2025 (6) TMI 1959 - AT - Central Excise

CENVAT Credit of service tax paid - input services - place of remaoval - sales commission paid to domestic marketing agents for the sale of finished goods during the period from 01.04.2011 to 31.12.2014 - Extended period of limitation - HELD THAT - From the terms of the agreement it is evident that the activities undertaken by the marketing agent involves the entire gamut of services of sale advertisement and sales promotion. Having ascertained the facts as to the activities of the marketing agent in order to appreciate the issue it is necessary to examine the definition of input service as it existed in the Cenvat Credit Rules 2004 (CCR) during the relevant period that is April 2011 to December 2014. The definition of input service in Rule 2(l) of the CCR came to be substituted by the Cenvat Credit First Amendment Rules 2011 notified vide notification No.3/2011 C.E.(NT) dated 01.03.2011 with effect from 01.04.2011 and stood further amended vide Notification No.28/2012 C.E.(NT) dated 20-6-2012 with effect from 01-07-2012. On a plain reading of the definition it is evident that advertisement or sales promotion service has been specifically included in the scope of input service as defined in Rule 2(l) of the CCR. That apart it is also noticed that the Central Board of Excise and Customs vide Circular No.943/4/2011-CX dated 29-04-2011 on the subject of clarification on issues relating to Cenvat Credit Rules 2004 has at sl.no.5 of the clarifications presented in tabular format in response to the issue stated as Is the credit of Business Auxiliary Service (BAS) on account of sales commission now disallowed after the deletion of expression activities related to business ? given the clarification that The 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. Reading the provisions harmoniously it is clarified that credit is admissible on the services of sale of dutiable goods on commission basis. - Thus it is evident that the contemporaneous exposition of the Department through its circular has clearly clarified that credit is admissible on the services of sale of dutiable goods on commission basis. It is a settled principle in law that the Department cannot argue against its own circular. Extended period of limitation - HELD THAT - There is a specific finding that the details of the transactions are recorded in the specified records - also it is held that the issue involved herein is interpretational in nature and thus the reliance placed by the appellant on the decision in International Merchandising Company LLC(Earlier known as International Merchandising Corporation) vs Commissioner Service Tax New Delhi 2022 (12) TMI 556 - SUPREME COURT to contend that extended period cannot be invoked is tenable in this context. The impugned order is set aside - appeal allowed.

The core legal questions considered in this judgment are:

1. Whether the service tax paid on sales commission paid to domestic marketing agents qualifies as an admissible input service under Rule 2(l) of the Cenvat Credit Rules, 2004 (CCR) during the period April 2011 to December 2014.

2. Whether the activities of the marketing agents constitute sales promotion or are merely post-removal sales activities, thereby affecting eligibility for cenvat credit.

3. The applicability and interpretation of the definition of "input service" in the CCR, 2004, particularly the inclusive clause relating to advertisement and sales promotion services.

4. The relevance and binding nature of departmental circulars and notifications clarifying the admissibility of cenvat credit on commission paid to sales agents.

5. The impact of conflicting judicial precedents on the issue, especially the decision of the Gujarat High Court in Cadila Healthcare Ltd. versus other High Court decisions and tribunal rulings.

6. Whether the extended period of limitation for demand of service tax credit could be invoked in the facts of the case.

Issue-wise Detailed Analysis:

1. Eligibility of Cenvat Credit on Service Tax Paid on Sales Commission to Marketing Agents

The relevant legal framework is Rule 2(l) of the CCR, 2004, which defines "input service." During the relevant period, the definition included services used by a manufacturer, directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal. The definition also contained an inclusive clause listing advertisement and sales promotion services as input services.

The Department's contention was that the commission paid to domestic marketing agents pertained to post-removal sales activities and thus did not qualify as input services. The Department relied on the definition of "place of removal" under Section 4(3)(c) of the Central Excise Act, 1944, and the decision of the Gujarat High Court in Cadila Healthcare Ltd., which denied credit on similar grounds.

The appellant argued that the marketing agents were engaged in procuring orders, sales promotion, advertising, and planning monthly sales targets, which directly influenced manufacturing and clearance activities. The appellant produced the marketing agency agreement dated 28.01.2009, which detailed the agents' responsibilities including sales promotion, advertisement, order procurement, and coordination with end-use industries.

