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TMI Blog2020 (12) TMI 913X X X X Extracts X X X X X X X X Extracts X X X X ..... for manufacturing new models of cars. Subsequently, the parties entered into a 'Model Agreement' dated May 31, 2011 [the Model Agreement] for the launch of a new model of 'Honda Civic' in India. This Model Agreement provided that the model fee and royalty fee would be determined as per the Technical Agreement. 3. The appellant claims that on account of unviability of high-end petrol cars due to increase in diesel cars, it decided not to launch the new model of Honda Civic car in India. For this reason, the Model Agreement was terminated on March 30, 2012 by a "Model Termination Agreement"[ the Termination Agreement]. In terms of clause 3 of this Termination Agreement, the appellant paid an amount of Japanese Yen [JPY] 130,000,000/- to Honda Japan to compensate all costs, expenses and non-cancellable commitments incurred by Honda Japan till then. This amount, according to the appellant, was paid to compensate for the following: i. Research and development already undertaken by Honda Japan; ii. Cost of Manpower assigned to the project; iii. Overseas business trip expenses; iv. Domestic business trip expenses; and v the Administrative costs incurred 4. According to the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between M/s Honda Siel Cars India Ltd and M/s. Honda Motor Co. Ltd Japan, it is apparent that the transaction involving payment of JPY 130,000,000 (Rs. 7,98,78,500/- including TDS of Rs. 79,87,850/-) by the Noticee to M/s Honda Motor Co. Ltd Japan in terms of the Model Termination Agreement cited above, is a taxable transaction and the Noticee is liable to pay Service Tax as recipient of service under Section 66A of the Act read with Rule 2 (1) (d)(iv) of the Rules. (as it existed during the period covered by audit)." 6. The appellant filed a reply dated July 7, 2014 to the aforesaid show cause notice contending that the appellant had not received any service from Honda Japan and, therefore, no service tax was payable on the termination fee paid to Honda Japan. After making reference to the Technical Agreement, the Model Agreement and the Termination Agreement, the appellant stated as follows: "A.9 A combined reading of the Model Agreement and the TCA shows that the Noticee was to receive technical information and know-how with respect to the full model changes for the CIVIC model in the form of drawings, specifications, engineering standards etc. (as mentioned in Article 1 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineer" has been defined under section 65(31) of the Finance Act 1994. Section 65(31) "consulting Engineering" means any professionally qualified engineer, or any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering. 4.7 On plain reading of the definition as above, it shows that following ingredients are required to qualify for a person to be consulting Engineering (i) Consulting Engineering should be either qualified engineering or any body corporate or any firm (ii) Consulting Engineering should render advice, consultancy or technical assistance to any person. 4.8 In the instant case M/s Honda Japan from whom the noticee had received the service, is a body corporate and M/s Honda Japan had rendered advice or technical assistance to the notice as discussed hereinabove para. 4.9 Therefore, and in view of my observation recorded in preceding para, I fail to find any legal force in noticee's argument that the services which they have received, is consulting engineering Service Tax. I therefore, hold that the department has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to service tax. (a) Ford India Private Limited vs. Commissioner, LTU, Chennai [2018 (1) TMI 1219-Cestat Chennai]. (b) Lemon Tree Hotel vs. Commissioner, GST, Central Excise & Custom [2019 (7) TMI 767-Cestat New Delhi]; (iii) When the benefits of the work undertaken by Honda Japan towards preliminary research or development for the appellant were not passed on to the appellant, no tax liability can accrue on reverse charge basis. This is specifically evident from the show cause notice itself. The show cause notice issued to the appellant discusses the clauses under the Technical Agreement which stipulate provision of technical information. The notice also discusses the taxing provisions for 'consulting engineer' service. Thereafter, the notice directly alleges that the appellant is liable to pay service tax on the amount paid under the Termination Agreement, without identifying or specifying any 'consulting engineer' service which was actually rendered by Honda Japan to the appellant; (iv) The amount received was in the nature of reimbursement of expenses, which is not subject to service tax; (v) No demand can be made under the category of 'consulting engineer' services; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such business, has acquired and possesses certain intellectual property rights, manufacturing information and know-how, quality standards and marketing methods relating to such products; WHEREAS, LICENSEE is desirous of obtaining and receiving a license and technical information from LICENSOR for the manufacture and sale of certain automobiles, and LICENSOR is willing to give such license and information; and WHEREAS, Exhibits I & II attached hereto, form an integral part of this Agreement, NOW, THEREFORE, LICENSOR and LICENSEE hereby agree as follows: Article 1. DEFINITIONS Unless otherwise clearly required by the context, the following capitalized terms as used in this Agreement, whether used in the singular or plural, shall have the respective meanings as defined below: 1. The tem "Products" shall mean the specific models and types of Honda-branded automobiles, being currently manufactured by the LICENSEE, hereinafter called the "Existing Models", and such additional models and types, which may, from time to time, be decided, as agreed upon by the parties hereto, in writing, in a "Model Agreement and shall cover; (a) Full Model Changes (FMCs) being variants of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panese Yen (JPY 800,000,000). This fee shall be payable in two (2) equal installments as detailed below: i) The first installment of Four Hundred Million Japanese Yen (JPY 400,000,000) shall be payable within sixty (60) days after the signing of Model Agreement by LICENSOR and LICENSEE; and ii) The second and final installment of Four Hundred Million Japanese Yen (JPY 400,000,000) shall be payable within sixty (60) days after commencement of Commercial Production of the specific New or FMC model of the Products. 