TAXABILITY OF COMMISSION FROM AUCTION OF FLOWERS

[Dr. Sanjiv Agarwal]

In one of the advance rulings, the issue of taxability of commission earned on auction of flowers was examined by Authority of Advance Ruling (AAR) and it was held to be exempt. However, on appeal by tax department, advance ruling was reversed and it was held that such commission income is not exempt and shall be a taxable supply.

The applicant was a company and worked as an auction house where the growers of the flowers bring the flowers to auction them and the buyers come and buy the produce. On successful auction, the applicant used to issue invoice on behalf of the growers and collect the sale price from the buyers and pays the consideration to the growers. Hence the applicant was acting as a ‘Selling Commission Agent of the  growers’. At the same time, it was also collecting commission for the services rendered to the buyer in providing the facilities etc. in connection with the flower auction.

The AAR also noted the Circular No. 57/31/2018-GST dated 04th September 2018 issued by CBIC. The Circular examines the scope of Principal-Agent relationship in the context of Schedule I of the CGST Act.

The Authority for Advance Ruling, vide Order dated 26.09.2019 ruled that the commission received by the applicant for facilitating the purchase and sale of cut flowers is covered under clause (g) of the Entry No. 54 of the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017 and hence exempted from CGST. Similarly, the services are covered under clause (g) of Entry No.54 of the Notification (12/2017) No. FD 48 CSL 2017 dated 29.06.2017 and hence, are exempted from tax under the Karnataka Goods and Services Tax Act, 2017. [IN RE: M/S. INTERNATIONAL FLOWER AUCTION BANGALORE LTD. - 2019 (10) TMI 1133 - AUTHORITY FOR ADVANCE RULING, KARNATAKA;].

Being aggrieved, Revenue Department filed an appeal u/s 101 of the CGST Act, 2017 before the AAAR, Karnataka on the grounds as enumerated in para 8 of appellate Order.

It was contended that the service rendered by the respondent does not fit into any of the categories specified in S.No. 54 of the Notification No 12/2017 CT(R) dt 28.06.2017, because the respondent company does not cultivate plants; does not supply farm labour; does not carry out the processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations; does not rent or lease agro machinery or land; does not offer services of loading, unloading, storage, etc.; does not offer agricultural extension services; and is not an Agricultural Produce Marketing Committee or Board. The Appellant also contended that the respondent company is not a primary trader or a wholesaler.

Further, the activity done by the respondent for sale and purchase of flowers including flower verification, cold room service and software service to the growers and also provision of Wi-fi software and flower display etc. for marketing in both domestic and international market does not constitute dealing of agriculture produce in primary market. In terms of Section 2(5) of the CGST Act, 2017, an agent means a person, including a factor, broker, Commission Agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

It was argued further that assessee does not act on behalf of another person for auctioning the goods, but is acting only as a mediator between the buyer and seller of the products and for offering these facilities a percentage of the sale value is received as Auction fees. Therefore, the services provided by them falls under the category of Auctioneer Service and they do not get covered under Commission Agent.

It was submitted that since the respondent company is not a Commission agent, he is not eligible for the exemption as per 54 (g) of Notification No. 12/2017 - Central Tax (Rate) dated 28.06.2017. Further, it has been argued that, as the basic character of the service provided by the respondent is “Auctioneer Service”, the services provided by them gets more appropriately covered under SAC 9961(Entry No. 5 of Notification No.11/2017 CT (Rate) dated 28.06.2017, as services of whole sale auctioning houses and hence liable to pay tax.

The AAAR observed that going by the nature of activities performed by IFAB, they do not merely cause the sale of goods on behalf of their clients, the flower growers/sellers. They undertake the complete process of auction of the flowers and upon completion of the auction, the sales consideration is received not by the sellers but by IFAB. Thereafter, IFAB will make payments to the growers for the flowers supplied to them after deduction of the commission. The payments are made to the growers/sellers on the day following the end of the calendar week. IFAB themselves issue delivery orders which enables the buyers to take delivery of the flowers from the auction house. They do the billing work and collection of sale proceeds on behalf of their clients. IFAB also invests a great deal in the system of sale through the clock. They offer dealers sophisticated facilities for online buying - remote buying. With the help of such services, IFAB is able to attract an increasing number of international buyers to the auction.

It therefore, appeared to reason that this wide gamut of activities of IF AB would go far beyond the scope of a commission agent since the services rendered by them are not restricted only to sale of goods on behalf of the sellers for consideration, which is the main edifice of the definition of commission agent. We are of the view that the activities of the respondent company - IFAB are more appropriately classifiable as ‘Auctioneer service’.

The AAAR, on exemption under Notification 12/2017-CT (Rate) noted that the Notification, as it is worded, grants exemption to the services provided by a commission agent. Even if the absence of a definition of “commission agent” in the notification or in the GST statute causes some ambiguity, the notification’s applicability to a particular class of service providers is to be arrived at by a strict construction and the benefit must go to the State. Viewed from this principle, it is clear that the respondent company - IFAB is not eligible for the exemption under entry 54(g) of Notification No. 12/2017 CT (R).

The AAAR therefore, set aside the impugned advance ruling and held that the commission earned from auctioning of flowers is not eligible for exemption under Entry No. 54(g) of Notification No. 12/2017 - Central Tax (Rate) dated 28.06.2017 and Entry No. 54(g) of Notification (12/2017) FD 48 CSL 2017 dated 29.06.2017. [IN RE: INTERNATIONAL FLOWER AUCTION BANGALORE LTD. - 2020 (3) TMI 72 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA].