2025 (6) TMI 685 - AT - Service Tax

Levy of service tax - Business Auxiliary Service - reverse charge mechanism - commission amount paid by the appellant to foreign buyers which is deducted in export invoices and shipping bills - invocation of extended period of limitation - HELD THAT - The payment of commission amount by the appellant is clearly established from the export invoices shipping bills and bank certificate of export and realisation (Form 1). On the other hand the appellant mentions that payment of commission to foreign buyers is a normal trade practice and unless they paid they won t get any export orders. During investigation the Director of the appellant in his statement dated 07.05.2014 clearly accepts that there was no written or verbal agreement and they have neither appointed any foreign commission agent nor paid any commission directly to them; that whatever commission is reflected in the export invoices shipping bills etc. is paid to the foreign buyer which cannot be equated to commission paid to the foreign commission agent. (Reply to question no.13) He goes on to say that since they have not received any service in relation to export goods they are not liable to any service tax. The issue is no more res-integra as it has been held in series of cases that service tax on commission amount paid to foreign buyer is not leviable to service tax. In a recent decision by this Tribunal in the case of Suryanarayanan Synthetics Private Limited Versus CCE ST -Surat-I 2024 (8) TMI 908 - CESTAT AHMEDABAD it has been held that when there is no contract/agreement between Indian exporter and foreign based service provider then the demand of service tax on the commission shown in the export invoices raised on the foreign buyers cannot be held sustainable even if there any arrangement of payment between the foreign buyer of the goods and so called commission agent in the foreign country. Time limitation - HELD THAT - The appellant have shown all the figures and data in the documents and 11%-12.5% commission in the invoice shipping bills and bank realization certificate therefore there is absolutely no suppression of facts on their part. Since undisputedly the amount of commission considered by the Revenue as against Business Auxiliary Service is related to export of goods the same in any case will not be taxable. For this reason also no malafide can be attributed to the appellant. Hence longer period of demand shall not be invoked. Conclusion - The demand of service tax on the commission deducted in the sale invoice of the appellant to their foreign buyer is not chargeable to service tax. The impugned order is set aside - appeal allowed.

The core legal questions considered in this case are:

1. Whether the commission amount paid by the appellant to foreign buyers, which is deducted in export invoices and shipping bills, constitutes a taxable service under the category of "Business Auxiliary Service" as defined under Section 65(105)(zzb) of the Finance Act, 1994, thereby attracting service tax on reverse charge basis.

2. Whether the appellant, who did not appoint any foreign commission agent directly and had no written or verbal contract with any foreign commission agent, is liable to pay service tax on the commission amount paid to foreign buyers who in turn paid foreign agents.

3. Whether the extended period of limitation for demanding service tax under the proviso to Section 73(1) of the Finance Act, 1994 is invocable in the present case.

4. Whether the commission amount reflected in invoices and shipping bills, and deducted from export proceeds, can be construed as a trade discount rather than a commission for taxable services.

Issue-wise Detailed Analysis:

1. Liability to Service Tax on Commission Amount under Business Auxiliary Service

The relevant legal framework is Section 65(105)(zzb) of the Finance Act, 1994, which defines "Business Auxiliary Service" and subjects such services to service tax. The department contended that the commission paid to foreign agents falls within this category and is liable to service tax on reverse charge.

The appellant argued that the commission amount was not paid to any foreign commission agent directly, but to the foreign buyer, and that the foreign buyer's agents were not appointed or known to them. The appellant further contended that no service was received from any foreign commission agent, thus no taxable event occurred.

The Court examined documentary evidence including export invoices, shipping bills, and bank certificates which showed that the commission amount was separately indicated and deducted from the gross invoice value to arrive at net export value. The Director of the appellant admitted in his statement that no foreign commission agent was appointed by the appellant and that the commission was a normal trade practice to secure export orders. There was no written or verbal contract with any foreign agent.

The Court noted that the presence of a service provider and service recipient with consideration is essential for a taxable event. Since the appellant had no direct contractual relationship with any foreign commission agent and no service was received from such an agent, the commission amount could not be considered as payment for a taxable service.

