Whether amount received from M/s Maruti Udyog Ltd. in the form of incentive/ commission on the sale and services of the vehicles falls under "BAS”?

PJ/Case Study/2012-13/

Prepared by:-CA Neetu Sukhwani & Kavita Thanvi

CASE STUDY

Introduction:

The assessee was served with a SCN proposing recovery of service tax along with interest thereon. The assessee had received incentive and commission income from M/s Maruti Udyog Ltd. against achieving sales targets/warranty commission/insurance commission etc which is reflected in the Balance Sheet. Therefore, service provided by the assessee appeared liable to service tax under the head “Business Auxiliary Service”. The assessee held that in order to levy the service tax in the category of BAS, there has to be agent-principal relationship and the commission should have been received for providing the specified services. In the instant case, the relationship between them and M/s Maruti Udyog Limited is on principal to principal basis and so no service tax is leviable. The adjudicating authority decided in favour of the assessee and dropped the proceedings initiated against them. Thereafter, revenue is in appeal against the said order in original passed by the adjudicating authority.

M/s L.M.J. Services Ltd. [OIA No. 16(RDN)ST/JPR-II/2013, dated 15.01.2013]

Relevant Legal Provisions:

Definition of Business Auxiliary Service:-
“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 by the client; or
[* * * *]
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or
        [Explanation — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;]
(v) production or processing of goods for, or on behalf of the client; or
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a   commission agent, but does not include any activity that amounts to “manufacture” of excisable goods.
[Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a) ”Commission Agent” means any person who acts on behalf of another person and causes sale or purchase of goods,or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person —
(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services;

Issue Involved:

The following issue was made before the Commissioner Appeals:-
Whether amount received from M/s Maruti Udyog Ltd. in the form of incentive/ commission on the sale and services of the vehicles falls under "BAS”?

Brief Facts:- The Present appeal has been filed by the Additional Commissioner of Central Excise Commissionerate Jaipur-II by aggrieving from Order-in-Original No. 84/ST/JP-II/2011/ADC dated 13.3.2011 passed by Additional Commissioner of Central Excise Jaipur-II in respect of M/s LMJ Services Ltd in compliance of Order in Review No. 48/2011 dated 7.9.2011 passed by Commissioner of Central Excise Jaipur-II. The assessee is a service provider under the category of “Authorised Service Station” under section 65(8) of the Finance Act, 1994 and paying service tax accordingly. The appellant was served with a SCN dated 27.9.2010 under proviso to Section 73 (1) for the recovery of amount of service tax Rs. 43,72,235/- chargeable on achieving sales target/warranty commission/insurance commission received during the period 2006-07 to 2008-09 from M/s Maruti Udyog Ltd. but did not pay service tax under the category of “Business Auxiliary Services” and also proposed penalties under sections 76, 77 and 78 of the Finance Act, 1994. The SCN was adjudicated by the impugned order that dropped the demand and penalties. Thus, the revenue filed this appeal.

Appellant’s Contention:

The appellant submit that the adjudicating authority, while adjudicating the case appears to have not examined the factual position of the issue involved in the case, as to drop the demand and non imposition of penalty under Section 76,77 and 78 of the Finance Act, 1994 does not appear to be legal and correct. These incentive and commission received by the assessee from M/s Maruti Udyog Ltd. are in the form of "Income" as reflected in assessee's balance sheet and not in the form of discount and the incentive and commission was paid to the assessee by M/s Maruti Udyog Ltd for promotion or marketing or sale of their goods subsequently, which falls under the category of "Business Auxiliary Service" and appears liable to service tax along with interest. Further they submit that the discount is generally deducted from the invoice value at the time of the sale itself, hence, the incentives paid subsequently in various names cannot be termed as discount. Thus, in view of the above, it is evident that the demand of Rs. 43,72,235/- was liable for confirmation along with interest and the assessee was liable for penal action under Section 76, 77 and 78 of the Finance Act, 1994, but the Additional Commissioner vide impugned order dated 13.06.2011 appears to have wrongly dropped the demand of Rs. 43,72,235/- and also failed, to impose penalties under Section 76, 77 and 78.

