2025 (7) TMI 215 - AT - Service Tax

Non-payment of service tax by authorized dealers of the vehicle manufacture - payments received as incentives / discounts reimbursements opining them to be in nature of consideration for Service - existence of element of Service or not - Business Auxiliary Service (BAS) being sales promotion activities - levy of interest and penalty - HELD THAT - In the case of Commissioner of Service Tax Mumbai Versus M/s. Jaybharat Automobiles Ltd. and vice versa 2015 (8) TMI 503 - CESTAT MUMBAI it was held that incentives received by the car dealers on principal to principal basis are not chargeable to service tax. In yet another decision titles as My Car Pvt. Ltd. V. CCE Kanpur 2015 (8) TMI 353 - CESTAT ALLAHABAD this Tribunal has remanded the matter back to the adjudicating authority while deciding that incentives and trade discounts provided by Maruti Udyog Limited (MUL) for fulfilling the targets given by them and for free services done by authorized dealers are out of the ambit of service tax regime. Thus the amount of incentives / discounts received by the appellants during the period of dispute have wrongly been held as consideration for rendering a service called BAS. Service tax demand is therefore held to have been wrongly confirmed by the Adjudicating Authority below. The adjudicating authority has rather failed to observe the judicial protocol. Charging of interest under section 75 of the Finance Act 1994 - Penalty - HELD THAT - The charging of interest under section 75 of the Finance Act 1994 is also not sustainable when service tax itself is not payable. In such circumstances neither there is non-payment / short payment of service tax nor there is contravention of any provision of service tax act by the appellant. Hence penalty also cannot be imposed upon the appellant firm nor on its proprietor. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the applicability of service tax on incentives, discounts, and reimbursements received by authorized vehicle dealers from the manufacturer, specifically whether such receipts constitute consideration for taxable Business Auxiliary Services (BAS) under the Finance Act, 1994. The issues include:

• Whether the incentives/discounts received by the authorized dealer from the vehicle manufacturer constitute taxable consideration for services rendered under BAS.
• Whether the relationship between the manufacturer and the dealer is principal-to-principal, thereby excluding service tax liability on incentives.
• The applicability of extended limitation period for service tax demand on such incentives.
• Whether interest and penalties can be imposed on the appellant for non-payment of service tax when the underlying liability is disputed.

Issue-wise Detailed Analysis

1. Taxability of Incentives/Discounts under Business Auxiliary Services

Legal Framework and Precedents: The relevant provisions invoked include Section 68 and Section 66D of the Finance Act, 1994, and Rule 6 of the Service Tax Rules, 1994. The definition of Business Auxiliary Services under Section 65(19) of the Finance Act is central to the issue. Precedents relied upon by the appellant include decisions of the Tribunal in cases such as M/s Vipul Motors Pvt. Ltd. vs. Commissioner of Customs, Central Excise and Service Tax Noida, T.M. Motors Pvt. vs. CGST & CE, Alwar, Jaybharat Automobiles Ltd. vs. Commissioner of Service Tax, Mumbai, and Sai Service Station Ltd. vs. Commissioner of Service Tax, Mumbai, among others.

Court's Interpretation and Reasoning: The Tribunal held that the incentives and discounts received by the authorized dealer from the manufacturer are part of the commercial transaction conducted on a principal-to-principal basis. The incentives are linked to achieving sales targets and do not arise from the provision of any service to the manufacturer. The Tribunal emphasized that the mere receipt of incentives or discounts under various schemes does not transform the transaction into a service liable to service tax under BAS.

Key Evidence and Findings: The appellant submitted detailed schemes and documents evidencing the receipt of incentives linked to wholesale and retail targets. The department's investigation confirmed receipt of substantial amounts as incentives but failed to establish that these were payments for services rendered. The appellant's argument, supported by statements from financial officers, was that these incentives were trade discounts or reimbursements, not consideration for services.

Application of Law to Facts: The Tribunal applied the principle that service tax is leviable only when there is provision of a taxable service and consideration received therefor. Since the incentives were not for services but for meeting sales targets, they fall outside the ambit of BAS. The Tribunal also noted that the issue had been settled in various precedents, including Rohan Motors Ltd. and Jaybharat Automobiles Ltd., where similar incentives were held not to attract service tax.

Treatment of Competing Arguments: The department conceded that the issue was no longer res integra and acknowledged the precedents cited. However, it maintained the demand based on the original Order-in-Original. The Tribunal rejected the department's stand, relying on the principle that incentives linked to principal-to-principal transactions are not taxable services.

Conclusions: The Tribunal concluded that the incentives and discounts received by the appellants were not consideration for taxable services under BAS and thus not liable to service tax.

2. Application of Extended Period of Limitation for Service Tax Demand

The department invoked the extended period of limitation for issuing the Show Cause Notice. However, since the Tribunal found no service tax liability on the incentives, the extended limitation period becomes irrelevant. The Tribunal did not separately elaborate on limitation but implicitly held that the demand itself was unsustainable.

3. Levy of Interest and Penalties on Non-Payment of Service Tax

Legal Framework and Precedents: Section 75 of the Finance Act, 1994, provides for interest on delayed payment of service tax. Penalties are imposed under various provisions for contravention of the service tax law. The Tribunal relied on Supreme Court decisions including Pratibha Processors vs. Union of India and Hindustan Steel vs. State of Orissa to analyze the nature of interest and penalty.

Court's Interpretation and Reasoning: The Tribunal emphasized that tax, interest, and penalty are distinct concepts. Interest is compensatory and linked to actual tax liability and delayed payment thereof. Penalty is penal in nature and requires contumacious, deliberate, or dishonest conduct. Since the Tribunal held that no service tax was payable on the incentives, there was no tax liability to attract interest or penalty.

Key Evidence and Findings: The appellant was found not to have withheld any tax since the incentives were not taxable. There was no evidence of deliberate evasion or dishonest conduct. The Tribunal also noted that the proprietor of the appellant firm was not liable for penalty in absence of any contravention.

Application of Law to Facts: The Tribunal applied the principle that interest cannot be levied in absence of tax liability, and penalty cannot be imposed without proof of willful default or dishonest conduct.

Treatment of Competing Arguments: The department's demand for interest and penalty was rejected on the basis of the primary finding of no service tax liability.

Conclusions: The Tribunal held that both interest and penalty imposed on the appellants were unsustainable and set aside the same.

Significant Holdings

"The incentives / discounts received by the appellants during the period of dispute have wrongly been held as consideration for rendering a service called BAS. Service tax demand is therefore held to have been wrongly confirmed by the Adjudicating Authority below."

"Interest is compensatory in nature and linked to payment of tax. So if there is no short or non payment of tax, interest cannot be levied thereon."

"An order imposing penalty for failure to carry out the statutory obligation is the result of quasi-criminal proceedings and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contentious or dishonest or acted in conscious disregard of its obligation."

Core principles established include:

• Incentives and trade discounts received by authorized dealers from manufacturers on principal-to-principal basis do not constitute consideration for taxable Business Auxiliary Services.
• Service tax liability arises only when there is provision of taxable service and consideration therefor; mere receipt of incentives linked to sales targets is not taxable.
• Interest under service tax law is compensatory and cannot be levied in absence of tax liability.
• Penalty requires proof of deliberate or dishonest conduct and cannot be imposed merely for non-payment when no tax is due.

Final determinations on each issue are:

• Service tax demand on incentives/discounts received by the appellants is set aside.
• Interest charged under Section 75 of the Finance Act, 1994, is not sustainable and is quashed.
• Penalties imposed on the appellants and their proprietor are set aside for lack of any contravention or dishonest conduct.