Sales Commission Vs Sales Promition - Eligibility?

[Madhukar N Hiregange]

Eligibility of input service credit – Sales promotion Vs Sales Commission

The cenvat credit scheme is a beneficent legislation and allows for credits used for manufacture or service. Sales commission is paid for the following reasons: market creation/development, advertisement, sales promotion activities, identifying potential customers, negotiating with them, sourcing / funneling of orders, increasing sales etc.

Cenvat Credit Rules prior to 1.4.11 specifically allowed for marketing and sale promotion as eligible. In addition the activities relating to business was also allowed. Post April 2011 the activities relating to business was dropped however the specific activity of sales promotion was continued to be included in the definition. Several decisions including COMMISSIONER OF CENTRAL EXCISE, LUDHIANA Versus AMBIKA OVERSEAS [ 2011 (7) TMI 980 - PUNJAB & HARYANA HIGH COURT ] affirmed this position. Further the CBEC Circular 943/4/2011 dt 29.4.11 issued in Sl.No 5 clarifies that inspite of the “activities relating to business” being omitted as far as dutiable goods are concerned as the same is specifically set out and provisions to be read harmoniously, the eligibility remains clear. Notification 18/09 of 7.7.09  followed by Not. 42/12 of 29.6.12 allow commission upto 10 percent of FOB value of exports to be paid and not subjected to service tax under reverse charge and the balance eligible for refund.

 The dispute got some support in the decision of COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD – II Versus M/s CADILA HEALTHCARE LTD. [ 2013 (1) TMI 304 - GUJARAT HIGH COURT] wherein this position was questioned. It unsettled to some extent the settled position of law that the sales commission was clearly eligible as an activity preceding sales.

The decision of ABB LTD. Versus COMMISSIONER OF C. EX. & ST., BANGALORE [2009 (5) TMI 48 - CESTAT, BANGALORE] of the larger bench approved by the Karnataka High Court observes that the term including cannot be read restrictively.. rather would expand. The latest decisions in Parars Motors manufacturing Co  as well as Sekeria Busan Sugar Factory both of 2014 also confirm the eligibility of sales commission.

However now a days at times the audit officers [ who have taken up the position of tax collectors] seek to deny the same alleging that it is a post removal expense relying on this judgment. However it is important to note that in this decision no evidence was led that any sales promotion activity was involved.  It appears now that the commission on selling goods is in a slightly better position than that for services as far as eligibility is concerned.

Therefore to avoid disputes in this regard the scope of the activities for which sales commission is paid is to be made clear in the agreements focusing on the fact that many activities are for long term – advertisement, road shows, business exhibitions, sponsorships … as well as shorter term measures of identifying customers, negotiating with them, increasing sales by collecting orders etc. The nexus and pre removal activities now require to be explicit instead of implicit to avoid demands in this regard.

Hope the Commissioners/ CAG is appraised of this trigger happy narrow interpretation of the audit parties. Maybe who known as part of the incoming reforms come July 2014- audit itself maybe removed as it hardly contributes any significant amount to the  exchequer but certainly is a cause of concern for the tax compliant while the tax evaders who have not got registered laugh their way to the bank, patting themselves for being outside the net.