2014 (1) TMI 45 - AT - Service Tax

Demand of service tax - Free service provided during warranty period - Held that - The entire dispute arises out of the fact that this service being provided is commonly referred to in this industry as free service. This is not free service at all. This is rendered at a cost both for the services and for the parts which are paid by the manufacturer to the appellant. However, the owner of vehicle is one of the beneficiaries of the activity. The vehicle manufacturer is also a beneficiary because such services enhances his brand value and the reputation of his goods and customer satisfaction which helps in further business. So the manufacturer pays for it and naturally it is a service provided to the manufacturer of vehicles. Similarly the person who pays for the parts is the person to whom goods are sold. Therefore, we are of the view that there is sale of goods in this case and the benefit of exemption notification No.12/03-ST dt. 20.6.2003 is prima facie available to the applicant - Stay granted.

Issues:
1. Whether the value of goods used in providing free services during the warranty period is subject to service tax.
2. Applicability of Notification No. 12/03-ST dated 20-06-03 on the reimbursement received for parts used in services.
3. Interpretation of the term "free service" in the context of service tax liability.

Analysis:

Issue 1:
The dispute in this case revolves around whether the value of goods used in providing free services during the warranty period is subject to service tax. The applicant, an authorized agent of vehicle manufacturers, sells vehicles and provides services, including free services during the warranty period. The Revenue contended that the cost of parts used in providing free services should be included in the taxable service value. The Tribunal observed that the services provided were not truly free as the manufacturer paid for both services and parts, benefiting both the vehicle owner and the manufacturer. The Tribunal concluded that there is a sale of goods involved in this scenario, making the benefit of exemption under Notification No. 12/03-ST applicable to the applicant.

Issue 2:
The counsel for the applicant argued that the reimbursement received for parts used in services should not be considered as part of the taxable service value, citing the struck-down Rule 5 of the Service Tax Valuation Rules and a precedent case granting waiver of pre-deposit on a similar issue. Additionally, the applicant had paid VAT on the parts used. The Revenue contended that there was no sale of goods involved, opposing the application of the exemption under Notification No. 12/03-ST. The Tribunal considered these arguments and held that the reimbursement received for parts used in services does not form part of the taxable service value, thereby granting waiver of pre-deposit on the dues arising from the impugned order.

Issue 3:
The interpretation of the term "free service" was crucial in determining the service tax liability in this case. Although the services provided during the warranty period were labeled as free, they were not truly free as the manufacturer covered the costs of both services and parts. The Tribunal emphasized that the manufacturer and the vehicle owner both benefited from these services, indicating a sale of goods in the transaction. This understanding led to the conclusion that the benefit of the exemption notification was available to the applicant, highlighting the importance of interpreting industry-specific terms in the context of tax liability.

This judgment clarifies the treatment of goods used in providing free services during the warranty period for service tax purposes, emphasizing the nuances of such transactions and the applicability of relevant notifications and precedents in determining tax liabilities.

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