that when the exemption has been withdrawn then the service tax is to be paid on such commission. The Government and exporters are seeking ways to end this dispute but the revenue posses a habit of interpretating the law in its own way. So, let us wait and watch that whether it is good bye to litigation on this issue or a new beginning of another chain of litigation.

Comments

Ramlakhan Sharma on 16 March, 2015 wrote:

I am not getting any clarity on this matter. therefore, you are requested to clarify that S.T. to be paid for the month of March 2015 or not, whether place of provision is applicably for commission

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A final good bye to ST on foreign commission ???

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