No Service Tax Liability on Foreign Commission Payments under RCM as They Constitute Trade Discounts: CESTAT [Read Order]
The Tribunal noted that these commissions were deducted by the buyers and reimbursed by the assessee as part of contractual terms, with no direct service received by the assessee from foreign agents
No Service Tax Liability – Service Tax Liability – Service Tax – taxscan
No Service Tax Liability – Service Tax Liability – Service Tax – taxscan
The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) held that there is no service tax liability on foreign commission payments under the Reverse Charge Mechanism (RCM) as they constitute trade discounts.
Artifacts India,appellant-assessee, was a proprietorship firm engaged in the manufacturing and export of paper products and handicrafts. It operated as a 100% Export Oriented Unit and received payments in foreign currency for the goods exported during the period from 01.04.2007 to 31.03.2012. Since the business was entirely export-based, the appellant-assessee did not obtain service tax registration.
During an audit, the Department observed that certain payments made in foreign currency had not been subjected to service tax under the Reverse Charge Mechanism (RCM). These included bank charges paid to foreign banks (classified under Banking and Other Financial Services), commission paid to agents (classified under Business Auxiliary Services), and design charges paid to professionals (classified under Design Services).
Read More: CESTAT upholds demand of Service Tax under RCM on Payments made to Foreign Entities
A show cause notice dated 17.10.2012 was issued proposing a service tax demand of ₹10,09,952. The matter was adjudicated by the Additional Commissioner through an order dated 30.08.2013, wherein ₹1,67,895 was dropped due to computational errors, and the balance amount of ₹8,42,057 was confirmed along with interest and penalties under the Finance Act.
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The assessee filed an appeal before the Commissioner (Appeals), who upheld the demand vide order dated 29.05.2014. Aggrieved by this, the assessee filed the present appeal before the tribunal.
The two member bench comprising Dr.Rachna Gupta (Judicial Member) and Hemambika R.Priya (Technical Member) heard both sides and examined the records. It noted that the show cause notice alleged commission payments made in foreign currency to overseas principals for order procurement. However, the assessee contended that the commission agents were appointed by foreign buyers to identify suppliers and provided services to those buyers not to the assessee.
The appellate tribunal observed that while commission agent services fall under "business auxiliary service," and reverse charge applies when such services are received from abroad, the key factor is identifying the actual service recipient. It referred to the purchase order from M/s TESCO, which stated that artwork charges, foreign bank charges, and agent commission were to be borne by the assessee as part of the sale terms.
The bench found that the commission was charged by the buyer and paid by the assessee as a contractual reimbursement, not as a payment for services received by the assessee.
Relying on its own decision in Suryanarayan Synthetics Pvt. Ltd. v. CCE & ST, Surat-I [2024 (8) TMI 908], the tribunal reiterated that where commission is deducted from invoice value and no payment is made directly to any foreign agent, nor is there any agreement or evidence of service received, the deduction merely represents a trade discount, not a taxable service.
The appellate tribunal further cited Laxmi Exports, where deductions labeled as "commission" were found to be trade discounts given to buyers, not payments to agents. Similarly, in Duflon Industries Pvt. Ltd. v. CCE, Raigad [2016 (12) TMI 230], it was held that unless there are three parties (seller, buyer, and commission agent), such deductions cannot be taxed as commission under the reverse charge mechanism.
Based on these precedents and the absence of any evidence of a direct relationship or contractual arrangement between the appellant and a foreign service provider, the CESTAT held that the demand of service tax on the commission reimbursed to foreign buyers was unsustainable .
In short,the appeal was allowed.
To Read the full text of the Order CLICK HERE
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