Cenvat credit of service tax paid on commission agents service

[Suriyanarayanan Iyer]

The excise commissionerates in Gujarat have been disallowing the cenvat credit of service tax paid on services rendered by commission agents for quite some time through adjudication proceedings. The interpretation in the decision of Honourable Gujarat High Court in Cadila Healthcare Ltd - 2013 (1) TMI 304 - GUJARAT HIGH COURT holding that service of commission agents does not fall under the expression ‘sales promotion’ occurring in the definition of ‘input service’ in the Cenvat Credit Rules, 2004 reinforced the view of field formations in Gujarat.  Numerous litigations are pending on this issue before various quasi-judicial authorities/ courts.  

Government of India has issued Notification no 02/2016-CE (NT) dated 03.02.2016. Through the said notification, Government has inserted an explanation after rule 2 (l) of the Cenvat Credit Rules, 2004 defining ‘input service’. The explanation reads as below: –

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

The notification dated 03.02.2016 specifically states that the said notification comes into force from 03.02.2016.  However, it is to be stated that the aforesaid explanation is declaratory and therefore retrospective in character. 
It is relevant to mention here that in COMMISSIONER OF CENTRAL EXCISE, LUDHIANA Versus AMBIKA OVERSEAS- 2011 (7) TMI 980 - PUNJAB & HARYANA HIGH COURT , the Punjab and Haryana High Court upheld the finding of the tribunal that the activity of commission agents procuring orders amounts to sales promotion. Contra, the Gujarat High Court held in Cadila Healthcare (cited supra) that the activity of commission agents procuring orders is not an activity falling within the expression’ sales promotion’.

It can be reasonably inferred that to resolve the divergence between the views of the two high courts, government amended the definition of ‘input service’ by inserting an explanation thereunder stating that the expression’ sales promotion’ includes services by way of sale of dutiable goods on commission basis.

The aforesaid amendment by way of inserting an explanation is nothing but a clarificatory and retrospective legislation. The following judicial precedents support the view for giving retrospective effect to the amendment dated 03.02.2016.

 6.1) In the case reported as GREATSHIP (INDIA) LTD. Versus COMMISSIONER OF SERVICE TAX, MUMBAI-I- 2015 (4) TMI 1006 - BOMBAY HIGH COURT , the Honourable High Court of Bombay stated as below.

‘19………….. It has been held that for determining the nature of the Act regard must be had to the substance rather than the form. It has been held that if a new Act is to explain an earlier Act, it would be without object unless construed retrospectively. It has been further held that an explanatory Act is generally passed to supply an omission or to clear up doubts as to meaning of previous Act.

20. In the case of Poddar Cement Ltd. & Ors. (cited supra), the Apex Court found that there was divergence of opinions with regard to the interpretation of definition of “owner of house property” as provided in Section 27. Some of the High Courts had held that owner is only a person who is owner by virtue of registered conveyance, whereas some of the High Courts held that definition of owner includes any person who has a right to enjoy the said property and income derived therefrom. Taking into consideration this background and the memorandum explaining the Finance Bill, 1987, it was held that the amendment was clarificatory in nature, so as to clarify the doubts as to who would come within the ambit of definition of “owner of house property”.

6.2) The presumption against retrospective operation is not applicable to declaratory statutes. Supreme Court in Central Bank of India v. Their Workmen, 1959 (5) TMI 39 - SUPREME COURT OF INDIA approved the explanation of CRAIES regarding declaratory statutes in the following manner [Statute Law, 7th Edn., p. 58] :- 

“For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word ‘declared’ as well as the word ‘enacted’.” 

6.3) In TATA UNISYS LTD. Versus COLLECTOR OF CUSTOMS, NEW DELHI- 1994 (9) TMI 166 - CEGAT, NEW DELHI , the 3rd member who formed part of the majority order held as below about a subsequent amendment to resolve differing judicial interpretations being clarificatory and therefore, retrospective.

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This notification, which merely inserts the enabling para with its Explanation in Notification 339/85 when read with the Public Notice 10/1993 of the Customs House which is prior to the Notification, clearly brings out the fact that the insertion of para 3C was clarificatory in order to make explicit, the intention already implicit in the earlier notification that the exemption shall apply to goods imported for the development of software for exports for providing consultancy services on site abroad. The introduction of a deemed export concept to cover consultancy services on site abroad has been apparently brought in so as to align the exemption notification to the export policy in respect of computer software development which had laid down that computers software exports will include besides physical export on magnetic media or on paper also export through satellite data link and consultancy delivered at the location of foreign client abroad by Indian Computer expertise. No doubt, arguments could not be made before the Referring Bench based on this material for obvious reason that these were not then available. However, having regard to the nature of this material, being documents revealing the departmental authorities’ own understanding of the scope of exemption under the notification, there will be no infirmity in taking these into consideration at this stage especially when it is found that the amending notification, mentioned above, is in the nature of clarificatory notification. The intention behind the deemed concept introduced is apparently to the extent only of making the fees received by such units for consultancy services on site abroad to be exports only for the purpose of fulfilment of export obligation under the notification. This is, therefore, a situation where, in order to interpret the scope of one notification, the latter notification, which is in line with and confirms the understanding of the authorities as reflected in the Public Notice, can reasonably be looked into. 

A proviso added with effect from 01.04.1988 to Section 43B inserted in the Income-Tax Act, 1961 with effect from 01.04.1984 came up for consideration in Allied Motors (P) Ltd. v. Commissioner of Income-tax, 1997 (3) TMI 9 - SUPREME Court and it was given retrospective effect from the date of inception of the section. The reason given was that the proviso was added to remedy unintended consequences and supply an obvious omission so that the section may be given a reasonable interpretation and that in fact the amendment to insert the proviso would not serve its object unless it is construed as retrospective. In Commissioner of Income-tax, Bombay v. Podar Cement Pvt. Ltd., 1997 (5) TMI 2 - SUPREME Court , the Supreme Court held that amendments introduced by the Finance Act, 1987 in so far as they related to Section 27(iii), (iiia) and (iiib) which redefined the expression ‘owner of house property’, in respect of which there was a sharp divergence of opinion amongst the High Courts, was clarificatory and declaratory in nature and consequently retrospective.

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The CBEC Circular No. 943/4/2011-CX., dated 29-4-2011 stated that ‘definition of input services allows all credit on services used for clearance of final products upto the place of removal. Moreover, activity of sale promotion is specifically allowed and on many occasions the remuneration for same is linked to actual sale.’ Thus CBEC’s view was always in favour of allowing the credit to the manufacturers who avail the services of commission agents.  
The difference in views between the Honourable   Punjab and Haryana High Court and Honourable Gujarat High Court about the phrase ‘sales promotion’ occurring in the definition of ‘inputs service’ in rule 2(l) of the Cenvat Credit Rules, 2004 leading to the insertion of explanation by notification no 2/2016-CE (NT) has to be considered in the light of the interpretation of amendments to law by judicial forums cited above. So considered, there cannot be any doubt about the explanation inserted by the notification no 2/2016-CE (NT) being only clarificatory and therefore retrospective in effect.