Sales promotion expenses incurred on services provided by foreign firm

[samiuddin ansari]

Sir,

My friend has a manufacturing unit engaged in the manufacture of Ball and Roller Bearing, he had incurred a handsome amount of expense in foreign currency for sales promotion in abroad with a view to enhance and expand the sale territory and accordingly paid to the foreign firm for the task. During conducting of Audit by CERA team, the audit team objected the same and raised revenue para for payment of service tax on the sum incurred for the same covering the last three year period. Thereafter, he received a demand SCN from the Central Excise Department demanding service tax on the same. On enquiring, the excise department informed him that being an observation by CERA audit, they have to issue the protective demand for service tax along with the levy of interest and penalty. In defence, his tax consultant submitted defence reply mentioning that it does not attract service tax in terms of provisions of Rule 9 of Place of Provisions of Services Rules, 2012, it being provided by the foreign firm in the foriegn country and place of provision is the foreign country, which is non taxable territory. However, they, thereafter, started paying service tax at the appropriate rate on above sales promotion expenses under reverse charge mechanism in the last year period and accordingly availed Cenvat credit of taxes paid thereon as Input service credit. In the meantime, adjudicating authority issued OIO and dropped the Demand SCN considering the submission of defence reply.

Now, CGST Audit team has conducted audit for earlier period up to March 2017 and raised a query stating that since his tax consultant has, vociferously, contested the leviability of service tax on such expenses in defence reply against above SCN, not only this the demand SCN itself has been dropped by the adjudicating authority, then what is the need of payment of service tax on such amount? Further raised an observation and asked them to reverse the cenvat credit of tax already paid on sales promotion expenses in foreign country and availed as input service credit since there is no leviability of service tax in terms of the above provisions and further instructed them to claim refund of the tax already paid in the last year. My query is whether it would be proper to reverse the cenvat credit of the same already availed as I don't think the Deptt. is having any revenue loss. In other words, cenvat credit of tax paid on above expenses as Input services has been taken on sales promotion expenses incurred in foreign currency against the services provided by the nominated foreign agency located in foreign soil. Though, it does not attract service tax as per the above provisions of Place of Provisions of services Rules, 2012.

Please solicit your guidance and provide necessary clarification on the matter with supportive Board's circular, instruction or relevant case laws.

[KASTURI SETHI]

When Service Tax is not leviable and ST has been paid by the assessee knowingly or unknowingly , reversal is required notwithstanding the fact of revenue neutrality.

Another aspect is whether Adjudicating Order has been accepted by the Commissioner or any competent higher authority. The possibility of filing appeal against the said order cannot be ruled out.

If the order stands accepted, then immediate reversal is required.

[samiuddin ansari]

Kasturiji,

There is a huge probability of acceptance of OIO by the Department in view of the above provisions. Pl. provide necessary supportive Board's circular or instruction or relevant case laws having identical issue.

Thanks with regards,

[KASTURI SETHI]

Dear Querist,

I agree with you in toto. It is a futile exercise as there is no revenue loss to Govt. But as far procedure is concerned, the department's officers are right. Keep track on the time limit for filing refund claim.

Meanwhile, I shall try to trace out any case law or instructions in your favour.

[YAGAY andSUN]

CENVAT Credit on Sales Promotion activities was allowed in earlier regime.

AI Summary

Cenvat credit reversal where services rendered outside jurisdiction may be required despite tax paid under reverse charge. The issue concerns service tax on sales promotion services provided by a foreign firm and paid in foreign currency; although the place of provision rule was relied on to argue non levy, the assessee paid tax under the reverse charge mechanism and availed Cenvat credit. A protective demand was dropped by the adjudicating authority, but CGST audit required reversal of the credit and advised claiming refund. Advisers state that if service tax is not leviable any tax paid and credited must be reversed unless a final accepted order or successful refund claim dictates otherwise.