CESTAT Rules No Service Tax on Foreign Commission and RCM on Director’s Rent

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, ruled in favour of M/s. PSV Polymers Pvt. Ltd., setting aside the earlier order passed in June 2018 that had confirmed service tax demands, interest, and penalties. The company, which exports guar gum powder, had paid over Rs. 75 lakhs as commission to foreign agents between 2010 and 2014 to help procure export orders, and around Rs. 5.3 lakhs as rent to one of its directors for using his godown between 2010 and 2015. The tax department, however, applied the reverse charge mechanism under Section 66A of the Finance Act, 1994 and Notification No. 30/2012-ST and raised a service tax demand of nearly Rs. 10 lakhs, along with penalties, by invoking the extended period of limitation under Section 73(1). Aggrieved by the said charge, the appellant filed an appeal before the CESTAT, New Delhi.

Issues Raised: Whether commissions paid to foreign agents for export facilitation and rent paid to a director in his individual capacity were subject to service tax under reverse charge, and whether the demands were required to be raised at all, considering the company could have claimed CENVAT credit, making the whole situation revenue neutral.

CESTAT’s Decision: The Hon’ble Tribunal determined that the service tax demand on commission paid to foreign agents could not be maintained based on revenue neutrality, since any tax paid would have qualified for a CENVAT credit or refund under Rule 5 of the CENVAT Credit Rules, Rule 18 of the Central Excise Rules, and Notification No. 41/2007-ST. The Tribunal pointed out that service tax under reverse charge on export commissions had constantly been ruled to be revenue neutral, citing rulings such as Texyard International, CCE v. Coca-Cola India Pvt. Ltd., and Satyam Enterprises. The Tribunal, while referring to Cords Cable Industries Ltd. and Varaha Infra Ltd., determined that the rent paid to the director was not taxable under reverse charge because it was paid in the director’s individual capacity as the godown owner rather than in his official capacity. The case was once more revenue-neutral because the appellant was qualified to receive a CENVAT credit on any such tax paid. Thus, the demand was set aside in its entirety, including interest and penalties. The Hon’ble tribunal also pointed out that extended limitation is typically not revocable in cases of revenue neutrality; therefore, the tribunal held no need to investigate the limitation issue.

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