2020 (12) TMI 913 - AT - Service Tax

Levy of Service tax - Reverse Charge Mechanism - consulting engineer service - amount paid to Honda Japan under the Technical Agreement - contention of appellant is that no services were received by the appellant from Honda Japan and, therefore, no service tax could have been levied - HELD THAT - The show cause notice only refers to various clauses of the Technical Agreement and the taxing provisions and then alleges that the appellant is liable to pay service tax on the amount paid under the Termination Agreement, without identifying or specifying what particular consulting engineer service was rendered by Honda Japan to the appellant. The appellant has stated that the amount of JPY 130,000,000/- was paid to compensate for the work undertaken by Honda Japan towards the commencement of volume production of the new Honda CIVIC Model and details have also been provided, which details clearly indicate that the amount was paid to compensate Honda Japan for the research and allied work it had performed at its end and not towards supply of any technical information to the appellant. In the absence of any evidence to the contrary, the Commissioner (Appeals) could not have concluded that the aforesaid amount was paid by the appellant to Honda Japan for rendering any taxable service. It is, therefore, not possible to accept the contention of the learned authorized representative of the Department that in terms of Article 4.1 of the Technical Agreement, Honda Japan was required to furnish technical information to the appellant on a continuous basis or that the amount was paid for the commencement of the production. It has also been submitted by the leaned counsel for the appellant that the amount paid by the appellant to Honda Japan is actually in the nature of a cancellation fee and, therefore, neither any service was rendered by Honda 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 - 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. In Ford India 2018 (1) TMI 1219 - CESTAT CHENNAI , 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 - In Lemon Tree 2019 (7) TMI 767 - CESTAT NEW DELHI , the Tribunal again held that the amount retained after cancellation cannot be subjected to service tax. The amount paid by the appellant to Honda Japan was not towards any consideration for a taxable service. It is, therefore, not possible to sustain the demand confirmed by the Commissioner (Appeals) - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the amount paid by the appellant to Honda Japan under the Termination Agreement is subject to service tax.
2. Whether the payment made qualifies as consideration for 'consulting engineer' services.
3. Applicability of the extended period of limitation for the demand of service tax.

Detailed Analysis:

Issue 1: Whether the amount paid by the appellant to Honda Japan under the Termination Agreement is subject to service tax.

The appellant, a manufacturer of motor vehicles, entered into a Technical Collaboration Agreement (Technical Agreement) with Honda Japan for receiving technical and proprietary information. Subsequently, a Model Agreement was entered into for launching a new model of Honda Civic. However, due to market conditions, the Model Agreement was terminated, and a Termination Agreement was executed, under which the appellant paid JPY 130,000,000 to Honda Japan to compensate for costs incurred.

The Department issued a show cause notice alleging that the payment was for services received and thus subject to service tax under 'consulting engineer' services. The appellant contended that no services were received, and the payment was purely compensatory. The Tribunal examined the agreements and found that the payment was indeed compensatory for costs incurred by Honda Japan and not for any services rendered. The show cause notice did not specify any particular service provided by Honda Japan that could be classified under 'consulting engineer' services. Therefore, the Tribunal concluded that the amount paid was not for any taxable service and could not be subjected to service tax.

Issue 2: Whether the payment made qualifies as consideration for 'consulting engineer' services.

The Department argued that the payment was for 'consulting engineer' services as defined under section 65(31) of the Finance Act, 1994. The Commissioner confirmed the demand, stating that Honda Japan provided technical assistance to the appellant. However, the Tribunal found that the appellant terminated the Model Agreement before any technical information or advice was provided by Honda Japan. The payment was made to compensate Honda Japan for costs incurred up to the date of termination and not for any consulting engineer services. The Tribunal emphasized that the show cause notice failed to identify any specific service rendered by Honda Japan that could be classified as 'consulting engineer' services. Therefore, the payment did not qualify as consideration for such services.

Issue 3: Applicability of the extended period of limitation for the demand of service tax.

The appellant argued that the extended period of limitation could not be invoked in the absence of any mala fide intent. The Tribunal did not find it necessary to delve into this issue since it concluded that the payment was not for any taxable service. Consequently, the demand for service tax was set aside, rendering the question of limitation moot.

Conclusion:

The Tribunal set aside the order dated January 23, 2015, passed by the Commissioner, confirming that the amount paid by the appellant to Honda Japan was not towards any consideration for a taxable service. The appeal was allowed, and the demand for service tax, along with penalties and interest, was quashed.