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Service Tax Applicability on COMMISSION ON SALE

Amit Bhatkar (Service) (457 Points)

04 March 2009

Hi All

Our pune based company want to raise a sale invoice for COMMISSION ON SALE to one of our group company which is located outside India.
My question is whether we are liable to raise Service Tax on Invoice.
I have heard that as per rule 4 of Export of services under Service Tax Act, some exemption is granted for similar situation.

Could you please clarify my doubt

Thanks
Amit

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9 Replies

Ramram (28 Points)
Replied 04 March 2009

Originally posted by :Amit

Mr Amit ,

Exemption referred by you is under Rule 3 of Export of Services Rule, 2005. In order to establish export of services, one must satisfy following conditions :

1] Provision of such service must be to a recipient located outside India,

2] such service is delivered and used outside India and payment received in foreign exchange.

If the receipient has any commercial establishment in India, such service shall be trated as export of service only if the Order for Service is made from establishment / office located outside India. Rule 3(iii).

To get exemption you must consider whether the service of Commission Agent is provided outside India and USED outside India. [i.e. target customer is not situated in India].

Hope this clarifies the position.

J M Tiwari, Mumbai

Hi All

Our pune based company want to raise a sale invoice for COMMISSION ON SALE to one of our group company which is located outside India.
My question is whether we are liable to raise Service Tax on Invoice.
I have heard that as per rule 4 of Export of services under Service Tax Act, some exemption is granted for similar situation.
Could you please clarify my doubt
Thanks
Amit

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Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 05 March 2009

I examined the issue on a different angle. I feel this service is neither provided in India, nor recieved in India and hence service tax provisions are not applicable, which does not extend beyond India. A link to my paper is,

https://www.hg.org/article.asp?id=5977

1 Like

Amit Bhatkar (Service) (457 Points)
Replied 05 March 2009

Tiwari / Rajesh Sir, Thanks for your valuable comment. I elaborates the situation. Our company X'India receives the commission on sale [ as agent] from one of our group company, name, company Y' dubai. This sale commission is mainly because of one sale order executed by company Y' dubai to company, Z in India. Now my question is X and Y both falls under same group. So will it be said that company'Y have a permanent establishment in India ? And the final customer [ on whom order get executed, company'z ] is in India. So whether that service will be trated as services operated within India ? Kindly reply Amit

Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 05 March 2009

If you have received your commission from Dubai Company, in foreign exchange, it is an export of services. No service tax is payable.

Ramram (28 Points)
Replied 05 March 2009

Service provided by company X [whicis in India] to company 'Y' in Dubai is to arrange for procuring the Order from company 'Z' [which is in India]. Hence the service is provided in India. Eventhogh the payment is received in convertible foreign exchange, it has to be treated as a taxable service and is liable to service tax. Pl refer to two conditions mentioned earlier.

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Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 05 March 2009

Well, the issue has been settled with CBEC circular dated 24.02.2009. A link is as

https://www.servicetax.gov.in/st-cirmainpg.htm

Relevant portion reads as,

In terms of rule 3 (2) (a) of the Export of Services Rules 2005, a taxable service shall be treated as export of service if “such service is provided from India and used outside India”

Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition ‘used outside India’,-

(i) Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;

(ii) Medical transcripttion where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him;

(iii) Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange;

(iv) Foreign financial institution desiring transfer of remittances to India, engaging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in India.

The departmental officers seem to have taken a view in such cases that since the activities pertaining to provision of service are undertaken in India, it cannot be said that the use of the service has been outside India.

2. The matter has been examined. Sub-rule (1) of rule 3 of the Export of Services Rule, 2005 categorizes the services into three categories:

(i) Category (I) [Rule 3(1)(i)] : For services (such as Architect service, General Insurance service, Construction service, Site Preparation service) that have some nexus with immovable property, it is provided that the provision of such service would be ‘export’ if they are provided in relation to an immovable property situated outside India.

(ii) Category (II) [Rule 3(1)(ii)] : For services (such as Rent-a-Cab operator, Market Research Agency service, Survey and Exploration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be ‘export’ if they are performed (or even partly performed) outside India.

(iii) Category (III) [Rule 3(1)(iii)] : For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be ‘export’,-

(a) If they are provided in relation to business or commerce to a recipient located outside India; and

(b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided.

3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term ‘used outside India’ has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.

4. All pending cases may be disposed of accordingly. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned. These instructions should be given wide publicity among trade and field officers.

Thus the services falling in sub clause (iii) shall be export if they are used by business or commerce, and such business or commerce is situated outside India. No other condition is required.

The activity under question is export of service on which no service tax is payable.

amit (Partner) (31 Points)
Replied 07 December 2009

We are Commission Agents for sale or purchase for Land / Flats. We charge brokerage of 2% on value of deal. Can you please clarify whether are we liable to pay service tax considering that land is not good as defined in Business Auxiliary Service.

if yes under which clause we need to take registration.

Thanking you in advance

ameet chheda

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 09 December 2009

You would be covered under the category of - real estate agent.

Sanjeev Nagal (Self) (22 Points)
Replied 24 December 2011

I have a proprietorship firm, which have companies of MTS, VODAFONE and DISH TV / SUN DIRECT DISH TV and work out like a E.P.R.S. / TOP-UP BALANCE / and recharge to my retialers and my end user customers thorough NET SERVICES provide by company. I have received commission from companies with deduction of TDS and my total Net Profit Margin at cost of Net Shell @ 2% Net Profit Margin and Commission on that services amount near about 55 Lakhs for FINANCIAL YEAR 2010-2011. My question is now that is, IS SERVICE TAX APPLICABLE ON THIS SERVICE, IF YES THAT MY PROBLEM IS THAT I HAVE NOT CLAIM FROM RETAILERS AND END USER CUSTOMERS AND NOT SERVICE TAX RECEIVED FROM ALL COMPANIES. PLEASE ADVISE ME BRIEFLY WITH POSSIBLE NOTIFICATIONS.