The Hindu Business Line : Incentive is service taxable

We are a company engaged in real-estate business and primarily work with builders. As we are a sales organiser for these builders, we bill them for the area sold and get a commission out of that. We levy service tax on the bills and deposit the proceeds with the government. In a particular case there was an incentive (a trip to Malaysia) on achieving certain amount of bookings. On achieving this target we opted for a cash payment. Will this payment of incentive falls in the service tax net?

V. S. Associates, e-mail

The activity undertaken by you, that is, promoting sales of buildings constructed by builders will come under the category of Business Auxiliary Services. As per the definition contained in Section 65(19) of the Finance Act, 1994, Business Auxiliary Services include "a service in relation to promotion and marketing or sale of goods produced by the client or promotion or marketing of services provided by the client."

As per Section 67 of the Finance Act, 1994, read with Service Tax (Determination of Value) Rules, 2006, effective from April 18, 2006, where the provision of service is for a consideration in money, the value of the taxable service will be the gross amount charged by the service provider, that is, the commission earned by you. Where the provision of service is for a consideration not wholly or partly in money, then the value of taxable service will be equal to the gross amount charged by the service provider for similar service to any other person as sole considerationIn your case, in addition to the money consideration, you are entitled for an incentive, the trip to Malaysia. This is a non-monetary consideration. But instead of taking the trip, you have opted for cash payment. This will be treated as a consideration or as the cash equivalent of non-monetary consideration for the service provided, apart from the commission already received. Hence, both will be taxed to service tax. Or in other words, the gross amount you receive for the service provided, including the incentive, will be taken into account for levying tax.

High sea sales

We purchase certain material from an India party which, in turn, imports the same. I have the following doubts: Is it applicable only in case of import of goods by sea or both by air and sea? What are the remedies to avoid sales tax implication in case `high sea sale' is not allowed by air?

Kewal Jindal

There is no specific definition of what is high sea sale in any Act. However, as per trade practice, sale of goods when they are on high seas, that is, in transit, is recognised and in such transactions, the liability to comply with import regulations and to pay Customs duty shift to the buyer of the goods. Transport of goods by sea takes more time and therefore, there is time to enter into agreements for sale of goods when they are in transit. This explains the reasons for the name given to such transactions.

In respect of goods transported by air, the time available for entering into a sales transaction may be limited. All the same, there are situations where it takes a few days for a cargo to arrive in one country to another country even by air. Whether there is sufficient time available to enter into the sales contract and to complete the transaction, when the goods are in transit by air, depends upon the facts of each case. There is no law that prohibits a transaction on goods transported by air.

With regard to your second query, if there is a law that when goods are imported by air, `high sea sales' cannot be effected then, there is no way sales tax or VAT can be avoided because such a sale will be treated as one taking place within the territorial jurisdiction of a state. However, in Central Sales Tax Act, under Section 5 there is a provision by which a sale or purchase of goods is deemed to take place in the course of import of such goods into India if such sale or purchase occasion the import. Thus the Local Sales Tax liability can be avoided in terms of this Section on the above basis as well as sale on high seas.

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S. Murugappan

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