FEBRUARY 11, 2016

By P G James

AMENDMENT in the CCR, 2004 by adding an Explanation to Rule 2 in clause (l) after sub-clause (C) vide Notn 2/2016–CX (NT) dated 3rd February 2016 is a welcome measure taken by the CBEC to remove the clouds of uncertainty that loomed over pursuant to the judgement in the case of Cadila Healthcare - 2013-TIOL-12-HC-AHM-ST by Gujarat High Court.

So much had been done to make the 'Doing of Business' easy like clarifications, exemption notifications, instructions etc. to re-affirm that Cenvat credit taken on sales commission in relation to sales promotion, which is a substantive right of assessees, is proper and legal. Recently also Board has circulated the Minutes of Tariff Conference by way of instruction to all Principal/Chief/Commissioners vide letter no F.No. 96/85/2015-CX.I dated 7.12.15 wherein it was clarified that both the Board circular and case laws on the subject allow credit of input services, when the activity of the sales commission agent involves an element of sales promotion.

Pertinent question here is whether the present amendment by way of an explanation- "For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis"- in the input service definition is warranted or not. Input service definition includes 'sales promotion' among various other services. It is illogical to presume that anybody will pay sales commission, especially in the highly competitive market of today, unless there is a boost in the sales which is caused by sales promotion.

As per Section 65(19)(a) of Finance Act, 1994, commission agent means any person who acts on behalf of another person and causes sale or purchase of goods and such services rendered are leviable to Service Tax under Business Auxiliary Service. Factually, commission agents do promote the sale and once the definition of the input service includes services of sale promotion, the services of commission agent shall be squarely covered by the definition of the input service.

There are a catena of judgements of Courts and Tribunals holding that inasmuch as the definition of 'input service' which is coined in the phraseology of "means and includes", the credit at the highest can be denied only in respect of services which are specifically excluded by the definition. It cannot be stretched to deny credit in respect of other services. Reference in this regard is drawn to the decision in the case of Collector vs Heavy Engineering Corporation [1990 (49) ELT 531 (Tri)]:

"..What are excluded from the scope of an expression in a legal provision by such an exclusion clause are only those items mentioned specifically in the exclusion clause. This cannot be stretched by analogy to other items not so specifically mentioned, unlike an inclusion clause where the items covered by the expression would not be confined to those so included. The items included are illustrative and not exhaustive. Contrarily, the items excluded are exhaustive and not illustrative."

CBEC Circular No. 943/4/2011-CX dated 29.4.2011 was especially important in this regard on two aspects. Firstly, in Sl no 5, it has been clarified that "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".

Secondly, in Sl. No. 2, it has been categorically clarified that the principle is that cenvat credit is not allowed, when services are used primarily for personal use or consumption of employees.

In view of the above, none can deny the fact that sales commission paid is for not promoting sale or being used for personal consumption.

Intention of the legislature is apparent from the erstwhile definition of input service which contained 'activity related to business', inclusion of sales promotion in the definition itself, Notifications allowing refund/ exemption of export sales commission paid/payable, or from the subsequent clarification by way of Circular and of the recent clarifications in the Tariff Conference. Instead of the present amendments and explanations which are beset with dispute regarding retrospectivity, Board ought to have directed field formations to stop raising demands leading to unwanted litigations.

CCE, Nashik also in the case of Genom Biotech P Ltd - 2015-TIOL-1046-CESTAT-MUM objected to the refund of the amount of service tax paid on the services of commission agent under Rule 5 and got the order in his favour, despite the settled law and motto of the Govt that no taxes should be exported.

In the Results Framework Document (RFD) for 2013-14 of CBEC, total amount demanded in Show Cause Notice as a percentage to revenue collected for Central Excise & Service Tax cases was 5.8% in 2012-13 and projection for 2015-16 & 2016-17 was fixed at 9% & 9.5% respectively. It is a paradox that while Govt, on one hand is emphasizing on reduction in litigation, on the other, by way of target fixation for tax demand, tacit obligation is cast upon field officers to raise frivolous demands to achieve the target.

Even with the amendment in the Rule with an explanation, it is apprehended that chances are remote that litigation on sales commission will come to an end. In view of the favourable decisions allowing the credit by various Courts and Tribunals, Cenvat credit on sales commission was not disputed for vast majority of the assessees except in Gujarat and few other places. Now just like the 'shikari in the jungle' got another weapon in his armoury, field formations can raise reckless demands across the country in respect of the credit taken for the past period on the ground that amendment is effective from 02.02.16 and not retrospective. This is the customary practice in most of the cases that CBEC approbates and Commissioners reprobate on the same issue thereby worsening the litigative trauma of taxpayers.

