Abatement & Service Tax Credit
Senguttuvan K
(Querist) 16 September 2008
This query is : Resolved
Brief Facts
“X” is a FMCG company and products are notified under Schedule III of CEA 1944 and abatement % is notified for each item.
The products are manufactured at their own factory as well at Toll Manufacturers (TM) on P to P basis.
Normal expenditure on advertisement is around 25 to 35% of the sale turnover (TO) and advertisement service is under service tax net.
The understanding of the trade and as per the dictum Tribunal in certain cases, one is eligible for service tax credit on advertisement services received only for the brands produced in own factory and that too only to the extent of the volume done (if same brand is produced at own factory as well at TM, then pro rate basis)
Argument
Abatement is Diminution in amount, degree, or intensity; moderation, The amount lowered; a reduction
Under excise provisions, abatement was granted with an intention not to levy excise duty on the expenses such as taxes payable including excise duty, trade commission and distribution.
From the table it is evident that advertisement and marketing expenses are removed from assessable value by the way of abatement.
Hence the advertisement and marketing expenses were assumed to be part of assessable value (AV) under RSP provision by law makers.
Also, in practice the transfer price of TM to FMCG would be material cost + conversion cost, which is much lower than AV (MRP – abatement).
Since TM is discharging duty liability for the excisable goods produced by them, it should have been a case that TM’s incur the expenses and accordingly valuation (material cost + advertisement expenses to the volume of production + conversion cost) is done for transfer.
Query
The advertisement company can raise invoice on TM directly and FMCG can pay on behalf of the TM and debit to TM
OR
FMCG avails advertisement services and distribute through Debit Note with supporting of relevant agency invoice with pro rate computation (Total Advertisement Expenses for the Brand * volume procured from respective TM / Total volume procured & produced) to TM’s.
With respect to TDS provisions, distribution will not attract TDS under Sec 194C. As per the section “in pursuance of a contract with the sub-contractor for carrying out”.
“in pursuance of a contract (no contract between FMCG & TM. FMCG only facilitates by paying for all such services and getting reimbursed through DN) with the sub-contractor (FMCG is not sub-contractor) for carrying out (nothing has been carried out except receiving and sharing)”
Hence the suggested transaction has no implication from Income Tax Act.
The quantum of abatement is notified by taking into account the amount of excise duty, sales tax and other taxes and trade margins.
Hence, my query is whether suggested procedure for availing credit on service tax paid on advertisement services for brands is viable from the legal perception?
Rajesh Kumar
(Expert) 16 September 2008
Your view:
The understanding of the trade and as per the dictum Tribunal in certain cases, one is eligible for service tax credit on advertisement services received only for the brands produced in own factory and that too only to the extent of the volume done (if same brand is produced at own factory as well at TM, then pro rate basis).
There is no basis for this understanding, particularly when goods are liable to assessment under Section 4A of the Central Excise Act.
Credit of the full amount of service tax paid is availale.
