2017 (9) TMI 233 - AT - Service Tax

Tribunal affirms service tax on additional commission as income for Business Auxiliary Services.

The Tribunal upheld the service tax demand on the additional commission received by the appellant, considering it as income for providing Business ... Business Auxiliary Services - conditional discount - commission disguised as trade discount - provision of Reseller Sell-Through and Inventory Reports - book-adjustment - principal-to-principal relationship versus agency - definition of Business Auxiliary Services under Section 65(19) of the Finance Act, 1994Business Auxiliary Services - conditional discount - provision of Reseller Sell-Through and Inventory Reports - commission disguised as trade discount - book-adjustment - Whether the additional 1% discount paid by HP to the appellant for furnishing weekly Reseller Sell-Through and Inventory Reports is a non-trade, taxable consideration falling within Business Auxiliary Services or a normal trade discount not liable to service tax. - HELD THAT: - The purchase agreement between the parties (clause B-7 of the Volume Distributor Program Terms) specifically provides that the 1% discount is payable for providing Reseller Sell-Through and Inventory Reports in a format specified by HP on a weekly basis. This makes the 1% amount a conditional discount tied to the performance of specified reporting services rather than an ordinary trade discount. The reports supplied by the appellant constitute inputs that assist HP in formulating marketing, sales and production strategies; such activities are in relation to promotion, marketing or sale of goods of the client. The definition of Business Auxiliary Services under Section 65(19) includes services in relation to promotion or marketing of goods and services incidental or auxiliary thereto, expressly listing inventory management and related information services. The Tribunal concurs with the adjudicating authority that furnishing the specified reports is a service incidental to promotion/marketing of HP's goods and that the 1% amount, even if effected by book-adjustment, represents consideration for those services and not a mere trade discount. Accordingly the amount falls within Business Auxiliary Services and is taxable as service income. [Paras 6]The 1% additional discount is held to be consideration for Business Auxiliary Services rendered to HP and is taxable; the impugned demand is sustained and the appeal is dismissed.Principal-to-principal relationship versus agency - Business Auxiliary Services - Whether the appellant's claim of a principal-to-principal trading relationship and denial of any agency or promotional service alters the taxability of the 1% amount. - HELD THAT: - While the appellant contended that the relationship with HP was principal-to-principal and that the appellant merely traded in goods without performing promotional or marketing services, the contractual clause and facts demonstrate that receipt of the 1% discount was conditional upon furnishing specific reports which serve HP's marketing and sales planning. The adjudicating authority found, and the Tribunal agrees, that for purchase of those reports HP acted as a client receiving services from the appellant; the commercial label of the parties' broader trading relationship does not negate the fact that the conditional discount is payment for services ancillary to promotion/marketing and thus falls within Business Auxiliary Services. [Paras 6]The contention of mere trading/principal-to-principal relationship does not negate taxability; the conditional 1% payment is for services and is taxable as Business Auxiliary Services.Final Conclusion: The Tribunal affirms the adjudicating authority: the contractual 1% conditional discount is consideration for services (furnishing Reseller Sell-Through and Inventory Reports) falling within Business Auxiliary Services and is taxable; the demand, interest and equivalent penalty confirmed in the impugned order are sustained and the appeal is dismissed. Issues:Appeal against service tax demand on additional commission received by appellant from a company; Determination of agency relationship between the appellant and the company; Classification of the activity as 'Business Auxiliary Services'; Interpretation of relevant clauses in the agreement; Application of the definition of Business Auxiliary Services under the Finance Act, 1994.Analysis:The appellant, a distributor of a company's products, appealed against a service tax demand of Rs. 62,02,559 along with interest and penalty. The issue revolved around the additional 1% discount received by the appellant from the company, which the department considered as commission income disguised as a trade discount. The department issued a show cause notice to the appellant, alleging tax evasion. The appellant contended that there was no agency relationship with the company, and the activity involved was merely providing weekly reports, not related to promotion or marketing. The appellant argued that the amount received was a discount and not a consideration for services provided.The Tribunal analyzed the terms of the agreement between the appellant and the company, which specified that the 1% discount was for providing specific reports on a weekly basis. The Tribunal referred to the definition of Business Auxiliary Services under the Finance Act, which includes services related to promotion, marketing, or sale of goods belonging to the client. The Tribunal concluded that the reports provided by the appellant were inputs for the promotion of the company's goods, making the 1% discount fall under the category of Business Auxiliary Services. The impugned order highlighted that the appellant's services were essential for the company's market strategy and future planning, qualifying as special tasks related to promotion and marketing.The Tribunal dismissed the appellant's arguments, emphasizing that the 1% discount was not a trade discount but a commission for services rendered. The Tribunal upheld the impugned order, stating that the appellant's receipt of the discount was well-known, even if it was through book-adjustment in the invoices. The relationship between the appellant and the company was seen as a client-provider dynamic, where the discount was a consideration for services provided. The Tribunal found the appellant's submission untenable, holding that the discount constituted income for the appellant in exchange for providing Business Auxiliary Services to the company.In conclusion, the Tribunal affirmed the impugned order, sustaining the demand for service tax on the additional commission received by the appellant. The appeal was dismissed for lack of merit, with the judgment pronounced on 4th August 2017.