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Foreign Agent’s Commission: Taxability & Exemption
The law makers represent the morals of the government therefore they need to be careful while formulating the law. Failing this, the law becomes a joke & the government gets the bad name because of the officials, who do not take pains to uphold the basics of the law. One such example is that of the levy of service tax on commission paid to the foreign agents appointed by the Indian exporters in the various countries for generating orders for them. The sole/main activity of the foreign agent is to represent the business interest of the exporter with the foreign buyer & get orders for which he gets a commission. It is difficult to understand that how this could be subjected to tax & how it could be exempted. The chain of the event & the basics of the law tell you very clearly that the whole thing is turned into a poor joke.

This is a case of a 100% EOU. The EOU is manufacturing Tungsten Carbide tools. It has agents in Europe who liaise with the buyers & book orders & 7.5% of the FOB value of goods is paid as commission. The unit does not have any Domestic Tariff Area (DTA) sale. The EOU is working under the administration of Customs at Mumbai & the Excise registration is granted by the customs department itself. The EOU s are entitled to refund of service tax as per the law. Therefore payment of Service Tax is revenue neutral.

The first basic thing in relation to the applicability of service tax is the jurisdiction. The service tax law clearly stipulates that the service tax is applicable to the whole of India except the state of Jammu & Kashmir. Therefore, as per the law, the tax is leviable on the service provider located in India. However, to collect tax on services received in India from the foreign territories the CBEC came out with TAXATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN INDIA) RULES, 2006. Now, Once again it is pertinent to point out here that in the rules, the emphasis is on the fact that the services provided from outside India should be received in India to be covered under the tax ambit. The rule for collecting the service tax is very specific regarding the receipt of service in India. This is only for the simple reason that the government of India can formulate laws applicable to the territory of India for the purpose of the collection of taxes. Therefore this basic principle is upheld in the service tax law. Another basic principle of the law is that it has to be read the way it is written. Nothing can be added to it or taken out to arrive at an interpretation of the law. However, in this case there is no scope for any interpretation. Here the law is absolutely clear that the services provided from outside India should be received in India are subject to service tax.

The foreign agent commission is not directly specified as a service to be taxed but it is covered under the Business Auxiliary services. Therefore exporters started asking for whether service tax has to be paid on the commission remitted to the overseas agent. The issue was answered in the affirmative by the field formation without analyzing the issue in depth. The manufacturers were normally convinced by telling them that though you are paying the service tax, the same is coming back to you as a credit therefore avoid the hassle of litigation & settle the issue. Therefore, the manufacturers agreed & started paying up. However, please see the case of merchant exporters, who are not even registered with the Service tax authority. In case of merchant exporters, the commission to the foreign agent plays a bigger role. Now, if this tax becomes a cost then the merchant exporters will be rendered uncompetitive. Therefore, most of the merchant exporters took the view that service tax is not payable because no service is received in India to be taxed. Actually, some of them took legal opinion to protect their interest as the liability is huge.

As on today, commission in itself is not free of controversy. There is no cap on commission payment to foreign agent as per the Reserve Bank of India. One of the cynical comments is that this is permitted to bloat the Swiss bank accounts of the Indian exporters. However, as per the DGFT & the customs, the commission up to 12.5% of the FOB value of exports is eligible for entitlements. However, commission in excess of 12.5% can be paid.

The CBEC started the trend of declaration of services, which are eligible for refund. After lot of representation & persuasion, service tax paid on foreign agent’s commission was declared eligible for refund (Notification No.41/2007 ST dated 6th October 2007) in respect of exports but initially, the refund limit was posted at 2%. Just think that the law of the land allowed the exporter to receive entitlement on commission up to 12.5% but the service tax refund was restricted to 2% only though the basic premise of the export promotion is that taxes & duties are not exportable. At the very outset, the law makers should at the very least see that what is deemed to be legitimate & fair is taken forward & the rationale is preserved although the law is not a rational code. Now, nothing could have been more preposterous than the fact that the exporter was required to file claims to get refund of 2% & forego the 8% & feel the pain. However, once again hectic lobbying took place & the limit was then raised to 10% (Notification No. 33 2008-ST dated 7th December 2008). Though refund provisions were made in the law but then implementation of the refund was far from satisfactory. Up to 2009, hardly any service tax refunds were processed. The position was so bad that the DGFT had to intervene for the relaxation of the law & ensure that refunds are made ut till date hardly any progress is recorded. However, the rigmarole of payment & refund is best avoidable because this exercise of payment & refund results in systemic corruption. Therefore, the CBEC has now included this service exempt from the payment of service tax. However, even this is not free of the problem. The exemption is available up to 10% of the FOB value of exports( w.e.f. 7.7.09). If the commission is paid in excess of 10% then the tax is payable. Not only this, this tax is not even refundable. Once again the irony of the fate is that there is no ceiling on commission payment by the RBI & the entitlements are given to the exporters to the extent of 12.5% of the FOB value of exports, the Service Tax exemption is still restricted up to 10%. Now, how can there be different rationale for giving the entitlement on exports & exemption from the payment of the service tax ot sending the basic premise for a toss that taxes & duties cannot be exported. Don’t you think this is simply a dirty manifestation of the minds of the officials in position! Simply the whims & fancies prevail. There is no room for any rationale.

The EOU & the SEZ unit exist with the same purpose. However, the SEZ units were allowed exemption from the payment of service tax right from the beginning. Further, there is no limit in respect of the commission applicable to them. I therefore fail to understand  that how & why such discrimination be valid in terms of the constitution of India. Is it not another whimsical manifestation in terms of the law! This is more so when the 100% EOU has no DTA sale at all.

