Service tax on sales incentives

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SummaryWe are retailers for a Ludhiana-based company, which trades in garments on a pan- India basis.

Queries on taxation and service tax liabilities, addressed by Vivek Sharma & Rajat Bose of Ernst & Young

We are retailers for a Ludhiana-based company, which trades in garments on a pan- India basis. This company sells goods to various regional distributors, who further sell goods to various retailers, including us. Going forward, the company has proposed to provide a monthly incentive scheme for various retailers, where it shall pay a pre-defined sum to retailers achieving specified targets. Is any service tax applicable on the same as we are not registered under service tax.

Based on your query, we understand that while the transaction for sale of goods is between you and the regional distributor on a principal-to-principal basis, the incentives are directly paid by the company to you. As per the definition of ‘service’ under the negative list regime of service tax effective from July 1, 2012, every activity for a consideration by any person for another shall be liable to service tax unless excluded under the negative list or is specifically exempted. The incentive is paid by the company to retailers for achieving specified targets. Therefore, it may be inferred that the company shall pay the incentive to you only upon you achieving a specified target. The act of you performing a specific activity for which the company gives an incentive may qualify within the definition of ‘service’ under the negative list regime of service tax.

Given the above, you should be liable to pay service tax on the incentive earned by you for performing specific activity for the company and charge service tax at the rate of 12.36% from the company on such incentives.

Head office-branch office deals

We are an India-based branch office (BO) providing marketing support services to our head office (HO) in Germany. We did not pay service tax on the commission received by us from our HO as we treated the BO as an extension of the HO and consequently, the said arrangement as service to self. However, we have been given to understand that from July 1, it has been specifically provided that BO and HO will be treated as separate persons for the purpose of service tax. Please let us know what are the ramifications of the recent change in the position.

Under the erstwhile regime, any service provided by a branch office to its parent entity was generally treated as services to self, thereby not liable to service tax in India. In any case, even assuming that branch office and head office were distinct person, the activities performed by your BO may have qualified as ‘export’ of service.

However, in the Negative list regime, ‘service’ has been defined to mean any activity carried on by a person for another for a consideration within a taxable territory. Further, it is specifically provided that an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Therefore, for the purpose of service tax, BO located in India and HO in Germany, by virtue of the above explanation, may be treated as distinct persons. Thus, it needs to be seen whether under the negative list regime, the services performed by the BO for the HO will be liable to service tax.

In this context, it is important to refer to the Place of Provision of Service Rules, 2012 (POS) which determines whether a service is performed in a taxable territory. As per the POS Rules, it appears that the activities performed by the BO shall fall under the general rule and accordingly, the place of provision of service would be the location of service recipient. Since the HO (which is the service recipient) is located in Germany, under the POS, the place of service is outside India. In other words, the place of service is outside the taxable territory of India. Hence, service tax will not be applicable on the said transaction.

The replies do not constitute professional advice. Neither Ernst & Young nor FE is liable for any action taken on the basis of these replies. Readers may mail their queries to fesmes@gmail.com

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