2016 (12) TMI 230 - AT - Service Tax

Import of services - reverse charge mechanism - Business Auxiliary Service - amount paid to their purchaser situated abroad as deduction / commission on the sale of goods - Held that - There is nothing on record to show that the said DEL was appointed as commission agent for the sale of the goods of the appellant to third parties. It may be that DEL might purchase the goods from the appellant and sells the same in Europe. The reliance placed by learned D.R. and adjudicating authority on the clause of agreement that DEL shall increase the market share of appellant s products to conclude that DEL was a commission agent seems to be erratic reading of the clauses of agreement and this itself does not amount DEL has been appointed as commission agent . The amount indicated on the invoice and recorded in the accounts as commission in our view will not attract tax under reverse charge mechanism. We also find strong force in the contentions raised by learned Counsel that in order to tax this account as a commission there has to be necessarily three parties seller purchaser and a person who negotiates such transaction. From the records it is very clear that DEL had not negotiated purchase or sale on behalf of appellant or their customers; to our mind the deduction/commission is nothing but trade discount. In view of the factual position as ascertained from the records we hold that the impugned orders demanding service tax under reverse charge mechanism from appellant are unsustainable and liable to be set aside. Appeal allowed - decided in favor of appellant-assessee.

Summary

The core legal question considered by the Tribunal was whether the appellant was liable to pay service tax under the category of "Business Auxiliary Service" on amounts paid to a foreign purchaser as deduction or commission on the sale of goods. Specifically, the issue was whether the payment to the foreign entity constituted commission subject to service tax under the reverse charge mechanism or was merely a trade discount on direct sales.

The Tribunal examined the nature of the transaction between the appellant and the foreign entity, the terms of the agreement, and the characterization of the amounts recorded as commission or deduction. The key legal framework involved the definition of "Business Auxiliary Service" under the Finance Act, 1994, the applicability of service tax under reverse charge mechanism post 08.04.2006, and relevant notifications excluding certain commissions from service tax.

Regarding the issue of liability to service tax on the amounts paid, the Tribunal analyzed whether the foreign entity acted as a commission agent or was a direct purchaser. The appellant's agreement with the foreign entity explicitly described the foreign entity as a purchaser of goods, with a flat deduction or commission of 8% on the invoice value. The invoices were raised directly in the name of the foreign purchaser, and the deduction labeled as commission was reflected as a reduction in the invoice value.

The Tribunal noted that for a payment to be treated as commission liable to service tax under "Business Auxiliary Service," there must be three distinct parties involved: a seller, a buyer, and an intermediary or commission agent who negotiates or facilitates the sale. In the present case, the foreign entity was the buyer, not an intermediary. There was no evidence that the foreign entity negotiated sales on behalf of the appellant or third parties. The clause in the agreement about increasing market share was insufficient to establish the foreign entity as a commission agent.

The Tribunal also considered the appellant's argument that the so-called commission was in fact a trade discount, and that the labeling as commission was an error. This was supported by the fact that the invoices were issued directly to the foreign purchaser and that the foreign entity was not acting as an agent but as a buyer. The Tribunal found this interpretation consistent with the factual matrix and commercial realities.

Further, the appellant relied on Notification No. 8/09-ST dated 07.07.2009, which excludes commission paid up to 1% of FOB value from service tax liability. Although the commission in this case was 8%, the Tribunal's primary finding was that the amount was not commission liable to service tax at all, but rather a discount on sale.

The Department's argument that the amounts were commission liable to service tax under reverse charge mechanism was rejected. The Tribunal found that the reliance on the agreement clause about market share enhancement was an erroneous interpretation and did not convert the foreign purchaser into a commission agent. The Department's reliance on the recording of the amount as commission in the appellant's accounts was insufficient to override the contractual and factual evidence.

In conclusion, the Tribunal held that the payment to the foreign purchaser was not commission within the meaning of "Business Auxiliary Service" and therefore not liable to service tax under reverse charge. The impugned orders demanding service tax, interest, and penalties were set aside, and the appeals were allowed.

Significant holdings include the clear articulation that for service tax under "Business Auxiliary Service" to apply, there must be three parties: seller, buyer, and commission agent. Mere deductions labeled as commission in a direct sale transaction do not attract service tax. The Tribunal emphasized that the foreign purchaser cannot be construed as a commission agent absent evidence of negotiation or agency. The Tribunal stated: "The purchaser of the goods cannot be considered as a 'commission agent' as the deduction/commission is for the goods sold. There is nothing on record to show that the said foreign entity was appointed as 'commission agent' for the sale of the goods of the appellant to third parties."

This judgment establishes the principle that the substance of the transaction and the role of the parties must be examined rather than the nomenclature used in invoices or accounts. It confirms that service tax under reverse charge on "Business Auxiliary Service" cannot be imposed on direct sales with trade discounts merely labeled as commission. The decision clarifies the scope of commission agents under the service tax regime and protects taxpayers from misclassification of commercial arrangements.