GUEST COLUMN

 

Eligibility of CENVAT Credit on “Sales Commission” - Welcome step vide

Notification No. 02/2016-CX (N.T.), dated 3^rd February, 2016

 

By Amit Laddha

Associate, Economic Laws Practice

 

The scheme of CENVAT credit is a beneficial piece of legislation wherein the manufacturer or service provider can avail the credit of tax borne on the inputs, capital goods and input services. The scheme is always under focus either due to its legislative changes or because of its judicial interpretations. The present article focuses on the eligibility of CENVAT credit on “Sales Commission” and the latest Notification being introduced whereby the dispute with respect to its eligibility is put to an end.

 

Background

Before the introduction of Notification No.3/2011-CE(NT) dated 01.03.2011, w.e.f. 01.04.2011, the CENVAT credit was allowed on a variety of services under the term “activities relating to business”. However, with the introduction of Notification No.3/2011-CE (supra), the term “activities relating to business” was removed and eligibility of CENVAT Credit was narrowed down with the services which are used directly or indirectly in or in relation to the manufacture of final products or the services which fall under the “inclusion clause” of the definition of input services provided under Clause 2(i) of the CENVAT Credit Rules, 2004.

 

Due to deletion of the term “activities relating to business”, disputes arose as to eligibility of CENVAT credit on “Sales Commission” service and as to whether “Sales Commission” service can be covered under “Sales Promotion” service.

 

The Board vide Circular No. 943/04-2011-CX dated 29.04.2011 (F.No. 354/73/2011/TRU) clarified that the commission paid to Commission Agent is eligible for CENVAT Credit if the same is used in relation to the manufacture of final products. The relevant paragraph from the Circular dated 29.04.2011 is as follows:

 

 

Judicial Interpretations:

The Hon’ble Punjab & Haryana High Court in the case of CCE, Ludhiana Vs. Ambika Overseas reported in 2011-VIL-73-P&H-ST, allowed the CENVAT Credit on Commission agent service and held that the services provided by Overseas Commission Agents of canvassing and procuring of orders were in relation to ‘sales promotion’ and would fall under sales promotion activities.

 

In the case of CCE, Vapi V/s Hindalco Industries Limited reported in 2011-VIL-37-CESTAT-AHM-ST, it was inter alia held that the service of commission agent is relatable to the business activity and would help in increasing sales and render service in relation to business activities and therefore the benefit of credit of service tax paid on services rendered by the agents would be admissible.

 

Further, in the case of Bhuruka Gases Ltd. Vs. CCE, Bangalore-I, reported in 2014-VIL-429-CESTAT-BLR-ST, while allowing the CENVAT credit on Sales Commission service, it was held that agents helping in selling of product, canvassing business, making their network available for expanding business and procuring of orders and can be treated as sales promotion.

 

However, on the other hand, the Hon’ble Gujarat High Court has taken a divergent view in the case of CCE, Ahmedabad-II Vs. Cadila Healthcare Ltd. reported in 2012-VIL-119-GUJ-ST, wherein the Hon’ble High Court questioned the eligibility of CENVAT Credit on Sales Commission and denied the credit to such asseessee. However, it should be noted that Hon’ble High Court has also observed that there was nothing on record to show that agents of the said assessee were actually involved in any activities of sales promotion.

 

 Due to judgement of Hon’ble Gujarat High Court in the case of Cadila Healthcare (supra), the assessee within the jurisdiction of Gujarat were in dilemma of non availment of CENVAT credit on Sales Commission service whereas assessee beyond the state of Gujarat were availing such credit on the basis of judgement passed in the case of Ambika Overseas (supra).

 

Introduction of Notification No.02/2016-CX (NT) dated 3^rd February, 2016 

The Board vide Notification No.02/2016-CX (supra) has confirmed their circular dated 29.04.2011 and resolved the different views of the High Court’s. The Notification amended the CENVAT Credit Rules, 2004 and inserted the following explanation in rule 2, in clause (l), after sub-clause (C), which is as follows:-

 

"Explanation- For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.".

 

The above Notification has now clarified the position on the eligibility of CENVAT credit on “sales commission” service and paves a clear path for all the assessee irrespective of the state in which they manufacture.

 

Further, the recent decision passed in the case of Essar Steel Pvt. Ltd. Vs. CCE, Surat-I reported in 2016-VIL-155-CESTAT-AHM-ST, it was held that Explanation inserted in Rule 2(l) by Notification No.2/2016 (supra) is declaratory in nature and effective retrospectively. It was held that the expressions in the Explanation as inserted by Notification No.2/2016-CE (supra), make it clear that it is for explaining the meaning of clause 'sales promotion' in the context of Rule 2(l) of the Rules, 2004. It is to provide an additional support to the dominant object of the word 'sales promotion' in Rule 2(l) in order to make it meaningful and purposeful. The language of the Explanation is consistent with Board Circular to the benefit of the Assessee and it would be effective retrospectively. 

 

Conclusion

The above Notification No.2/2016 (supra) is a welcome step towards settling the different views of High Court and removing the obstacles on availment of CENVAT Credit on “Sales Commission” service and equalising the assessee of different states by putting them on a common platform. The Notification No.2/2016 (supra) also reflects the Government’s commitment in reducing the litigation by putting an end to the unsettled issues.

 

Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose, it doesn’t constitute professional advice or recommendation.