CESTAT Bangalore Upholds Service Tax On Emmvee Photovoltaics' Bonus Payments To Foreign Shareholders

On 21 April, the Bangalore Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) upheld the service tax on bonus payments made by Emmvee Photovoltaics Power Pvt. Ltd. to foreign shareholders and partly allowed the company's appeal, granting limited relief on penalties imposed under the Order-in-Original.

A Bench comprising Judicial Member Dr. D.M. Misra and Technical Member R. Bhagya Devi held that bonus payments linked to performance conditions constitute consideration for marketing and business promotion services and attract service tax under the reverse charge mechanism. It observed:

“.....in addition to the purchase of shares for an amount of 450,000.00 Euros, there is an additional payment of 300,000.00 Euros termed as 'bonus payment' for fulfilling the conditions as laid down in the Agreement. Thus, it clearly establishes the fact that this 'bonus payments' are nothing but payments towards marketing the products of the appellant. The Revenue has rightly classified the same under 'Business Auxiliary Services' since the same is towards promoting the business of the appellant and accordingly, the demand of service tax of Rs.26,75,322/- is upheld......”

The Department alleged that Emmvee Photovoltaics Power failed to discharge service tax on two categories: commission paid to foreign service providers and “bonus payments” made to individuals associated with Emmvee Photovoltaics GmbH, Germany. It contended that both payments fell within “Business Auxiliary Services” under the Finance Act, 1994 and attracted tax under the reverse charge mechanism.

Emmvee Photovoltaics Power, engaged in manufacturing photovoltaic modules for export to European markets, argued that the bonus payments formed part of the consideration for acquiring 51% shareholding in the German company under a Share Purchase Agreement dated 5 December 2011.

It submitted that these payments represented share acquisition consideration and did not relate to any taxable service. It also stated that it had already discharged part of the commission-related tax along with interest before issuance of the show cause notice, and therefore the Department could not invoke extended limitation or impose penalties.

The Revenue argued that the structure of the agreement clearly showed that the “bonus payments” depended on continued managerial involvement of the sellers and achievement of specified sales targets by the foreign entity and its subsidiaries. It submitted that such conditional and performance-linked payments did not form part of share purchase consideration and instead represented consideration for marketing and business promotion services rendered to the company.

After examining the Share Purchase Agreement, the Tribunal found that the agreement provided for a fixed consideration for share transfer and an additional EUR 300,000 as “bonus” payable in two instalments, subject to conditions such as continued managerial involvement of the sellers and achievement of sales targets. It held that such payments directly linked to performance and business outcomes could not form part of share acquisition cost.

On limitation, the Tribunal upheld invocation of the extended period after it found that the company did not disclose material facts and the Department discovered them only during investigation.

However, since the company had already paid part of the tax along with interest before issuance of the show cause notice, the Tribunal reduced the penalty under Section 78 to the tax confirmed on bonus payments and set aside the penalty under Section 77.

Accordingly, CESTAT upheld the service tax demand of Rs. 26.75 lakh on bonus payments, confirmed the commission-related demand already paid, and partly allowed the appeal with modification of penalties.

For Appellant: B. G. Chidananda, Advocate

For Respondent: Vikalp Jain, Superintendent