Respondent Assessee’s Contention:

The assessee submit that the Order-in-original no. 84/ST/JP-II/2011/Additional Commissioner, dated 13.06.2011 passed by the learned adjudicating authority is very correct and deserves to be upheld in view of existing legal provisions. Therefore the order in review no. 48/2011 dated 07.09.2011 passed by Commissioner (appeals), Jaipur-II is not sustainable and as such the impugned appeal filed by the department is liable to be quashed.
Further, in the impugned appeal it is alleged that the incentives and commission received by them are in form of income as reflected in the Balance Sheet and are not in form of discount. It is further contended in the impugned appeal that the commission was paid by M/s Maruti Udyog Limited for promotion or marketing or sale of their goods which fall under the category of “Business Auxiliary Services” and hence appear to be liable to service tax along with interest. In this regard, it is submitted that the service tax is leviable under the category of Business Auxiliary services (BAS), if the conditions laid down in the definition of “BAS” is satisfied. Thus, in order to levy the service tax in the category of BAS, there has to be agent-principal relationship and the commission should have been received for providing the specified services. In the instant case, the relationship between them and M/s Maruti Udyog Limited is on principal to principal basis. This fact is clarified by the dealership agreement entered into by them and also affirmed by the fact that the goods are sold by them after paying the appropriate sales tax. In absence of agent-principal relationship, it cannot be said that the amount received by them is a commission liable to service tax under the category of BAS. It has been held by various appellate authorities that the amounts received by the buyer from the seller of the goods as an incentive to purchase more vehicle cannot be termed as ‘commission’ which is taxable under the category of BAS. This has been decided in the following cases:-
·         Skylift Cargo Pvt. Ltd. Vs Commissioner of Service Tax, Chennai [2010 (17) STR 75 (Tri.-Chennai)]
·         R. Venkataramanan Vs Commissioner of Trichy [2009 (13) STR 187 (Tri.-Chennai)]
·         R.B. Agencies Vs. Commissioner of Central Excise, Calicut [2008 (11) STR 124 (Tri.-Bang)]
·         Pratap Singh & Sons Vs Commissioner of C.Ex., Mumbai-I [2007 (5) STR 389 (Tri.-Mumbai)]
·         H.K. Associates Vs Commissioner of Chandigarh [2009 (14) STR 543 (Tr.-Del.)]
In the above cases, it was held that the service tax cannot be levied on any amount received by the buyer from seller under the category of BAS. In the instant case also, the relationship between them and M/s Maruti Udyog Limited is of the buyer and seller and the amount in issue has been issued in the capacity of buyer. The fact of relationship between the two is confirmed by the fact that the goods have been sold by them in their own name after paying the appropriate sales tax thereupon. Therefore, the ratio of above decisions is extendable in their case and as such, in the light of above decisions, the amount received by them in the capacity of the buyer cannot be taxed under the category of BAS. Thus, the contention of the impugned appeal filed by the department is not sustainable and is liable to be set aside.
It is further submitted that for charging any amount to service tax under the head of BAS, it has to be received as commission against the services provided by a person as agent of the seller. As already discussed, the relation between both the parties is on principal to principal basis, they cannot be said as agent of M/s Maruti Udyog Limited. Further, they are merely engaged in purchase and sale of vehicles manufactured by M/s Maruti Udyog Ltd. and the amount received by them as alleged in the impugned appeal cannot be linked in any ways to the services provided by them. The said incentives are in nature of discounts given by M/s Maruti, thus, these cannot be taxed as a commission in the head of BAS. To substantiate their claim that these amounts are in nature of discounts, they submit that the demand in issue, involves the following amounts:-

Incentive on spare purchase from M/s Maruti Udyog Ltd. – This amount is the quantity based discount received on account of purchase of spare parts of various schemes related to purchase of spare parts. Thus, this is directly related to sales and cannot be linked to any service; therefore, demand under service tax law is not tenable.

Amount received against BSC– This is Balance Score card and is nothing but the overall performance of sales unit when compared to other dealers. This is directly related to sales and purchase of vehicles and is given by comparing with the transactions of all the dealers of Maruti Vehicles.

Amount received against DEMO CLAIM– This incentive is received against vehicle purchased from M/s Maruti and displayed as DEMO vehicle. It is in nature of compensation against financial interest and depreciation on vehicle retained by them as DEMO vehicle. Thus, the amount received as compensation cannot be charged to service tax.

Amount received as EXCHANGE CLAIM– This incentive is received against various EXCHANGE SCHEMES provided by M/s Maruti Udyog Ltd. and it is a sort of compensation against the losses borne by them against exchange of old vehicle. Thus, an amount received as compensation for exchange loss cannot be termed as service so as to levy the service tax.

