Service tax on export commission under Notification 18/2009-ST exempt; partial liability on import commission post 01.10.2014, Section 76 penalty quashed

CESTAT held that service tax under reverse charge was not payable on services of foreign commission agents availed by the appellant for the period April 2014 to June 2017, as the services related to export of goods and were exempt under Notification No. 18/2009-ST read with POPS, 2012; consequential interest and penalties were set aside. On commission received from foreign clients for promoting their goods in India, the Tribunal held no tax was leviable on commission for April-September 2014, but upheld liability for commission from 01.10.2014 to June 2017, subject to verification. The matter was remanded to confirm correctness of tax and interest payments; penalty under Section 76 was quashed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether services of foreign commission agents availed during April 2014 to June 2017 were liable to service tax under reverse charge or exempt in view of the applicable exemption notification and Place of Provision of Services Rules, 2012.

1.2 Whether commission received from foreign clients for sales promotion of their goods in India for the period April 2014 to September 2014 constituted export of service and was not liable to service tax.

1.3 Whether commission received from foreign clients for the period from 1 October 2014 to June 2017 was taxable in India as intermediary service and to what extent tax already paid required verification, including liability to interest and penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Taxability under reverse charge of commission paid to foreign agents (April 2014 - June 2017)

Legal framework

2.1 The Tribunal noted that service tax on services received from service providers located outside India is payable by the recipient in India under reverse charge. Exemption under Notification No. 18/2009-ST was available where services of commission agents used for export of goods complied with the notification conditions. The Tribunal also took note of its own prior final order in the same assessee's case allowing such exemption.

Interpretation and reasoning

2.2 The Tribunal recorded that for the earlier period it had already held the assessee entitled to exemption under Notification No. 18/2009-ST, despite a procedural lapse of non-mentioning of invoice numbers in shipping bills, as the services were used for export and there was no substantive violation of the notification conditions.

2.3 For the present period (April 2014 - June 2017), the Tribunal treated the issue as covered by its earlier final order, holding that the services of foreign commission agents were used for export of goods and thus remained exempt.

2.4 The argument of the revenue that foreign commission agents were providing the "main service" and not "intermediary service" and hence Rule 9 of the Place of Provision of Services Rules, 2012 would not apply, was rejected as the core liability itself stood negated in view of the binding earlier order granting exemption under the specific notification.

Conclusions

2.5 The Tribunal held that service tax demand of Rs. 1,66,809/- on commission paid to foreign agents for April 2014 to June 2017 was not sustainable and set aside the demand along with consequential interest and penalty under Section 76 of the Finance Act, 1994.

Issue 2 - Taxability of commission received from foreign clients for sales promotion in India (April 2014 - September 2014)

Legal framework

2.6 The Tribunal examined the definition of "intermediary" under Rule 2(f) of the Place of Provision of Services Rules, 2012 as it stood prior to 1 October 2014, which covered a broker, agent or other person arranging or facilitating provision of a service between two or more persons, excluding a person providing the main service on his own account.

2.7 The Tribunal considered Rule 3 and Rule 6A of the Service Tax Rules, 1994 and the CBIC Circular No. 111/05/2009-ST, which clarified the concept of "export of service", particularly for services falling under Category III, where the relevant factor is the location of the service recipient and where "used outside India" is to be understood as benefit accruing outside India.

Interpretation and reasoning

2.8 The Tribunal noted that the assessee received commission from foreign clients for promoting sale of their goods in India and that all such commission for April 2014 to September 2014 was received in convertible foreign exchange.

2.9 Relying on the cited CBIC circular, the Tribunal held that for services like business auxiliary services (Category III services), the test for export is the location of the recipient and where the benefit of the service accrues. The circular clarified that Indian agents marketing goods of foreign sellers in India are treated as exporting services if the benefit accrues to the foreign principal outside India.

2.10 Applying this, the Tribunal held that although the activities were performed in India, the benefit-promotion of the foreign principals' business-accrued outside India to recipients located abroad, and hence the services constituted export of service and were not chargeable to service tax.

Conclusions

2.11 The Tribunal held that commission of Rs. 5,71,37,998/- received from foreign clients during April 2014 to September 2014 was export of service and not liable to service tax. The corresponding service tax demand for this period was set aside.

Issue 3 - Taxability of commission received from foreign clients as intermediary services (from 1 October 2014 to June 2017), and verification of tax paid, interest and penalty

Legal framework

2.12 The Tribunal noted the substituted definition of "intermediary" under Rule 2(f) of the Place of Provision of Services Rules, 2012 with effect from 1 October 2014, by which intermediary was defined to include a broker, agent or any person who arranges or facilitates a provision of a service or a supply of goods between two or more persons, excluding a person who provides the main service or supplies the goods on his own account.

2.13 Under Rule 9(c) of the Place of Provision of Services Rules, 2012, the place of provision for intermediary services is the location of the service provider. When such provider is located in taxable territory, the services are taxable under Section 66B of the Finance Act, 1994.

Interpretation and reasoning

2.14 The Tribunal accepted the assessee's contention that from 1 October 2014 it fell within the amended definition of intermediary, since it was arranging or facilitating the promotion and sale of goods of its foreign clients in India, without supplying goods on its own account.

2.15 Consequently, the place of provision for such intermediary services was held to be the location of the service provider in India, making the services taxable in India from 1 October 2014 onwards.

2.16 The Tribunal recorded that the assessee had already discharged service tax of Rs. 1,51,90,918/- on commission of Rs. 11,73,07,770/- for the period 1 October 2014 to 30 September 2015, and that the adjudicating authority had appropriated service tax for the later period (October 2015 to June 2017) along with interest.

Conclusions

2.17 The Tribunal confirmed the taxability of commission received from foreign clients as intermediary services for the period from 1 October 2014 to June 2017, subject to verification of the correctness and completeness of tax and interest already paid.

2.18 The matter was remitted to the adjudicating authority solely to verify accuracy of service tax payments and to determine any short payment or delayed payment and corresponding interest liability.

2.19 Penalties imposed under Section 76 of the Finance Act, 1994 were set aside in entirety in view of the substantive acceptance of the assessee's position on non-taxability for part of the period and the remand limited to verification for the balance period.

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