“Commission” Is distinguishable From “Incentive”, No Service Tax Can Be Levied On “Incentive”: CESTAT

The Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that no service tax can be levied on “incentives.”.

The bench of Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that the amount received as “commission” is distinguishable from the amount received as „incentive for the simple reason that “commission” has direct nexus to the service that the appellant is providing, i.e., booking of space with the airlines, whereas “incentive,” as explained by the appellant, is the profit that they earn from the difference in the amount that they generally charge their clients, which is higher than the price they have negotiated with the airlines. Therefore, the amount received by way of incentive is not on account of rendering any services but on account of trading activity, which is not taxable.

The appellant/assessee has challenged the imposition of a service tax on “incentives” received from the airline companies under the category of “Business Auxiliary Service.”.

The department has filed a cross-appeal on the bifurcation of income under the categories “commission” and “incentive” and further the bifurcation of incentives to "incentive," "discount,” and “market price adjustments,” on which demand has been dropped.

A show cause notice was issued as the department compared the ST-3 returns, 26AS statements, and balance sheets of the appellant and concluded that they had underreported their taxable values and paid less service tax on the various services under the categories of “Clearing and Forwarding Agent” (CFA) and “Business, Auxiliary Service” (BAS).

The demand for the differential service tax of Rs. 9,44,87,513 along with interest and penalty was raised by invoking the extended period of limitation.

The adjudicating authority observed that the extended period of limitation cannot be invoked in so far as the inclusion of freight in the value of clearing and forwarding agent service is concerned, as on the same facts, the department has already issued the show cause notice. On merits, it was held that freight is not taxable under the provisions of the Act as it is charged and recovered by the assessee from its clients or exporters for booking space for the transportation of goods, which is paid by the assessee to the airlines and hence cannot be attributed to the services of the clearing and forwarding agent, and therefore, the demand of Rs. 7,72,79,839/- on this account was dropped. On the second aspect of “Business Auxiliary Service," which is the subject matter of dispute both by the appellant and the Revenue, the adjudicating authority considered the two elements “commission” and “incentive” separately, but as the appellant had paid the service tax on "commission," there was no dispute.

The liability of service tax on “incentives" was considered by the adjudicating authority, taking into account the different terminology used in the Cargo Sales Report (CSR) Sheets, i.e., “incentives," "discounts and “market price adjustments, and holding the latter to be non-taxable as they have direct linkage with the freight charged by the airlines. The demand of Rs. 11,47,957/- for service tax on “incentives” was confirmed for the normal period from October 2013 to March 2015.

The assessee contended that there is no difference between “incentive," "discount'discount” and “market price adjustment,” and the same have been used in the CSR Sheets for the same category of income and therefore should have been treated alike. He further clarified that “incentive," "discount” or “market price adjustment” refers to the activity of booking space in airlines by the appellants for the exporters in which no service element is involved.

The department contended that the activity of booking space for airlines by the appellant is a service provided by them to the airlines, and therefore the amount received by them towards incentives is very much in the nature of payment for services rendered in promoting such businesses and is therefore taxable. In support of the appeal filed by the revenue, it has been submitted that the bifurcation of “incentives” and holding the value of “discount and "market price adjustment” as not taxable is not legally tenable, and the entire amount towards “commission” and “incentive” is taxable.

The tribunal held that no service tax can be levied on “incentives.”. In so far as the appeal filed by the revenue against the demand being dropped on “discount” and “market price adjustment” is concerned, the same has been dropped as they are directly linked to freight, which has been held to be non-taxable by the adjudicating authority, and the same has not been challenged by the department.

Counsel For Appellant: Harshvardhan

Counsel For Respondent: A.K. Prasad

Case Title: Wig Air Freight Pvt. Ltd. Versus The Commissioner of Central Goods and Service Tax, New Delhi

Case No.: Service Tax Appeal No. 50177 of 2019

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