Amount received against EXPENSES CLAIM– This is reimbursement against partial compensation of expenses incurred on various occasions like pre-launch meeting of customer for a new vehicle, conducting Gramin Mahotsav, Mega Event car loan mela, etc. Thus, amount received a compensation of expenses cannot be levied to service tax under the head of BAS as it does not fall under the definition of BAS as already reproduced here above.

Amount received against IFC SCHEME– This amount is a interest free credit support provided by M/s Maruti Udyog Ltd. for keeping certain stock of vehicles kept for a particular period. Thus, a short term compensation of interest cannot be said as services provided under the head of BAS and cannot be levied to service tax.

Amount received against INT: INTEREST– This is the compensation received from M/s Maruti Udyog Ltd. in the cases where the advance has been paid by them but there is delay in delivery of vehicle by it. As such, it is also a type of compensation which cannot be levied to service tax.

Amount received against ISL/RMK CLAIM– This incentive is received from M/s Maruti Udyog Ltd. as a compensation of a part of total discounts offered by them to the various institutional customers like LIC/Reliance/bank employee/govt. employee and also rural customers like farmers. Thus, this is also a form of discount which cannot be said as a service chargeable to service tax.
Amount received against JASP– This amount is also on account of partial compensation to advertisement expenses borne by them against sale promotion of vehicles. This cannot be levied to service tax under the category of BAS as the relationship of agent-principal is absent.

Amount received against “RETAIL”– This is the partial compensation against the discount offered to the retail customers against sale of particular model and also early birds sales scheme. Thus, this is simply a compensation for discount offered and the same cannot be subject to service tax under the category of BAS.

Amount received against WHOLESALE– This is the discount offered by M/s Maruti Udyog Ltd. against a particular target of PURCHASE of vehicle and also additional discount for consistent purchase of targeted vehicles for a particular period. Thus, this is nothing but a purchase discount and cannot be correlated to the service commission taxable under the category of BAS. As such, service tax cannot be levied on the same.

Amount received against WS SUPPORT (WORKSHOP SUPPORT) – This amount is a discount provided by M/s Maruti Udyog Ltd. on achieving a particular target of vehicles for repairs in the workshop. This discount is provided as more the vehicles in workshop more the sale of spare parts of Maruti. But since this is a quantitative discount, it cannot be said that the same is in nature of commission received from principal to be taxed under the category of BAS. Thus, no service tax is payable.
Amount received against Payout from DGS&D Sales– This amount is nothing but a partial compensation provided by M/s Maruti Udyog Ltd. against the rate difference for vehicles sold to various govt. departments like Customs, Police Department, ministries, Court, etc. Since this is also in nature of compensatory discount, service tax cannot be levied on the same.

Amount received against PAYOUT ON EXTENDED WARRANTY– This amount pertains to certain amount paid by M/s Maruti Udyog Ltd. against the extended warranty policy executed by it with the customers. Here no services are being provided by them as the agreement is between M/s Maruti Udyog Ltd. and the customers. Thus, even if any service tax is payable, the same is to be paid by M/s Maruti as they do not provide any service to the customers. Reliance is placed on the decision of POPULAR VEHICLES & SERVICES LTD. VS. COMMISSIONER OF C.EX., KOCHI [2010 (18) STR 493 (TRI.-BANG.)].