Another serious problem, which is encountered, is that the commission agent is already subject to the payment of tax on the amount of commission received. The European agent located in Germany has confirmed with the certificate from the practicing tax consultant that the agent is paying Excise duty & income tax on the commission received from the Indian exporter. This commission received frm the Indian exporter is part of normal business income on which the Excise Duty & Income Tax is paid. Thus the liability of payment of taxes is discharged by the foreign agent in the jurisdiction in which he operates therefore under the International convention & treaties such deemed services cannot be taxed in India. Further, there are Double Tax Avoidance Agreement with Germany therefore once again it is apparent that the foreign agents commission cannot be taxed in India.   

On the other hand, please note that the commission paid to foreign agent is also taxable through import. If you will see the Indian Customs Valuation Rules then you will realize that if the overseas supplier pays commission to the agent then that commission is to be included in the CIF value of imports for the assessment & payment of duty. The valuation rules specifically exclude commission paid to the buying agent. The Indian valuation rules are based on the WTO guidelines & the WTO guidelines are followed the world over. Therefore commission paid to the foreign agent by the exporter is includible in the CIF value of imports & subject to the payment of import duties in the country of import. Therefore, it is not in order that when the tax is paid in the country of import, the Indian government levies service tax on reverse transaction basis here in India, which is already taxed in another jurisdiction.

The applicability of service tax on transactions not originating or received in India is seriously in doubt because this extension can change the age old concepts of taxation. For e.g., the foreign agent is appointed by the Indian company, books an order for the supply of goods. However, the goods are not supplied from India but China. Now, in this case of third country transaction, though there is no reason for service tax to be paid in India but still with the present interpretation of the field formations tax is to be paid in India. Another tricky situation can be that the Indian company has an overseas office abroad. This office appoints the agent & effects the payment of commission. However, the goods are supplied from India in respect of the orders passed through the branch office. Under these circumstances, is the service tax payable by the exporter located in India? The service tax is already paid by the branch office as per the municipal law of that country. Here, the pertinent fact is that the foreign branch office is contracting the services for the Indian exporter & effecting payments of commission but can there be double taxation of the same transaction in different jurisdictions under different interpretations of the law. This effectively means multiple jurisdictions & multiple taxation.  

Coming back to the 100% EOU administered by the Customs in the port city, as per the CBEC instructions, the Service Tax refund is to be refunded by the administering/bonding authority. However, the field formations are granting registration to such units. Is it that the registration is to be done with the jurisdictional Service Tax authority but the refund is to be granted by the administering/ bonding authority! No clarity prevails & no authority is willing to give the written reply. The registering authority is asked the simple question that please specify the service received in India, which is being taxed by the law,but once again stoic silence prevails. However, verbally the Asstt. Commissioner says that since the foreign Agent is representing the Indian exporter, the service tax is payable. This is ridiculous because appointment of a representative is not the service being taxed under BAS. The appointment is sought from the Commissioner but the Commissioner is not willing to meet or take the call. The law needs to be transparent & the field formations are required to assist the assesses but this is only good for showcasing & to be incorporated in the law. However, there is no reply but then for all you know, as per the auditor not only the tax is due but non-payment entails, interest, fine & penalty also.

Another front was opened by the Income Tax department. They also wanted to get their share in the pie. The IT department wanted the exporter to deduct the TDS. The tribunal ruled that the counsel has made a fallacious argument made that since the orders are in the name of the assessee, the sales are deemed to have been effected in India . This argument has totally ignored the Sale of Goods Act and if such an argument were allowed to be sustained, then all the clarifications issued by the Board would be nullified and the very concept of export sales would disappear altogether. Therefore the issue of no service being received in India is confirmed through the judicial process & accepted.   

Once again just read the provisions of the tax leviability in respect of the export of services. The export services are exempt from the payment of tax. Now in case of the foreign agent if the recipient is treated to be the service provider then the service is being provided abroad & paid for in free foreign exchange therefore how this becomes a taxable transaction is still once again very difficult to comprehend. For this reason, the FTP says that services received / rendered abroad, where ever possible, shall be exempted from service tax. Not only this, as explained earlier, in case of 100% EOU, the tax is refundable. Further, there are services rendered in India paid for in Indian Rupees but deemed to be export services & therefore no service tax is payable on that. Therefore, this means that anything is possible if the policy maker is willing.

Finally, it is very intriguing that the subject matter of service tax on the commission paid to foreign agents by the Indian exporter has been visited several times because several amendments have been effected as detailed herein. However, till date no clarity exists in terms of the service received in India from the foreign agent, which makes this service taxable & if this is not taxable then how exemption is granted & for what. Finally, if 12.5% is considered good for giving the export entitlement then why the exemption of tax should be restricted to 10% only. Why the law cannot be more transparent & rationalistic so as not to challenge the mental ability of the assessee! Paying commission to foreign agents is a legitimate business expense for the furtherance of business & when this fact is expected then there is no way that service tax should be levied on it to make the exports uncompetitive. Without the commission being paid to the agent it is difficult to get orders & expand your business in new markets. If there is no proper application of mind & transparency in the law then this is simply a ripe ground for harassment & provides impetus to corruption. Further, such ambiguities give rise to frivolous litigation, which serves no purpose except clogging the courts.

rajiv.pec@gmail.com

 

 

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