The Court examined the agreement and found that the marketing agents' activities encompassed the entire gamut of sales promotion and advertisement services. The Court noted that the definition of input service explicitly included advertisement and sales promotion services, thereby covering the commission paid to such agents.

The Court also referred to Circular No. 943/4/2011-CX dated 29.04.2011 issued by the Central Board of Excise and Customs (CBEC), which clarified that credit is admissible on sales commission paid to commission agents when such services are used for clearance of final products up to the place of removal. The circular emphasized that sales promotion services are specifically allowed and often linked to actual sales.

The Court held that the Department cannot take a position contrary to its own circular, which was contemporaneous and authoritative. Applying the law to the facts, the Court concluded that the appellant was entitled to cenvat credit on the service tax paid on commission to marketing agents.

2. Interpretation of the Definition of Input Service and the Role of Sales Promotion

The Court analyzed the three-part structure of the definition of input service: (i) main part covering services used in relation to manufacture and clearance up to place of removal, (ii) inclusive clause expanding scope to specific services including advertisement and sales promotion, and (iii) exclusions.

The Court emphasized the inclusive clause, which explicitly mentions advertisement and sales promotion services, thus broadening the scope of input services beyond the main part. This interpretation was supported by the CBEC circular and subsequent amendments.

The Court distinguished the facts of the present case from the Cadila Healthcare Ltd. decision, noting that in Cadila, the commission agents were not involved in sales promotion activities, whereas here the marketing agents clearly performed sales promotion and advertising functions.

The Court also referred to the explanation inserted by Notification No. 02/2016-CE(NT) dated 03.02.2016, which clarified that sales promotion includes services by way of sale of dutiable goods on commission basis. This explanation was held to have retrospective effect, endorsing the circular and supporting the appellant's claim.

3. Treatment of Conflicting Judicial Precedents

The Court acknowledged the conflicting decisions between the Gujarat High Court in Cadila Healthcare Ltd. and other High Courts and tribunals such as the Punjab and Haryana High Court in Ambika Overseas, Madras High Court in Intimate Fashions India Pvt. Ltd., and various tribunal decisions including Essar Steel India Ltd., Mitsubishi Heavy Industries India Precision Tools Ltd., and others.

The Court relied on the principle that where legislative intent is to confer benefit, retrospective effect may be given to clarificatory amendments, citing Supreme Court decisions on purposive construction of statutes.

The Court found the appellant's reliance on these decisions and the CBEC circular well-founded and held that the appellant was entitled to credit. The Court noted that the facts of the present case aligned with the cases allowing credit where sales promotion activities were evident.

4. Invocation of Extended Period of Limitation

The Department invoked the extended period of limitation for demand of service tax credit, alleging suppression of facts by the appellant.

The Court found no material or positive finding of wilful suppression or misstatement of facts by the appellant. The appellant had disclosed the credit availed in statutory returns (ST3) and was subjected to audit without objection.

The Court held that the issue was interpretational in nature and relied on the Supreme Court decision in International Merchandising Company, LLC vs Commissioner of Service Tax, which held that extended period of limitation cannot be invoked in such cases.

The Court concluded that the demand was barred by limitation and the invocation of extended period was not justified.

Significant Holdings:

"The activities undertaken by the marketing agent involves the entire gamut of services of sale, advertisement and sales promotion."

"The definition of input service as defined in Rule 2(l) of the CCR, 2004 explicitly includes advertisement or sales promotion services in the inclusive clause, thereby covering commission paid to marketing agents engaged in such activities."

"The Department cannot argue against its own circular, Circular No. 943/4/2011-CX dated 29.04.2011, which clarifies that credit is admissible on services of sale of dutiable goods on commission basis."

"The explanation inserted by Notification No. 02/2016-CE(NT) dated 03.02.2016 is clarificatory and retrospective, endorsing the circular and extending the benefit of credit on commission paid to sales agents."

"The decision in Cadila Healthcare Ltd. is distinguishable on facts, as in that case commission agents were not involved in sales promotion activities, whereas in the present case, marketing agents were engaged in sales promotion and advertisement."

"Extended period of limitation cannot be invoked where the issue is interpretational and there is no allegation or finding of suppression or misstatement of facts; disclosure in statutory returns bars such invocation."

"The impugned order denying cenvat credit and imposing penalty is unsustainable on merits and is set aside."

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