Amount received against PAYOUT FROM MARUTI INSURANCE – This amount is the part of commission paid by the insurance companies to M/s Maruti Udyog Ltd. against the insurance policies executed by them with the retail customers. A part of this amount is forwarded by M/s Maruti Udyog Ltd. to them. Here no services are provided by them and the agreement is also between the insurance company and M/s Maruti. Thus, if any service tax is to be paid, it is to be paid by M/s Maruti Udyog Ltd. Even if the same is demanded from them, it is available as Cenvat Credit to M/s Maruti Udyog Ltd. Thus, the situation is revenue neutral, hence the demand does not sustain as held in the case of M/s Popular Vehicles cited supra.
The above details of the amount in issue makes it ample clear that these demand has been erroneously made on the compensations and discounts which is not justified. Further as already clarified, the relationship of agent-principal is also absent. Therefore, the demand alleged to be confirmed by the impugned appeal filed by the department is not sustainable and is liable to be set aside.
Further, while filing the appeal it is alleged that the discounts are generally deducted from the invoice value at the time of sale itself. Hence the incentives paid subsequently in various names cannot be termed as discount. In this regard, they submit that the learned officer has erred restricted the meaning of word “discount” which has wide connotation. The meaning taken while filing the appeal is simply of the cash discount which implies the direct reduction in the purchase price of the goods. On the other hand, the cash discount is simply one type of discount. The term “discount” implies every such incentive given by the seller which will lead to increase in the quantitative purchases by the buyers and retaining the existing buyers. In current scenario, the word discount is not limited to merely “cash discount” and “trade discount”, these have wide meanings and include the “Buy one, get one free schemes”, gift coupons redeemable on subsequent purchases, etc. Thus, the meaning taken by the authority while filing the appeal has restricted the meaning of word “discount” which is not justified. Further, as clear from the discussion in the forgoing paras, the amounts received are not restricted to discounts only, a major part of these amounts includes the amount received as compensation. The compensations cannot be termed as commission by any stretch of imagination. Thus, by whatever name it is called, whether discount or compensation, it cannot be termed as commission to be taxed under the category of BAS. They reiterate that the impugned demand of appeal cannot sustain under the category of BAS due to following reasons:-
·         The relationship of agent-principal does not exists. It is on the principal to principal basis as already discussed in forgoing paras.
·         The amount received is not a commission, it is in nature of discounts and compensations. Unless it is a commission, it cannot be taxed under the category of BAS.
·         The compensations are not received against the services provided, these are allowed for the loss suffered on any account or against any cost or expense incurred by a party to contract.
·         A significant part of the appeal includes the demand on the quantitative discounts directly relatable to the purchases, there is no connection with the services. As such, the demand under service tax law is not sustainable.
Since the agent principal relationship does not exist, and the amount is not flowing in form of commission from the principal to agent against the services provided; the impugned appeal filed by the department is not sustainable and is liable to be quashed.
Further they submit that the contract entered into by them with M/s Maruti Udyog Ltd. is a contract entered into between the two parties, namely buyer and seller of Maruti Brand Motor vehicles. It is a case of the composite contracts where dominant nature test will be applicable in light of Apex court decision in case ofBharat Sanchar Nigam Limited v/s Union of India [2006(2) STR 161 (SC)] which says that “the test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract”. In the instant case, the substance of the contract is purchase and sale of Maruti Brand Motor Vehicles. As such, the sales tax would be levied, which is already been paid by them. As such, the service tax cannot be levied on the same. This has also been decided in the case of AIA Engineering Ltd. V/s Commissioner of Service Tax, Ahmedabad [2010 (19) STR 257 (Tri-Ahmedabad)]. In this case it is held that the profit on sale of goods cannot be termed as commission or discount to make the same liable to service tax when the excise duty has already been paid on the full value. The ratio of this decision is squarely applicable in the instant case and as such, the impugned appeal filed by the department is liable to be set aside.
They submit that the impugned appeal has been filed for getting confirmed a time barred demand. The extended period of limitation is invokable only if the assessee has willfully suppressed the facts with an intention to evade payment of Service tax. They submit that for invoking the extended period, the fraud, collusion or willful misstatement should be there. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Willful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This is also held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC- CX) - [1989 (40) E.L.T. 276 (S.C.)] that extended period of limitation can only be invoked in case of fraud, collusion, suppression or willful misstatement. In absence of these essential ingredients, extended period cannot be invoked. Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Similar decision is given in the following cases:-
Ø Pushpam Pharmaceuticals Company Vs. CCE, Mumbai reported in[ 2002-TIOL-235-SC- CX]
Ø M/s Idea Cellular Ltd Vs CCE, Rohtak [2009-TIOL-387-CESTAT-DEL]
In the above cases, it was held that mere inaction would not be a valid ground for invoking the extended period of limitation. Further, in the case of PADMINI PRODUCTS vs. CCEreported at 1989 (43) ELT 195 (Supreme Court) it was held that mere negligence or failure to pay duty on part of manufacturer is not sufficient to invoke the extended The extended period was held to be wrongly invoked in this case. All the above cited decisions makes it clear that for invoking the extended period of limitation, something positive is required to be proved. In the instant case, the amounts received by them were in nature of discounts and compensations related to purchase and sale of goods. Further, the agent-principal relationship also does not exist in the instant case so as to make the service tax payable under the category of “BAS”. Therefore, there is genuine belief that service tax is not payable on the amounts under issue. As such, it cannot be said that there was willful suppression of facts so as to invoke the extended period of limitation. Thus, the impugned appeal is not sustainable and is liable to be quashed.
It is further submitted that whether the incentive/discount will attract the service tax or not is a question of interpretation of law and in such situations, extended period of limitation and penalty is not attracted. This has been held in the following cases:-
·         P.T. Education & Training Services Ltd. Vs Commissioner of Central Excise, Jaipur [2009 (14) STR (Tri.-Del.)]
·         Singh Brothers Vs Commissioner of Cus. & C.Ex. [2009 (14) STR 552 (Tri.-Del.)]
Further, the fact that penalty is not imposable where the issue involved is interpretation of legal provisions has been upheld by hon’ble apex court in the following case:-
·                           Uniflex cables Ltd v/s CCE, Surat [2011-TIOL-85-SC-CX]
Thus, in case of issue being interpretational in nature, penalty is not imposable. In the instant case also, the issue “whether incentives/discounts are liable to service tax or not and whether they fall under the definition of BAS” is interpretational in nature, thus, extending the ratio of above decision, the extended period is not invokable and penalty is not imposable.
It is further submitted that the impugned appeal is alleging that the penalty is imposable in the instant case under section 76, 77 and 78 of the Finance Act, 1994. In this regard, it is submitted that no penalty can be imposed under Section 78 of the Finance Act, 1994 as there was no willful suppression or intention to evade payment of service tax on their part. The impugned appeal has not been able to clearly establish that any of these elements were in existence in their case. On the other hand, bona fides of them are already proved on the forgoing paras which proves that there was no malafide intention. It is submitted that when no such element was there, the penalty under Section 78 of the Act is not required to be imposed. Thus, the charge of willful misstatement or deliberate suppression has not been proved, as such, the penal provisions cannot be invoked in the light of the judgment given inCommissioner of Central Excise v/s ESS ESS Engineers [2011 (23) S.T.R. 3 (P & H)].

