Service Tax on Early Payment Incentives: CESTAT Rules Extended Limitation Period Unjustified [Read Order]

The Chennai Bench of Customs, Excise and Service Tax Appellate Tribunal(CESTAT) ruled that the extended limitation period invoked by the Revenue for demanding service tax on early payment incentives was unjustified as the incentives were disclosed in the assessee’s financial records and no suppression of facts occurred.

RR Polymers,appellant-assessee, provided Clearing and Forwarding (C&F) services and Del Credere Agent (DCA) services to Haldia Petro Chemicals Ltd. (Haldia). As a C&F Agent, they handled receiving, storing, and forwarding High-Density Polyethylene (HDPE) for Haldia, earning a commission of ₹550 per MT. As a DCA, they procured orders from buyers on Haldia's behalf, with the goods delivered directly by Haldia, earning ₹350 per MT as commission.

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During an audit, the Revenue found that RR Polymers received early payment incentives from Haldia but did not pass them on to customers as required. Instead, they made early payments to Haldia on behalf of customers and collected the amount later, retaining the discounts. The Revenue viewed this as procurement of goods for customers, classifying it under "Business Auxiliary Service" (BAS) and liable for service tax.

A show cause notice dated October 19, 2012, was issued, alleging that assessee concealed the early payment incentives by not declaring them in its ST-3 returns. The assessee argued that it regularly paid service tax on its commission earnings and treated the discounts as part of its business practice.

However, the Adjudicating Authority(AA) held that the early payment incentives were taxable under BAS and upheld the service tax demand.

The issue was whether the Revenue was right to use the extended period of limitation to demand service tax under BAS from the assessee.

Read More: Extended Limitation cannot be Invoked Twice for the Same Issue: CESTAT

The assessee's counsel argued that the Revenue did not dispute the assessee’s practice of taking temporary loans through overdraft (OD) facilities to make early payments and get cash discounts. The assessee later collected the sale amount from the end-customers.

The counsel explained that the discounts were used to cover bank interest on the OD, so they could not be passed on to the customers. Since the assessee made the early payments, the discount could only be passed on if the customers had paid in advance.

It was also argued that the discounts were not commission and, therefore, not liable for service tax. The appellant had already paid service tax on the separate commission received.

The Revenue, however, relied on the findings of the impugned order.

The two member bench comprising P.Dinesha(Judicial Member) and M.Ajit Kumar(Technical Member) found that the Revenue failed to prove that early payment incentives always involved advance payments by end-customers, as there was no cross-verification of payments. It noted that Section 65(19)(iv) of the Finance Act, 1994, did not cover cash discounts and applied only to the procurement of inputs, which the Revenue did not establish in this case.

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The appellate tribunal also observed that the early payment incentives were disclosed in the appellant's financial records. Since there was no suppression, the extended period of limitation could not be invoked. It concluded that the Revenue failed to justify the service tax demand on the early payment incentives.The CESTAT found no merit in the demand against the assessee and set aside the impugned order.

In short,the appeal was allowed with consequential benefits.

To Read the full text of the Order CLICK HERE

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