The Service Tax Department of Central Excise has slapped notices on all regional and sub-distis, claiming service tax on trade discounts/backends/incentives received by them since 2004. As per this notice channel partners have to pay up crores of rupees as service tax.

S Karthikeyan, CEO, Bloom Electronics, Coimbatore and Advisor, Confed-ITTA, who is spearheading the issue with the vendors, termed the act as the worst scenario channels have faced till date. "We have been asking vendors to clarify on which heads they debit the backends and whether they will attract service tax or not. However, nobody has explained it to us till date. The sudden imposition from the Central Excise has come as a bolt of thunder on the heads of channels," Karthikeyan claimed.

The channel partners are now looking to vendors to bail them out of this situation, and feel that the partners need to collect the service tax on their claims from vendors and pay the same to Service Tax Department. Claiming that today was the deadline for vendors to reply and support the channels on this front, Karthikeyan reiterated that if at all the tax needs to be paid, it has to be collected from the vendors.

"This has been the most challenging situation I have ever come across in my career, and we aren't sure what we should do. If it is said that the tax needs to be paid, it must be collected from the vendors only. If a situation arises where we need to pay the tax for getting our money, our businesses will perish. We are waiting for a clarification from vendors by end of today, and it's a test for vendors as well on how committed and supportive they are to their channel partners," he claimed.

Confed-ITTA has written to all major vendors whose partners are affected by this demand like HP, Lenovo, Numeric, Acer, TVS-E, Samsung, etc.

A legal opinion was provided to a member of Confed-ITTA by a vendor. In the following it is very clear that the practice of buying from national distributors and getting rebates from vendor makes the claim of trade rebates untenable. These are treated as 'Auxilary Business Services' and such payouts attract Service Tax.

1. Only the payments received by the channel partner from national disti for the price difference can be treated as a reduction in the purchase price and therefore will not be liable for Service Tax levy. This is subject to the condition that the perfect linking of the price difference debit note with the purchase invoice is available on channel partner records and mentioned in both the documents

2. However any incentive/ commission/ price difference payments received by the CP from any person (from whom the good are not purchased even if it is from manufacturers etc) shall be subject to Service Tax levy payable by the CP. In such cases, CP has to raise the invoice for such incentive/commission along with Service Tax and collect the same from such other person from whom the good are not purchased

3. The above is irrespective of the fact whether the incentive/ commission payments (second part alone above) is more than Rs 10 lakh in a financial year or notbecause the channel partner is the user of brand name of other like TVS-E dealer, HP partner, Samsung, Lenovo stores, etc.