The Court relied on precedents including a recent decision by the Tribunal which held that when no contract or agreement exists between the Indian exporter and foreign service provider, the demand of service tax on commission shown in export invoices raised on foreign buyers cannot be sustained. The relevant excerpt states:

"Even though some service provider is involved there is no relationship between the appellant and any foreign based service provider as there is no direct transaction made by the appellant with any of the commission agent. It is also a fact that there is no contract between the appellant and the foreign based service provider even if any arrangement of payment is there between the buyer of the goods and so called commission agent in the foreign country. For this reason, the demand of service tax on the commission shown in the invoice raised to the buyer cannot be made."

Other cited precedents similarly held that commission amounts reflected as deductions in export invoices and shipping bills, where no third-party commission agent exists or is appointed by the exporter, constitute trade discounts rather than taxable services. The Court emphasized that a three-party relationship (exporter, buyer, and commission agent) is necessary for commission agent services, which was absent here.

2. Nature of Commission Amount: Commission or Trade Discount

The appellant contended that the commission deducted was effectively a trade discount extended to the foreign buyer, reflected clearly in export invoices and shipping bills. The department argued it was commission paid for services rendered by foreign commission agents to promote exports.

The Court analyzed invoices, shipping bills, and bank certificates showing commission rates generally less than 12.5%, deducted from gross export value. The appellant's own admission that the foreign buyer's agents never provided any service to the appellant and that the commission was a customary trade practice to secure orders supported the appellant's contention.

Precedents were cited where similar deductions were held to be trade discounts rather than commission for taxable services. For instance, in Laxmi Exports, the Tribunal observed that the deduction shown as commission was nothing but a discount given by the exporter to the foreign buyer, with no evidence of a commission agent or service provider. Similarly, in Duflon Industries, the Tribunal held that the purchaser of goods could not be considered a commission agent in the absence of a third-party service provider.

The Court found the department's contention that the commission was for business auxiliary services unsupported by evidence of any contractual relationship or service receipt by the appellant from foreign commission agents. Consequently, the commission amount was held to be a trade discount, not subject to service tax.

3. Invocability of Extended Period of Limitation

The department invoked the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994, alleging suppression of facts by the appellant. The appellant argued that the commission amount was fully disclosed in export invoices, shipping bills, and bank realization certificates, negating any suppression.

The Court agreed with the appellant, noting that all relevant figures were disclosed in official documents and that the commission amount related to export of goods, which is not taxable. The Court held that no malafide or suppression could be attributed to the appellant and therefore the extended period of limitation was not invocable. This was supported by precedent in Texyard International, where similar facts led to rejection of extended period demands.

4. Application of Law to Facts and Treatment of Competing Arguments

The Court considered the department's argument that payment of commission was for sales promotion services rendered by foreign agents and that the appellant's admission of paying commission to secure orders supported the tax demand. However, the Court found that without a direct contractual relationship or evidence of service receipt, such payment could not be taxed.

The appellant's contention that the commission was a trade discount and no third-party service provider existed was supported by documentary evidence and consistent with established case law. The Court emphasized the necessity of a service provider and service recipient relationship for service tax liability, which was absent here.

The Court also noted that the department failed to produce evidence of any foreign commission agent appointed by the appellant or any service rendered to the appellant by such agents. The appellant's disclosure of commission amounts in export documents further negated any claim of suppression.

Significant Holdings:

The Court established the core principle that for service tax liability under Business Auxiliary Service, a direct contractual relationship and receipt of service by the Indian exporter from a foreign commission agent is essential. Mere deduction of commission amounts in export invoices payable to foreign buyers, who may themselves pay commission to agents, does not create a taxable event.

The Court further held that commission amounts reflected as deductions in export invoices and shipping bills, absent any evidence of a third-party commission agent service provider appointed by the exporter, constitute trade discounts and are not subject to service tax.

On limitation, the Court concluded that where the commission amount is fully disclosed in export documentation and no taxable service exists, invocation of the extended period of limitation is unjustified.

Accordingly, the Court set aside the demand of service tax on the commission deducted in the export invoices and allowed the appeal with consequential relief to the appellant.

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