When a decision is favourable to an assessee, even if that is delivered by the highest Court, Govt is all prepared to circumvent it either by retrospective amendment or through instructions to field formations not to follow the same. For instance, Circular No. 85/2002-Cus. dated 11-12-2002 was issued by CBEC not to follow Supreme Court's decision in the case of GMMCO [2001 (127) E.L.T. 508] in the context of related party transaction.

Had the Board a genuine intent in reducing litigations, enhancing competitiveness of Indian business as dictated in its Vision Statement and allowing the credit on sales promotion by enforcing its own Circular, it would have issued a Circular on the above lines treating Cadila judgment as not speaking or not reasoned inasmuch as it is against the legislative intent as clarified in the Circular and also in conflict with the Ambika Overseas - 2011-TIOL-951-HC-P&H-ST  decision of Punjab & Haryana High Court.

The only ray of hope while contesting the potential demands cropping on this issue is that there exist umpteen decisions including that of Apex Court that an explanation added to a Rule will have retrospective effect.

In the case of Vatika Township Pvt Ltd vs Commissioner of IT, New Delhi, - 2014-TIOL-78-SC-IT-CB, it was held by Hon'ble Supreme Court that:

"If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect"

The Constitution Bench of the Hon'ble Apex Court in the case of Shamarao vs. Parulekar v. The District Magistrate, Thana, Bombay & Others reported in AIR 1952 SC held as follows:

"When a subsequent Act amends an earlier one in such a way as to incorporate itself or a part of itself into the earlier, then the earlier Act must thereafter be read and construed (except where that would lead to a repugnancy, inconsistency or absurdity) as if the altered words had been written into the earlier Act with pen and ink and the old words scored out so that there is no need to refer to the amending Act at all."

The above decision was followed by Karnataka HC in CCE, Bangalore vs Fosroc Chemicals (India) Pvt Ltd) - 2014-TIOL-1609-HC-KAR-CX. While dismissing the appeal filed by Dept in respect of the demand of Cenvat reversal for supplies to SEZ Developer for the period prior to the inclusion of Developer in Notification No. 50/2008 C.E. (N.T), dated 31-12-2008, it was held that the said amendment has to be construed as retrospective in nature.

As per Hon HC of Madras in Loyal Textile Mills Ltd vs Joint Secretary:

"The explanatory notifications are in the nature of judgment of courts, which only interpret the existing rights. The explanatory notification thus is to be treated as part and parcel of notification, which is clarified, by explanatory notification, there is operative from the date of original notification, as in absence of clarificatory notification, the original notification is required to be read, as explained in subsequent explanatory notification. The explanatory notification being part of original notification therefore has to apply from the date of original notification and does not operate with prospective effect, as it does not give any substantive right independently".

As per the principle of statutory interpretation also, if legislation is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation, it should have retrospective effect and the one which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective.

It was held by Hon SC in the case of Suchitra Components Ltd vs CCE, Guntur - 2007-TIOL-09-SC-CX that abeneficial circular to be applied retrospectively while adverse one to be applied prospectively - If the circular is against the assessee, it has the right to seek its enforcement prospectively.

Hon Supreme Court's decisions in the case of Zile Singh v. State of Haryana and Others - 2004 (8) SCC and GOI & Others v. Indian Tobacco Association, - 2005-TIOL-109-SC-CUS are also squarely applicable in this regard.

Larger Bench decision in the case of Vandana Global - 2010-TIOL-624-CESTAT-DEL-LB is also relevant wherein it has been held that explanation added to the Rule is clarificatory in nature and will have retrospective effect.

But the hapless assessees in Gujarat cannot have a sigh of relief from litigation unless Board comes to their rescue.

Though the LB decision was followed by different HC's /Tribunals, this was distinguished by Guj HC in Mundra Port & SEZ Ltd vs CCE - 2015-TIOL-1288-HC-AHM-ST holding that amendment to Explanation 2 of Rule 2(k) w.e.f. 7-7-2009 was not clarificatory in nature and hence not retrospective.

Following the judicial discipline as is done in the case of Cadila, Tribunal may follow the Mundra Port decision in case of the contentions with regard to the retrospectivity of the present explanation to Rule 2(l) by way of Notn 2/2016 dated 2.02.16.

But from the Circular No. 943/4/2011-CX., dated 29.4.2011 and Minutes of Tariff Conference circulated through Board's instruction dated 7.12.15 intention of legislature is well exposed and it is unambiguous that services of commission agent qua sales promotion is input service and eligible for cenvat credit.

Whether to be a responsible litigant or compulsive litigant is Board's prerogative; if it chooses the former, it should not pursue and contest the litigation on these matters further and strict directions to be given down the line not to burden assessees with further demands.

Concluded with the following observation made by Hon SC in Lloyd Electric & Engineering Ltd vs State of Himachal Pradesh - 2015-TIOL-198-SC-CT-LB:

"What is given by the right hand cannot be taken by the left hand. The Government shall speak only in one voice. It has only one policy. The departments are to implement the Government policy and not their own policy"

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