Service Tax Under RCM Payable on ‘Bonus Payments’ Linked to Performance: CESTAT

The Bangalore Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that “bonus payments” made to foreign shareholders, when linked to performance conditions such as sales targets, cannot be treated as part of share purchase consideration but instead constitute consideration for marketing services, liable to service tax under the Reverse Charge Mechanism (RCM). The bench of Dr. D.M. Misra (Judicial Member) and R. Bhagya Devi (Technical Member) has observed that the Share Purchase Agreement clearly bifurcated the transaction into two parts—purchase of shares and separate bonus payments. The bonus payments were conditional upon: The sellers continuing as managers of the foreign company, and achievement of specified turnover targets by the company and its subsidiaries. The appellant, engaged in manufacturing photovoltaic modules and exporting them to European markets, had entered into a Share Purchase Agreement with two individual shareholders of a German company, Emmvee Photovoltaics GmbH. Alongside the acquisition of 51% shareholding, the agreement provided for additional “bonus payments” contingent upon the achievement of specified sales turnover targets and continuation of managerial roles by the sellers. During investigation, the department alleged that The appellant had failed to discharge service tax on imported marketing services received from the foreign entity. The so-called “bonus payments” were not part of share purchase consideration but were linked to future business performance and therefore represented consideration for services. A show cause notice was issued demanding service tax under RCM along with penalties. The Tribunal examined two primary issues: Whether service tax was payable on commission paid to foreign service providers. Whether “bonus payments” made under the Share Purchase Agreement constituted consideration for services or were part of share acquisition. The Tribunal noted that the appellant had already accepted liability on commission payments and had discharged service tax along with interest prior to issuance of the show cause notice. Accordingly, the demand of ₹15.18 lakh along with interest was upheld. On the more contentious issue of bonus payments, the Tribunal made a crucial distinction between share purchase consideration and performance-linked payments. The Tribunal emphasized that such conditions demonstrate a direct nexus with business promotion and marketing performance rather than share acquisition. The tribunal held that payments made after completion of share transfer, contingent upon future performance, cannot be treated as part of share value. Bonus payments linked to turnover targets are inherently connected to marketing and business promotion activities. The Tribunal concluded that these payments fall within the ambit of “Business Auxiliary Services” and are taxable under Section 66A of the Finance Act, 1994 as import of services. The appellant had contended that the payments were towards share capital and not services. Bonus payments were discretionary and part of the overall acquisition deal. However, the Tribunal rejected these arguments, noting that the conditional and performance-linked nature of payments negates their characterization as share consideration. Payments were made to individuals based on future performance, reinforcing their service character. The reliance on customs valuation judgments was misplaced as the issue pertained to service tax liability. The Tribunal upheld invocation of the extended period of limitation, observing that the relevant facts came to light only during investigation. There was suppression of material facts with intent to evade tax. However, considering that part of the tax liability had been discharged before issuance of notice: Penalty under Section 78 was reduced and the penalty under Section 77 was set aside. The Tribunal upheld service tax demand on both commission and bonus payments, confirmed tax liability of ₹26.75 lakh on bonus payments, reduced penalties, and partly allowed the appeal. Case Details Case Title: M/s. Emmvee Photovoltaics Power (P) Ltd. Versus The Commissioner of Central Excise & Service Tax Citation: JURISHOUR-913-CES-2026(BANG) Case No.: Service Tax Appeal No. 21527 of 2016 Date: 21.04.2026 Counsel For Appellant: B. G. Chidananda, Advocate Counsel For Respondent: Vikalp Jain, Superintendent (AR) Click Here To Read Order Read More: Roasted Areca Nuts Not Fit for Consumption: CESTAT Allows Provisional Release for Industrial Use Under Strict Supervision

Service Tax Under RCM Payable on ‘Bonus Payments’ Linked to Performance: CESTAT

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