Service tax is to be paid on commission received for promoting a service

Written by The Financial Express | Updated: Sep 5 2009, 02:30am hrs
We are a company engaged in the manufacture of pesticides at our facilities in Delhi and Gurgaon. We receive all inputs for manufacturing at the Delhi factory and avail of cenvat credit of excise duty paid, on such receipt. At times, we transfer inputs to the Gurgaon factory, and reverse proportionate credit on such inputs removed as such from Delhi. In this regard, we have received a show-cause notice from the department as to why a proportionate credit of service tax paid on goods transport services received at the time of receipt of the inputs has not been reversed. Please let us know whether we need to reverse the proportionate input service tax credit availed of input services also, along with the reversal of credit availed of when the inputs are removed as such.

As per Rule 3(5) of Cenvat Credit Rules, when inputs or capital goods are removed as such from the factory, an amount equal to the credit availed on respect of such inputs or capital goods is to be reversed or paid in cash. However, this rule does not provide for reversal of credit availed of input service used in respect of such goods. Accordingly, reversal of credit in respect to input services would not be required when the inputs or the capital goods are removed as such.

I am an engineering consultant and pay service tax under the category of consulting engineers services. Last month, I purchased a set of precision instruments on payment of excise duty and VAT. I am aware that in respect of duty paid on capital goods, cenvat credit can be availed of the extent of 50% of duty paid in the year of purchase, and the balance in the subsequent years. Please let me know whether the restriction applies only to excise duty or also on the education cess payable alongwith excise duty.

Rule 4(2)(a) of the Cenvat Credit Rules states that cenvat credit in respect of capital goods can be availed of up to 50% of the duty paid in the year of receipt in the factory. In this sub-section the term used is duty, which doesnt reveal much as to whether cesses would also be included. However, Rule 4(2)(b) provides that balance cenvat credit can be taken in any subsequent financial year. Based on this, it can be said that since cenvat credit would include credit of education cess also, the credit admissible in the initial financial year would be restricted to 50% of cesses along with duty paid.

We are a firm engaged in selling branded furniture. We have entered into agreements with banks and financing companies wherein we promote their loan schemes with our customers. For this, we receive commission from them. Kindly let us know whether we are required to pay service tax on such commission.

Marketing and promotion of services provided by a client are chargeable to service tax under the taxable service category of business auxiliary services. In various judgements it has been held that such tie-ups, where finance schemes offered by banks are promoted by traders/ manufacturers, amount to provision of business auxiliary services. Accordingly, in your case, service tax would be payable on the commission received from the banks and the finance companies.

We have recently opened a beauty and fitness centre in Delhi, and provide services covered under the taxable category of beauty treatment service. Besides, we also sell products such as shampoos and conditioners and charge VAT on the same. Recently, we had hired a business consultant to set up our accounting and billing system, which is common for both services and trading activities. Please let us know the availability of cenvat credit of service tax paid to the consultant under the category of management or business consultants service, in the light of the fact that we are engaged in provision of taxable services as well as trading.

In case a person is engaged in providing taxable as well as exempted/non-taxable services, then credit can be availed only to the extent of input services used in provision of taxable services. Alternatively, credit can be reversed to the extent of 6% of the value of exempted services provided. In this regard, trading would be categorised as a non-taxable activity, and accordingly the above provisions would apply. However, Rule 6(5) of the Rules provides that in case service tax is paid on services such as management consultancy, security, maintenance, banking and other financial services, full credit can be availed even if they are used as input services for both taxable and non-taxable services. Accordingly, you would be eligible to avail full credit of service tax paid on management consultancy services.

Respondents are senior professionals at Ernst & Young. The replies do not constitute professional advice. Neither EY nor FE are liable for any action taken on the basis of these replies