2024 (5) TMI 1339 - AT - Service Tax

Demand of service tax - Upfront charges collected towards Extended Warranty Scheme (EWS) as well as for the amounts collected for used car scheme - Classification of services under Works Contract Service Or Not - Activity of issuing EWS would fall under Repair to Vehicle Services prior to 01.07.2012 - demand of service tax raised Period prior to 01.07.2012, u/s 65(105)(zo) and Period after 01.07.2012, u/s 65B(44) on the consideration received by the appellant for Extended Warranty Service (EWS ) sustainable or not. HELD THAT - Period prior to 01.07.2012 - HELD THAT - Definition of Repairs to Vehicle Services which was introduced as a taxable service with effect from 16.07.2001 was amended with effect from 01.05.2011 by substituting the words by an authorised service station with the words by any person . Consequent to the amendment, the Department entertained the view that the appellant having collected charges for EWS they are liable to pay service tax under Repair of Vehicle Services with effect from 01.05.2011 till 30.06.2012. Tribunal in the case of M/s. Ford India Pvt. Ltd. Vs. Commissioner of Customs, 2023 (8) TMI 409 - CESTAT CHENNAI wherein it has been held by the Tribunal that prior to 01.07.2012, the demand cannot sustain u/s 65(105)(zo) for the reason that repair to vehicle services involve both use of materials and rendition of service. Following the same, we are of the considered opinion that for the period prior to 01.07.2012, the demand raised u/s 65(105)(zo) cannot sustain and requires to be set aside. Ordered accordingly. Period after 01.07.2012 - From the definition of service u/s 65B(44) of the Finance Act, 1994, it can be seen that post 01.07.2012, service includes declared services. Section 66E gives the list of declared services and clause (e) of Section 66E speaks about agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act . The main argument advanced by the appellant is that repair of vehicle involve replacement of spares / parts and as there is transfer of property in goods, such services are to be classified under Works Contract Services only. As per the EWS certificate, the appellant undertakes to carry out the necessary remedial work (including replacement of parts / spares) necessitated by any mechanical / or electrical break down under normal use and maintenance, subject to terms and conditions. In essence, EWS is only a creation of an obligation to do an act. The consideration is paid by customer for this undertaking and is not paid for having done or for doing any remedial work instantly. EWS is a service in the nature of creating an obligation to do an act and then would fall under sub clause (e) of Section 66E which gives the list of declared services. In the case of EWS, the appellant while receiving the consideration is for indemnifying risks for repair and replacement that may happen to the vehicle during the warranty period, subject to terms and conditions. The agreement is in the nature of a promise to do an act in the event of a contingency that may or may not happen in future and has to fall u/s 65E(e) as a declared service. The reimbursement of service charges to the dealer by appellant arises out of the separate dealership agreement. The EWS agreement is independent and entered by appellant with customer. There is no cause for double taxation. The Ld. Counsel for the appellant has been at pains to argue that since the repair of a motor vehicle involves supply of parts / spares and is composite in nature, the same has to be classified only under WCS. We have no quarrel that when actual repair work is done, the activity would fall under WCS as defined u/s 65B(54). However, in the present case, it is only a promise to do the repair and the consideration is not for the actual repair. It has to be stated that in case there is an agreement to provide Works Contract Services (repair services), there is a specification as to what is the works that has to be executed and as well as the amount required for execution of such work. Both parties would be at consensus as to the nature of the work that has to be done as well as the consideration that has to be paid for the work. There is no element of risk involved to either parties. In other words, when there is a payment made agreeing to provide a service, both parties are well aware as to what is the service to be provided. In Extended Warranty Scheme, as already stated, the parties do not know whether the vehicle will require any repair or whether it will require only replacement of spares or whether it will require only services without replacement of spares or whether it will require both replacement and repair. We say that Sub-clause (h) of Section 66E covers actual Works Contract Services executed and does not cover the assurance to provide repair services. In actual repair services, there is an element of sale which involve transfer of property in goods and therefore for post 01.07.2012 would be a Works Contract Services. In EWS it s an assurance to provide repair service whereas, u/s 66E(h) it s the agreement to provide or to be provided which becomes taxable. In fact post 01.07.2012 any activity carried out by a person for another for consideration is a service. Thus, we hold that the issuing Extended Warranty Scheme is a service falling u/s 65B(44) read with Section 66E(e). The demand is therefore sustainable. We find that the appellant has adopted the classification under WCS for the period post 01.07.2012 and have discharged service tax by availing the abatement which is permissible if the activity is to be classified as WCS. This shows that appellant was under bonafide belief that the EWS falls under WCS and had no intention to suppress facts to evade payment of tax. There is no positive act of suppression of facts established against the appellant. Further the issue being classification of service is purely interpretational in nature. For these reasons, we hold that the demand raised invoking the extended period requires to be set aside. For these same reasons, the penalties for the period post 01.07.2012 also requires to be set aside. Ordered accordingly. In the result, the impugned order is modified - Appeals are partly allowed.

Summary

Issues Involved:
1. Whether the demand of service tax raised for the period from 01.05.2011 to 30.06.2012 under Section 65(105)(zo) on the consideration received by the appellant for Extended Warranty Service (EWS) is sustainable or not.
2. Whether the demand of service raised under Section 65B(44) for the period post 01.07.2012 on the consideration received by the appellant for Extended Warranty Service (EWS) is sustainable or not.

Summary:

Period prior to 01.07.2012:
The Tribunal examined whether the demand raised u/s 65(105)(zo) on the consideration received for EWS is sustainable. The Department argued that the definition of 'Repairs to Vehicle Services' was amended from 01.05.2011 to include services provided by any person, not just authorized service stations. The appellant contended that the EWS involves a composite contract of labor and materials, classifiable under Works Contract Services (WCS). The Tribunal, referencing the decision in M/s. Ford India Pvt. Ltd. Vs. Commissioner of Customs, Chennai [2023 (8) TMI 409-CESTAT Chennai], held that prior to 01.07.2012, the demand under Section 65(105)(zo) cannot sustain as the service involves both materials and labor, thus falling under WCS. Consequently, the demand for this period was set aside.

Period after 01.07.2012:
The Tribunal then examined the demand post 01.07.2012, where the Department classified the EWS under Section 65B(44) of the Finance Act, 1994, which includes declared services. The appellant argued that the EWS involves replacement of parts and thus should be classified under WCS. The Tribunal noted that the EWS is essentially an assurance to repair in the future, not an immediate repair service, thus falling under Section 66E(e) as a declared service. The Tribunal held that the EWS is a service u/s 65B(44) read with Section 66E(e) and upheld the demand for the normal period post 01.07.2012, setting aside the demand for the extended period and the penalties due to the interpretational nature of the issue and the appellant's bona fide belief.

Conclusion:
1. The demand, interest, and penalties for the period prior to 01.07.2012 were set aside.
2. The demand and interest for the normal period post 01.07.2012 were upheld, while the extended period demand and penalties were set aside. The appeals were partly allowed with consequential reliefs.