13.1.2 ROYALTY In consideration of the right and license granted to LICENSEE under Article 2 hereof for the Products and the Export Parts, LICENSEE shall pay to LICENSOR a Royalty on all Products and Export Parts, while this Agreement is effective. The rate of royalty for the Products payable by LICENSEE to LICENSOR shall be as under: (a) On Domestic Sales: Five Percent (5%) net remittable to LICENSOR, after deduction from the Gross rate, the applicable withholding taxes, which shall be additionally borne and deposited by LICENSEE on behalf of LICENSOR (b) On Export Sales: Five Percent (5%) net remittable to LICENSOR, after deduction from the Gross rate, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the Model Agreement dated the 31st day of May, 2011 concerning the 2012 YM Civic (hereinafter referred to as the "Products") as an addendum to the TCA (hereinafter referred to as the "Model Agreement"; WHEREAS, after execution of the Model Agreement by the parties hereto, LICENSEE has been having difficulty with the fast-changing environment for the Products, as Indian car market is rapidly getting dieselized because of large difference between the Petrol and Diesel fuel prices. Consequently, the upper segment Petrol cars are getting uncompetitive. This has sharply eroded the demand for the LICENSEE's existing Civic models; and WHEREAS, in consideration for the above situation, LICENSEE requested LICENSOR to terminate the Model Agreement without the commencement by LICENSEE of the volume production of the Products and LICENSOR accepts as an exceptional case such LICENSEE's request if LICENSEE compensates all costs, expenses and non-cancelable commitments incurred by LICENSOR for the work towards the commencement of volume production of the Products by LICENSEE up to the date of cancellation of the Model Agreement, NOW, THEREFORE, LICENSOR and LICENSEE hereby agree as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the appellant. The Termination Agreement specifically provides that though the production of new Honda Civic Car would not take place, the appellant would have to compensate all costs, expenses and non-cancellable commitments incurred by Honda Japan for the work towards the commencement of the volume production of the new model and this amount, as noticed above, was also specified to be JPY 130,000,000. 19. According to the Department the respondent is liable pay service tax on a reverse charge basis on the amount paid to Honda Japan under the Technical Agreement under the category of "consulting engineer" service. 20. The dispute in the present appeal is, therefore, whether the amount paid by the appellant to Honda Japan can be subjected to service tax. 21. To appreciate the issue it would be pertinent to refer to the relevant clauses of the Technical Agreement, the Model Agreement and the Termination Agreement. 22. A perusal of the clauses of the Technical Agreement would indicate that Honda Japan was in the business of research and development; manufacture and sale of auto-mobiles; and possessed manufacturing information and know-how. The appellant desired to obtain a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. 25. It would also be pertinent to refer to the charges leveled against the appellant in the show cause notice. The show cause notice mentions that as per the Agreement, the appellant was required to pay the first installment within sixty days after the signing of the Model Agreement for launching of the new model car and, accordingly, an invoice dated March 31, 2012 for payment of JPY 130,000,000/- was raised as per the terms and conditions of the Termination Agreement dated March 30, 2012. The notice further mention that this amount was "in consideration of new model projects" (reimbursement of all costs, expenses and non-cancellation commitment changes) and, therefore, was taxable, but the appellant did not pay appropriate service tax on this amount. 26. The appellant filed a reply to the show cause notice clearly pointing out that the decision to launch the Full Model Change of Honda Civic model was terminated before any information/advice/ drawing could be supplied to the appellant by Honda Japan and, therefore, the appellant had not received any service from Honda Japan with regard to the launching of the Full Model Change of the new Civic Car. Thus, as advice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant imported technical information from Honda Japan. It is seen that the entire transaction concerns only the Termination Agreement and the payment that has been made by the appellant to Honda Japan is also in terms of the Termination Agreement. The provision of the Technical Agreement or the Model Agreement could not have been taken into consideration for arriving at a conclusion that Honda Japan had rendered 'consulting engineer' service to the appellant, as a result of which the appellant was required to pay service tax on a reverse charge basis. 30. The contention of the learned authorized representative of the Department is that between the execution of the Model Agreement and the Termination Agreement, some technical information must have been furnished on a regular basis by Honda Japan and, therefore, the Termination Agreement cannot undo the technical information already provided by Honda Japan. In this connection the learned Authorized Representative of the Department has also made reference to the amount to JPY 400,000,000/- that was required to be paid in terms to the Model Agreement/ Termination Agreement towards the first installment. 31. This submission of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onda Japan to the appellant nor any amount was paid for any service. The contention is that the amount was paid by the appellant only to restitute Honda Japan for the cost incurred, once the Model Agreement to provide the service was terminated. 34. This submissions of learned counsel for the appellant also deserves to be accepted. In view of the specific provisions of the Termination Agreement, it is clear that no service, much less 'consulting engineer' service, was provided to the appellant. The appellant, therefore, could not have been subjected to service tax on a reverse charge basis. 35. In Ford India, a Division Bench of the Tribunal, held that no identifiable service can be attributed for payments made if the agreement is terminated, since the consideration is to make good the loss. The observations are as follows: "7. Regarding the tax liability on the consideration received due to termination of the arrangement, we note that no identifiable service can be attributed for such consideration. It is rather a termination of arrangement which itself the original authority held as a service. We note that by terminating the arrangement, the appellants are adversely put to ce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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