Cestat rules service tax relief for exporters

New Delhi, Feb 19 The Customs, Excise Service Tax Appellate Tribunal (Cestat) on Tuesday ruled that service tax on commission paid by exporters to agents situated abroad could be levied only prospectively from the date when the relevant Section 66 (A) was introduced in Budget 2006.

The case relates to the revenue department’s appeal for a service tax claim of Rs 8.32 lakh on Bhandari Hosiery Exporters Ltd for the period from July 2004-February 2006. The company is a hosiery goods exporter and pays commission to such agents for getting orders from abroad.

The department contended that as per Rule 2 (1)(d)(iv) of Service Tax Rules 1994, the assessee is laible to pay tax. The Rule was made in 2002, but the Section regarding service tax on commission to foreign agents was introduced only in Budget 2006.

Rejecting the department’s appeal, Cestat held that service tax cannot be levied with retrospective effect on services rendered outside India before April 18, 2006, when Section 66A was introduced in the Finance Act. The department is expected to appeal before the high court shortly.

The company’s counsel J K Mittal said, “This landmark decision has major consequences as many similar cases are pending in other courts. More exporters can get similar relief now. Also, the revenue department will not be able to impose service tax just by bringing in Rules before a relevant Section is introduced in the Budget and passed by Parliament.”

Exporters in sectors like pharmaceuticals, textiles and leather pay a substantial commission to agents based abroad. The commission ranges from 5-25% of the freight on board (FoB) value of exports in pharma sector, and 5-10% in textiles & leather sectors. The commission is paid on around $6 billion worth exports of the total $20 billion worth annual exports from the three sectors. Back of the envelope calculations show that of this amount about $ 5.4 million is paid annually as service tax on commissions to foreign agents.

“This commission is the most effective marketing tool of exporters to promote their new products. The tax would harm their businesses, since exporters find it difficult to get major foreign buyers without the help of such agents,” Ajay Sahai, director general, Federation of Indian Export Organisations said.