Reliance is also placed on the following cases:-
·         2009 (238) ELT 3 (SC) – Rajasthan Spinning & Weaving Mills
·         2009 (238) ELT 209 (P&H) – J. R. Fabrics
·         2009 (238) ELT 226 (Mad) – Thirumala Alloys Castings
·         2008 (228) ELT 31 (Del) – K. P. Pouches
Therefore, extending the ratio of above decisions, no penalty is imposable as the impugned appeal has failed to prove that there was willful suppression on their part.

It is also submitted that for imposing penalty, presence of mens rea is a mandatory requirement and in the absence of which imposition of penalty is unjustified, as enshrined by the Hon'ble Supreme Court in the case of Hindustan Steel Ltd v/s. State of Orissa - [1978 (2) ELT (J-159)] and number of subsequent judgments from various judicial fora based thereupon. It is submitted that none of the acts were backed up with any ulterior motive or mala fide intention to evade duty and therefore, imposition of penalty is incorrect and uncalled for based on settled position on the issue. It is further submitted that the Hon’ble Punjab & Haryana High Court, following the ratio of Apex Court judgment in Hindustan Steel Ltd. (supra), has held that mens-rea is a mandatory requirement for imposition of penalty, in support of which reliance is placed on the ratio of following judgments:
·         2010 (258) ELT 465 (SC) – Sanjiv Fabrics
·         2007 (207) ELT 27 (P &H) – UT Ltd
·         2007 (5) STR 251 (P & H) – Kamal Kapoor
In the above decisions, it was held that the penalty is imposable only if there was malafide intention on part of the assessee, else it will not sustain. In the instant case, no malafide intention is proved but they have proved their case that there was no ulterior motive. The service tax not paid simply on the grounds that the discounts and compensations are not liable to service tax under the category of BAS. Thus the contention of the impugned appeal is not sustainable and no penalty is imposable.

It is further submitted that the impugned appeal is alleging the simultaneous imposition of penalty under section 76 and 78 of the Finance Act, 1994. In this regard, it is submitted that the Section 76 and Section 78 are mutually exclusive provisions and penalty cannot be imposed simultaneously under the provisions of both the Sections. It is provided in section 78 of the Finance Act, 1994 that if penalty is payable under section 78 than penalty under section 76 will not leviable.
When there is clear cut provision in the Section itself then there is no dispute on the same. Hence, the contention of the impugned appeal is totally erroneous and liable to be set aside. The fact that both the penalties cannot be imposed simultaneously has been affirmed by various appellate authorities from time to time. It has been held by hon’ble Punjab & Haryana High Court in the case of Commissioner of Central Excise, Chandigarh-I Vs M/s Cool Tech Corporation, Chandigarh [2011-TIOL-23-HC-P&H-ST] that the penalty under section 76 & 78 are mutually exclusive and cannot be imposed simultaneously. Similar decision has been given in following cases:-
·   M/s Safe Test Enterprises v/s CCE, Salem [2010-TIOL-355-CESTAT-MAD]

