CESTAT: Performance-Linked ‘Bonus Payments’ to Foreign Shareholders Taxable as Business Auxiliary Services

April 21, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore Bench, has upheld the levy of service tax on “bonus payments” made by M/s Emmvee Photovoltaics Power Pvt. Ltd. to foreign shareholders, holding that such payments were not part of share purchase consideration but were linked to marketing and business promotion activities.

A Bench comprising Dr. D.M. Misra (Judicial Member) and R. Bhagya Devi (Technical Member) partly allowed the appeal, granting limited relief on penalties while affirming the substantive tax demand.

The ruling arose from an appeal against Order-in-Original dated 19.07.2016, which had confirmed service tax demands under the reverse charge mechanism on (i) commission paid to foreign service providers and (ii) “bonus payments” made pursuant to a Share Purchase Agreement dated 05.12.2011.

The appellant, engaged in manufacturing photovoltaic modules and exporting to European markets, argued that the bonus payments formed part of the consideration for acquiring 51% shareholding in Emmvee Photovoltaics GmbH, Germany, and were therefore capital in nature, not taxable as services.

However, the Tribunal, on a detailed reading of the agreement, noted a clear distinction between the fixed share purchase consideration and additional payments of EUR 300,000 designated as “bonus payments.” These payments were contingent upon fulfilment of specific conditions, including continued managerial involvement of the sellers and achievement of defined sales turnover targets by the foreign entity and its subsidiaries.

Rejecting the appellant’s contention, the Bench held that such conditional and performance-linked payments could not be treated as part of the share acquisition value. It observed that entitlement to the bonus depended on future business performance and managerial participation, indicating a direct nexus with business promotion. The Tribunal concluded that the payments were “nothing but consideration towards marketing services” rendered to the appellant.

Accordingly, the Tribunal upheld classification of the payments under “Business Auxiliary Services” under the Finance Act, 1994, confirming the service tax demand of ₹26,75,322/- on bonus payments.

With respect to commission payments, the Tribunal noted that the appellant had already discharged the service tax liability along with interest prior to issuance of the show cause notice. This portion of the demand was therefore sustained as admitted liability.

On limitation, the Tribunal held that the extended period was rightly invoked, noting that material facts came to light only during investigation and there was suppression of relevant information.

On penalties, the Bench took a lenient view. Considering that part of the tax had been paid voluntarily before issuance of the show cause notice, it reduced the penalty under Section 78 to the amount of tax confirmed on bonus payments and set aside the penalty under Section 77.

The appeal was thus partly allowed, limited to modification of penalties.

Cause Title: M/s Emmvee Photovoltaics Power Pvt. Ltd. v. Commissioner of Central Excise & Service Tax
Case No.: Service Tax Appeal No. 21527 of 2016