·   M/s Anand Agencies v/s CCE (Service Tax), Coimbatore [2010-TIOL-364-CESTAT-MAD]

·   M/s AR AS PV PV Motors Erode (P) Ltd v/s CCE, Salem [2010-TIOL-1241-CESTAT-MAD]

·   COMMISSIONER OF C. EX., SALEM Versus PHOENIX MARKETING [2010 (19) S.T.R. 755 (Tri. - Chennai)]

·   JOE TRANSPORT Versus COMMISSIONER OF CENTRAL EXCISE, TRICHY [2010 (18) S.T.R. 646 (Tri. - Chennai)]

·   ANDHRA BANK Versus COMMISSIONER OF C. EX., HYDERABAD [2010 (18) S.T.R. 475 (Tri. - Bang.)]

It is therefore submitted that imposition of penalty under both sections i.e. Section 76 and Section 78, would make the proviso to section 78 as redundant. Thus, the contention of the impugned appeal is not sustainable and is liable to be set aside.
They also place reliance on the following decisions relevant to the issue pertaining their case as follows:
·         Pillai & Sons Motor Co vs Commr of C. Ex., Trichy [2009 (14) STR 844 (Tri.-Chennai)]
·         Behr India Ltd. vs Commr of C. Ex., Pune-III [2012 (25) STR 64 (Tri.-Mumbai)]

Reasoning of Commissioner (Appeals): -
The Commissioner (Appeals) held that in the light of the definitions of “Business Auxiliary Services” and “Commission Agent” the activity of the respondent can be examined who is a dealer of M/s MUL and also works as an authorised service station on behalf of the company for which he is paying service tax. The contention of the appellant is that the respondent did not pay service tax on the commission received from M/s MUL under the head of various incentives and commissions which have been shown in his books of accounts as "income". The appellant contended that this income was not shown as discount but as incentives and commission received from M/s MUL. Now the only point to be decided is that any amount which has been booked in books of account as income can be termed as incentive or commission and charged to service tax as "Business Auxiliary Service". It was observed that for a commission agent, three ingredients are essential; first there should be a principal, secondly an agent who works for or on behalf of the principal, and thirdly a client. But in this case the respondent is a dealer of the principal and it is settled law that a dealership of the manufacturer is a relationship between principal to principal, and that any incentive received from principal to principal basis cannot be termed as commission as has been held by Supreme Court in the case of Moped India Ltd. vs. CCE reported at 1996(1993) 23 ELT 8. As in this case, as per the agreement signed between the respondent and M/s MUL sale and purchase are effected, which resulted in income in the form of incentives or commission, by way of discount, and the same has been booked by the respondent as "income" in his book of accounts. Besides the respondent being a dealer of M/s MUL also purchased and sold goods of the company and did not provide any service to the customers on behalf of the principal. Furthermore, as per Section 65(19) "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; (ii,) or promotion or marketing of service provided by the them; but in this case there are no clients but there are customers to whom goods are sold. Basic difference between a client and a customer is that in case of clients no commodity or goods are bartered but only advice or services of professional are obtained, but in case of customers, there has to be an exchange of commodity or goods. Here in this case the relationship between a dealer to that of the company is that the dealer purchases the goods and sells to another person i.e. customers. Therefore the relationship of principal vis-a-vis client is missing in this case. Hence, merely booking an amount as "income" booked in the form of incentives or commission cannot be termed as an income earned on account of any service provided by the appellant. In view of the above, the order in original passed by the adjudicating authority is found to be correct and proper.

Decision: Department’s appeal rejected.

Conclusion: The essence of this case is that every commission or incentive received cannot be treated as commission taxable to service tax under the category of ‘BAS’ because as per the statutory definition given in BAS, commission received under principal agency agreement is only liable to service tax. As there was principal to principal relationship between the assessee and MUL, the incentive income was not liable to service tax under BAS.

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PJ/CASE STUDY/2012-13/44
23 February 2013

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PJ/CASE STUDY/2012-13/44
23 February 2013